Snowflake - Q4 2023
March 1, 2023
Transcript
Operator (participant)
Hello, welcome to the Q4 FY 2023 Snowflake Earnings Conference Call. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star one on your telephone keypad. I would now like to hand over to Jimmy Sexton, Head of Investor Relations. The floor is yours. Please go ahead.
Jimmy Sexton (Head of Investor Relations)
Good afternoon, thank you for joining us on Snowflake's Q4 fiscal 2023 earnings call. With 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 join us for the Q&A session. During today's call, we will review our financial guidance for the fourth quarter and full year fiscal 2024, and our results of the first quarter and full year fiscal 2023. 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, 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 those risks is available in our earnings press release distributed after market close today in our SEC filings, including our most recently filed Form 10-Q and the Form 10-K for the fiscal year ended January 31st, 2023, 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 in 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 (Chairman and CEO)
Thanks, Jimmy. Good afternoon, everybody on the call. Q4 product revenue grew 54% year-on-year, and for the fiscal year grew 70%, totaling $1.9 billion. Q4 net revenue retention was 158%. We continue to be on track for our $10 billion product revenue goal in fiscal 2029. Remaining performance obligations grew 38%, totaling $3.7 billion. We saw a measure of bookings reticence with certain customer segments in Q4, reflecting a lack of visibility in their business and preferring a cautious short-term stance versus larger, longer term contract expansions. The contractual posture focused on sufficiently enabling consumption growth in the near term. This was more pronounced among international SMB and commercial customers, and much less so at the high end of our customer base. We made substantial progress on our efficiency metrics.
Non-GAAP operating margin for the quarter reached 6%. Non-GAAP adjusted free cash flow margin for the quarter was 37%. For the full fiscal year 2023, non-GAAP adjusted free cash flow margin was 25%, totaling $520 million. Our data networking growth, as measured by so-called stable edges, grew 93% year-over-year. 23% of our customers now have at least one stable edge, up from 18% a year ago. Among $1 million consumption customers, 65% of them had on average six stable edges. Snowflake's marketplace listings grew 8% quarter-over-quarter and now total over 1,800. During Q4, Snowpark for Python reached general availability status. Early traction is promising. 20% of customers have now tried Snowpark. Snowpark is initially focused on the adoption and migration of Spark workloads for data engineering and machine learning.
Spark jobs typically run cheaper and faster on Snowpark, with the added benefits of superior governance and operational simplicity. POC activity is ramping fast. Benchmark results so far indicate superior comparative results. A Fortune 500 customer loads 1 billion transaction records into Snowflake every day. This organization saved $1 million after migrating work from Spark to Snowpark. A financial services customer is migrating workloads from Spark to Snowflake. Snowpark ran 8x faster at 30% of the cost. We entered private preview status with what we call Streamlit in Snowflake. This is the replatforming of Streamlit inside of Snowflake. Streamlit is a popular application development framework for the Python developer community, especially those focused on machine learning applications. Streamlit enables the use of machine learning models and applications by a general business audience. In Q4, we announced our intent to acquire Mobilize.net's SnowConvert.
SnowConvert's proprietary conversion tools enable migration from legacy platforms. SnowConvert also helps migrate Spark workloads to Snowpark. These capabilities accelerate migration to Snowflake, hence the strategic nature of this acquisition. We are operating in a vast and growing market, generating free cash flow and maintaining a strong balance sheet. We focus on the businesses at hand and the outcomes we can control. We are prioritizing positions that directly support the core mission of the enterprise. Resources will continue to be concentrated on the roles that sell, support, and build our products. For that, I will turn the call over to Mike.
Mike Scarpelli (CFO)
Thank you, Frank. Q4 product revenues were $555 million, representing 54% year-over-year growth. Remaining performance obligations grew 38% year-over-year.
Totaling $3.7 billion. Of the $3.7 billion in RPO, we expect approximately 55% to be recognized as revenue in the next 12 months. This represents a 48% increase compared to our estimate as of the same quarter last year. Our net revenue retention rate of 158% includes 13 new customers with $1 million in trailing 12-month product revenue, and reflects durable growth among our largest customers. The outperformance in Q4 was driven by longest-tenured customers. We continue to see the greatest contribution from the financial services in media and entertainment verticals. We continue to focus on growth and efficiency. We generated $215 million in non-GAAP adjusted free cash flow, outperforming our Q4 target. Full year fiscal 2023 non-GAAP adjusted free cash flow margin was 25%.
Q4 bookings underperformed versus our expectations. Pipeline conversion in the final two weeks of the quarter diverged from historical norms. International territories drove the largest underperformance relative to plan. Multi-year bookings declined 15% year-over-year. While we are not okay with this outcome, customers' bookings behavior does not dictate their consumption patterns. Customers have the contractual right to sign smaller deals to bridge them to their contract end date. We are confident that our customers are committed to Snowflake and are increasingly focused on better managing their business during more uncertain times. Q4 represented another quarter of continued progress on profitability. Our non-GAAP product gross margin was 75%. Scale in our public cloud data centers, continued growth in large customer accounts, and more favorable pricing with our cloud service providers will contribute to year-over-year gross margin improvements.
Non-GAAP operating margin was 6%, benefiting from revenue under outperformance and savings on T&E and lower bad debt expense. Our non-GAAP adjusted free cash flow margin was 37%, positively impacted by strong collections. We received some large customer payments in January that were expected in February. We ended the quarter in a strong cash position, with $5.1 billion in cash equivalents in short-term and long-term investments with no debt. As noted in the press release that went out earlier today, we have expanded our partnership with AWS over the next five years, more than doubling our previous spend commitment to $2.5 billion. As part of the new agreement, AWS is committing to support joint go-to-market efforts, more favorable pricing. This partnership is aimed at driving growth and innovation. Let's turn to our guidance.
As of today, we have completed the Graviton2 migration in all of our active commercial AWS deployments. We remain committed to driving towards greater profitability. We are focused on growing revenue while expanding operating and free cash flow margins. The change in existing customer purchasing behavior, lower than expected new logo bookings, and slower expected ramp from our youngest cohorts has led us to reevaluate our FY 2024 outlook. For the first quarter, we expect product revenues between $568 million and $573 million, representing year-over-year growth between 44% and 45%. Turning to margins, we expect on a non-GAAP basis, 0% operating margin, and we expect 361 million diluted weighted average shares outstanding. For the full year fiscal 2024, we expect product revenues of approximately $2.7 billion, representing year-over-year growth of approximately 40%.
Turning to profitability for the full year fiscal 2024, we expect on a non-GAAP basis, approximately 76% product gross margin, 6% operating margin, and 25% adjusted free cash flow margin, and we expect 363 million diluted weighted average shares outstanding. I would also like to announce that our Board of Directors has authorized a stock repurchase program of up to $2 billion over the next two years. This program reflects our conviction in the business and allows us to use our expected free cash flow to manage dilution over this period. Our share count guidance does not include the impact from the stock repurchase. During fiscal 2023, we added approximately 1,900 net new employees. We view the current hiring market as favorable for Snowflake and will continue to prioritize hiring in product, engineering, and sales.
We expect to add more than 1,000 employees in fiscal 2024. We remain on track to achieve our fiscal 2029 $10 billion product revenue target. We look forward to executing against our growing opportunity. Lastly, we will host our Investor Day on June 27th in Las Vegas in conjunction with Snowflake Summit, our annual users conference. If you are interested in attending, please email [email protected]. With that, operator, you can now open up the line for questions.
Operator (participant)
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Mark Murphy from J.P. Morgan. Your line is open.
Mark Murphy (Head of U.S. Enterprise Software Research)
thank you very much. Mike, I'm curious if you have any insights into the consumption patterns that you saw generally, but including during the holiday periods.
Including MLK weekend and President's Day week. Is there anything, any, you know, noteworthy change there? Then I have a quick follow-up.
Mike Scarpelli (CFO)
Yeah, you know, there was nothing really noteworthy around the holidays. As we said, going into our Q4 guidance, we were factoring in the holidays, clearly we're 3% above our guidance, our actual results. I will say President's Day was slow, but February is off to a very good start. It's kind of was where we were expecting it to be.
Mark Murphy (Head of U.S. Enterprise Software Research)
As a follow-up, Frank, I wanted to ask you on the topic of generative AI and large language models. Can you frame up the opportunity there for Snowflake? Because I would think, with the Unistore, you could probably handle all these chat logs. You know, you could be training some of these models on, you know, very large datasets. I would think that Snowpipes can pull in social media feeds. It kinda helps you improve those models. Do you see any customer activity around that vector or any tailwinds you think that could be developing in time?
Frank Slootman (Chairman and CEO)
Well, you know, it's still early, you know, in the cycle. Obviously, like everybody else, you know, we're all over it in terms of, you know, evaluating, you know, where these technologies can make a difference. I mean, the things that we've sorta, you know, honed in on short term, you know, is code completion, code optimizations, you know, things that have very clear business returns. You know, one of the challenges, you know, with these new technologies, that people come up with a lot of interesting questions, but without a solid business model, you know, that's not going to take off. We take a very pragmatic view. You know, we do anticipate that Snowflake data will be a very big driver of large language model in conjunction with many other data sources.
We think that the gravity around data will drive a lot of this action and activity to our platform.
Mark Murphy (Head of U.S. Enterprise Software Research)
Excellent. Thank you very much.
Operator (participant)
We now turn to Kirk Materne from Evercore ISI. Your line is open.
Kirk Materne (Senior Managing Director, Equity Research)
Yeah, thanks for taking the question. Congrats on a good quarter. Mike, can you just talk about, you know, the international sort of underperformance? Obviously, a really good quarter. Is there something just specific about the region in terms of how people are consuming over there versus the U.S., or is this just a maturation of your sales organization that needs to continue over in that region?
Mike Scarpelli (CFO)
I think it's customers being a little more cautious in their business and just buying as they consume, which they can do under their contracts as well, too. We've always seen that in Japan in particular. Those customers tend to do that. You know, I would say part is also our own execution as well, too, which we're working on. Yeah, I will say we did see as well in North America, a number of customers, some of our larger customers, who had consumed their full contract amount but still had a contract in place and just bridged themselves rather than do big deals right now. I think that's just a function of uncertainty in their business, but their consumption still continues to grow on Snowflake.
Kirk Materne (Senior Managing Director, Equity Research)
Okay. Just one quick one for Frank. Frank, on the Telecom Data Cloud that you guys have announced, I was just kinda curious your thoughts there, how fast you think that could ramp. Obviously, financial services and some of the other verticals that you focused on been really strong to your point around some of the shared edges that you've seen in your bigger customers. Just any thoughts on how fast that could ramp for you guys?
Frank Slootman (Chairman and CEO)
Telco is a really important segment for us. I mean, our largest customers, some of our largest customers are in that segment. They're running massive amounts of data. They're very focused on managing the service experience, you know, cross-selling across very, very large customer bases. You know, this is our fifth industry cloud that we have announced. It's really, you know, focused on bringing, you know, telco-specific datasets, data assets, you know, to it, data practices, applications, and then really bringing that ecosystem of telcos, people that interact with each other. They'll have the opportunity to have the benefit of a data network like Snowflake. We're very high on it. I mean, obviously, telcos are the cornerstone of every modern economy, and especially in a lot of, you know, secondary markets.
I mean, telcos tend to be the biggest consumers for us. Yeah.
Kirk Materne (Senior Managing Director, Equity Research)
Thank you all.
Operator (participant)
Our next question comes from Brent Thill from Jefferies. Your line is open.
Brent Thill (MD and Senior Equity Research Analyst)
Thanks. Just as it relates to the overall guide, can you just give us a little more color, kinda what you baked in, Mike, ultimately, you know, perhaps what's been the big change from your perspective?
Mike Scarpelli (CFO)
You know, the big change is really We're seeing the younger cohorts that are coming into Snowflake are really ramping at a slower pace than what some of the early adopters of Snowflake did. They're still consuming. These tend to be large organizations, as we've been focused on those large G2Ks, and they just move slowly. They're still ramping their consumption, just at a lower rate. I think Snowflake is being deployed more efficiently for these customers. I also just think too, as our base gets bigger, that growth naturally slows down in the business. Customers are still consuming.
Brent Thill (MD and Senior Equity Research Analyst)
Just from a rep productivity perspective, Mike, is there anything changing there where you're seeing reps productivity slow, or is that consistent to what you've seen historically?
Mike Scarpelli (CFO)
I would say we have a rep productivity issue in some of the international markets, and we are slowing down some of our hiring where we don't see the productivity, but there's other areas where productivity is doing well. The large enterprises is definitely doing well for us. North American enterprise continues to be strong for us. We're gonna deploy resources where we think we can get those reps productive over the next 12 months.
Brent Thill (MD and Senior Equity Research Analyst)
Great. Thanks for the color.
Operator (participant)
We now turn to Keith Weiss from Morgan Stanley. Your line is open.
Theodor Thun (Research Associate)
Great. This is Theodor Thun on for Keith. You put up 158% net retention this quarter, which is still an impressive number, but slowing sequentially. I would love to understand what you're seeing between the different customer cohorts in terms of expansion momentum, but also maybe optimization and how that sort of changed over the last 90 days. Any way you could sort of parse that out between your $1 million+ customers and then the rest of your customers?
Mike Scarpelli (CFO)
First of all, the 158 was the exact net revenue retention, just as a reminder, when we went public. I think there was a little bit of a re-acceleration in our business in 2021, 2022, where there's a lot of customers that maybe had spending out of control. Now that costs are a much bigger focus within almost every company today, I think people are using Snowflake more efficiently. Customers are having very detailed, methodical deployment plans on Snowflake, which is slowing down that growth rate of customers' consumption as they're going through their implementations. We're not seeing any customers decrease their spend in any material way in Snowflake. Yes, we still had those three we pointed out at the beginning of last year, that a few of those have dropped out of our top 10.
Those guys have stabilized. In general, most of our customers continue to grow with us, albeit at a lower pace, and I think that's more of a nature of controlling costs.
Theodor Thun (Research Associate)
Okay. Great. Got it. Just quickly on your verticalization. I mean, clearly that's a big focus for you, and I think the AWS partnership expansion sort of reiterates that effort. Any, any way you can sort of explain what you're seeing in different verticals? Are there any that's slow that are stabilizing now, any that might be accelerating? Sort of how you're thinking about different verticals when it comes to your fiscal 2024 guide?
Mike Scarpelli (CFO)
Well, I would say, as I mentioned in my remarks and I've said before, financial services is definitely our biggest vertical. That's where we have the most data sharing going on. Next is media and technology, entertain. That's a huge segment for us. Clearly some of the newer technology companies, we've seen a slowdown in some of those ones, which we had highlighted last year. I do think you're definitely gonna see a slowdown in a lot of the venture-backed companies that may have been growing very quickly. We're definitely seeing cost controls in those companies as well. The large Global 2000 continue to grow.
Operator (participant)
Our next question comes from Raimo Lenschow from Barclays. Your line is open.
Sheldon McMeans (Assistant VP, Equity Research)
Hi, this is Sheldon McMeans on for Raimo. Thanks for taking our question. You've recently discussed the top 15 GSIs have done around $1.4 billion in services spend around Snowflake, and that was year-to-date as of Q3. I was wondering if we could get an update on that. How should we think about the attach to those services, the attach of future consumption onto those services? Is there any framework we can think about to help inform next year's revenue expectations? For example, is there a correlation between the growth rates, or can we think about the magnitude of that GSI spend with some sort of lag? Thank you.
Mike Scarpelli (CFO)
I'll just say in the top 15 GSIs, the spend was in deals they've booked is over $1.6 billion last year, based upon the data that my alliances team is reporting. In terms of trying to get any concrete relationship between their spend and Snowflake revenue, I really don't have that data, and I would be guessing anecdotally, looking at specific customers, so I'm not gonna guide towards that. It's generally a number of times bigger than what the revenue is associated with in year one.
Sheldon McMeans (Assistant VP, Equity Research)
Got it. A quick follow-up. How should we think about the relationship between operating margin and free cash flow margin going forward, particularly when considering the increasing S&M leverage you guys are getting on larger accounts and the greater role of expansion revenue versus net new, may affect commissions? You mentioned there was-
Mike Scarpelli (CFO)
Sure
Sheldon McMeans (Assistant VP, Equity Research)
... some lower bookings duration, and I was wondering if billings duration played into that as well.
Mike Scarpelli (CFO)
First of all, I don't even look at billings because in our model, people are just buying capacity, and that capacity may be for three months, it could be for one month, or it could be for one year, and it really varies by customer, and they have the right to do that. In terms of relationship between operating margin and free cash flow, well, definitely as your operating margin expands, I expect our free cash flow to expand, but the operating margin will expand at a more rapid pace, given it's a much lower number. We will update the longer-term model as part of our investor day in June. We clearly just guided to 6% non-GAAP operating margin and 25% adjusted free cash flow full year this year.
Sheldon McMeans (Assistant VP, Equity Research)
Got it. Thanks.
Operator (participant)
We now turn to Gregg Moskowitz from Mizuho. Your line is open.
Gregg Moskowitz (MD and Senior Enterprise Software Analyst)
Okay. Thank you for taking the question. Mike, you mentioned that weaker net new bookings and, you know, the slower than expected ramp from your youngest cohorts impacted the fiscal 2024 guide. Thinking back to the Q3 call, you know, you'd also spoken about some significant customers that you were expecting to materially ramp in fiscal 2024, and you also said today that the enterprise has generally held up pretty well. I'm wondering, you know, three months later, maybe looking at it from a bottoms-up perspective, can you share with us how you're thinking about these particular customers and the ones that, you know, there was this potential line of sight in terms of them ramping into fiscal 2024? Wondering if that's changed at all in terms of that viewpoint. Thanks.
Mike Scarpelli (CFO)
Those customers are definitely still ramping. What I will say what is different, in literally week 10 of our quarter, we converted 90% of our weighted pipeline into bookings, where historically, that's been 140% in Q4, and that's typically because deals are understated and deals get pulled in. That did not happen this quarter. We also had a number of customers, big customers, who rather than they consumed everything and rather than do a big multi-year deal, literally just bought enough capacity to get them through to the next quarter or two. I do have two of my biggest customers, I know they run out of capacity within the next six months, that they will have to do something.
Once again, they could do big deals, or they could just do, buy a sufficient capacity on a quarterly basis because their contracts still haven't expired, they just don't have any capacity left on them. That's why I don't focus too much on bookings and focus more on revenue and why I think that's the leading indicator. As I said, we definitely do see a number of our newer, customers in the cohort still ramping, but ramping at a slower pace, than what historically they have. I think that is a function of the cost controls that are going on within companies to make sure they are, conserving as much money as they can from an expense standpoint.
Gregg Moskowitz (MD and Senior Enterprise Software Analyst)
Right. Very helpful. Then just for Thanks, Mike, and for Frank, on Snowpark for Python. You know, we've heard of a lot of customers that are kicking the tires, a lot of small tests that are taking place. You did call out a couple of customers that are really ramping, and it sounds like there's a lot of robust POC activity. Just be helpful to get a little bit more insight in terms of how you're thinking about how this plays out over the course of fiscal 2024 in terms of adoption. Thank you.
Frank Slootman (Chairman and CEO)
We definitely have sort of unleashed a full court press because our basic posture is that, you know, for example, any Spark job that runs into Snowflake orbit, either putting data into Snowflake or taking data out of Snowflake for consumption, analytics, machine learning purposes, is really ours. That's sort of the attitude that we take towards it, and we will challenge existing Spark jobs and we will compete hard for any new ones. We are really taking ownership for the action, the activity that is happening in our hemisphere, so to speak. It is all over the map. We can see very clearly from our own data, you know, which customers are doing what because they're touching Snowflake.
We really mobilized ourselves as an organization to target that, and you clearly seem to have picked up on the, a lot of the activity. It's a huge amount of stuff, and you know, it's really rolling out in ways, and there is a lot of POC activity going on there. These customers, you know, wanna see, you know, whether we can verify some of the outcomes that we're anticipating. So far, those results have been super encouraging, and our sales force is pretty geeked about the opportunity, you know, based on the results that we're seeing. We're quite excited about it.
This is really, you know, the really biggest expansion, if you will, you know, of our scope as a company since we first came out in, you know, 2015 timeframe, you know, when we went after Hadoop workloads and things of that sort.
Gregg Moskowitz (MD and Senior Enterprise Software Analyst)
Great. Thanks very much.
Operator (participant)
We now turn to Derrick Wood from Cowen. Your line is open.
Derrick Wood (MD and Senior Equity Research Analyst)
Great. Thanks. Frank, legacy migrations from on-premise have been a key growth driver for new customers for you guys. Is the macro causing any change in urgency for those kinds of migration projects? Then given you guys acquired SnowConvert, can you talk about how that may help simplify or accelerate migration projects?
Frank Slootman (Chairman and CEO)
Well, you know, on SnowConvert, I mean, we've been working with that technology for years and years. We're super familiar with it. You know, we're actually, you know, really happy that we now have full control over that technology because it's not just about migrating customers, it's also getting them to consumption faster, which is, you know, why it matters, you know, to our, you know, to our model. Not really seeing a slowdown on migrations. I mean, all of Mike's comments so far is really about all the customers are continuing, you know, to do contract extensions. They just have, you know, a more reticent posture. You know, in the past, it was all about enabling growth as hard and as fast as they could because that was the dynamic of the times.
Now we're sort of in the opposite dynamic.
Where they're looking to not get too far over their skis, and they're enabling the growth they are foreseeing, and they're going, you know, a few steps at a time. Migrations are keep on coming, you know, fast and furious.
Derrick Wood (MD and Senior Equity Research Analyst)
Great. Mike, given all the headcount cuts happening in the tech sector, is that having any material impact to your assumptions around consumption activity? You did allude to kind of the start-up tech seeing pressure. Can you give us a sense for how much revenue exposure you have there?
Mike Scarpelli (CFO)
Yeah. Well, first of all, when I make the comment about companies are definitely looking to save on their spend. When you're doing a RIF, you're generally not just looking at reducing costs on headcount, you're also looking at other areas of your business you can reduce costs. I definitely think in some customers, you can see ones that have publicly announced RIFs. We've seen some real slowdown on the revenue, yet others, I can't name their names, but there's another one that announced a RIF in one of our top 10 customers. Their consumption has actually gone up in Snowflake, there's no direct correlation between RIFs in a customer's consumption in Snowflake. I will say CFOs.
Derrick Wood (MD and Senior Equity Research Analyst)
Yeah. Thank you.
Mike Scarpelli (CFO)
... in companies are definitely looking for ways to cut costs, and either through headcount or other things.
Derrick Wood (MD and Senior Equity Research Analyst)
Right.
Operator (participant)
We now turn to Alex Zukin from Wolfe Research. Your line is open.
Alan Blokh (Research Analyst)
Hey, guys, this is Alan Blokh on for Alex Zukin. Thank you for taking the question. Just one quick one for me. For your 40% product growth guide in fiscal 2024, how should we think about the seasonality through the year? Perhaps, how has that changed relative to your view last quarter after now seeing slower ramp times with your more recent adopters of the platform?
Mike Scarpelli (CFO)
Well, as I said, the more recent adopters of the platform, we're definitely see them ramping slower. They're taking longer in terms of they're not growing euphorically like some of the earlier ones. I really do think that is a factor of it could be the macro that they wanna conserve, it could be that they're depending on the customer, that they're being more efficient in how they roll Snowflake out as there's a bigger population of people who have been using Snowflake in the market. It's also a factor that a lot of the new customers that we're signing up aren't necessarily these venture-backed startups that had unlimited capital. They tend to be more these mature companies that have always been disciplined on their spending. It really does vary.
In terms of seasonality, we just guide it for the quarter. You can see what we guided. We guided 44%-45% growth in Q1, and guided 40% to the year. I'm not gonna give you the quarterly guidance for the other quarters, 'cause we'll give you Q2 after Q1's finished, as we've always done.
Alan Blokh (Research Analyst)
Thank you.
Operator (participant)
Now turn to Sterling Auty from SVB. Your line is open.
Sterling Auty (Senior Managing Director, Technology Equity Research)
Yeah, thanks. Mike, you gave a couple of reasons for the slower growth in the newer customers. I'm also wondering, are new customers reducing the number of use cases initially? If so, what are the use cases that you see them ramping with first, and what things maybe are they putting on hold?
Mike Scarpelli (CFO)
There is no reduction in use cases. The use cases continue to expand. What are the most common use cases? It really depends.
Sterling Auty (Senior Managing Director, Technology Equity Research)
Migrations.
Mike Scarpelli (CFO)
Migrations are a big one in on-prem, but it's an on-prem data warehouse, a lot of them. Some of them, though, we're still replacing some of those first-generation cloud data warehouses. Think Redshift and things like that. I really haven't seen any slowdown in use cases. The average deal sizes remain relatively the same. Hasn't changed.
Sterling Auty (Senior Managing Director, Technology Equity Research)
Makes sense. Thank you.
Operator (participant)
Now turn to Kamil Mielczarek from William Blair. Your line is open.
Kamil Mielczarek (Equity Research Analyst)
Thanks for taking my question. Your free cash flow margin reached your long-term target of 25%. Can you provide a little more color around how you think about that shorter term tactical decision to balance margin and revenue growth? Assuming the macro environment improves, you know, later this year in fiscal 2025, how do you think about bringing down margins to re-accelerate revenue?
Mike Scarpelli (CFO)
Free cash flow margin is not directly related to our growth. Our growth is more on the expense side and looking at productivity, will not grow our revenue faster unless we see productivity increase in the sales organization. When we see that increase in productivity, we'll add more heads there, and we think we're adding at the appropriate pace based on what we're seeing in the business today. As I said, where most companies are cutting, we added 1,900 people last year net, and we will add over 1,000 people this year, while still generating improvement in operating margin and having very good free cash flow next year again.
Kamil Mielczarek (Equity Research Analyst)
That's helpful. A quick follow-up. I realize it's still early, but can you provide some detail around the traction you're seeing with the Unistore product and how you expect that piece of the platform to evolve over the next few years?
Christian Kleinerman (SVP of Product)
Yeah, this is Christian. It is, as you say, still very early on. We're still in private preview with tens of customers validating it, providing us feedback. We received quite positive feedback and encouragement, it's early for us to have any meaningful broad rollout or adoption.
Mike Scarpelli (CFO)
Got it. Thank you.
Operator (participant)
We now turn to Fred Lee from Credit Suisse. Your line is open.
Fred Lee (Small and Mid-Cap Software Analyst)
Hey, gentlemen. Thank you very much for taking my question. You've both been very clear about managing the business for the long term. Considering this operating philosophy, what's the thinking behind the $2 billion share buyback versus pouring more gas into the company's R&D engine and doubling down on product? Thank you.
Mike Scarpelli (CFO)
Yeah, Fred, it's Mike. You know, we have $5.1 billion in cash on our balance sheet. We've had $5 billion since the time we went public. We've made a number of strategic acquisition and M&A deals, we feel we have more than enough capital in the business to fuel our growth through both the small tech and M&As, as well as invest in head count. You can only add so many people at a time and get them productive in an engineering organization. I'm not hearing our engineering leaders claim they need more people. It's not growth at all costs, this company. Yes, we are a growth company, it's efficient growth as well too, we'll continue to do that. You know, we expect we're gonna generate close to $2 billion over the next two years.
Given the $5.1 billion we have, we think it'd be great to manage dilution through that. We still have the opportunity, if we find great candidates, to hire faster if we so choose.
Fred Lee (Small and Mid-Cap Software Analyst)
That's very helpful. Thanks. Thank you, Mike.
Operator (participant)
We now turn to Brad Reback from Stifel. Your line is open.
Brad Reback (Managing Director, Senior Equity Research Analyst)
Great. Thanks very much. Mike, over the last three years, you've added 1,800-1,900 new customers each year. As we look into 2024, should we expect that to continue in a similar sort of growth in revenue per customer, or will it skew more towards revenue per customer? Thanks.
Mike Scarpelli (CFO)
First of all, I don't really focus on the total number of customers. As I've said many times, I like to focus on quality customers. We tend to focus on large enterprise, or they can be small, that have the ability to be significant customers. Clearly the number of customers is going to grow. Whether we add 1,800, 2,000, or 1,500, I really don't know next year. I'm gonna focus more on what those right customers are. You will see the revenue per customer growing. Yes, our $1 million+ customers have stayed flat at $3.7 million, but we also added a number of new customers in there. Our Global 2000 now are up to $1.4 million in trailing 12 months.
They were at $1.3 million last quarter. We still added more Global 2000. I do think the revenue per million-dollar-plus customer in G2K is going to continue to grow over time, and I think you're gonna see more growth out of those Global 2000 numbers.
Brad Reback (Managing Director, Senior Equity Research Analyst)
That's great. Thanks very much.
Operator (participant)
Our next question comes from Brent Bracelin from Piper Sandler. Your line is open.
Brent Bracelin (Managing Director, Head of Technology Equity Capital Markets)
Thank you. Good afternoon. Frank, 20% of customers have tried Snowpark Python. When do you think that those use cases and workloads could actually move from testing and experimentation to actually driving, you know, acceleration in the business? Do you think this is a potential lever in the second half, or do you think it might take a year for a lot of these customers to work out some of these new use cases from a workload driver's perspective? Thanks.
Christian Kleinerman (SVP of Product)
Yeah. In terms of, you know, what we're already seeing in the velocity of consumption that is coming, you know, from Snowpark, we think it'll be in the second half, you know, at some point, you know, where we're gonna see, you know, what we think is material impact, you know, from that. It's still early days. You know, we're growing from a very small base, so yes, we are seeing high velocity, but that still need to persist before on our revenue scale it becomes material.
Mike Scarpelli (CFO)
Said another way, Brent.
Brent Bracelin (Managing Director, Head of Technology Equity Capital Markets)
Mike, real quickly.
Mike Scarpelli (CFO)
Our guidance.
Brent Bracelin (Managing Director, Head of Technology Equity Capital Markets)
Your guidance.
Mike Scarpelli (CFO)
Our guidance. Hey, Brent, our guidance for this year is not material what we have for Snowpark, but I do think longer term will be much more material. It could give us upside, but it's still too early.
Brent Bracelin (Managing Director, Head of Technology Equity Capital Markets)
Very helpful. Mike, I want to go back to the margin comment here. I get recession, you know, impacting a drag on the growth business for a 100% usage model, but you are guiding at 25% free cash flow margins at $2.5 billion scale. Are you rethinking the profitability of this business at $10 billion scale, just thinking through margins today and what they potentially could be at much larger scale?
Mike Scarpelli (CFO)
You're just gonna have to wait for June, our Investor Day, when we give an update on that model, but clearly there's upside to what we said last Investor Day.
Brent Bracelin (Managing Director, Head of Technology Equity Capital Markets)
Great. Thank you.
Operator (participant)
Now turn to Tyler Radke from Citi. Your line is open.
Tyler Radke (MD and Senior Equity Research Analyst – Software)
Yes. Good afternoon. Thanks for taking the question. Mike, going back to your comments on the booking slowdown at the end of the quarter, how much of that was driving the lower outlook for the full year versus actual consumption slowdown that you saw? I guess secondly, as you think about that, booking slowdown, are you incorporating lower close rate assumptions just given that this was the first quarter that you converted, you know, below 100% of the weighted adjusted pipeline? Thank you.
Mike Scarpelli (CFO)
Most of that bookings was really just a duration, customers buying enough capacity to get them through. Yes, there were customers that we did not land, some new ones that have deferred in, into this year to do deals. It does have an impact on the second half of the year on revenue. The biggest thing on the revenue guide is really we are seeing the newer customers take longer to ramp, and these are some of our big customers that are large Global 2000 that are very methodical in the way they do things. Unlike some of the early adopters that were do everything as possible to get everything on Snowflake as soon as possible.
Tyler Radke (MD and Senior Equity Research Analyst – Software)
Helpful.
Operator (participant)
We're now turning to Simon Leopold from Raymond James. Your line is open.
Victor Chiu (Equity Research Associate, Telecom and Technology)
Hi guys. This is Victor Chiu in for Simon. Regarding the behavior of the new cohorts, do you anticipate that consumption, you know, accelerates and returns to previous consumption rates in a more normalized environment, or is this a structural shift around how new cohorts are kind of approaching their implementations, and, you know, this is how we should think about it as kind of the status quo going forward?
Mike Scarpelli (CFO)
Well, what I would say is, you know, we're in a consumption model that literally the beginning of a day, we have zero revenue, and customers choose to use Snowflake. In a tight macro environment, I think people are watching their costs, but just as quickly as they can turn Snowflake off, they can ramp it up very quickly as well too. So we're seeing a customers, as I said before, use Snowflake more efficiently, be more methodical in how they roll Snowflake out to make sure they're doing things, but there's really no big change. Customers are still consuming. They're just not growing at the rate they were. They're still growing. You see that in our net revenue retention.
Victor Chiu (Equity Research Associate, Telecom and Technology)
Okay, that's helpful. Just one quick follow-up. Can you help us understand a little more around your R&D priorities? Maybe help us understand where your preferences are between adding new features versus entering new markets. You know, just trying to get a sense for, you know, where you see opportunities, you know, around your R&D efforts.
Mike Scarpelli (CFO)
I'll let Christian talk about that.
Christian Kleinerman (SVP of Product)
Yeah. We continue investing and innovating across the three broad vectors that we've discussed in the past. One is continued progress on analytics. Second one is around collaboration where data sharing, clean room space. Third one is in the broader category of workload enablement by which we bring computation to come closer to the data. That's where Snowpark, stream data, many other initiatives fit in. We continue investing and making progress on all three prongs.
Mike Scarpelli (CFO)
On the product side or in market side, we will have FedRAMP High very, very soon, that the public sector, we're gonna be able to go after, we're working on IL5. Expect we'll have, the public sector will start to be more material to us this year in terms of new deals. In terms of new markets, we continue to explore China with a strategy for our global multinationals who operate in China. That is something where we will be in there this year. Then the other thing that I would say too is, we're not opening any new countries, and we're gonna invest more in some of the bigger international markets like Japan, where we're seeing huge opportunity there. They just move slower.
Victor Chiu (Equity Research Associate, Telecom and Technology)
That's helpful. Thank you.
Operator (participant)
Our next question comes from Will Power from Baird. Your line is open.
Will Power (Senior Research Analyst)
Okay, great. Thanks. It looked like a really nice comprehensive agreement with AWS. I guess I wonder, in that vein, if you can provide any update as to, you know, the Azure relationship, the opportunity there, you know, what go-to-market currently looks like. Mike, just as it pertains to margins this year, you know, margin guidance a bit higher than where you were previously despite the lower revenue outlet. Just maybe any other color on kind of the key levers helping to enable that.
Mike Scarpelli (CFO)
I'll start with the margins first. Clearly when we, like many of our customers, started looking at our costs, we slowed down some of our hiring this year. That's really driving the margin outperformance as well as efficiencies in the way we do things. We are committed to continuing to operate the company as efficiently as possible. Do expect longer-term, more leverage in the model there. In terms of the relationship with the cloud vendors, I would say the new AWS agreement is a great step forward in improving an already really good relationship with AWS to begin with. We had a $1.2 billion commit. Now we have a $2.5 billion commit over the next five years, it's much better alignment go-to-market between the two.
AWS, we're still, or I mean, Azure, we're still two and a half years into that five-year contract. We will start discussing with Azure, trying to get better terms, and I'm not just talking pricing, I'm talking go-to-market, working together with one another, and there's no change in GCP to date. I'm hopeful there could be something in GCP longer term. We will come to the end of our GCP contract in May of 2024, and we're tracking to fully consume what we committed to with GCP, but we're clearly running ahead with Azure and AWS, and that's why we did an early renewal, or a new contract with AWS.
Will Power (Senior Research Analyst)
Thank you.
Operator (participant)
We now turn to Fred Havemeyer from Macquarie. Your line is open.
Fred Havemeyer (Senior Enterprise Software Analyst)
Hi. Thank you. you know, Mike, I wanted to go back to an earlier comment you made about some of your newer customer cohorts being more methodical in their approach to ramping on Snowflake. Could you provide a little more context around what you're seeing there in terms of what they're doing? Is this something around the, perhaps like, anything budget-related oversight, internal change management or anything? I'm trying to square that also, or not square it rather, but understand it in context with the description you gave that the enterprise segment is performing quite well. Thank you.
Mike Scarpelli (CFO)
Well, I'm just telling you, they're not growing as quickly as what they did, what we saw in 2021 and 2022, where I think it was a little bit more euphoric with companies that didn't have as much cost discipline around spending. You're seeing people being more cost-conscious in how they do things across the board, not just on Snowflake. That's why you're seeing these companies do RIFs out there. As a result, we do see these companies growing, albeit they're growing at a more methodical pace. We're not seeing these crazy spikes in consumption in customers. That's also a function of people are using Snowflake more efficiently in terms of really planning out the rollout of Snowflake. Also, our PS resources are actively involved with customers. Our partners are getting better trained on how to do Snowflake migrations.
This just is, this is really a maturing of our partner ecosystem and us.
Fred Havemeyer (Senior Enterprise Software Analyst)
Thank you.
Operator (participant)
Our next question comes from Michael Turrin from Wells Fargo. Your line is open.
Michael Turrin (MD and Senior Software Equity Research Analyst)
Hey, great. Thanks.
Mike Scarpelli (CFO)
Sorry, I can't hear you. Can you repeat that?
Michael Turrin (MD and Senior Software Equity Research Analyst)
Even with... Oh, yeah.
Mike Scarpelli (CFO)
Sorry. Can you start from the beginning? I couldn't hear you.
Michael Turrin (MD and Senior Software Equity Research Analyst)
If I did, wasn't coming.
Mike Scarpelli (CFO)
Yep.
Michael Turrin (MD and Senior Software Equity Research Analyst)
Yep. Yeah, no, happy to. Look, even with some of the impacts you're mentioning, the NRR is still holding strong at 158%. Not lost on us, any change in how you're thinking about target levels, realize there's variability, but you said you expect those to remain above 130% for a long time. Just anything you're seeing currently that could cause that metric to dip more meaningfully or anything you can add there is helpful.
Mike Scarpelli (CFO)
We're not forecasting it to dip to that level anytime soon. Clearly, as the numbers get bigger, it becomes harder. That number is still gonna be a very high number. It really all depends upon the customers we land today and the ones that we landed over the last two years that will come into our cohort next year. Clearly, if you recall back in 2020, we actually had an acceleration in our net revenue retention rate. I'm not saying that's going to happen, but that is possible, that that could happen as well too. You look through 2022, our net revenue retention went up. That's the beautiful thing of a consumption model.
Just as companies can really control their spend on Snowflake, when they open up their budgets more, they can ramp very quickly existing customers on Snowflake that could drive that up. We're not seeing a precipitous drop-off longer term in the net revenue retention. It will potentially come down longer term, but it's gonna still stay very high.
Michael Turrin (MD and Senior Software Equity Research Analyst)
What about profitability of the company?
Mike Scarpelli (CFO)
Sorry, I can't hear you.
Michael Turrin (MD and Senior Software Equity Research Analyst)
Very helpful. Just one more, if I may. Sorry.
Mike Scarpelli (CFO)
Yeah.
Michael Turrin (MD and Senior Software Equity Research Analyst)
That's helpful. You've mentioned the new customers ramping slower. I think we can appreciate the environment we're in. Are there things you're contemplating either from a product or go-to-market perspective that could change that dynamic at all? Is it more a matter of being patient and letting them come to you, and this all evens out over time from your perspective?
Mike Scarpelli (CFO)
Yeah. I also want to stress, too, that's on average. There are some customers who are ramping very, very quickly. That was the whole strategy behind our SnowConvert acquisition of Mobilize.Net. That's really to help enable migrations faster. That's also why we are spending a lot of time certifying and training our partners, so they can work on this. We're doing everything we can to continue to see customers ramp on Snowflake. To be clear, they continue to ramp at a very good pace, albeit not at the euphoric pace that they were in the past.
Michael Turrin (MD and Senior Software Equity Research Analyst)
That's very clear. Thank you.
Operator (participant)
Our next question comes from Mike Cikos from Needham & Company. Your line is open.
Mike Cikos (VP and Senior Equity Research Analyst)
Hey guys. Thanks for getting me on the call here. Wanted to see if I could course back the guidance construction that you guys have. I know a couple of other folks have been asked about maybe total customer adds, and I know, Mike Scarpelli, you had commented that you guys are looking to focus on the quality customers. If I just look at, like, the Global 2000 as an example, I think previously Snowflake has spoken about having, call it, one or two year sales cycles for some of these customers, again, because it's a strategic relationship. Is there any way or can you provide any detail as far as how you're thinking about additions from the Global 2000 or how those net retention rates are expected to trend over the course of the year?
Then one follow-up, if I could. I know, an earlier colleague had asked about the company's exposure to, let's say, the more VC-backed companies which are clamping down versus the euphoric growth that you had seen previously. Can you size up what that exposure is to that customer segment?
Mike Scarpelli (CFO)
You asked a number of questions, but the first thing is, you know, we land large enterprises, Global 2000, as fast as we can. They are large, long sales cycles. They will be lumpy in terms of when we land them, but that is purely the booking. The ramping of those guys take time, and it's to get them to ramp to revenue. We have not seen any change in terms of really the average deal size of those Global 2000 when we land them. In terms of net revenue retention you asked about, I'm not gonna guide to net revenue retention in the future. And in terms of your question on venture-backed companies, we had disclosed this before, and it remains there. It's roughly 10% of our business.
That tends to be the segment that our inside sales really focuses on, not all of that, and there are some large companies in there as well too. These are some of the unicorns that have been ready to go public for a while, but given the markets, have chosen not to. When I look at those large unicorns, they're still very well capitalized.
Mike Cikos (VP and Senior Equity Research Analyst)
That's awesome. Thanks. Thanks, Mike. I know that you're saying that there's no change in the average deal size for when you're landing customers, but you are saying that the newer cohorts are expanding at a slower rate. Can you provide, like, magnitude of difference if customers have typically taken, I don't know, six months to ramp to their run rate, how is that trending today? like, what would that delta be if we're thinking about magnitude, based on this macro impact we're seeing?
Mike Scarpelli (CFO)
Yeah. I'm not gonna disclose it. I'm just saying it's slower.
Mike Cikos (VP and Senior Equity Research Analyst)
Got it. Thank you.
Operator (participant)
Our final question today comes from Brad Reback from Deutsche Bank. Your line is open.
Dan Bergstrom (Research Analyst)
Hey, thanks for taking the question. This is Dan on for Brad. I just wanted to ask one quickly on some of the hardware and software improvements that were kind of a key focus going into the year. Now that we've kinda gone through the year, and you mentioned the Graviton migration was completed, how did those kind of play out, the impact of that on consumption relative to kind of what you were expecting? Anything to kinda call out looking into next year or over the next several quarters in terms of hardware, software improvements and any reason that would kinda differ from kinda the long-term impact that you expect those to have, that you've talked about before? Thanks.
Mike Scarpelli (CFO)
No, as I said before, we factor in a 5% revenue headwind every year associated with both hardware and software improvements. Don't see any material hardware improvements happening this year as of today. There are a number of software improvements that we were constantly working on those, and so I feel pretty good about that 5%. As I mentioned, the Graviton2 deployments are all completed as of today. We didn't quite get them all done last year. A number of them were finished in the first month of this quarter. Didn't quite have the full impact as we thought last year, but it's really hard to tell. It's baked into our forecast for this year.
Dan Bergstrom (Research Analyst)
Thanks. Just one last one. I was just curious on the international, if there were any markets in particular that kind of drove the underperformance in international.
Mike Scarpelli (CFO)
You know, EMEA actually had a good consumption. They were pretty much on plan from a consumption. They were a little slower on the booking side, and I think that's more of a function of people being more cautious with uncertainty in their businesses. I would say, Japan is doing well for us, but they are very methodical and buy as they go. I would say some of the other areas in Asia are a little bit slower, but Asia's such a small piece of our overall business. It's really EMEA that was a little slower than what we would have thought from a bookings perspective and productivity.
Dan Bergstrom (Research Analyst)
Got it. Thanks.
Operator (participant)
Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.