IPO Launch: Snowflake Seeks Multi-Billion IPO
Snowflake (SNOW) intends to raise $2.2 billion from the sale of its Class A common stock in an IPO, according to an amended registration statement.
The company provides integrated data management capabilities for enterprises worldwide.
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 overview video of a customer testimonial:
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 extremely well for this metric.
Average Revenue per Customer has grown sharply, 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).
SNOW intends to sell 28 million shares of Class A common stock at a midpoint price of $80.00 per share for gross proceeds of approximately $2.24 billion, not including the sale of customary underwriter options.
A concurrent private placement is expected to sell an additional $500 million to Salesforce and Berkshire Hathaway.
Class A stockholders will be entitled to one vote per share and Class B shareholders will hold ten votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $22.8 billion.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 10.04%.
Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds as follows:
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 and the concurrent private placements. However, we currently intend to use the net proceeds we receive from this offering and the concurrent private placements for general corporate purposes, including working capital, operating expenses, and capital expenditures. We may also use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies.
Management’s presentation of the company roadshow is available here.
Listed underwriters 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.
SNOW is raising a total of $2.7 billion for its growth plans, which will likely include acquisitions as the firm seeks to increase its footprint within the enterprise.
Snowflake’s financials show very strong topline revenue growth but high operating losses and cash used in operations.
Sales and marketing expenses as a percentage of total revenue have been dropping and its sales and marketing efficiency rate has risen.
The company’s dollar-based net retention rate is a very high 158%, which indicates the firm is adding revenue from the same customer cohort and shows an efficient ‘land and expand’ sales approach.
The market opportunity for providing integrated data management is large and expected to grow to significant size according to reports by IDC.
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 64.9% since their IPO. This is a top-tier performance for all major underwriters during the period.
As to valuation, management is asking investors at IPO to pay an EV / Revenue multiple of 56.7x.
According to a May 2020 compilation of public SaaS firm multiples, the stock market is valuing them at an all-time high:
Source: Meritech Capital Partners
SNOW is seeking to go public at a price approaching 3 times the next twelve months revenue equity value weighted multiple of 20.4x shown above.
So, the IPO appears priced for perfection, which is a cause for concern and generally leads me to seek to avoid overpaying for such IPOs.
SNOW is a firm that is well positioned for continued growth, but not at any price.
My opinion on the IPO is NEUTRAL based on excessive valuation.
Expected IPO Pricing Date: September 15, 2020.
(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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