Precious Njoku is a Financial Writer with extensive knowledge about the stock market.

2022-03-06 10:35

Summary

• A 22% drop despite great Q4 2021 earnings
• CEO points out conservative guidance approach as a reason for the stock steep drop
• Acquisition of Streamlit could be a major factor, however, it's not time to cut your losses if any.

Snowflake (NYSE: SNOW) posted solid results for its Q4 2021, but that didn’t stop the stock from tumbling because investors were focused on its guidance. In addition, the market was not happy with the disappointing fiscal 2023 guidance posted by the company.

Snowflakes is a cloud-based data software company. It is one of the most expensive and fastest growers in the sector. As a result, the market is sensitive to news about the company. On Thursday, the stock fell 22% to $205.99 in pre-market trading. The stock has been in success since it went public.

Let’s review the results and then understand why the guidance was dismal. The company had revenue of $383.8 million which represented a growth of 101% and beat the Wall Street forecast of $372.6 million. Product revenue was up 102% at $359.6 million, ahead of the guidance range. The gross margin for the non-GAAP sector was 75% for quarter four. Free cash flow was about 27% of revenue.

In an interview with the CEO of Snowflake, Frank Slootman, he noted that the earnings report was “exceptional” for the quarter, but one sore point was the revenue did not beat guidance by a significant margin.

Slootman explained why it was so. This is because the revenue is tied to the unusual consumption-based revenue model of the company. That is, customers only pay for the compute time they consume. A tweak to the software in January made customers use the same workload but with fewer resources. That tweak was costly to the company, and in the first three weeks of January, the cost was only $2 million. But Slootman notes that eventually, the change will benefit the company. “When something becomes cheaper, the demand rises. In our company, that is compute time.” The company used to sell compute time by the hour but has now changed to per-second billing.

Despite the dismal guidance, Slootman notes that the company had an impressive performance in the quarter. Citing secondary metrics, he states that the net revenue retention rate, which shows how effective repeat business was, was 178% which is a growth from the 173% in October. The remaining performance obligations rose 99% year over year to $2.6 billion, which was a considerable growth considering 94% in the former quarter. The number of customers is now 5,944, including 184 customers with trailing revenue above $1 million, and that has grown above the 116 customers in the former quarter.

Other incredible performance metrics such as the full year product revenue was up 106% at $1.14 billion while adjusted free cash flow rose 12% to $149.8 million.

So, what is in guidance?
Slootman notes that the approach the company takes to guidance is conservative. For example, the original outlook for January 2022 was a growth of 80%, but in reality, the actual increase was 26% points higher. Also, a significant number of new customers have been signed by the company, which was not considered by guidance. Because these are just coming into the company, the revenue will be in the future.

One highlight of the report, according to Slootman, was that Snowflake had just acquired Streamlit, a company that would help Snowflake create data visualization products on its platform. This acquisition cost the company about $800 million, with payment being 80% in stock while the rest will be in cash.

Despite the stock’s drop, Snowflake’s shares are trading at 34 times the forecasted sales for the current year.