Snowflake - Q2 2024

Transcript

Moderator (participant)

Good afternoon. Thank you for joining the Snowflake Q2 Fiscal year 2024 Earnings Conference Call. My name is Kate. I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the call over to your host, Jimmy Sexton, Head of Investor Relations at Snowflake. You may proceed.

Jimmy Sexton (VP of Finance, and Head of Investor Relations)

Good afternoon, thank you for joining us on Snowflake's Q2 fiscal 2024 earnings call. With me in Bozeman, Montana, are Frank Slootman, our Chairman and Chief Executive Officer, Michael Scarpelli, our Chief Financial Officer, and Christian Kleinerman, our Senior Vice President of Product, who will join us for the Q&A.

Moderator (participant)

Excuse me, ladies and gentlemen. It does look like the speakers have disconnected. One moment while we get them reconnected. Thank you for your patience, ladies and gentlemen. We do appreciate that, and we do ask that you remain holding for a few more moments while we get the speakers reconnected. Again, ladies and gentlemen, we do appreciate your patience, and we do ask that you remain holding for a few more moments while we get the speakers connected again. Again, ladies and gentlemen, we do appreciate your patience, and we do ask that you remain holding for just a few more moments while we get the speakers reconnected to the call. Again, ladies and gentlemen, we do appreciate your patience, and we do ask that you remain holding for a few more moments while we get the speakers reconnected.

Again, ladies and gentlemen, we do appreciate your patience, and we do ask that you remain holding for a few more moments.

Jimmy Sexton (VP of Finance, and Head of Investor Relations)

It was like the first.

Moderator (participant)

Ladies and gentlemen, we have the speakers back in the call. You may proceed with the presentation.

Jimmy Sexton (VP of Finance, and Head of Investor Relations)

All right. Good afternoon again, and thank you for joining us on Snowflake's Q2 Fiscal 2024 Earnings Call. With me in Bozeman, Montana, are Frank Slootman, our Chairman and Chief Executive Officer, Michael Scarpelli, our Chief Financial Officer, and Christian Kleinerman, our Senior Vice President of Product, who will join us for the Q&A session. During today's call, we will review our financial results for the second quarter fiscal 2024 and discuss our guidance for the Q3 and full year fiscal 2024. During today's call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, product and features, long-term growth, our stock repurchase program, and overall future prospects. These statements are subject to risks and uncertainties, which could cause them to differ materially from actual results.

Information concerning these 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, 2023, and the Form 10-Q for the quarter ended July 31, 2023, that we will file with the SEC. We cause 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 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 at the substitute for, our 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 posted at 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 (CEO)

Thanks, Jimmy. Welcome. Good afternoon. Q2 product revenue grew 37% year-over-year to reach $640 million. Non-GAAP product gross margin expanded to 78%. Non-GAAP adjusted free cash flow was $88 million, representing 50% year-over-year growth. Q2, we continued to execute in an unsettled macro environment with incremental improvement in general sentiment and engagement. Generative AI is at the forefront of customer conversations. However, enterprises are also realizing that they cannot have an AI strategy without a data strategy to base it on. We have a head start in this race, as the epicenter of highly curated, optimized, and trusted enterprise data. We now have a presence with 639 Global 2000 customers. AI reaches beyond enterprise boundaries. Models need external data to answer challenging questions. Data sharing makes Snowflake uniquely positioned to enable AI workloads.

As of Q2, 26% of Snowflake customers are data sharing, up from 20% in the same period last year. Approximately 70% of customers with more than $1 million in trailing twelve-month product revenue are data sharing with an average of six stable edges. For years, we focused on the programmability of our platform via Snowpark. We are seeing momentum. In Q2, we added more than 400 Snowpark customers, and our consumption grew approximately 70% quarter-over-quarter. 63% of our Global 2000 customers are using Snowpark on a weekly basis. Document AI is now in private preview. With Document AI, customers can use natural language to ask questions of unstructured data. Legal contracts or invoices are now available for inquiry and analytics. This is an early example of how language models are expanding our opportunity.

With Snowflake Container Services, we are bringing LLM models like Reka and NVIDIA's NeMo into Snowflake. You heard in my conversation with Jensen, Snowflake is sitting on a goldmine of data. Together, we can help customers turn that goldmine into intelligence. We announced Snowflake Container Services two months ago. Since then, hundreds of customers have requested access to the private preview. With our support of Iceberg tables, we are expanding our data lake scope. Many customers already use Snowflake as a data lake. Large Financial Services Customer consolidates data in Snowflake to eliminate useless extracts in transfers of data. This means new use cases are deployed 80% faster. Iceberg tables will bring additional scope and open file formats to Snowflake. We expect to unlock more data lake opportunities with these capabilities. We've also reached an inflection point on the application front.

At Snowflake Summit, we launched so-called Native Apps in public preview. We have over 25 native application providers today. Snowflake is a safe, certified, and sanctioned place to deploy applications. Grassroots support is building. We now have more than 145,000 monthly active developers on Streamlit. This, this represents an increase of 160% year-over-year. Our startup program allocates resources to developers planning to build on Snowflake. Approximately 20% of new customers landed in Q2, landed on Snowflake through our startup program. General sentiment appears to be incrementally getting better. Snowflake Summit in June was a highlight of energy and excitement about what is becoming possible in the world of data. We hosted over 20,000 on-site and virtual attendees. This was up over 85% from last year. Next stop is our Data Cloud World Tour.

The World Tour brings Summit messaging to a wider audience. We expect to double the attendance of Summit, visiting 26 cities worldwide. With that, I will turn the call over to Mike.

Mike Scarpelli (CFO)

Thank you, Frank. Consumption came in line with our expectations for the quarter. In May, we saw a return to growth, with strength continuing into June and July. From a booking standpoint, we saw promising signs of stabilization, with new bookings outperforming our expectations. However, we believe productivity has room for further improvement. Q2 remaining performance obligations grew 30% year-over-year, totaling $3.5 billion. Of the $3.5 billion in RPO, we expect approximately 57% to be recognized as revenue in the next 12 months. This represents a 32% increase compared to our estimate as of the same quarter last year. Our net revenue retention rate of 142% includes six new customers with $1 million in trailing twelve-month product revenue.

We now have 402 customers with trailing twelve-month product revenue greater than $1 million. We continue to focus on growth and efficiency. We generated $88 million in non-GAAP adjusted free cash flow, outperforming our Q2 target. Q2 represented another quarter of continued progress on profitability. Our non-GAAP product gross margin was 77.9%, benefiting from a one-time credit, from one of our cloud service providers. Non-GAAP operating margin was 8%, benefiting from tight controls on headcount additions and the overachievement in product gross margin. Our non-GAAP adjusted free cash flow margin was 13%. We continue to have a strong cash position with $4.9 billion in cash, cash equivalents in short-term and long-term investments. We did not repurchase any shares in the quarter, but plan to opportunistically purchase shares using our free cash flow.

Now, let's turn to guidance. Our forecast assumes that our largest customers will continue to be a growth headwind. We are seeing encouraging signs of stabilization, but not recovery. Our forecast calls for these customers to more closely align their consumption with their annual contract value. For the Q3, we expect product revenues between $670 million and $675 million, representing year-over-year growth between 28% and 29%. Turning to margins, we expect on a non-GAAP basis, 4% operating margin, and we expect 364 million diluted weighted average shares outstanding. For the full year fiscal 2024, we expect product revenues of approximately $2.6 billion, representing year-over-year growth of approximately 34%.

Turning to profitability for the full year fiscal 2024, we expect on a non-GAAP basis, approximately 76% product gross margin, 5% operating margin, 26% adjusted free cash flow margin. We expect 362 million diluted weighted average shares outstanding. We will continue to prioritize hiring in product and engineering. We still expect to add approximately 1,000 employees in fiscal 2024, inclusive of M&A. With that, operator, you can now open up the line for questions.

Moderator (participant)

Absolutely. We will now begin the question and answer session. If you would like to ask a question, please press star followed by a one on your telephone keypad. As a reminder, if you're using a speakerphone, please remember, remember to pick up your handset before asking your question. The first question will be from the line of Keith Weiss with Morgan Stanley. Your line is now open.

Keith Weiss (Managing Director)

Hey, everyone. Thank you for taking the question, guys. Mike, I wanted to dig into, into the comment about, kind of a large customer activity. And you talked to us about sort of consumption coming more in line with their, their committed contracts. Can you give us any visibility what's happening on the contract renewals? Like, as you go through these big contract renewals, are you seeing any change in their behavior of what the large customers are willing to commit to, and, and any impacts that, that we should be thinking about on how that's going to impact bookings and sort of RPO on, on a go-forward basis?

Mike Scarpelli (CFO)

Yeah. No, we, we're seeing customers renew. This quarter was a good renewal quarter. We had our largest customer, they renewed under their existing terms. They did a $100 million 3-year renewal, even though their revenue run rate is at a higher amount than that. I think we did 9 or 10, $10 million plus TCV deals this quarter, and most of those were renewals. So customers are doing that. Remember, that doesn't necessarily equate to a consumption, and we do know some of our largest customers are trying to consume at their contract rate rather than going above that.

Keith Weiss (Managing Director)

Got it. So the dynamic is really on consumption, it is not on contracting as of yet?

Mike Scarpelli (CFO)

No, it's, it's on consumption. As I said, the contracting actually feels the sentiment really seemed to change in July, with customers really reengaging with us. I, I think we'll have good bookings, but that doesn't equate to consumption. It takes time for the consumption to come in.

Keith Weiss (Managing Director)

Got it. Got it. If I can sneak one in for Frank as well. You talk about you need a good data strategy to have a good AI strategy, and that's something we hear a lot when we're talking to customers and people out there in the field, so that really resonates. When it comes to kind of go to market and sort of the selling motion, does having to have the GenAI conversation, while a long-term positive, does that disrupt the sort of typical kind of data cloud discussion that you guys have been having for the past, like, five years with these customers? Does it risk or has it been elongating the sales cycles in a real way?

Frank Slootman (CEO)

No, I wouldn't say so. You know, Keith, we were actually saying that having highly organized, optimized, trusted, sanctioned data is incredibly important for deploying large language models. If you think you can just, you know, drop a model on top of a data lake and just, you know, see what happens, that's not gonna end well. That's what people are realizing. They really got to get super serious, you know, about their foundations, you know, before we. If you don't have a good foundation, there's not much you can build on top of that. There's tons of governance issues involved as well. You know, we spent, you know, literally decades, you know, as an industry, you know, making data highly governed.

In other words, who can have access to what? That now needs to translate into the world of large language, you know, models as well. There's, there's tons of questions that are coming up that are, are, are really important for the enablement of, of, of language models and AI generally. Being extremely organized on your data is, is, is gonna become, you know, a, a premium thing. We're obviously that's, you know, we've been on that, but it's become more important as a function of this.

Keith Weiss (Managing Director)

Got it. Yeah, it definitely resonates with the conversation we're having as well. Thank you very much for the time, guys.

Moderator (participant)

Thank you. The next question will be from the line of Mark Murphy with JPMorgan. Your line is now open.

Mark Murphy (Managing Director, and Head of US Enterprise Software Research)

Oh, thank you very much. Frank, I'm wondering if you can speak to the expanded Microsoft relationship. I, I believe you referred to it as nearly a doubling of the commitment. I'm wondering if you're optimistic on seeing that alignment in the field coming together and perhaps unlocking some, some new opportunities relating to Azure or, or even some of the OpenAI workloads that you wouldn't have seen previously. I have a quick follow-up.

Frank Slootman (CEO)

Yeah, yeah. Look, you know, the, the bottom line of, of working with the, the cloud vendors, you know, is not, you know, what gets said at the top levels, the good intentions. What, what, what matters is, what are the incentives, you know, when you get 14 layers down at street level, how do you get people to get paid? That determines whether they're either gonna fight you and, and double and triple down on that, or they're going to partner with you. You know, we, we see models where we've worked out really, really well, of course, with, with, with, with AWS, but with Microsoft, we were not in the place that we wanted to be at street level in terms of the incentives.

We really took this opportunity when we were renegotiating our relationship with Microsoft to say, "Hey, we have to tackle this," right. Microsoft very much wanted to be a bigger percentage of our business, because they're, they're not punching, you know, at their weight, at all. They're not as big a percentage of our business as they should be based on their market share, and they want to be, and this is the way to do it. It's really, you need to bring alignment, you know, to the field organizations. You're gonna get partnerships, and then you're gonna get joint selling, and then you're gonna get your fair share.

Mark Murphy (Managing Director, and Head of US Enterprise Software Research)

Okay. Thank you for that. Mike, as a follow-up, in Q2, did you observe any customers adjusting their indexing or reducing data retention timelines? It looks like the quarter went well overall, but I'm curious if you sense any more or less of that optimization activity, you know, heading into the H2 year?

Mike Scarpelli (CFO)

In, in terms of customers changing their retention policy, we really didn't notice any of that. If anything, we saw growth in the amount of storage in the quarter. And I just want to call it, that was really one large customer that changed their retention from 5-3 years. That was pretty unusual. And in terms of optimizations, you know, we continually work with customers on their own optimizations, but we're continuing to optimize our software as well, too, because we are really dedicated to delivering price performance for our customers. And I, I want to stress, we've been talking about optimizations with investors since we went public. These will always continue, optimizations, whether it's customer or us doing the optimizations, because when-- history has shown when we improve price performance, more workloads come to us.

Mark Murphy (Managing Director, and Head of US Enterprise Software Research)

Thank you very much.

Moderator (participant)

Thank you. The next question will be from the line of Kirk Materne with Evercore ISI. Your line is now open.

Kirk Materne (Senior Managing Director)

Yeah, thanks very much. Mike, I was wondering if you could just talk a little bit more about the, the comment, you're seeing stabilization in consumption but not recovery. I'm just kind of curious, when you say that, is that the, the pressure from the top down on practitioners starting to ease a little bit, and they're, you know, they're starting to feel better about what they can consume, and they're just waiting for budgets to kind of get refreshed to sort of, you know, get going on the recovery side? I'm just kind of curious if it's sort of the top-down is easing, or it's more that they're taking a little while to sort of ramp back up on projects that perhaps they slowed down, you know, six months ago, three months ago?

Mike Scarpelli (CFO)

I, I actually think it's both. I definitely think the fact that we, kind of saw customers more reengaging with us in July on contracts, and that continues into this quarter, I think it is easing a little bit at the top level in terms of approvals for customers, and they're willing to commit, but it takes time to convert that to consumption. With that said, consumption is good. It was really good today as an example. That's only 1 data point. We want to see more days of that before we, we, we think the, we're, we're, we're, we're into a real recovery. I, I think stabilization is the right term. We're not seeing customers reduce their consumption right now.

Kirk Materne (Senior Managing Director)

Okay. Then, Frank, just as you spoke to a lot of executives at Snowflake Summit, you know, do they recognize the fact that the road to AI does require perhaps a heavier level of investment than they were thinking 12 months ago? You know, how do you think that factors into sort of their thinking on budgets as we go into 2024? Thanks.

Frank Slootman (CEO)

Yeah, the reality is, you know, they don't really know yet in any, you know, real definitive terms, you know, what this is going to take. I mean, I, I think a lot of people, and I think this is correct, they have characterized, you know, their foray, you know, into language models as experimental, exploratory, and, sort of trying to, you know, get their arms around, you know, how big a breadbox, you know, is this? You know, it's gonna take a while, you know, before, you know, we get a real read, you know, on what the level of, of investment is that our people are gonna stomach to do this.

I mean, one of the challenges, you know, one of the great things about Search historically has been that Search, you know, also had a very potent business model to go with it, to pay for it, and, you know, we cannot sort of unleash AI and have no business model to pay for it. People will get tired of that really, really quick. These GPUs, from NVIDIA, you know, they, they, they aren't cheap, you know, as powerful as they are. We all have to bring that into alignment and into focus and, and have a, a sensible go-forward strategy. A lot of the use cases will focus on, you know, what are we getting for this, right? This is not just fun and games and, you know, planning your next trip to Yellowstone.

I mean, people are gonna be asking very, very hard-hitting questions, you know, "What is this doing for us?

Kirk Materne (Senior Managing Director)

Thank you all.

Moderator (participant)

Thank you. The next question will be from the line of Raimo Lenschow with Barclays. Your line is now open.

Raimo Lenschow (Managing Director and Senior Equity Research Analyst)

Thank you. Great to see the stabilization as well from my end. Congrats there. The, Frank, one for you more, as we all realize that data is kind of the new fuel, we do see more, more vendors saying like: "Oh, no, I have the data, I have the data." Which kind of, in a way, like, kind of puts them on a slightly different course than it used to be, compared to your partnership. How do you see that competitive landscape evolving for you, since you, in theory, are the natural kind of holding source for data that is used in AI? How do you see this playing out for you guys? Thank you.

Frank Slootman (CEO)

Well, we see it play out really well. I, I think we agree with you. I mean, we think that data is becoming, you know, infinitely, you know, valuable, and that's for all kinds of reasons. Because we can no longer, you know, run enterprises and institutions based on what we call anecdotal observation, you know. Because the world is, is, is too dynamic, too disruptive, and we have this massive disintermediation happening. You know, we no longer have all these intermediaries, you know, between us and the end customer. You can only run direct-to-consumer businesses, you know, with data. I mean, you see that, for example, in, in insurance, like auto industry, you know, companies like GEICO and Progressive and Liberty Mutual. I mean, you can only run these businesses, you know, on top of data, telemetry data being really important.

We think every business, every institutions, is gonna develop a complete and total dependency, not just on data, but the ability to harness that data. This is a full-on transformation, you know, really, of how industry and, and institutions have, have operated. you know, we're at the leading edge of it, but we're also very much at the beginning of it.

Raimo Lenschow (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Moderator (participant)

Thank you. The next question will be from the line of Karl Keirstead with UBS. Your line is now open.

Karl Keirstead (Managing Director and Senior Research Analyst)

Thank you. Mike, just one, maybe two quickies. You mentioned there was a one-time credit from one of the CSPs. Are you able to define how material that was? It sounds like it might have certainly hit gross margins, but just wanted to clarify.

Mike Scarpelli (CFO)

That was about $4 million that hit in the quarter.

Karl Keirstead (Managing Director and Senior Research Analyst)

Okay, got it. Thanks for that. Maybe just to follow up, Mike, what I'm hearing you describe is an effort, you mentioned certainly your largest customer, but perhaps others, taking their usage a little bit closer to their ACV. One would think that that would result in a decent amount of headwind, yet your guidance for the Q3, in my judgment anyway, is relatively solid. What, what's the offset? What customer segment might be ramping nicely to offset, to some extent, the headwinds from your large customers? Thanks so much.

Mike Scarpelli (CFO)

Well, we're now at 639 Global 2000 that are only consuming on average, on a trailing 12 months, at around $1.5 million, $1.6 million. A lot of those are still doing their migrations, and we do not see that stopping. It's the larger customers, they just are not forecast to grow as quickly. They're still growing, but at a slower pace. Once again, this is a consumption model that could turn around tomorrow.

Karl Keirstead (Managing Director and Senior Research Analyst)

Yep, I get it. Okay. Thank you, Mike.

Moderator (participant)

Thank you. The next question will be from the line of Kash Rangan with Goldman Sachs. Your line is now open.

Kash Rangan (Managing Director and Senior Equity Analyst)

Thank you so much, Frank. I think your Fireside chat with Jensen was absolutely illuminating. He was looking at the opportunity set with structured data in the Snowflake ecosystem and almost salivating. And yet you, you seemed a little moderated in, in that you need to have a business case. So where, when are we likely to reach the point where Generative AI, coupled with Snowpark, could really lead to a tangible increase in consumption outside of the core Data Cloud business? And one for you, Mike. If, if, if we are to read your comments, 3 months of stability, 4 months of stability, it looks like, including August, does that mean that net expansion rates reach a bottom and could potentially start to stabilize and, and rebound as we head into the, the later part of the year? Thank you so much.

Frank Slootman (CEO)

Well, this is Frank, Kash. You know, I'm in, in the, in the really short term, I'm, I'm really talking, you know, days, weeks, and months here, you know, where, where you're gonna see a language model begin to immediately impact the business, is that SQL generation. I mean, in other words, the analyst job is gonna be uplevelled so much, and then people are going to be able to drive queries, you know, into the data much better, much faster, with far less skill requirement than they ever have before. You know, we're, we're, we're showing that off, you know, every day. So, I mean, these days, you know, you, you don't even have to be literate in order to be able to have interactions with your data. So that, that really is an expansion vector that is just enormously...

It's very close to home because it's really how you use data and how you use a platform, you know, like Snowflake. The other area, you know, where you're gonna see drivers of workload is that people get to search for data related to what their general angle of inquiry is in a much more effective manner than they have been able before. This is also where it's very important that you can search beyond enterprise boundaries, you know, because the context of data, you know, is not limited by your enterprise boundaries. We can go on, and on, and on about use cases. There, there is a million of them.

If you get further down, you know, you start asking really, really hard questions that, you know, in, in, in, in, in prior periods, prior eras, we really needed to launch whole analyst teams to go research and investigate topics, where now, you know, the data will be able-- or the systems will be able to generate the queries and the type of data that will immediately very, very quickly begin to generate insights. That's, that's, by the way, that, that's gonna become the leading edge for structured proprietary data, which is, of course, you know, the center of our, of our universe.

Mike Scarpelli (CFO)

Yeah. On your question on net revenue retention, I just want to remind you, I'm not gonna guide to net revenue retention. I do think over time, it is going to continue to converge closer to our growth rate. I do think it will stabilize, I do expect it's gonna come down slightly from where it's at right now, just in what we're seeing today.

Moderator (participant)

Thank you. The next question will be from the line of Brad Zelnick with Deutsche Bank. Your line is now open.

Brad Zelnick (Managing Director and Senior US Software Analyst)

Great. Thank you so much. I've got one for Frank and one for Mike. Frank, stable edge continue to tick up, which is great to see, and I know it's an important metric for the company and its strategic, you know, vision. Anything else, perhaps qualitative, that you can share in terms of, of how data sharing is progressing? For you, Mike, great to see the margin upside. Everybody's happy about it. With such a huge opportunity, how can you be sure you're striking the right balance of investment, especially when you're up against such well-capitalized competitors? Thanks, guys.

Frank Slootman (CEO)

On the, on the, on the topic of, of, of data sharing, you know, we, we instrument, you know, that whole side of the business very, very carefully, and we drive it on a, on a quarterly basis. You know, sometimes, you know, data edges are very enterprise-specific. In other words, they do just have things, the use cases, that just pertain to their business, and it's, these are bilateral relationships between Snowflake accounts and different, you know, institutions. Where it gets really interesting, where you get real network effect kicking in, is when you have industries or sub-industries where data sharing just, just, just makes sense. Obviously, you know, in financial institutions, you know, because financial institutions inherently have been pumping data around at, in massive, massive volumes for literally for generations, this is an absolute no-brainer.

We, we, we do the vast majority. You know, historically, data edges have been in the, in the, in the financial services sector. It's become almost a standard. This, this, this is how we move data from A to B to C. Asset management, particularly, you know, has a really big need for that. The other area, and again, this is an industry in supply chain management, you know, in the supply chain, there are multiple entities to the degree that they all have Snowflake accounts. It's very easy to get visibility in the supply chain across entities, and, and being able to flag supply chain events, you know, much earlier and get visibility to that. Once you're in a supply chain, the need to be, you know, on Snowflake and share data with your supply chain partners is gonna become very, very compelling.

You know, we announced, you know, at Snowflake Summit, and even earlier, our relationship, with Blue Yonder, for example, was really the largest software company in the world of supply chain management, that they are re-platforming, on Snowflake. We think that's another sort of industry/sub-industry, where every manufacturer, every retailer, it's gonna become an opportunity there for us. Just a little bit of color on, on, on how these things develop from our perspective.

Mike Scarpelli (CFO)

On, on your question on investments in the business, Brad, given the opportunity, we are investing as fast as we think we need to invest. You did see the guided margins to 4% for operating margin, where we just did five this quarter, and that's because we're investing. As an example, we have 1,000 H100 GPUs reserved. That's an extra $1 million a month as we're working on AI. I'm not getting requests that people need more headcount in the engineering organization and the sales and marketing. Until we see an increase in productivity, we're gonna be very methodical about how we add resources into those areas. We're definitely not under-investing in the business. I'm not getting the feedback from any of the executive team with regards to that.

Brad Zelnick (Managing Director and Senior US Software Analyst)

Thanks for the additional color.

Moderator (participant)

Thank you. The next question will be from the line of Tyler Radke, with Citi. Your line is now open.

Tyler Radke (Managing Director and Senior Equity Analyst)

Yeah, thanks for taking the question. First question, just on the, the commentary around some of the projects. You're starting to see better momentum there, particularly in July. I was wondering if you could just comment on, on the nature of those projects. Are they, you know, are they larger deals than, than you typically see, or maybe they, they include, you know, more, more Generative AI or, or, or data science, given all the, the new products that you released? If you could just kinda contrast, the pickup and, and kinda where that's coming from?

Frank Slootman (CEO)

As this--. You want me to-.

Mike Scarpelli (CFO)

Go ahead, Frank.

Frank Slootman (CEO)

You know, you, you shouldn't equate, you know, projects with deals, okay? Because there's, there's tons and tons of projects, you know, going on, and projects really relate to use cases, and workloads, and, and applications. You know, we said in the prepared remarks, is we've really seen a sort of a sentiment change from the earlier quarters, where, you know, people were sort of trying to cut off their limbs to, to, to fit within budgetary constraints and all this kind of stuff, and, and where do we-- And, and that's where you see unnatural acts to save money. That, that has really subsided considerably, and the, the conversation has really gone back to where it historically has been.

As you know, we wanna do these applications, these workloads, these migrations, and of course, you know, we're, we're, we're pushing the boundaries, you know, on, on the much more sophisticated use cases. In machine learning, and obviously, you know, people want to understand, how do I deploy, you know, large language models, you know, on a, on a Snowflake platform? We have outlined that in excruciating detail and demonstrated, showcased, you know, how we are doing that, and, and we're super excited about how that's unfolding for us and our customers.

Tyler Radke (Managing Director and Senior Equity Analyst)

Great. Follow-up, just in terms of the Snowpark revenue, any update on, on kind of where you're expecting that to, to track as, as you exit this year? You know, these, these related services, whether it's the native app store or container services, would, would that all fall under Snowpark, you know, theoretically when that, that goes GA next year? Thank you.

Mike Scarpelli (CFO)

You know, in terms of Snowpark, as we said, Frank talked about seeing 70% growth in Snowpark consumption. Still relatively small, but meaningful. We have a number of customers that are in the process of doing their migrations, a few quite large ones. I do think next year it will be more meaningful to revenue, but on $2.6 billion in revenue, it's a couple percent of our revenue this year.

Frank Slootman (CEO)

Once the Container Services, yeah-

Mike Scarpelli (CFO)

Yes

Frank Slootman (CEO)

...become prime time, and that is part of Snowpark, obviously, that, that means any workload that comes through our game can be deployed on, on Snowflake. This is obviously running close to the data inside our governance perimeter. You know, it's essentially virtualization, you know, for the cloud, so we, we think there is enormous upside, you know, for us, you know, once those services become generally available across all our cloud platforms.

Mike Scarpelli (CFO)

Which will be next year.

Tyler Radke (Managing Director and Senior Equity Analyst)

Thank you.

Moderator (participant)

Thank you. The next question will be from the line of Brent Thill with Jefferies. Your line is now open.

Brent Thill (Managing Director and Senior Equity Research Analyst)

Mike, you mentioned at the analyst day you were dialing back quota-carrying sales capacity on the new hire front. Have you seen anything different to lean back into hiring quota reps in 2023?

Mike Scarpelli (CFO)

You know, it really depends upon the territory and the opportunity. There are some territories where kind of regions we're shrinking, where it's over capacity, and we're reshifting those heads to other, more productive territories. As we're, I'm not planning on adding net, a lot of new ones for the balance of this year, but as we're starting to plan for next year, there are, there is additional headcount going into the quota-carrying rep area.

Brent Thill (Managing Director and Senior Equity Research Analyst)

Great. For Frank, on the vertical side, are any verticals that are showing more excitement that perhaps weren't, weren't online, that weren't, weren't firing up? Are you seeing anything change here?

Frank Slootman (CEO)

Yeah, actually, yes, that's a great question because we had massive outperformance by our healthcare vertical this quarter. Healthcare usually runs fourth or fifth in the, in the, in the lineup of, of verticals. They massively outperformed. Really excited about, you know, it, it feels like that healthcare is, is really getting a move on, you know, if you will. They have not traditionally, you know, been a, been an aggressive adopter of technology, but, you know, in the world of data, they're, they're, you know, they, they're moving. They're moving hard. You see it on the provider side, you see it on the payer side, you see it on the pharma side. So I think that's going to become a, a great contributing segment for us.

Mike Scarpelli (CFO)

Yeah, healthcare and life sciences grew 61% year-over-year in revenue for us.

Frank Slootman (CEO)

Yeah, cool.

Brent Thill (Managing Director and Senior Equity Research Analyst)

Thanks for the color.

Mike Scarpelli (CFO)

Very good, too.

Moderator (participant)

Thank you. The next question will be from the line of Michael Turrin with Wells Fargo. Your line is now open.

Michael Turrin (Managing Director and Senior Software Equity Research Analyst)

Hey, great, thanks. I appreciate you taking the questions. I, I think one of the comments mentioned new bookings outperformed expectations. Appreciate you're still seeing room for improvement, but anything you can add around what drove the improvement versus last quarter? It sounded like healthcare from the prior commentary, but wondering if, if some other certain product releases maybe also contributed there.

Mike Scarpelli (CFO)

Yeah. Hard to say whether it was... I don't think it was a product release. I would say we saw some nice renewals from customers with growth. We also saw two very large cap 1s. One large one in Europe, which was a cap one as an initial deal, it was a $22 million TCV deal in the insurance industry, and we saw a large gaming company in Korea commit to $9.5 million as a cap 1. Clearly, our message is getting across to these customers, and they see what we're doing, and a lot of these want to do more in the area of AI, but first they need to get their data into Snowflake, and it's gonna be a journey for these people. It's not gonna happen overnight, AI, for our customers.

Michael Turrin (Managing Director and Senior Software Equity Research Analyst)

Like, like and appreciate those large deal stats. Maybe just quickly on the back half, if you can just help level set what's embedded in the rest of the year outlook. You've seen multiple comments around stabilization. Is that fairly consistent with what informs the outlook? Maybe just any refresh on H2 seasonality as expected. Thank you.

Mike Scarpelli (CFO)

Well, Q4 is usually one of our largest bookings quarter, and it's shaping up, but that's not necessarily consumption. The sentiment within our sales team has definitely shifted from where it was in the H1 of the year.

Michael Turrin (Managing Director and Senior Software Equity Research Analyst)

Thank you.

Moderator (participant)

Thank you. The next question will be from the line of Patrick Colville with Scotiabank. Your line is now open.

Patrick Colville (Director, Equity Research Analyst, U.S. Software)

All right, thank you so much for taking my question. Just want to double-click on your comment. You know, I think you said customers are reengaging in July. You said that in the prepared remarks. I mean, I guess, what do you mean by that? Is that new customers, existing customers, consumption, contract negotiations? Any color you can give us on, on thus far in August would be helpful.

Mike Scarpelli (CFO)

All three of the above. We have new customers. I just pointed out those two large cap ones. We usually don't do cap ones that big, and it was a very good quarter with some large new customers. We're seeing our existing customers, we saw some nice early renewals with customers where they were consuming faster. And we're seeing customers willing to do larger deals rather than just do a co-term to bridge them through to another period. That's what I mean by the sentiment is changing with our customers.

Patrick Colville (Director, Equity Research Analyst, U.S. Software)

All right. I, I guess my kind of follow-up is, I mean, NVIDIA reported results tonight. I think looking at their numbers, I think their data seven-- data center revenue rose by 150% sequentially. Clearly, my AI spend is hitting the Silicon Layer. I mean, a question I get from investors is: When will AI spend more clearly hit the software layer? I mean, do you have any thoughts on that?

Mike Scarpelli (CFO)

I think it's going to be next year. As I said, it's going to take some time for AI, and people are still struggling to get GPUs. There is a time lag between when a Chip Manufacturer sells their Chips, till it gets built into the hardware that actually gets deployed in a rack in a Data Center, and it gets deployed to customers.

Frank Slootman (CEO)

I think, I think you will see the leading edge of it, you know, happening in, in months to come, but the material impact, I think most, most analysts out there, you know, are seeing as a 2024 thing, and we, we, we tend to agree with that.

Mike Scarpelli (CFO)

I would say in my prior life, when we were buying, racks of servers, there was a 6-month delay between when we bought them and when they were actually going into production. I don't see that any different with GPUs.

Moderator (participant)

Thank you. The next question will be from the line of Alex Zukin with Wolfe Research. Your line is now open.

Ethan Bruck (Senior Equity Research Associate)

Hey, guys, this is Ethan Bruck for Alex Zukin. I just had a quick kind of numbers question. If we calculate the product revenue of CRPO Booking growth, it, it decelerates to 13% from about 30% last quarter. Just curious, how should we think about this as an indicator of a future consumption for a future Product growth?

Mike Scarpelli (CFO)

I guided full year revenue at $2.6 billion, and we'll guide next year, next year.

Ethan Bruck (Senior Equity Research Associate)

Okay. I, I just ask the August trends question a different way. I guess, has some of the stability you called out trended into August in the kind of first month of the quarter? Then just on the seasonality, is there any kind of month to note as you think about the rest of the year that seems that either seasonally short or seasonally weak?

Mike Scarpelli (CFO)

Well, as I said, August is shaping up very good. I called out yesterday was actually a very good consumption, but one day doesn't make a trend. Q4 is definitely seasonality with the holidays, with Thanksgiving in the US and the Christmas holidays, it does impact daily consumption. From a bookings perspective, Q4, though, is clearly our largest bookings.

Ethan Bruck (Senior Equity Research Associate)

Got it. Got it. Makes sense. Okay, thank you, and congrats on the quarter.

Moderator (participant)

Thank you. The next question will be from the line of Brent Bracelin with Piper Sandler. Your line is now open.

Brent Bracelin (Managing Director)

Thank you. I, I wanted to go back to the discussion around the increase we're seeing in, in model training capacity. Clearly, $billions of incremental dollars going into NVIDIA GPUs here, you need data to train the models. I appreciate there's going to be a lag, relative to when the spend hits the data layer, but are there any technical hurdles that need to be overcome, or do you think this cycle is different, and that there are other considerations as well? Just thinking through that, the, the investment we're seeing right now in infrastructure and, and thinking through what are the other factors we need to think about before it starts to impact the data layer. Thanks.

Frank Slootman (CEO)

I, I'll, I'll, I'll start, and then maybe Christian, you know, can follow and think about your question while I'm talking. You know, you, you can't characterize this AI as one thing, right? Because you, you see the things that people are doing with unstructured data and the whole notion of copilots and the systems and tutors and, and all that. It's, it's very, very much focused on, on, on contextual data. You know, we see, you know, action in, you know, with, with support call records, contact centers, and so on. Then, you know, you look at Snowflake, who sits on mountains of structured, proprietary enterprise data. You know, that's, that's a different realm for, for AI than, than the, the, the very text model-oriented, type of, type of inquiry.

I have to say that just, just from, from all my conversation with, with customers, I mean, people are, are behind, I would say, the textual side of the house with proprietary data, how they're going to approach that. We view that as our business, and, you know, we're, we're driving that very hard, hence the emphasis on getting your data house in order, because you just cannot unleash, you know, large language model and, and, and hope for the best because of all the issues that we've mentioned before around governance and just, just understanding, you know, of what, what kind of data we are generating in the process.

That's why I said the early going, you know, you're gonna see a lot of upside from AI that analysts are going to be able to generate data far quicker, far better than they ever have been before. We're really massively reducing the skill sophistication requirements to be able to do that. That in and of itself, you know, is going to be a big driver for us.

Christian Kleinerman (SVP of Product)

Yeah. Christian here, I, I would add maybe two areas in addition to what Frank mentioned. The first one is around having the right data to be fed into these models. Frank started the call with no AI strategy without data strategy, and it is very interesting that the results of traditional ML or GenAI is a function of having the right data, the right data quality, the right metrics. The technology will be as good as the data that is fed in. All of the investments that we make on data quality, and cleansing, and pipelines, all of that is very important. The other piece that I think will be a technical imperative for everyone doing AI and GenAI is around the measurement and feedback. How good are the solutions?

How do I know if there are potential biases into the data, or there are gaps in their understanding and performance of the model? Those two are inherent parts of the life cycle. Interestingly, now they all run through having a great data foundation enabled service.

Brent Bracelin (Managing Director)

Helpful color. Lastly, for Mike, on consumption, one follow-up. The implied Q4 product growth is, I think, 26% at the midpoint. I know there's a delta between signing growth and consumption. Exiting this year, do you think product growth stabilizes in the mid-20% range, maybe starts to reaccelerate next year, or is it just too early to tell?

Mike Scarpelli (CFO)

Let us finish Q3, and then we'll guide to Q4. I'll see how next year is looking, but I do anticipate there's a lot of new things coming out next year that we think are going to have a very positive impact on our consumption from... Remember, we have Streamlit goes into GA Unistore towards the end of this year. Our public preview, we have containerized services next year. There's a number of things that are happening that are all going to have a positive impact on our revenue growth rate next year. Stay tuned for that.

Brent Bracelin (Managing Director)

Helpful color. Thanks.

Moderator (participant)

Thank you. The next question will be from the line of Brad Reback with Stifel. Your line is now open.

Brad Reback (Managing Director)

Great. Thanks very much. Gentlemen, you've talked about changing sentiment, a couple of times during the call. How much of that is your sales team being better able to engage with the customers, selling value, you know, just looking at the problem from a different perspective, given the macro trends, versus customers just feeling better about their businesses and the macro unleashing the demand? Thanks.

Frank Slootman (CEO)

Frank, look, you know, it, it's not the sales team. There, there's really a change in, in how customers engage. You know, a couple of quarters ago, like I said earlier, you know, people were doing unnatural acts to force fit themselves into a spending envelope, and they were doing it, you know, almost regardless of consequence. That fixation on, on that reset, you know, we obviously felt that. The change in sentiment is that, you know, that, that has passed. You know, we, we are now sort of, "Okay, we're comfortable, you know, with, with the path that we're on," and now we're talking again about projects, and migrations, and use cases. We're trying to, you know, basically get a, get a grip, you know, on, on deploying large language models.

What do we have to do with the data, with the infrastructure? Answering governance questions and so on. In other words, the sentiment is very constructive and engaging on core data strategy. That's a big change from, from where we were a couple of quarters ago. Obviously, the salespeople are, are perceiving that as, as very positive. That's where you wanna be.

Brad Reback (Managing Director)

That's great. Thanks very much.

Moderator (participant)

Thank you. The next question will be from the line of Derrick Wood with TD Cowen. Your line is now open.

Derrick Wood (Managing Director and Senior Equity Research Analyst)

Thanks. Mike, this was the, the strongest sequential growth quarter you've had in three quarters. I think you, you were at 6%, then 6%, then this was 8.5%. Your, your guidance for Q3 is kind of 5.5% sequential. I'm sure there's some level of conservatism in there, but just in terms of the Q2, are there any, kind of one-time consumption dynamics to, to call out, or, or, or does that just really kinda inform us that, the, the optimization headwinds that you saw in Q4 and Q1 kinda dissipated in Q2?

Mike Scarpelli (CFO)

Yeah. Q, Q2 has more days in it. Remember, we're a consumption model. It was actually a 5% quarter-over-quarter working days adjusted was the growth rate. Actually, Q3, it goes up when you look at the working days in Q3. Remember, on a consumption model, where really kind of 70% is the scheduled work, there is a big piece that is tied to work days that does have an impact. There is growth next quarter in that guide-

Derrick Wood (Managing Director and Senior Equity Research Analyst)

Okay.

Mike Scarpelli (CFO)

on a days adjusted basis, working days.

Derrick Wood (Managing Director and Senior Equity Research Analyst)

Okay. Frank or Christian, I'm hoping to double-click on the new Container Services. You know, seems like it enables you to deploy different types of third-party engines, apps, code bases directly in the platform. You can streamline a lot more workflows, which, you know, I think when it comes to building AI models, seems pretty interesting. I'm just curious, what are you most excited about in terms of this new capability and opening up new consumption, especially when it comes to AI?

Frank Slootman (CEO)

Yeah, you know, it, container services was, was the absolute hit, star performer at our Snowflake Summit, conference. I mean, customers were just mesmerized by the possibilities, that a, that a platform, capability has, because we've, we, we've essentially eliminated any limitation, you know, on deployment, on Snowflake. You know, why do you care? I mean, the, the, the thing is, first of all, you know, you want to deploy close to the data for, for all the reasons that we, that we, that we talk about. This enables this. You, you get a fully trusted, sanctioned platform where you can deploy applications without any further questions. I mean, one of the, one of the challenges that you have in cloud computing is, you know, who's, who's managing this, right?

I mean, what, what is, what is the safe space to deploy into, and who's, who is really guaranteeing the, you know, the, the, the high trust, enterprise-grade capabilities of that platform? We, we are bringing that, you know, we're, we're gonna see a lot of services. You know, a lot of them could be, you know, on-premise legacy engines that are going to be containerized and re-serviced as a cloud service, right? A lot of things that were old will be new again. There's it's, it's, it's, it's virtualization for the cloud, and, and having secure, safe, high performance, very, very efficient spaces to, to run services and applications in.

You know, the, the, the sky's the limit on this capability, and, you know, we and our customers and our partners, you know, could not be, you know, more excited about the, the potentials and the, the possibilities here. Specific to AI, and this, this, this matters a whole lot, because the containers are our vehicle, our vessel, if you will, to deploy large language models, there's no limits on which models and how many models, and for which segments of the business, you know, we can deploy. We can shift gears very, very quickly, and we have incredible flexibility in terms of deploying these capabilities, because you're gonna see a lot of change and a lot of movement. We've already seen an enormous amount. That's gonna continue.

We're very, very well-positioned architecturally, platform-wise, to enable the AI revolution with container services.

Derrick Wood (Managing Director and Senior Equity Research Analyst)

Awesome. Thank you.

Moderator (participant)

Thank you. The final question will be from the line of Sterling Auty with MoffettNathanson. Your line is now open.

Sterling Auty (Senior Managing Director, and Head of Software Equity Research)

Yeah, thanks. Hi, guys. Just one question from my side. You mentioned sales productivity a couple of times. I'm curious, how would you grade your go-to-market sales execution in the quarter? Are there any specific changes that you're making to further optimize, given the environment for the back half?

Mike Scarpelli (CFO)

I think in general, our execution in Q2 on the sales side was actually quite good. It improved, but there's still pockets, though, where there is room for improvement when you look in certain territories or geos. We have a new leader in EMEA. EMEA, certain markets in EMEA are doing good. Others, there's a lot of room for improvement. We have a new leader in EMEA. There's certain pockets in Asia that are doing good, but there's others that have a lot of room for improvement, so. In general, overall, as I talked about, you can see it through our bookings, it was a good execution from a bookings perspective in the aggregate last quarter.

Sterling Auty (Senior Managing Director, and Head of Software Equity Research)

Understood. Thank you.

Moderator (participant)

Thank you. That will conclude today's Q&A session and today's conference call. Thank you all for your participation, and you may now disconnect your lines.