(Bloomberg) — Snowflake Inc., a software company that helps businesses organize data in the cloud, plunged 22% in early trading on Thursday after projecting that annual product sales growth would slow from its previous triple-digit-percentage pace.
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Executives said improvements to the company’s data storage and analysis products will let customers get the same results by spending less, which will hurt revenue in the short term, but attract more clients in the future.
“The full-year impact of that next year is quite significant,” Chief Executive Officer Frank Slootman said on a conference call after the results were released. But “when customers see their performance per credit get cheaper, they realize they can do other things cheaper in Snowflake and they move more data into us to run more queries.”
Product sales will increase as much as 67% to $1.9 billion in the current year, the company said Wednesday in a statement. While in line with estimates, the forecast represents a significant decline in Snowflake’s revenue growth, which has more than doubled year-over-year in each of the past six quarters.
Snowflake earns revenue when customers store data and run queries on its platform, which is different from other software vendors that charge a monthly subscription cost. As a result of that consumption model, some early users are often surprised to get much bigger bills from Snowflake than they anticipated. Recognizing that, Snowflake has worked to improve the efficiency of its platform to help reduce costs for customers.
Those product enhancements are expected to result in a $97 million revenue hit in the year ahead, executives said on the call.
The outlook suggests Snowflake may also be getting hurt by the rising competition in the data storage and analytics sector. Product revenue makes up almost 95% of the company’s total sales.
The forecast “could be due to saturation of new customer additions at large companies,” said Mandeep Singh, an analyst at Bloomberg Intelligence. Snowflake is likely to move toward finding ways to sell to midsized companies, he added.
Snowflake gained prominence by taking the on-premises data warehouse and moving it to the cloud. However, its initial public offering, which was the largest in the U.S. in 2020, and subsequent success have led to a rush of investment in the sector, including into startups such as Databricks Inc. and Starburst Data Inc. that are trying to eliminate the need for Snowflake’s core offering.
But Snowflake is also adding features, like improved analytic capabilities to review corporate data to help predict future behavior, which is ramping up competition in a sector long-dominated by legacy vendors like Oracle Corp.
Notably, Snowflake continues to drive additional spending from existing users. Its net revenue retention rate was 178% in the quarter, significantly above the industry average. That figure, however, is expected to drop in the coming quarters, partially a result of the product enhancements.
Fiscal fourth-quarter revenue doubled to $383.8 million. Analysts, on average, estimated $372 million. The company’s net loss narrowed to $132.1 million, or 43 cents a share, from a loss of $198.9 million, or 70 cents, in the period a year earlier.
Snowflake also agreed to acquire Streamlit, a company that helps developers build and share data applications, in a stock-and-cash deal for $800 million, executives said on the call.
Executives said Streamlit could help in Snowflake’s push to add features to its platform to attract more data scientists, like supporting Python, a popular programming language.
The focus is on “driving workloads from the developer to Snowflake,” Slootman said.
Snowflake’s stock fell to a low of $204.90 in premarket trading. The shares closed at $264.69 in New York and have declined 34% from a November high.
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