Snowflake Inc. ($SNOW) experienced a notable decline in its shares early Thursday, following the company's cautious fiscal third-quarter product revenue outlook. Despite enhancing its full-year expectations for this key metric and surpassing Wall Street estimates for the second quarter, the sentiment was dampened.
The firm, recognized for its cloud-based data platform, provided insights that product revenue is projected to land between $850 million and $855 million for the upcoming fiscal third quarter. This estimate falls slightly short of the consensus forecast from Visible Alpha, which was pegged at $855.4 million.
In premarket trading, Snowflake's stock plunged 9.4%. Chief Financial Officer Michael Scarpelli explained during an earnings call that the forecast for product revenue was informed by observed customer behavior: "We forecast product revenue based on observed behavior. Our forecast does include revenue headwinds associated with performance improvements." For the quarter ended July 31, Snowflake reported adjusted earnings of $0.18 per share, a decrease from $0.22 in the previous year, although this was still ahead of the consensus polled by Capital IQ, which anticipated $0.16 per share.
The overall revenue surged by 29% year-over-year, reaching $868.8 million, which also exceeded Street expectations of $850.7 million. Notably, product revenue increased by 30%, totaling $829.3 million. The second quarter's growth was primarily driven by the financial services and technology sectors.
Scarpelli observed positive trends that indicate a stable optimization environment. Furthermore, the company boasted a net revenue retention rate of 127%, and remaining performance obligations (RPO) soared by 48% year-over-year, climbing to $5.2 billion. Looking ahead to fiscal 2025, Snowflake has adjusted its expectations for product revenue to approximately $3.36 billion, aligning with the consensus estimate from Visible Alpha and marking an increase from its previous outlook of $3.3 billion.
The company reiterated its forecast for an adjusted product gross profit margin of 75%. Market analysts, including those from Truist Securities, viewed the results favorably but noted that investors were seeking even stronger incremental product revenue following Snowflake's robust performance in the first quarter.
Truist still regards Snowflake as a primary beneficiary of the ongoing surge in artificial intelligence and has maintained a buy rating on the company's stock. Despite the short-term challenges, the outlook remains optimistic in the long run as the industry's push towards AI continues to fuel demand. The current prices reflect $121.78 with a change of -13.28, representing a percentage change of -9.83, signifying the market's reaction to the earnings announcement..