Snowflake exceeded expectations in nearly all areas, except for one figure that went in the opposite direction.
Snowflake surpassed expectations in revenue, profit, and guidance, resulting in a more than 20% increase in its shares after hours. However, one figure from the release went in the opposite direction, and it's the one that forecasts the future. Remaining performance obligations, which represent the contracted revenue Snowflake has recorded but has not yet recognized, totaled $9.00 billion. According to Brody Ford from Bloomberg, analysts had anticipated $9.37 billion.
Highlights of the performance
For the quarter ending July 31, revenue reached $1.55 billion, a 35% increase year-over-year, surpassing the consensus estimate of $1.48 billion. Product revenue, which accounts for 96% of the total, grew by 37% to $1.49 billion, compared to the expected $1.42 billion. Adjusted earnings were reported at 62 cents per share, exceeding analysts' estimates of 45 cents.
It's important to clarify one point, as at least one outlet misreported it. Product revenue does not include professional services. This is stated in the release, and the calculations support it: $1,491.9 million of product revenue plus $54.9 million in services equals the total of $1,546.8 million.
The company has raised its full-year product revenue guidance to $6.07 billion, reflecting a 36% growth from the previous guidance of $5.84 billion and 31% growth communicated in May. For the current quarter, it expects revenue between $1.588 billion and $1.593 billion, significantly above the approximate $1.50 billion consensus.
Net revenue retention stood at 126%. Snowflake gained 692 net new customers, bringing the total to 828 clients spending over $1 million annually.
The disappointing figure
Although remaining performance obligations grew by 30% year-over-year, which seems positive on its own, it fell short by approximately $370 million compared to analysts' projections. Snowflake's release described this figure as difficult to interpret, noting it "is not necessarily indicative of future product revenue growth because it does not account for the timing of customers’ consumption," mentioning factors such as renewals, contract length, and seasonality that can influence it.
Most coverage on Wednesday evening focused on the positive earnings and the stock price increase, with Bloomberg being the outlet that highlighted the shortfall.
Beyond the profit everyone discussed
Snowflake disclosed a non-GAAP operating income of $237.0 million, reflecting a 15.3% margin, and a non-GAAP net income of $235.3 million. On a GAAP basis, however, the company reported a loss. Its operating loss was $263.0 million, with a net loss of $191.7 million, or 55 cents per share. While this loss is smaller than the $297.9 million loss from the previous year, it is still a loss.
The difference between the two figures primarily stems from one category. Stock-based compensation expenses amounted to $456.4 million for the quarter, exceeding the non-GAAP operating income that the results are celebrating. Snowflake itself identifies reducing stock compensation as a share of revenue and achieving GAAP profitability as part of its risk factors.
This situation is not uncommon for enterprise software, and the loss is decreasing. It's important to clarify this since the reported figures are adjusted ones.
What is fueling the growth
Chief Executive Sridhar Ramaswamy explained to Reuters that AI products accounted for "approximately half of the acceleration that we are seeing." The coding assistant CoCo surpassed 9,100 accounts, adding over 2,000 in the recent quarter. CoWork, which addresses inquiries related to a company’s own data, reached 5,800 accounts, with averages taken from the last four weeks of the quarter.
Finance Chief Brian Robins remarked that this represents the third consecutive quarter of accelerating product revenue growth, with margins also expanding during this period.
However, running AI is not cost-free. The non-GAAP product gross margin was 74.7%, a decline from about 76% the previous year based on company data. In May, Snowflake entered a five-year, $6 billion agreement with Amazon Web Services for Graviton processors, which Ramaswamy noted secures their costs for storage and computing.
The competing company growing faster
Databricks is the rival that Snowflake cannot overlook. Last month, we reported that Databricks concluded a $5 billion funding round with a valuation of $190 billion. Databricks has since announced that it has surpassed a $7 billion revenue run-rate, achieving more than 80% year-over-year growth in its own second quarter, which is more than double Snowflake’s growth of 37% from a smaller base. Additionally, Databricks is private and not required to disclose audited results.
The broader context
This news arrives during an earnings season where AI
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Snowflake exceeded expectations in nearly all areas, except for one figure that went in the opposite direction.
Snowflake surpassed expectations for revenue, profit, and guidance, leading to a more than 20% increase in its stock price. However, its remaining performance obligations were $370 million lower than anticipated.