#71- Snowflake

Key learnings from Q2 2023 earnings

Sep 02, 2022

Snowflake is a US-based company offering a cloud application development and run-time platform. It announced its Q2 2023 earnings last week and held a call soon after (plus presented at the Deutsche Bank’s 2022 Technology Conference). Sharing key learnings from both which will help the larger B2B software audience:

Numbers

Product revenue grew 83% year on year to $466 million. In the quarter, we added 12 Global 2000 customers. Our net revenue retention rate exceeded 170%, and Snowflake leads the industry with a Net Promoter Score of 72. Snowflake is delivering high growth and operating leverage. Non-GAAP product gross margin exceeded 75%, and we continue to generate non-GAAP operating income and free cash flow.

Gross margins

…there is room in product margin. We've guided to 78%. We're at 75% right now, maybe we can get a little bit higher... We're never going to get into the mid-80s…

On adding 12 new Global 2000 customers

Our average trailing 12-month product revenue from these customers grew 14% quarter-over-quarter to $1.2 million. We believe these accounts will grow to become our largest customers. A Global 2000 technology company is now a top 10 product revenue customer less than 2 years after signing their initial deal.

…we are still very much in the early innings with most of our companies that we're dealing with. If you look at the Global 2000, we gave you that metric. We have about 500 of them, and the average revenue is $1.2 million. That is not very big spend on a Global 2000.

If you look at our $1 million-plus customers, we're at $3.5 million. It tells you there's a lot of room for growth in those companies. And it's funny. I get all these questions from people and they're saying, well, all customers and the macro uncertainty you're trying to cut costs. Well, you want to know what? $1.2 million in spend, you could let go 5 people, and that covers $1.2 million when you get companies that have 100,000 employees or more. This is not a huge spend for most of our customers.

What slowdown?

..we have 510 Global 2000 customers. The average revenue from them today is $1.2 million. That's up from $1.05 million last quarter, and that will continue to grow. Those large customers are what is driving those million-plus customers for us, and we don't see that slowing down.

We are not seeing metrics soften across the customer base.

our corporate sales team that addresses small and medium-sized businesses outperformed their net new bookings goal for the quarter. Our EMEA sales team contributed 4 of our top 10 new customer wins in the quarter.

…our top customers continue to grow. And I haven't seen that slowing down the NRR.

Software continues to eat the world

Customers are -- they picked up the scent of the opportunity that is in front of them. And they're investing. They're hiring. They're buying because these are things that are going to be big changes for the industry. The whole industries are going to get redefined in health care, in pharma and financial services.

Benefits of usage-based pricing vs SaaS subscription pricing

…this is a consumption model, not a SaaS model. So even if we sign up a customer, it takes some months before they go into production. As I mentioned, there was a Global 2000 technology company we signed in the last 2 years. It's now one of our top 10 customers. That customer didn't start really ramping until the end of last year, and they're going to continue to ramp.

Constant improvements in ramping up

Cap One is the initial deal on a new customer coming in (a $48mn account). It was taking 240 days to get them up to that contracted rate that they were consuming within the first year. Now we've accelerated that with the help of partners and tools, that is now about 210 days to get them fully ramped into production.

Generally, customers are consuming 100% within their first year.

The way our contracting works is as long as you renew for an amount equal to or greater than your last annual contract, you can roll those unused credits over.

On SaaS companies like Salesforce & Splunk lowering guidance

…most SaaS companies, when they land an account, they typically license most of the users in an account. When we land, we land small. And they go workload by workload, and they just keep moving stuff over to Snowflake. That drives that. And it's a multiyear journey within our customers. And I don't see any of our customers that are fully saturated, where I think some SaaS companies may be saturated.

…I would have thought our largest customer was a saturated account 2 years ago, and it's kind of gone from $29 million to $48 million, $49 million run rate. And I know there's more opportunity there. So I don't really know what a saturated account looks like.

Global 2000 could easily spend $10 million a year on average easily (with us over time).

Sales teams ramp up as per their remit

…depending on where they are in the corporate sales team, which is more of an inside sales, it's about a 6-month period to ramp. It's a little bit longer around the enterprise and the verticals. The real large verticals we go after, those guys could take a year to ramp because those are long sales cycles.

On landing and serving whales

The selling motion in these large accounts, when you get -- when accounts get to a certain size, there's just one rep that, that's their entire life is working on that account, but it's not just that rep. You could have multiple [indiscernible] and resident architects in those accounts. And that rep is compensated more on revenue versus growth. And the bigger the customer relationship, the more leverage we get out of sales and marketing dollars, but it's not 100% passthrough to us because those big accounts do take more resources to manage them. But clearly, managing $50 million relationships have a much higher contribution margin than managing a bunch of $2 million customer relationships.

Moving up the chain

…with many of our customers, they don't necessarily see us as a cost. They see us as helping drive their business and even new revenue streams for their business.

…we see broadening of the personas within a company that we speak to. It's not just the traditional data analyst team, but data engineering team are engaged with us. Data science teams are engaged with us.

Snowflake has become de facto a cloud application development and run time platform. People are building and deploying applications on Snowflake. I mean we have customers like Western Union who were starting whole businesses on top of Snowflake. Those are the conversations that we are having with customers. Workload modernization, we'll be doing that until the end of time, but that's no longer the reality that dominates our daily existence.

Important takeaways from Snowflake

In a large market ($80Bn TAM) with frenemies like AWS, Azure, and Google Cloud, Snowflake not only built the business on these platforms but also competed with them. The proof of the pudding lies in 80%, 18%, and 2% of their customers working on AWS, Azure, and Google Cloud respectively while Snowflake managing to grow gross margins from 58% to 65% (with room to grow more).

In a world where every company is selling software subscriptions via a product-led growth (PLG) model, Snowflake is running on top-down enterprise sales with limited PLG motion. They mean it when they say “free isn’t free if there’s a cost of running it”. The headcount shows 2.4 sales & marketing employees per tech & product employee which is a clear indication of them following an enterprise sales-led approach.

The biggest revenue kicker is the adoption of usage-based or consumption-based pricing on the go. Where software subscriptions land and have to upsell new products, usage-based enterprise software grows along with the customers’ usage - sell once, reap benefits along the way. This is evident in 246 customers paying Snowflake over $1.2mn per year, and a 170% net retention rate.

Snowflake Mumbai event

Those interested in deploying their applications on Snowflake and learning more about it are in luck. Snowflake’s The Data Cloud World Tour is making a stop in Mumbai to showcase the latest innovations to Snowflake’s Data Cloud on Sep 21st 2022 in Powai. Click here for more details.

Cheers for now!

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