IPO Preview: Snowflake Commences U.S. IPO Push


Snowflake (SNOW) has filed to raise $100 million in an IPO of its Class A common stock, according to an S-1 registration statement.

The firm provides enterprises with an integrated Data Cloud ecosystem.

SNOW has generated impressive financial metric growth, including extremely high dollar-based net retention rates, indicating efficient marketing efforts and strong product market fit.

San Mateo, California-based Snowflake was founded to combine three separate data functions, that of storage, compute, and cloud services, into a Data Cloud system to enable enterprises 'to simultaneously access common data sets for many use cases without latency. The cloud services layer intelligently optimizes each use case's performance requirements with no administration.'

Management is headed by Chief Executive Officer Mr. Frank Slootman, who has been with the firm since December 2019 and was previously Chairman of ServiceNow (NOW) and a Partner at Greylock Partners.

Below is a brief video of a customer testimonial:

Source: Snowflake

Snowflake has developed a robust partner program, with Technology, Services, Cloud and Data Provider partners assisting the firm in extending its offering reach and capabilities.

The company’s primary offerings include:

  • Diverse data type capabilities
  • Data volume scalability
  • Dynamic availability of compute resources
  • Multi-cloud and multi-region
  • Seamless & secure data sharing

Snowflake has received at least $1.6 billion from investors including Altimeter Partners, ICONIQ Strategic Partners, Redpoint Ventures, Sequoia Capital and Sutter Hill Ventures.

SNOW pursues organizations of all sizes, although its focus is not on small firms; rather it focuses its efforts on medium and larger sized firms which have larger data integration needs.

For example, the average annual revenue per customer was $111,000 for the year ended January 31, 2020, so the company's services are really not aimed at small businesses.

Sales & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Sales & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales & Marketing spend, rose to 0.7x in the most recent reporting period.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory. SNOW’s most recent calculation was 61% as of July 31, 2020, so the firm has performed well for this metric.

Average Revenue per Customer has grown sharply to over $155,000, based on 1H FYE 2020 annualized.

The firm recorded a dollar-based net revenue retention rate of 158% for the period ended July 31, 2020. This is an extremely high figure and indicates the firm is generating growing revenues from the same customer cohort.

According to IDC reports cited by management, which include the markets of Analytics Data Management, Integration Platforms, Business Intelligence and Analytics Tools, it believes the combined market size is '$56 billion by the end of 2020 and $84 billion by the end of 2023.'

I have not been able to independently verify these figures, which are apparently derived from four IDC reports:

  • Business Intelligence End User Survey, February 2020.
  • The Digitization of the World - From Edge to Core, November 2018.
  • FutureScape: Worldwide Cloud 2019 Prediction, October 2018.
  • Worldwide Big Data Analytics Software Forecast 2019-2023, September 2019.

Major competitive or other industry participants include:

  • Amazon - AWS
  • Microsoft - Azure
  • Google Cloud
  • Various other smaller, application specific competitors

Snowflake’s recent financial results can be summarized as follows:

  • Sharply growing topline revenue
  • Increasing gross profit and gross margin
  • High operating losses but reduced negative operating margin
  • Reduced cash used in operations

Below are relevant financial results derived from the firm’s registration statement:


Source: Company registration statement

As of July 31, 2020, Snowflake had $886.8 million in cash and equivalents and $673.6 million in total liabilities.

Free cash flow during the twelve months ended July 31, 2020, was negative ($125.8 million).

Snowflake intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, although the final amount may differ.

Class A common stockholders will be entitled to one vote per share and Class B stockholders will be entitled to ten votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Management says it will use the net proceeds from the IPO as follows:

The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our Class A common stock. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses, and capital expenditures.

Management’s presentation of the company roadshow is not currently available.

Listed bookrunners of the IPO are Goldman Sachs, Morgan Stanley, J.P. Morgan Securities, Allen & Company, Citigroup, Credit Suisse, Barclays, Deutsche Bank Securities, Mizuho Securities, Truist Securities, BTIG, Canaccord Genuity, Capital One Securities, Cowen, D.A. Davidson & Co., JMP Securities, Oppenheimer & Co., Piper Sandler, Stifel, Academy Securities, Loop Capital Markets, Ramirez & Co., and Siebert Williams Shank.


Snowflake is seeking U.S. public capital market funding to continue its expansion efforts.

SNOW’s financials show impressive revenue and gross profit growth, still elevated operating losses (lower negative operating margin, though) and reduced cash used in operations.

Sales & Marketing expenses have been dropping as revenues have increased; its Sales & Marketing efficiency rate has increased to 0.7x in the most recent reporting period.

The market opportunity for simplifying data storage, compute and cloud services is large and obviously growing quickly.

Enterprises are continuing their historic, multi-decade transition from on-premises systems to cloud-based infrastructures, providing companies like Snowflake with tremendous opportunities to sell converged, integrated services.

As enterprises transition to the cloud, complexity has increased markedly, putting pressure on IT groups and providing an opening for companies like SNOW to provide a suite of capabilities that both simplifies and removes data siloing limitations.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 84.8% since their IPO. This is a top-tier performance for all major underwriters during the period.

SNOW has produced extremely high net retention rates, which are critical in evaluating whether a subscription-based company is efficiently growing its business.

I look forward to learning more about the firm’s IPO pricing and valuation assumptions.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)


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