Snowflake [SNOW] Conference call transcript for 2021 q2
2021-08-25 21:47:10
Fiscal: 2022 q2
Operator: Good day, and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2022 Snowflake Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Now, I would like to hand the conference over to your first speaker today, Mr. Jimmy Sexton, Head of Investor Relations for Snowflake. Sir, please go ahead.
Jimmy Sexton: Good afternoon, and thank you for joining us on Snowflake's Q2 fiscal 2022 earnings call. Joining me in Bozeman, Montana, are Frank Slootman our Chairman and Chief Executive Officer; Mike Scarpelli, our Chief Financial Officer; and Christian Kleinerman our Senior Vice President of Product, who will be joining us for the Q&A session. During today's call, we will review our financial results for second quarter fiscal 2022 and discuss our guidance for the third 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 for the fiscal quarter ended April 30, 2021, and the Form 10-Q for the quarter ended July 31, 2021, that we will file with the SEC. We caution you to not place undue reliance on forward-looking statements and undertake 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 both posted on 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: Thanks, Jimmy. Good afternoon, everybody. We saw continued momentum in Q2 with 103% year-on-year growth to $255 million in product revenues, reflecting strength in Snowflake consumption. Remaining performance obligations grew to $1.5 billion indicating strength in sales. For the first half of fiscal '22, total revenues were $501 million, up 107% year-on-year. As the net revenue retention rate reached 169%, we also saw non-GAAP product gross margin and operating margin efficiency improved to 73.6% from negative 8% respectively. Adjusted free cash flow was positive for the third quarter in a row. As we approached the $1 billion mark in annual revenues, we continue to add customers at a robust pace adding 458 net new customers, up from 397 in Q2 of last year. With a focus on the largest organizations or Fortune 500 count totaled 212, increasing by 18 in the quarter. We are addressing the largest enterprises globally with a vertical industry approach. We see these investments yield strong results. In Q2, financial services customer product revenue grew more than 100% year-on-year, representing the largest contribution, while healthcare customer product revenue grew nearly 200%. We have engaged in targeted industry events for these verticals and we'll continue to go-to market with tailored business outcomes. We are pleased with our geographical expansion outside of the United States for product revenue from EMEA and Asia Pacific, outstripping the company's growth as a whole, growing 185% and 170% year-on-year, respectively. One of our largest new customer signed in the quarter came from Asia Pacific. During Q2, we had key enterprise wins, including AllianceBernstein, Constellation Brands, and Lithia Motors. Following milestones, we think are worthy of note. In Q2, we announced public preview availability in all AWS regions of Snowpark, our new developer experience. Snowpark enables developers to work in their preferred programming language in formats, including Java and Scala. Snowpark is designed to make building complex data pipelines and applications easy, and allow developers to interact with Snowflake directly without having to extract data, maximizing governance. The Snowflake accelerated program has over 50 partners enrolled to bring their capabilities and innovations across data science, data engineering, and security to Snowpark. In the future, Snowpark will add support for pipeline and expand to Azure and Google Cloud regions. Python is the most widely used programming language for machine learning and data science generally. We also launched Powered by Snowflake in June to help companies build, operate, and grow applications in the Data Cloud. Powered by Snowflake is designed to accelerate delivery of differentiated applications on Snowflake by supporting developers across all stages of the application journey in Snowflake's Data Cloud. Today, there are over 80 Powered By partners, including founding members, BlackRock, Adobe, Lacework, Observe, and OppLoans. Increasingly, application providers are enabling their apps to operate directly against their customer Snowflake accounts, meaning no data needs to be copied or replicated, simplifying data governance while accelerating the network effect of the Data Cloud. We also continued to deliver new capabilities to strengthen data governance for our customers. During the quarter, we made row access policies generally available. Data governance features are typically the broadest and fastest adopted feature across our customer base. Snowflake's increasing focus on vertical industries is leading to more deeper discussions with customers globally. Snowflake team is organized around the following core verticals. They are financial services, healthcare and life sciences, retail and CPG, advertising, media and entertainment, technology, public sector, education and manufacturing. This vertical industry focus will continue to intensify and expand over time. One example of our vertical approach is the advertising industry, which is facing new regulations and increasing pressure to strengthen consumer privacy. Advertisers want to compete in a market dominated by the walled gardens. The Snowflake Data Cloud is empowering large media companies, technology providers, and marketers to collaborate with their data assets across the ecosystem. Snowflake's data clean room solutions can enable companies to share and join data without copying or moving their data assets. Snowflake's Data Cloud powers these data clean rooms with transparency and privacy controls for customers like Disney and NBCUniversal. Each customer is creating their own data network within the Snowflake Data Cloud for their advertising businesses. Snowflake continues to deliver performance and optimization improvements throughout the platform, from improving storage efficiencies, lower ingestion latencies to faster query performance across different workloads. Performance improvements bring not only timelier insights, but improve the economics of our platform for our customers. Finally, Data Cloud adoption is growing rapidly. The Data Cloud is the sum of all data networking relationships that are active at any point in time. We track these data relationships through what we call edges. We added over 450 customers in the quarter and continue to expand the number of customers with stable edges. At the end of the quarter, 16% of our customers had stabilized edges in place with external Snowflake accounts compared to 15% last quarter. The total number of these stable edges grew more than 20% quarter over quarter. This growth is fueled by the content on our marketplace, which saw listings grow 32% quarter-over-quarter. The Data Cloud enables our customers to enrich their data, gain more effective analytical insight, and do so faster and more cost effectively. Strategically, Snowflake is emerging as a highly secure, compliant, global and efficient data network in the infrastructure across the major public cloud domains. The combination of world-class data workload execution with cloud application development, cross-cloud operations, data and data application marketplaces as well as planned monetization is what makes Snowflake stand out. During the quarter, we hosted our Annual Snowflake Summit to share our Data Cloud strategy, platform optimizations, feature enhancements and vertical industry use cases. Over 60,000 folks registered for the three-day event. We had four industry executive sessions and more than 60 customer sessions. Snowflake was launched in preview with over 50 partners supporting the Snowpark Accelerated program. And we announced OverlayAnalytics as the winner of the first Snowflake Startup Challenge. In Q3, we will be hosting events, including the Snowflake Financial Services Data Summit across the Americas, Europe, and Asia Pacific, where we'll be sharing more of how Snowflake is connecting the entire financial services ecosystem. Snowflake is a sponsor at Ad Week, where we will discuss our enhanced advertising media and entertainment offerings. And finally, Snowflake is holding our BUILD event for technical executives, including CTOs, VPs of engineering, data scientists, data engineers, and application developers. In closing, our results demonstrate high-quality durable growth, coupled with improving efficiency and we're looking forward to executing the second half of the year. With that, I will now turn the call over to Mike.
Michael Scarpelli: Thank you, Frank. We saw continued strength across the board in Q2 with great sales execution and operational efficiencies, setting us up for a strong back half of the year. Our Q2 product revenues were $255 million, representing 103% year-over-year growth. Consumption outperformance was led by our financial services customers, with continued strength from our technology and healthcare verticals. Our rapid growth is driven by our existing customer base. The expansion of our net revenue retention rate to 169% is indicative of the power of our product over time, as well as our sales team driving long-term business outcomes. Q2 was an impressive quarter of sales execution. Remaining performance obligations grew to $1.529 billion, with net new bookings led by the technology and financial services verticals. We are still maturing sales organization to sell multi-year contracts, and the timing of the largest multi-year deals will be lumpy. As a reminder, in Q2 last year, we sold our largest multi-year contract ever, a three-year $100 million deal. While the multi-year component of new booking sets up a difficult comparison, we saw a net - we saw new annualized contract value accelerate compared to the year ago period. This is why RPO and revenue must be evaluated together in a consumption-based business model. Of the $1.5 billion in RPO, we expect approximately 56% to be recognized as revenue in the next 12 months, representing approximately $87 million increase quarter-over-quarter. We remain focused on penetrating the largest enterprises globally as we believe these organizations provide the largest opportunity for account expansion. In Q2, the number of customers with greater than $1 million in trailing 12-month product revenue increased to 116, up from 104 last quarter. The second quarter was a breakout quarter for us in terms of profitability and efficiency. On a non-GAAP basis, our product gross margin was 73.6%, up 140 basis points from last quarter. Increased price per credit related to higher price addition consumption and higher-than-expected compute as a percent of revenue from improved storage compression mentioned last quarter drove the outperformance. We have confidence in our ability to show leverage over time, but we view this significant quarter-over-quarter increase as one-time in nature. Operating margin was negative 8%, benefiting from revenue outperformance. Our adjusted free cash flow margin was 1%, positively impacted by strong linearity in bookings and operating margin outperformance. Going forward, we believe we will remain adjusted free cash flow positive. As a reminder, adjusted free cash flow excludes the impact of net cash paid or received on both employee and employer payroll taxes related items on employee stock transactions. This quarter, we saw a $15 million impact from those items. We maintained a strong cash position with approximately $5.1 billion in cash, cash equivalents and short-term and long-term investments. Now let's turn to our guidance and outlook. For the third quarter of fiscal 2022, we expect product revenues between $280 million and $285 million, representing year-over-year growth between 89% and 92%. Turning to margins. We expect, on a non-GAAP basis, negative 7% operating margin, and we expect 303 million weighted average shares outstanding. For the full-year fiscal 2022, we expect product revenues between $1.06 billion and $1.07 billion, representing year-over-year growth between 91% and 93%. Turning to profitability for the full year. We expect, on a non-GAAP basis, 73% product gross margins, negative 9% operating margin and 7% adjusted free cash flow margin. And we expect 300 million weighted average shares outstanding. Our outlook assumes that we will still add more than 1,200 net new employees during the fiscal year. With respect to COVID, our forecast now assumes that we will most likely continue to work remotely for the foreseeable future, and we have paused most travel with a slight uptick of return to office expenses in the fourth quarter. While we anticipate an eventual return to the office, we do not have a specific time line for that goal. With that, operator, you can now open up the line for questions. As a reminder, Christian Kleinerman, our SVP of Product, will be joining us for Q&A.
Operator: [Operator Instructions] Your first question comes from the line of Mark Murphy from JPMorgan. Your line is open.
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Operator: Thank you. There are no further questions in queue. Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.
