Snowflake Inc. (SNOW) Earnings Call Transcript & Summary

And presumably with the acceleration in the guide, you're kind of seeing those trends continue on a go-forward basis, another topic that you led off with in terms of your priorities was margins -- and I guess, how do you think about sort of trade-offs with higher AI revenue, right? Gross margins were lower a bit last quarter in terms of the full year target. Just give us a sense of how you think about that going forward as Snowflake becomes a greater AI business?

Absolutely. I guess the first thing I'll say is we are in such an awesome market today. there's so much opportunity, and it's changing so rapidly. And there's just so much opportunity out there. And the TAM because of these things that we're doing is expanding very, very rapidly. And so with that, radars is very committed to revenue growth and meeting our customers where they're at, giving them tools, help them get value out of their data through AI and other methods. And so the #1 thing from a company perspective is we want to capture that market share. And so growth is extremely important. You've seen in our guidance for the full year. We raised it from 31% year-over-year growth to 36% year-over-year growth. And so that's a pretty significant step up off of a prior quarter where we had another big increase, but we've done that with increasing operating leverage in the business. And so what we are very committed to is increasing operating leverage in the business. For those of you who work at Investor Day, we committed to being GAAP profitable in fourth quarter of next year. And so slightly over a year out. And so we're seeing a really big -- we put a plan around stock-based compensation, you're seeing a really big decline there. you're seeing us hold gross margins with the increased revenue that you see, we guide 74% non-GAAP product gross margins. and you're seeing a strong cash flow generation. And so we're doing that with less people around the enterprise. One of the things I talked about on earnings, if you look at sort of year-to-date hiring for first and second quarter this year versus last year, we added roughly 330 people this year. Last year, we added about 950 people. Of the 330 this year that we added, 180-ish of those more or less came from the Observe acquisition. And so the amount of people that we're adding with the acceleration of revenue, I think, is really a testament of how times are changing. On gross margin specifically, -- the company has done a really good job over the years of basically getting leverage and scale with our providers once we sort of reach a certain threshold -- and so as we launch all these new AI products, AI products naturally have a lower gross margin than our core business. The good news is it does drive our core business, so that's how bound -- but we feel that there are things that we can do over time to maintain a strong gross margin.

Yes. And you talked about on the operating margin line and particularly the people side of the business, right, having to hire significantly less despite this growth acceleration. Certainly it was evident to us at Investor Day how much internally Snowflake kind of transformed on this organization certainly across product velocity, your finance organization as well. What are like some of the biggest efficiencies that you've seen through that transformation? And do you kind of feel like this is the new normal of like very, very minimal head count growth even if growth were to continue to accelerate from here?

Efficiencies are happening all over the business. We start at the top of the P&L on revenue, we're seeing efficiencies in the sales organization. We actually have a model called Raven, and people can go in and speak to Raven really about -- and so for instance, if I got the user list of who's here attending in this, I could easily download it into Raven and say how much ARR sitting in the room for financial services is a big vertical for us. And so it would tell me basically by customer what everybody is spending and who's not customers. And so -- the power to do that is like I could never do that, right? Like it would basically I'd have to get the list. I've been into an FP&A analyst, it would take a while. They would go do all this stuff. But with these models, you can actually connect all these different data structured to unstart and literally get it at your fingertips. And going back to the CFOs that I talk to and the CEOs that Street are talk to -- that's why they're so passionate about like I need to get this yesterday and get it in my hands. And so from the sales side, we're seeing prospecting how they're putting deals together and so forth. And so we have not hired as much in sales and seeing the productivity per rep go up dramatically this year. And that's within the sales organization. And so I know folks like [indiscernible] go and string the Internet for open racks and try to see how much people are hiring and that would be an indication of growth, like, unfortunately, you can no longer do that. On the R&D side, we're getting with relatively flat declining head count. We're getting increased productivity on lines of code produced at an astonishing rate. And so what we're doing is we're -- one of the things that we're doing to get got profitable was a big component of that was stock-based compensation. And what we're doing is we're hiring a different type of person that can actually be an engineer versus what we would historically hire. So historically, you'd have to hire someone with 8 to 10 years of experience, really senior you had a management role in the past. And now you can hire some on 1 to 2 years out of college, who really is AI filled that has 5 coded to use CoCo and so forth. And so we're seeing a dramatic difference in the 2 of them on the productivity. If you go into the finance organization, we have probably 150 different use cases. I'd say probably because they're developing them every -- so it's more than that on how we're using Snowflake on snow on doing automation. And so it's sales and marketing the same thing. HR, we have an HR skill that can give you the health of your organization and can tell you everything you want to know about your organization and people to check on people stats and how much are you using AI tools, like a whole bunch of time stuff. And so the point of all this is we're seeing efficiencies and you can tell by headcount, but I really think we're just getting started. I think the efficiencies that I think of the curve of adoption in proving out the efficiencies, we're in the early beginning stages of that. I talk a lot about AI being a human transformation more than a technology transformation. And so really getting individuals to understand what the art of the possible is, is really, really important. And so I meet every week, one-on-one with my direct and someone from my data science team data -- senior data analysis manager to talk about what they're doing to become AI native and how they're changing their organization. It's just literally every week 1-on-1 just on AI in their function, internal audit, investor relations, accounting, FP&A, tax, deal desk, because it's that important. And it's amazing to see the light as to often talk about the possible and so you have to give them this north star of what they need to shoot for on what they can get to from the to possible. So -- we're building a lot today. We're seeing efficiencies, but I don't think we're seeing as much efficiency that you'll see over time once we get some of the stuff fully deployed.

Yes. Well, that sounds really exciting and certainly kind of a new lead generation opportunity for you if you're meeting with CFOs every day and showing them what can be accomplished. I guess as you think about -- you mentioned the North Star and how important that is, like, where do you -- at a high level, where do you inset view the potential of this business? I mean there's certainly been targets that have been put out there years ago. Growth is on the upswing. But how do you kind of characterize that North Star goal to your group of Snowflake, flake employees every day to keep them motivated.

The market is like I said, rapidly changing. And 1 of the things I love many things about Snowflake, but 1 of the things I love is we are spending millions and millions of dollars, tens of millions of dollars reeducating and retraining our employees on what it is like to work in an AI environment. And we're really driving that. And so I'm into our number of people, and they'll come to me and talk to me about careers and maybe taking a CFO role and so forth. And if you're in the job market today, like it has to be 1 of the most clarifying things because there's a lot of companies that just won't be here in 2, 3, 4 years. And so what I tell them, the most important thing is to get with the company is AI forward, they want to make sure AI builds and they're going to invest a lot of money unique and the way I use -- I've been doing this for about 30 years. And the way I used to work won't work going forward. It just -- it won't work. And so I'm really bought into it and really spend a lot of time on because I think it's critically important. And so from a Snowflake perspective, people are extremely excited because all the customer stories that they're hearing, the impact they're making around the world when AstraZeneca comes and talks and they've done cases and press releases with us and so forth. And they'll come talk at Summit or whatever they are like use Snowflake are saving people's lives. We've been able to X Y and Z because we've implemented Snowflake and are far along on that. They're getting drugs out to trial faster, they're doing it more economically. And it's just awesome to see those results. And that's in life sciences. And then you go to the supply chain, you see the same thing. You go to government and pub-sec and you see the same thing. And so it's super exciting. And within my organization, there's 5 or 6 people who talk to customers on a regular basis and that happens around the company. And then people bring those stories back and they talk about that. Obviously, the earnings that we're posting is really awesome. But for Schrader, we want to basically create a set of tools and the ability to access your data to be able to drive your business more efficiently, so know more about your business. And we're at the center of AI and doing just an awesome job at that. And the key for us to continue to be successful is product velocity. What you did yesterday, it doesn't matter for tomorrow. And so we need to develop the next CoCo, the next CoCo, get deeper penetration within the account and also sales execution.

Yes. That makes sense. Brian, it's a CFO, you probably are involved with the renewals of a lot of third-party software contracts at Snowflake. And certainly, there's been a lot of concern in the market around traditional SaaS businesses. And we've seen them kind of make moves to kind of look more like databases in some ways with UI layers going to AI labs and everything. How do you kind of see this playing out, both from what you're doing with your third-party software contracts, putting more stuff into Snowflake. And then the opportunity for you to kind of be more of an operational database in some of those use cases for your customers?

Yes. Great question. So let me unpack that from -- so procurement is under me and so I get to see all the deals that sort of come through the pipeline. And because things are changing so rapidly, I am very hesitant to do 3-year deals. And so I won't save money, but I won't get up into a long-term commitment. And so I'll basically sign 1-year deal. Not saying that wonton 3-year deals. There's some software that is critical to what we're will be there, and you can tell it will be there in 2 to 3 years or we've talked to them about the road map their AI pill, they're changing the way they're working. And so some -- we will do some 3-year deals. But the standard is a 1-year deal, where that's changed a little because historically, you want to commit as much as you can for as long as you can to get the biggest discount you get. And I'm just not -- because things are changing so rapidly, I'm just not -- I can't -- I'm on mind, I just have a hard time wrapping my mind around that. So we're actually doing lower deals. From a from the data coming into Snowflake and then other companies trying to be a database or be a database site. The thing as Snowflake that is incredible is -- we are an open system. We have the iceberg tables where we're encouraging you to inquire your data from anywhere, anyhow or whatever, it's our -- we have to create great products like CoCo to incentivize you to use us. One of the things around -- that we talk a lot about internally is it's customers first. If you don't make a great experience for your customer, we talk about it's really easier to migrate into Snowflake Casale tools. It's just as easy to migrate a -- and so let's say the reverse of it, too, right? And so we have to create those great customer experiences to keep them within Snowflake and to give them the ROI of doing that. And since we don't run, we aren't an HR application, we aren't a CRM. We don't run all these various components like a lot of people want to put all their data in Snowflake so then they can use tools to actually be able to understand more about their business. And so I'm very encouraged with how things are going and what we're seeing from a business momentum perspective with people putting data into Snowflake.

Yes. One of the questions we often get just on the competitive landscape is what do we make of frontier labs, right? Obviously, you have a coopetition dynamic with the hyperscalers that you're used to, both partners and competitors. How do you see the frontier labs? Are they in a similar boat as the hyperscalers? Or do you view them differently?

Yes, I think it's -- I've talked a lot today about sort of the changing business environment. We have great partnerships with the hyperscalers -- we also compete with them in some way as well. And so -- but I talked to the count the CFO of AWS, very John, on a very frequent basis. I talked to the folks at Microsoft and the folks at GCP on a regular basis as well. And so we have a very good relationship there. And they're using us as well to sell them more workloads and so they're -- in some cases, they're giving order relief to their team to do that and so forth. And so we have a good working relationship there and same thing with the large foundational models. We've just had our Summit that we recently had. We had the Co-Founder of Anthropic up on stage with Sridar, talking about the partnership. Now we're working together. We work very closely with OpenAI, Christian talked a little bit about SpaceX and rock, and so we're working with all of them. And so I think you said it right. There's a very healthy, stable partnership, but there's also some warm of competition as well.

Yes. And maybe in the closing minute or 2 here, Brian, if you're sitting back up on the stage, certainly welcome back next year and growth rates have meaningfully accelerated once again beyond where anyone's thinking of? What would you say are kind of the 2 or 3 main reasons why that happened? And anything else you just want to leave the audience with before we wrap up? .

Yes. I think it's a Kevin and I are doing our jobs if we aren't communicating to you on a regular basis about the business and the driving factors of where we're going. And so there shouldn't be any surprises. And I think it really is the durability of the business as it relates to AI, the ability to do migrations quicker to get to personas, they basically get deeper within these accounts and to really show them what can happen. So I don't view from now to next year, it's -- given the forecast in these markets is just absolutely crazy. And so we're trying to execute every single quarter. But I think you'll see more of the same. We're developing a lot of AI products and features, really with the goal of driving consumption and for getting people put more data within Snowflake. And so that's really the goal of the company in this AI era that we're in.

Awesome. Well, Brian, really appreciate you coming to the Citi Conference. Thanks, everyone, for packing the room. It's a great discussion.

Thanks everyone.

Thanks so much.