Snowflake Inc. (NYSE: SNOW) Deutsche Bank Technology Conference August 31, 2022 3:45 p. m. m. Et
Participating companies
Mike Scarpelli – Chief Financial Officer
Conference Call Participants
Brad Zelnick-Deutsche Bank
brad zelnick
Welcome to all. I remain Brad Zelnick of Deutsche Bank’s software team, delighted to be here for this opening session, posting a verbal exchange with Snowflake’s CFO, Mr. Mike Scarpelli. Mike, welcome.
Mike Scarpelli
Thank you for having me, Brad.
brad zelnick
It’s always a pleasure, even bigger to see them here in Las Vegas, where there’s casino action and all kinds of entertainment plus learning a lot about corporations like Snowflake.
Mike Scarpelli
Yes, first convention as a public company.
brad zelnick
I’m glad to see you again. I’m glad to see you again. The format of this consultation is a conversation by the fireplace. I’m going to ask Mike a total series of questions. I’ll make sure to keep an eye on my inbox in case I have something I need to upload to the conversation. I will do my best to integrate it. But with that, let’s go. Maybe Mike, for starters, just posted the quarterly effects of the moment last week. What key messages do you expect investors to remember?
Mike Scarpelli
I think the first thing is that we are betting on a big market that is developing and there is a great opportunity. And there will be many winners in this space. It is not a whole. So I think it’s a very important thing. The other thing is that we’re still in the early rounds with most of the corporations we deal with. If you take a look at the Global 2000, we’ve given you this metric. 500. La average source of revenue is $1. 2 million. It’s not a very big expense for a Global 2000, but if you take a look at consumers of a million dollars and more, we’re at $3. 5 million. This tells you that there is plenty of room for expansion in those corporations. And it’s funny. I get all those questions from other people and they say, well, all consumers and macro uncertainty are looking to cut costs.
Well, you need to know how much $1. 2 million you can let pass from five other people and that covers $1. 2 million. When you have corporations that have a hundred thousand or more employees, it’s not a huge expense for most of our customers. And the other thing that I think is also vital is that with a lot of our customers, they don’t necessarily see us as a cost. They see us as an aid to the expansion of their business and even as new resources as a source of profit for their business. You have noticed that Capital One has this Slingshot software that they need to sell. We generate profits for them there. And this is not unusual in all spaces with many of our clients or we are at the base of controlling their businesses. So very early rounds of migrations for our clients.
brad zelnick
This is helping to set the scene. And again, I just need to open it with a little thought on the way, I do not need to delay. But if I go back to Q1, Q1 wasn’t and possibly isn’t that smart a way, Q2 possibly is or some would let’s say in a positive sense when you look at the latter part of the year compared to the first and second quarters and think about your targeting method and guess the accuracy you would possibly have over time and the ability to increase are waiting for activity. Is there anything to say that we should take into account when thinking about the rear and the expectations that you have placed on yourself?
Mike Scarpelli
Nothing has replaced in our guiding philosophy since our initial public offering. If any of you were at the traveling presentations, when we talked to investors, I told them very clearly that a speed of 3% to 5% is a smart speed and that’s the kind of goal we’re looking for. Yes, I would like to beat it more, but I don’t need to beat 10% to 15%. I try to give other people a meaningful recommendation and a realistic recommendation for the company, just like Q1. We don’t understand too worried when we have a speed of 3%, just as I’m not too excited when we have a speed of 6%. These are quarterly things. I’m focusing more on the $10 billion and how temporarily we can get to $10 billion. I know that’s what the whole control team is focusing on.
brad zelnick
Well, it’s smart to know that nothing has changed.
Mike Scarpelli
It has nothing at all.
brad zelnick
And it’s also smart to hear him say $10 billion, because we’re moving on to communicate more about this as we go along. But perhaps just in terms of snowflake’s business trends and drivers, one of the very positive things we keep hearing about Snowflake from consumers is its early leadership and knowledge sharing and potential opportunity there. Where are our consumers in terms of their willingness to use knowledge sharing for analytical processes?And how do you see this creation of thickness for the platform in the long run?
Mike Scarpelli
Well, I would say I’ll take a step back. So when we communicate with almaximum with each and every new client, that’s one of the things we’ve communicated about the ability to percentage knowledge, and that’s what motivates a lot. other people opt for Snowflake: for Snowflake, but the truth is that you want to put your knowledge into Snowflake first and start doing your general work, then start sharing knowledge. Data sharing is probably the ultimate complex in money services, however, it shouldn’t surprise you either, because a lot of knowledge is shared, think about the whole coverage budget and the like, all the other knowledge resources from where you earn cash or think about constancy or banks and how they take care of transmitting knowledge to their customers. Data sharing is an ideal way to do things in a secure and governed way, as the custody of knowledge never changes.
Therefore, it solves many privacy security issues. And by using Snowflake to share knowledge, you know precisely who accessed what knowledge to get things done. And so it’s a pretty significant piece for us and it creates that grip. And what we’re seeing now is that a lot of the new consumers we’re getting are due to some of our instances of snowflake use in monetary facilities that attract new consumers to us. So, we think it’s one of the most significant things and a real differentiator for Snowflake is this ability to share knowledge that we have.
brad zelnick
I attended the summit in June, tons of visitor activity and a lot of enthusiasm, a lot of new or new features, a lot of innovation, two in particular that marked me significantly, Iceberg and Unistore. And I’d love to hear from you, why are you so excited and why?
Mike Scarpelli
So, they’re pretty exciting, but Unistore, where you can process transactions like workloads, think about things in 10 milliseconds, you might not get less than that right now, but it actually allows a lot of other people to build your apps with the full local knowledge and application. But it’s not just that Streamlit is a vital component of it. And one of the reasons we bought Streamlit was to push our product roadmap, where we were looking to make it less difficult to write Unistore related apps. And I think Apache Iceberg is adapting to the de facto popular table format for our biggest consumers. And it gives consumers the ability to run their Snowflake directly on those external boards. Some of our biggest consumers need us to integrate this into GA as soon as possible, as they have started employing it in production to do so.
So, I’m excited about both, however, local apps are where the real opportunity lies and that will be felt next year. I would say Iceberg Tables will be in GA until the end of this year. No communication about PI Snowpark with Python. Ability will be in GA later this year, Unistore a little later, more in the early part of next year. And that’s when we expect Streamlit to be completely local to Snowflake as well to enable that. That’s what we’re passionate about. Really, local apps are the thing.
brad zelnick
Great, I can’t wait to be there, I can’t wait to see the effect it has on the business and be more informed about consumers. It is down 171% in the last quarter, suggesting that consumers see the real price of what is a small starting ground and then evolves very quickly. How does the abrupt increase in usage that we are seeing in many consumers facilitate its expansion movement?
Mike Scarpelli
So first of all, our Net Earnings Source means I just need to update everyone to remind them to get into this cohort for the Net Earnings Retention Source that they need to consume for two years and that, because that’s their last 12 months. of expansion over its last 12-month expansion. And what I would say is that we think our net earnings retention rate will remain the highest for some time. Yes, it will fall. But that’s just a starting service: Many of our consumers are early in their migrations. I don’t see it slowing down. It’s back to what I say, the average G2K spends 1. 2 million today. In other words, if you look at those people’s budgets, there’s very little spending. And if we can get the likes of Capital One, it’s like a run fee of $48 million, $49 million, but they’re all in the cloud. Most of the other banks, the big ones, may be much bigger than Capital One if they pass out in the cloud, but whether or not that will happen remains to be seen.
brad zelnick
How do you see customers, Mike, overconsuming instead of consuming less of their credits in contractual commitments?Can you remind us of your practice of using unused credits in long-term contract years?And what trends do you see in terms of customers?’ skill who are waiting for your intake with you?
Mike Scarpelli
yes it
brad zelnick
Because I feel like if we think about the past year, it’s the recurring story of, hey, consumers see so many benefits. They deploy even faster, get even more price, and are located where they are before the end of the year, depleted by their credits.
Mike Scarpelli
Sí. Bien. No well, so I’m going to divide it into two things. So generally when we do a Cap One with a client, Cap One is the initial agreement on the arrival of a new customer, it took 240 days. so that they are successful at the contractual rate they consumed the first year. Now, we’ve accelerated this with the help of partners and teams that now take around 210 days to get them fully into production. Typically, consumers consume one hundred percent in their first year. Yes, you have consumers for professional or other reasons, they were just slower, priorities have been replaced within the company. Possibly it would take them longer and then they would have unused credits. The way our contracts work is that as long as you renew for an amount equal to or greater than your last annual contract, you will be able to carry out those unused credits.
And we usually sign a contract with a consumer that is a 3-year contract and regularly it’s a commitment of both the first year, the ramps in the current year, the ramps in the 3rd year. In the end, if they have something left over, they would move on to a new contract as long as they earn an equivalent or greater amount, but the truth is that we enter into negotiations with consumers. Unused credits are a great thing. It’s frankly that most consumers who eat before their 3-year period, and our biggest consumers are the best example of those who possibly wouldn’t, will run out of credits before their 3-year period. I will say that there are regularly $3 or $4 million in overdue credits in each quarter that is converted into revenue. And it regularly relates to: believe it or not, there are a lot of small businesses that are still bankrupt that you never hear about. There are corporations that have replaced their businesses and are downsizing and promoting a department or whatever, but that’s not a massive percentage of our revenue.
brad zelnick
Nice and useful comment. Maybe moving on to another topic of verbal exchange is about innovations in your Snowflake platform, in which you have a wonderful roadmap to move forward for many years as a company. And it turns out that consumer feedback on innovations at the end of last year is still very positive and I know you shared some examples of that on your Investor Day, showing some adoption across the cohort. But can you tell us about the elasticity of the call and the expansion opportunities you talked about that normally take about six months to materialize?And how do we think about the effects of having Graviton 2 in the current part of the year and to what extent is this included in your forecast?
Mike Scarpelli
Well, that’s completely included in our forecast, as we said at the beginning of the first quarter when we gave our. when we reported on the fourth quarter and this was expected to happen in a part of this year. The truth is that software and hardware innovations are something basic that we will continue to see. And that’s smart because it enhances valuable functionality for our customers. When we become less expensive for our customers, they shift more workloads to us. And as we said in the past, we expect there to be a 5% headwind in earnings each and every year. That’s how we forecast the corporate long term for those various functionality innovations, whether they’re software and we believe most of them are software or hardware. And every time I go to an assembly each and every quarter where I deal with senior control in product engineering and control, and there are over 50 things in that pipeline that are all software innovations that are running on and are going on to be implemented. for the next two years.
The only thing I will say is that it is so exclusive about this company unlike an application software company, in an application software company you can implement a new feature in a quarter. What we do are two-, three- or four-year projects that we’re running. Like all those things that we’re talking about, Unistore, Snowpark, all those things, those are things that when I, somewhere before, when I joined the company, they just delivered to the market now, because we’re in a global database. You have to put everything in its place. There are so many trials that go through it. Then. . .
brad zelnick
And I think it’s fair to say that it creates a competitive mode that isn’t appreciated through app companies. . .
Mike Scarpelli
Correct. . .
brad zelnick
. . . that style, an enterprise workflow can be much, much less technologically sophisticated, unimportant, but. . .
Mike Scarpelli
We’re naïve either. There is a festival there. And as I’ve said in the past, there will be a lot of winners. We just think we have amazing technology. And we believe that we are several years ahead of the people. A genuine differentiator that creates rigidity is the exchange of knowledge.
brad zelnick
It makes a lot of sense.
Mike Scarpelli
And, by the way, we are the only ones who share knowledge as we do. People communicate about knowledge sharing, but they don’t do the same.
brad zelnick
Can you double click on it?
Mike Scarpelli
Some corporations communicate about knowledge sharing, but move knowledge. We do not move knowledge. We continue to maintain that in our Snowflake instance, and we have the security and governance around that.
brad zelnick
I’ll say, what are the benefits of security and governance?
Mike Scarpelli
Security and governance come first, but also cost, because you buy it once. This is a big plus.
brad zelnick
It makes a lot of sense. You already communicated a bit about this when you communicated about the average of 1. 2 million, but are there any other statistics that convince you that Snowflake remains poorly penetrated within its installed base?And also, can you give us an idea of what a saturated account looks like?If there is such a thing, which I have to imagine, there will be a growth of knowledge, however, what does an average account look like and how does it make investors perceive the point, what is the room for maneuver?look like through the base?
Mike Scarpelli
Well, I have the idea that our biggest consumer had a saturated account two years ago and went from $29 million to $48 million, a run rate of 49 million and I know there are more opportunities, so I don’t really know what to count saturated looks like. I haven’t noticed it. I’m not saying it’s there, I’m not aware that everything I would say is absolutely saturated because there are more use cases. Body of workers to manage that hardware and all the other security around that hardware, 1. 2 million is nothing.
I, the CFO of ServiceNow, control our entire infrastructure internally, such as running SAP and HANA. And when he saw what he would spend a year on his hardware for HANA, it’s nothing. And that’s what the I Trust I Know provides me, it’s a very small post about where they can go. And when I look at our 246 consumers who are over a million a year on average, it’s 3. 5 million. There is no explanation as to why for a Global 2000, I’m not going to say it will happen in six or seven years, yet they can seamlessly spend $10 million a year on average without problems.
brad zelnick
That makes a lot of sense. One of the considerations about the immediate expansion of cloud use within the enterprise that we hear about is inefficiency and overconsumption. And in a way that adds questionable business value, how do you work with consumers to make sure their snowflake usage is truly optimized?by value?
Mike Scarpelli
The most important thing we see when we look at clients whose expenses temporarily get out of control regularly goes back to the fact that they never took up education. I mean it. And I was literally disappointed with our sellers my last QBR. I’m like, listen, the district administrators we had established that they have to, when they’re Cap One, they have to buy education and why it’s cheap. It’s not that expensive, however, the explanation for why you need to get an education is because you really perceive how to use Snowflake correctly. And it establishes its own government, because ultimately, the visitor has to establish the government to control its use. And what was happening was that the DMs just allowed it, they had the strength to remove it from the takeover order.
And now, education can only be passed if it goes through controlled agreements through my organization because of this. But we move on to consumers. We’ve done it since day one, this is not a new phenomenon where we pass on to consumers and help them optimize. We put resident architects on site with clients to help them. And most of the time, it’s about understanding how to write well. its queries in Snowflake, so you don’t lose a lot of computational cycles to process things, things as undeniable as that.
brad zelnick
Mike, you’re one of the top strategic CFOs I’ve had the thrill of meeting, but you’re still a CFO. So if it sounds good to you, do I have to ask you some monetary questions?
Mike Scarpelli
You can ask me whatever you want.
brad zelnick
Navigate to the template. So Mike, if we extrapolate from your consultant for fiscal year 2023 to your $10 billion purpose for fiscal year 2029, that implies a CAGR of 32% or very close to the expansion rate of about 30% that you’re looking for for fiscal year 2029 once you have a scale of $10 billion. Its expansion rate is unlikely to fall by about 65% in fiscal 2023, and only about 30% will remain strong at this rate for six years. Can you adjust the expansion trajectory to $10 billion for fiscal year 2029?
Mike Scarpelli
Well, that’s a purpose we’ve set for ourselves and everyone expects us to fight and we must defeat it and I don’t consult beyond what I did there. And listen to what our forecasts are for 2024 at the end of February when we debut the fourth quarter.
brad zelnick
It is ok. We look forward.
Mike Scarpelli
Sorry, Brad, I can’t give you any further directions.
brad zelnick
No, pretty fair. As you dig deeper into companies’ accounts, how does their sales movement and the company’s unitary economy evolve?
Mike Scarpelli
The promotion movement in those giant accounts, when the accounts reach a certain size, there is only one representative who works all his life on this account, but it is not just this representative, he can have several SEs and resident architects in those accounts. . And this representative is paid more for the source of income than for growth. And the more important the visitor’s appointment, the more we take advantage of the cash from sales and marketing, but this is not transferred to us one hundred percent because those giant accounts require more resources to manage them. But it’s transparent that the $50 million appointment control has a much larger contribution margin in managing a $2 million visitor appointment pool.
And see the long-term leverage in sales and marketing. And I think we’ve been pretty consistent with the year-over-year decline in operating leverage over the last few years. And we’re going to continue with that, however, I’d like to say we’re focusing more on earnings growth, product margin expansion, loose money flow, and then operating margin.
brad zelnick
This brings me to my next query, which is that on Investor Day, it raised its long-term operating margin or fiscal target for 2029 to 20% from 10% previously. Can you maybe double-click and have already answered that query?to some extent, however, only the combination of the contribution to that purpose between the gross margin of the product, sales and marketing profits, which turns out to be the percentage of the lion where the leverage and the other expense items come from.
Mike Scarpelli
Oui. Je I think there’s room in the margin of the product. We’ve guided 78, we’re at 75 right now. Maybe we can pass a little higher, but first let’s get closer to 78. We’re never going to get to the mid-80s, which probably wouldn’t happen with the amount of computation and garage costs we have there. Sales and marketing are indeed the ones where there is leverage and we are a bit into the unknown. I feel comfortable with the passals we have given, maybe there are benefits. I don’t know, but my philosophy is that I like to walk before running and let’s get closer to those passals before we update them and knowing that it’s pretty smart on an investor’s data, update things.
brad zelnick
What is the threat of the gross margin of product problem?You find a place on the horizon, a greater festival of prices or other points that. . .
Mike Scarpelli
The number one threat to product margin is that if we get into more transactional workloads, what does pricing look like to succeed?and who knows what the festival is. And by the way, they gave us the margins of the units when we dealt with people, like some of the big cloud players who like to give loose things to save our accounts and we are still to win. .
brad zelnick
We are like a baby, they say.
Mike Scarpelli
Yes. Free is free. There are still prices to make it work.
brad zelnick
Great. Let’s talk about balance. It now has about $5 billion in coins and investments and has no debt. And now it is also starting to generate significant loose coins. How many currencies do you want to run the business and how do you plan to implement excess capital in the future?
Mike Scarpelli
I don’t have a secure amount of cash that I would say we want to run the business. I’ll tell you that in this environment, I like to have that because now there are a lot of attractive corporations coming to us, we would. we’re likely to do more mergers and acquisitions, I don’t know, I don’t see us doing great things, however, we’re going to continue to do mergers and acquisitions that drive our product roadmap. And that’s what Streamlit did. That’s what Applica does. So, am I contemplating doing some sort of percentage buyback or not until we have a positive operating margin?So.
brad zelnick
Certainly, with this opportunity that you talked about Applica, you can double-click on us, for us. What an opportunity he saw, all the main points to scale. What she paid, what she expects from her.
Mike Scarpelli
So, Applica has about 95 engineers, most commonly founded in Warsaw, Poland has some attractive technical skills around AI that we didn’t have in the company and especially the generation they have and the other people they helped take unstructured documents, think PDF and others. , and put it in a semi-structured format. So you can do more research on those things. And that’s what it does. And that was all we were looking to do. And we’re working on building it, but we didn’t have the DNA.
brad zelnick
Did they have a source of income or is it. . .
Mike Scarpelli
Small income. They – it wasn’t even a million dollars.
brad zelnick
they gave it to me Thank you. Thank you. Just follow. . .
Mike Scarpelli
About two hundred million.
brad zelnick
I’m Sorry.
Mike Scarpelli
That’s about $200 million for the company.
brad zelnick
they gave it to me Well understood. It just moves on to other topics.
Mike Scarpelli
By the way, it is the company that recently contemplated a valuation of $600 million in loose financing. So, there are a lot of those corporations right now with the idea that they were worth $600 million, 700 million that are now looking for $100 million for $200 million dollars to buy them.
brad zelnick
But again, with intellectual resources and talent.
Mike Scarpelli
Correct.
brad zelnick
And the ability to do it right away.
Mike Scarpelli
yes it
brad zelnick
And what about bringing more knowledge to the platform.
Mike Scarpelli
Correct.
brad zelnick
I see where there is a logical business case for that. Just another general query away from mergers and acquisitions and the features it loads onto the platform. One of the unexpected things he revealed on Investor Day is that more than 40% of the migrations he sees come from other cloud solutions. And I think it’s a pretty heavy burden to move volumes of data. What motivates consumers to triumph over the inertia of sticking to their existing solution and where do you see maximum migrations to the cloud from?
Mike Scarpelli
So, in fact, the simplest migrations are migrations to the cloud. Migrations on site are the most painful. And we still see a lot of Redshift consumers coming to Snowflake. my previous comment, there will be many winners. I think Redshift still has about $1 billion in business. But many of those consumers have gone beyond Redshift features and need to share knowledge, which is why they come to us. And so I will say that much of GSI’s assistance accelerates migration times, but they have a tendency to focus more on giant local migrations. Ter’s knowledge is that we’re seeing HANA migrations and other things falling right now.
brad zelnick
Only to the point where migrations to the cloud are much easier, to what extent do I know that sharing knowledge creates adhesion over time, but to what extent is it a threat to Snowflake?And obviously, I mean, their net retention is phenomenal. I don’t think you’re talking much about your gross turnover or your gross retention.
Mike Scarpelli
Raw hold is like 90, north of 95. Je I don’t even know on 97 maybe, I don’t know – Jimmy is there. He knows exactly the number.
brad zelnick
Jimmy, 97 gross retention, a lot there. Very well. That’s great.
Mike Scarpelli
Me more in that retention.
brad zelnick
No, I think it’s much more vital and understandable, so we’ve run out of time to the fullest. We have a few minutes left. I mean, I can ask you several questions, Mike. What’s the question I’m not asking you?What do you need to make sure we know?
Mike Scarpelli
Yes, I just think a lot of other people look at us as a burden and I look at that more, what is the price we generate and help reduce business fees?And the other thing that is vital to perceive is a massive market that we are in, there will be many other people who will succeed in that market. It is not one for all, it will never be one for all. Nothing has replaced since we went public, with which we compete to the fullest is Google with Big Query, then Microsoft and AWS. However, we are such smart partners with AWS. And then Microsoft, secondly, I would say we don’t have a wonderful partnership with GCP, but now we can sell on Marketplace and GCP. We coexist with Databricks on many, many accounts, I think they do very well on the knowledge science side. They don’t have the ability to share knowledge, but what sets us apart from all of them is the ease of use in the sense that you don’t need to be a tech aficionado, to have a lot of technical skills to be able to use Snowflake, unlike other products out there.
brad zelnick
Great. Mike, in that, I think we’ve almost run out of time. It’s smart to see you, even better to see you here and really enjoy it. Thank you.
Mike Scarpelli
Thanks for having me.
Q&A session
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