Snowflake (SNOW) Q4 2021 Earnings Call Transcript

Snowflake (NYSE: SNOW) Q4 2021 earnings call dated Mar. 03, 2021

Corporate Participants:

Jimmy Sexton — Finance Director, Head of Investor Relations

Frank Slootman — Chairman and Chief Executive Officer

Mike Scarpelli — Chief Financial Officer

Analysts:

Raimo Lenschow — Barclays — Analyst

Derrick Wood — Cowen & Company — Analyst

Patrick Colville — Deutsche Bank — Analyst

Brad Zelnick — Credit Suisse — Analyst

Patrick Walravens — JMP — Analyst

Brent Thill — Jefferies — Analyst

Kash Rangan — Goldman Sachs — Analyst

Brad Reback — Stifel. — Analyst

Brent Bracelin — Piper Sandler — Analyst

David Hynes — Canaccord Genuity — Analyst

Mark Murphy — JPMorgan — Analyst

Tyler Radke — Citi — Analyst

Mark Randy — Morgan Stanley — Analyst

Andrew Nowinski — D.A. Davidson — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q4 FY21 Snowflake Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jimmy Sexton, Head of Investor Relations. Thank you. Please go ahead, sir.

Jimmy Sexton — Finance Director, Head of Investor Relations

Good afternoon and thanks for joining us on Snowflake’s Q4 fiscal 2021 earnings call. Joining me are Frank Slootman, our Chairman and Chief Executive Officer and Mike Scarpelli, our Chief Financial Officer.

During today’s call we will review our financial results for fourth quarter fiscal 2021 and discuss our guidance for the first quarter and full year fiscal 2022. During today’s call we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, products and features, long-term growth and overall future prospects. These statements are subject to risks and uncertainties which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after market close today and in our SEC filings, including our most recently filed Form 10-Q and the Form 10-K for the fiscal year ended January 31st, 2021 that we will file with the SEC. We caution you to not place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in our expectations.

We’d also like to point out that on today’s call we will report both GAAP and non-GAAP results. We use these non-GAAP financial measures internally for financial and operational decision-making purposes and as a means to evaluate period to period comparisons. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see the reconciliations of these non-GAAP financial measures, please refer to our earnings press release distributed earlier today and our investor presentation, which are posted at investors.snowflake.com. A replay of today’s call will also be posted on the website.

With that I would now like to turn the call over to Frank.

Frank Slootman — Chairman and Chief Executive Officer

Thanks, Jimmy, and good afternoon everybody. We finished our fiscal year with strong consumption across our customer base with a 116% growth year-on-year to $178 million in fourth quarter product revenue. Remaining performance obligations of $1.3 billion grew 213% year-on-year, reflecting strength in sales across the board. Coupled with this rapid growth we saw improving operating efficiency while onboarding over 800 new employees for the year. Our growth is driven by long-term secular trends in data science and analytics and enabled by cloud scale computing and Snowflake’s cloud native software architecture.

With the onslaught of digital transformation, data operations become the beating heart of the modern enterprise. Customers realize that to survive and thrive they need to step up their data again, given what is now possible with technology.

The Snowflake Data Cloud enables breakthrough data strategies. Capacity limitations are a thing of the past. There virtually no constraints anymore on the number of workloads that can execute at the same time against the same data. The performance of individual workloads has increased by orders of magnitude while latency has been reduced by similar proportions. The only constraints left are budgets and our customers’ imagination. And we believe those boundaries are shifting quickly as well.

The Snowflake Data Cloud also breaks new ground in terms of data access, which is increasingly critical for data science, artificial intelligence and machine learning workloads. The days of mostly in-silo analytics are numbered. The promise of data science is to discover and mobilize data relationships that can be glimpsed across a broad diversion — diversity of data sources and data types.

Physical boundaries between datasets dictated by technology legacies have no meaning or significance in data science. Science sees the world’s data as a single universe that is easily, seamlessly and frictionlessly traversed as if it’s one giant database. That is the essence of the Snowflake Data Cloud, world-class workload execution, coupled with practically unfettered data access across clouds, cloud regions and geographies.

The BlackRock, the world’s largest asset manager, has adopted the Snowflake Data Cloud to help make the best investment decisions for their clients. Last week, we announced a strategic partnership to launch the Aladdin Data Cloud powered by Snowflake. Now Aladdin clients can combine Aladdin portfolio data with non-Aladdin data to analyze faster and create customer applications and dashboards. Clients will have a single control plan to make data-driven decisions around portfolio management, trade execution, investment operations, analysis and risk management. With Aladdin becoming a strategic part of the Snowflake Data Cloud, our shared goal with BlackRock is to create a cutting edge industry standard for accessing governing and acting on data in a unified and governed data environment.

The Data Cloud is inspiring more new conversations with customers and prospects and that leads them to a different view of their data strategies going forward. Active data sharing relationships in the Snowflake Data Cloud are growing by leaps and bounds, increasing 51% quarter-on-quarter. We’re seeing rapid adoption of the Snowflake marketplace as well with consumption attributable to data from marketplace providers, up 48% quarter-over-quarter, and new listings growing 10 times year-on-year to a total of 380 as of the end of the fiscal year. Newly added to the marketplace in Q4 are data providers such as ZoomInfo, Western Union and Foursquare.

Our continued push to campaign the largest enterprises in the world is proving to be successful. We added 19 Fortune 500 customers in Q4, including Mastercard, Genuine Parts and Northern Trust. While customers choose to partner with Snowflake because of the Data Cloud, we still must meet customers wherever they are on their technology journey. Often engagements begin with the migration of legacy data warehouse platforms. We have engaged in over 75 legacy migrations last year and we have identified many more for this year.

Our global system integration partners or GSIs have seen their backlogs multiply and are rushing to staff, train and provision the resources to meet the demand head on. While we team up with our GSIs, our strategy is to rely on our implementation partners for much of this work. We are pleased to welcome Infosys to Snowflake elite partner status during the quarter. A fortunate 100 technology company has deployed Snowflake across numerous lines of business since migrating their on-premise data warehouse platform to Snowflake. Because of Snowflake their marketing department tells you more informed decision making process with 20 times faster support for their customers.

For fiscal 2022, our focus is to turbocharge our Snowflake Data Cloud with NASA workload execution expansions and refinements as well as expand our data federation with numerous new additions to the Snowflake marketplace. While our selling motions address some of the world’s smallest as well as the largest data states in the world, we will have continued emphasis on landing and expanding in the largest enterprises and institutions, not just in the Americas, but also in EMEA and Asia Pacific. To that end, we have announced new leadership in the latter region to accelerate and scale the Snowflake campaign there. A new global initiative we began last year and are now accelerating is a vertical industry focus which is permeating our sales, marketing, alliances, product and service organizations.

We have long sold almost exclusively on architectural distinction which has served us well and we will continue to do so in situations that warranted. But our large enterprise focus has informed an evolution to a go-to-market motion that is industry specific and outcome oriented. We view this as a maturation of Snowflake in the large enterprise. We also now have so much critical mass in our target verticals, coupled with industry-specific data marketplaces that this strategy will further differentiate Snowflake.

We are super excited about the new year. We have the technology, the talent and the organization to fully pursue our opportunity.

With that I will now turn the call over to Mike.

Mike Scarpelli — Chief Financial Officer

Thank you, Frank. Q4 was another quarter of exceptional execution and a strong finish to our first fiscal year as a publicly [Technical Issues]. Our Q4 product revenues were $178 million, representing 116% year-over-year growth and the remaining performance obligations were $1.3 billion. The outperformance of consumption spanned all verticals as we continued to see our customers deploy Snowflake across their organizations. Our strong RPO results continued to be driven by more multi-million dollar deals as well as our customers’ willingness to engage in multi-year contracts.

Of the $1.3 billion in RPO, we expect approximately 55% to be recognized as revenue in the next 12 months. As a reminder, this number is an estimate and can fluctuate significantly due to our consumption business model. The strong performance reflects Snowflake’s role as both a technology solution offering superior execution across workloads and as a strategic partner enabling digital transformation through the Data Cloud.

We continue to invest in growth opportunities and we are now benefiting from our maturing enterprise sales efforts. In Q4, we saw the number of customers with greater than $1 million in trailing 12 months product revenue increase to 77, up from 65 last quarter with 12 customers now consuming over $5 million on a trailing 12-month basis. Internationally, we have expanded our sales force across relevant geographies. We are seeing promising traction in these markets, but remain in the early stages of this opportunity.

Turning to margins. On a non-GAAP basis, our product gross margin was 70%, up 400 basis points from last year. Favorable cloud service agreements, growing scale across regions, our enterprise success and ongoing discounting discipline all contribute to steady gross margin improvement. Our operating margin was negative 24% benefiting from revenue outperformance and continued T&E savings.

Our adjusted free cash flow margin was 9%, positively impacted by strong collections with Q4 being our largest booking quarter, cash inflows relating to our employee stock purchase program and operating margin outperformance. As a reminder, adjusted free cash flow excludes the impact of cash paid for employer payroll taxes on employee stock transactions. This quarter we saw a $10 million impact from those items. While we will continue to focus on long-term margin expansion and profitability, we do experience free cash flow seasonality and Q1 and Q4 will continue to be our strongest free cash flow quarters.

We are very proud of our strong free cash flow. On a year-over-year basis, we cut our annual cash burn by 64% or $128 million while more than doubling the business. And we have implemented operations that will help us show more profitability while continuing to invest heavily in the business. We’ve ended the year in a strong cash position with approximately $5.1 billion in cash, cash equivalents and short-term and long-term investments. This enables us to explore a number of strategic initiatives, including Snowflake Ventures, which has made several investments in the quarter, including DataRobot, Hunters, Noma [Phonetic] and Lacework. Our mission is to engage more organizations with the Data Cloud and all investments aimed to drive increased consumption of Snowflake.

Now let’s turn to our guidance and outlook. For the first quarter of fiscal 2022 we expect product revenues between $195 million and $200 million, representing year-over-year growth between 92% and 96%. Turning to margins, we expect on a non-GAAP basis, negative 23% operating margin and we expect $289 million weighted average shares outstanding. For the full year fiscal 2022, we expect product revenues between $1 billion and $1.02 billion, representing year-over-year growth between 81% and 84%.

Turning to profitability, we expect on a non-GAAP basis 71% product gross margins, negative 19% operating margins and breakeven adjusted free cash flow and we expect 295 million weighted average shares outstanding. Our outlook includes increased investments in our FedRAMP initiatives and accelerating migrations off of legacy solutions, both of which will drive enterprise customer success. In order to support our growth and initiatives we plan on adding more than 1,200 net new employees during the year.

With respect to COVID, our forecast assumes that we will continue to work remotely for the foreseeable future with an increase to potential travel expenses in the back half of the year. We are benefiting from strong productivity in our current environment and we have successfully onboarded and ramped new employees since March 2020. While we anticipate an eventual return to the office, we do not have a specific timeline for that goal.

Before closing, I’d like to note a few recent or upcoming events. Today, we announced that on March 1st, 2021 our Class B shareholders in accordance with our governing documents converted all of our Class B common stock to Class A common stock, eliminating the dual-class structure of our common stock and ensuring that each share has an equal vote. We view this as operationally beneficial to the Company and our shareholders.

In addition, the restrictions under our IPO lock-up expire on March 5th and almost all remaining shares not purchased in the private placement or secondary transactions concurrent with our IPO will no longer be subject to a lock-up agreement. And lastly, we will host a virtual Investor Day in conjunction with Snowflake Summit, our annual users conference, the week of June 7. If you’re interested in attending, please email ir@snowflake.com.

With that, operator, you can now open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Raimo Lenschow with Barclays. Your line is open.

Raimo Lenschow — Barclays — Analyst

Hey. Congrats. That was detailed [Indecipherable] numbers. First one, Frank, this quarter we saw a little bit more noise around kind of market activity. I think it’s probably because of your success. Can you see if you experienced any changes in the competitive dynamic out there? And then I have a follow-up for Mike.

Frank Slootman — Chairman and Chief Executive Officer

Not really Raimo and things have been stable and certainly from a public cloud standpoint for the course there in terms of the comparison. Legacy providers, no change there either. If I sort of take a global perspective on our sale [Phonetic] I feel that our competitive positioning is gradually strengthening and I’m just basing that on the types of interactions we have with customers. We’re operating far more at CEO level now than at the highest level of IT. So there is just definitely, I feel, an inflection there that is reflecting the relative position of the Company marketplace which we feel is very good.

Raimo Lenschow — Barclays — Analyst

Okay. Perfect. Thank you. And then, Mike, on the gross margins, I mean we see the progress this year and we give a guidance. Just talk a little bit about the drivers for the gross margin improvement we’re going to expect in the coming year and what are the — like, is it more of a contract with the cloud providers or what’s driving it going forward? And what’s left to do for you to reach the long-term goals? Thank you.