Consumption Model and Snowflake Notes Following DB Tech Conference
This was a busy week as we covered many of the presenting companies at several technology conferences. Snowflake was top of mind given their strong report a week ago, and Snowflake's consumption model is proving resilient. As a preamble, our focus is around product and opportunity, and today less on valuation.
Our quick view on the consumption model is this.
While in many cases, a company's business model can influence decision-making, we believe that it is the product that drives behavior across economic environments. Ease of deployment and mission-critical products with a clear return on investment always have a place in budget roadmaps. We bring this up as we are now seeinng several companies such as C3 ai try out a consumption-based model, and we heard numerous analysts ask about this during earnings calls and presentations. We expect this to be an ongoing dialogue among the investment community.
Why is this important?
For one, a business model transition can obscure a business's true health from the investors' lens. A shift from software subscriptions to consumption would collapse traditional metrics in subscription land, such as annualized recurring revenue "ARR", bookings, billings, and annual contract value "ACV, among others. We actually like when this occurs (see Nutanix, Adobe, Autodesk), as it creates a dislocation in the stock as the company moves through the transition. One of our investment pillars is transformation ie transition stories.
So pay attention to your software companies and who may go down this transition path (subscription to consumption). We will have a podcast on this soon, so subscribe here (Apple Podcast | Spotify ) to stay on top of it.
Turning to Snowflake
Here are positives, negatives, and basic notes. We focus on comments around growth drivers, messaging around their moat, product cadence, and raw notes.
Our Main Takeaway From the Conference
It furthered the view that Snowflake remains in the very early days of its adoption phase with the average spend per Global 2000 customer spending around $1.2m. Those customers paying $1m or more have an average spend of $3.5m. They have Capital One as a customer who seems to be all in on Snowflake. They have gone from $29M in annual spending to $48m in two years. This is quite the land-and-expand example. See the image above for more notes about Snowflake.
The company has a goal of $10B in sales over the next 7 years. To get there, we calculate roughly a 30% annualized growth requirement exiting 2022 to 2029. We also decay revenues by various amounts to gauge where the business could land.
Given Snowflake's early adoption phase and the optionality around its product portfolio, these numbers are indeed achievable. However, let's see the current trend on a year-over-year basis using total revenue. Below shows the trend coming down to the mid-50s (60s percentage if using product revenue only).
We also must consider that Snowflake has landed a significant amount of customers over the last 6 quarters, which takes time to ramp. As these customers ramp on top of a more extensive product portfolio, we could see an acceleration around this trend growth.
For investors, I think the big question is... if they arrive at $10B on schedule or before their goal, what revenue rate are they exiting at, and what value are you paying for $10B in sales on their stated margin target? That is for you to determine.
Now, Snowflake will run into competition on that journey as 7 years is a lot. To put some perspective, 7 years is half the age of the iPhone and the iPhone became the core operating system for many things.
We know that 80% of the customers using Snowflake run it on Amazon AWS. This proves to be an interesting position to be in as Amazon has Redshift, a direct competitor to Snowflake and Amazon owns the compute and storage.
We also wanted to look at trending competitors to Snowflake within the enterprise category. Redshift is #1, but we noticed a move higher in Vertica, and the company is gaining momentum.
On the next page, we went through Reddit, GitHub and other forums to determine critical differences.
Below is a comment from an employee, so have that for context. However, this was 2021, and the core advantage presented is that Vertica can handle on-prem and cloud-based workloads. It is interesting that since then, Snowflake announced the ability to manage on-prem workloads after preaching that they would not. Was the change in customer demand? or competitive threat? Again, probably both.
We also wanted to see how penetrated Vertica was. We looked for job postings requiring Vertica and started seeing it everywhere. Tesla, Bookings, Chewy, Deloitte, BNY Mellon, BofA, and many others. Some of these had multiple skills required, but the point is, when you are skills for jobs, you are kind of important.
To be very clear, we continue to like (if not love) what Snowflake is doing. They have a beloved product, a management team that can execute, and at scale can create an ecosystem that is much more than something that centralizes data. In addition, it is more than clear that this is the early days in the space. We continue to juggle the opportunity around data sharing, which can create a network moat, their dependency on their competitor's platforms, and the non-hyperscaler (Azure, GCP, AWS) competitor trends.
That is it for today. On to Smartsheet earnings and PagerDuty!
If you or anyone use Vertica or Snowflake, we would love to speak with you. Bring you on our Podcast Inside Scoop to share your insights broadly. Please email us at firstname.lastname@example.org
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*** This is for educational purposes only and not a recommendation to purchase or sell any securities mentioned.