Snowflake (NYSE: SNOW) and Salesforce (NYSE: CRM) both reported earnings on 2 March 2023 and did their fortunes differ!
Snowflake’s share price plummeted 12% while Salesforce’s share price spiked 12%. This brought Snowflake’s YTD performance to a standstill with share price at the same levels it began the year with while Salesforce is up nearly 39% in just over 2 months.
Buffett owns shares in Snowflake and does not have any shares in Salesforce. Salesforce was a former shareholder of Snowflake but sold all its holdings just over a year ago. It seems like CEO and Founder of Salesforce Mark Benioff might be more astute in the SaaS space than Buffett.
Here, we review their recent results to understand the share price performance.
Snowflake (NYSE: SNOW)
Snowflake’s 4Q FY23 YoY growth was 53%, however QoQ growth slowed for the third consecutive quarter to 5.7% or $589 million revenue in 4Q FY23. Snowflake ended FY23 with $2.07 billion revenue, a 69% growth.
Net loss widened to $207 million in 4Q FY23 and $797 million for FY23, significantly higher than 4Q FY22 and FY22 losses of $132 million and $680 million respectively.
Snowflake was also able to grow its total customer base by 31% year on year or an additional 1,861 customers to 7,828 customers. However, the number of customers contributing over $1 million in product revenue only increased by 146 to 330 customers.
Although there was significant expansion with existing customers, retention rate declined. Nevertheless, Snowflake still has one of the highest retention rates amongst SaaS stocks.
Although it is hard to land strategic customers, each of these strategic large customers has vast potential revenue. Snowflake recorded a mere 16% growth or 81 new strategic customers.
Snowflake’s guidance for the next financial year indicates decelerating growth.
Snowflake reiterated its target of $10 billion revenue by 2029 which means that should it achieve its FY24 revenue guidance, it will have to record 30% growth for the remaining 5 years to get to $10 billion revenue.
The softer outlook is consistent with the moderating growth posted by other cloud computing businesses such as Amazon Web Services, Microsoft Azure and Google Cloud.
Snowflake’s board authorized a stock repurchase program of up to $2 billion of stock. Although Snowflake is not profitable, the company actually generates positive operating cashflow.
This is because a substantial portion of its expenses arises from stock based compensation and are non-cash in nature. The likely intention of the stock repurchase program is to offset the stock’s massive dilution of nearly $900m in FY23 arising from stock based compensation.
Paying its employees by issuing stock and then repurchasing stock from the open market to negate the dilution effectively means that Snowflake is funding this expense in cash. As Snowflake has only $4 billion in cash and short term investments on hand, it makes one wonder about the broader objectives of the company.
Salesforce (NYSE: CRM)
Salesforce’s 4Q23 Revenue was $8.38 Billion, up 14% YoY (17% based on Constant Currency) while FY23’s revenue was up 18% YoY.
In 4Q23, the company swung from an operating loss to an operating profit as its operating margin increased by 6.7% to 4.3%.
Snowflake’s Non-GAAP operating margin was even more impressive as it increased 14.2% to 29.2%.
4Q23’s loss per share was -$0.10, restructuring costs per share was -$0.84. As a result, FY23’s earnings per share was $0.21. Excluding restructuring costs, 4Q23’s earnings per share would have been $0.74 and FY23’s earnings per share would have been $1.05.
The restructuring came as multiple well known activist investors such as third Point, Elliott Management and Starboard acquired stakes in Salesforce and pressured the company to slash costs.
Salesforce then reduced its workforce by 10% as part of a restructuring plan designed to offset a deceleration in the company’s growth during the current economic downturn.
Salesforce recorded low double digits growth in all segments of its revenue for 4Q FY23 as it continues to cross sell all its products by leveraging on its integrated CRM platform known as Customer 360. The Tableau offering continues to be popular as it was included in all 10 of Salesforce’s largest deals for the year.
While the APAC region was the smallest of its international markets at just under 10% of total revenue, it recorded the strongest revenue growth at 18% year on year or 30% based on constant currency. Salesforce’s revenue attrition was below 7.5%, reflecting a high retention rate.
Salesforce provided a stable guidance, expecting 10% growth in its revenue for both 1QFY24 and FY24. It expects the full year operating margin to increase from the current 4.3% to 10.8%, a whopping 6.5% increase.
The company is also guiding for a FY24 earnings per share of approximately $2.60, 12 times higher than FY23’s earnings per share of $0.21. Even after adjusting out restructuring costs from FY23’s earnings per share, the FY24 earnings per share forecast is still more than double of FY23’s.
Closing statements
Both companies have recorded slowing growth and are expecting to record even lower growth in the near term. Snowflake saw its loss widen while Salesforce was able to contain its expense and record improved operating margins.
Both also provided guidance indicating tapering revenue growth. Despite growth expectations tapering off, Salesforce is focusing on its cost base and forecasting significantly higher operating margins while Snowflake is forecasting a mere 1% uptick.
It is clear that in this current market, prudence is rewarded while spending is not. In addition, the market probably did not look favourably on Snowflake’s intention to carry out share repurchases as it would have probably made more sense to conserve cash in these uncertain times.