Snowflake Inc. (SNOW) Q3 2022 Earnings Call Transcript

Snowflake Inc. (SNOW -1.99%)
Q3 2022 Earnings Call
Dec 01, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter fiscal year 2022 Snowflake earnings conference call. [Operator instructions] I would now like to turn the conference over to your speaker today, Jimmy Sexton, head of Investor Relations. Please go ahead.

Jimmy Sexton -- Head of Investor Relations

Good afternoon and thank you for joining us on Snowflake's Q3 fiscal 2022 earnings call. With me in Bozeman, Montana are Frank Slootman, our chairman, and chief executive officer; Mike Scarpelli, our chief financial officer; and Christian Kleinerman, our senior vice president of product will join us for the Q&A session. During today's call, we will review our financial results for third quarter fiscal 2022 and discuss our guidance for the fourth quarter and full year fiscal 2022. During today's call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, product and features, long-term growth, and overall future prospects.

These statements are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after the market closed today and in our SEC filings, including our most recently filed Form 10-Q for the fiscal quarter ended July 31, 2021, and Form 10-Q for the quarter ended October 31, 2021, that we will file with the SEC. We caution you to not place undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in our expectations. We'd also like to point out that on today's call, we will report both GAAP and non-GAAP results.

We use these non-GAAP financial measures internally for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see the reconciliations of these non-GAAP financial measures, please refer to our earnings press release distributed earlier today and our investor presentation, which are both posted at investors.Snowflake.com. A replay of today's call will also be posted on the website.

With that, I would now like to turn the call over to Frank.

Frank Slootman -- Chairman and Chief Executive Officer

Thanks, Jimmy. Good afternoon, everybody. We saw momentum accelerate in Q3 with product revenues growing 110 percent year on year to $312 million and remaining performance obligations growing to $1.8 billion. The net revenue retention rate expanded to 173 percent, and we recorded our first positive non-GAAP operating income in the company's history.

Our Q3 Fortune 500 customer count totaled 223, increasing by eight in the quarter, and we now have 148 customers with trailing 12-month product revenue greater than $1 million. Our growth is driven by a diverse mix of customers. The 10 largest consumers in Q3 include four Fortune 500 companies, four companies less than 10 years old, and the Powered By Snowflake program partner. We continued our international expansion with product revenue from EMEA and Asia Pacific, outstripping the company's year-on-year growth, up 174 and 219 percent, respectively.

We recently launched operations in three new countries: Israel, Korea, and the United Arab Emirates. Vertical industry focus is an important evolution of our selling motion, especially in global enterprise accounts. During the quarter, we announced two industry data clouds. The financial services data cloud brings together the Snowflake platform, partners solutions, and industry data to help financial services organizations mobilize their data.

Customers can launch products, build fintech platforms, and accelerate their compliance on top of Snowflake. Industry-leading customers Allianz, BlackRock, Capital One, New York Stock Exchange, Refinitiv, Square, State Street, and the Western Union are all part of the financial services data cloud. We also launched a media data cloud, which enables media and advertising companies to share data for audience insights and measurements. With data clean rooms enabled by Snowflake, advertisers, agencies, and publishers can design their own collaborative environments.

The media data cloud includes industry leaders like Disney Advertising Sales, Experian, Horizon Media, and The Trade Desk. We're teaming up with Disney Advertising Sales to provide the infrastructure underlying their new data clean room solution. Together, Snowflake and Disney Advertising Sales enable data collaboration for compliant and secure advertising. We launched our Powered By Snowflake program in June to help companies build and promote applications in the data cloud.

Powered By Snowflake is designed to accelerate the delivery of cloud applications on Snowflake. To date, there are over 175 Powered By Snowflake companies who have access to technical resources to design their applications. Most recently, we announced Securonix, UiPath, VideoAmp, and ZoomInfo as Powered By Snowflake partners. In October, we held the Snowflake BUILD Summit, which focuses on software developers, data scientists, and data engineers.

The event received over 20,000 registrations, which was three times last year's BUILD events. Attendees got a closer look at new applications leveraging Snowpark, which brings programmability to Snowflake and is in public preview. Developers explored how new Java user-defined functions are expanding what is possible with Snowflake. Updates to the Snowpark accelerator program were also announced at BUILD.

Snowpark Accelerator provides partners with access to technical experts and market exposure to Snowflake customers. Snowpark provides programming language choice to Snowflake's data cloud. Customers can access pre-built partner capabilities and integrations. It is leveraged by companies such as DataIQ, DataRobot, and H2O.ai.

At our recent Snowday event with more than 23,000 registrations, we announced that our customers can now use Python natively within Snowflake. With Snowpark for Python, developers will be able to easily program with a widely popular language. They can also leverage the security governance and performance of Snowflake. Snowpark for Python is currently in private preview.

During the quarter, Snowflake invested in Anaconda to bring enterprise-grade Python capabilities to the data cloud. Together, we enable the Python community to build secure data pipelines and machine-learning capabilities. The Anaconda partnership will enhance the Snowpark experience to extend programmability with Snowflake. Last year, we issued our first start-up challenge.

Seven hundred companies from 56 countries competed to build a data application with Snowflake. We announced our second Snowflake start-up challenge at BUILD with an opportunity for up to $1 million in total investment. Snowflake's data marketplace grew 41 percent this quarter, now with more than 900 datasets from over 200 providers. We also saw more than 130 percent annual increase in so-called stable edges.

Stable edges are ongoing Snowflake data networking relationships between providers and consumers. One of the featured data sets is FactSet's Tick History data feed. It provides asset managers real-time data from over 200 exchanges. ZoomInfo is another featured data set.

It provides company and contact data with no additional integration or ETL required. The overarching backdrop for Snowflake is the inexorable march toward direct-to-consumer operations and full-bloom digital transformation. Enterprises and institutions have grown acutely aware how much they will end up relying on data operations, data analytics, and data science. Data is becoming the beating heart of the modern enterprise.

So, the race is on to lay the foundation for a digital data-driven infrastructure. Snowflake is and will be a critical enabler of this journey. With that, I will now turn the call over to Mike.

Mike Scarpelli -- Chief Financial Officer

Thank you, Frank. Q3 was a breakout consumption and bookings quarter for us. Our Q3 product revenues were $312 million, representing 110 percent year-over-year growth. Consumption continues to be led by our financial services, media, retail, and technology customers.

Our outperformance is fueled by our existing customer base, which is demonstrated by our net revenue retention rate of one 173 percent. Net revenue retention expansion is driven by rapid growth among our largest customers and the addition of six customers to the measurement cohort that have gained greater than $1 million in revenue in the past year. In Q3, five of our Top 10 customers grew at or above the company's product revenue growth rate of 110 percent year on year. Q3 benefited from record quarter-on-quarter incremental growth, and we are pleased to see our largest customers continuing to expand their use of Snowflake.

Q3 was also an impressive quarter of sales execution. The remaining performance obligations grew to $1.8 billion with our key industries leading net new bookings. We are also pleased with our progress to mature the sales motion to sell large multi-year deals. In the quarter, we signed a three-year $100 million deal to an existing customer, as well as five additional eight-figure multi-year deals.

These commitments signal organizations' intent to expand their use of Snowflake, and we look forward to seeing their consumption follow. Of the $1.8 billion in RPO, we expect approximately 55 percent to be recognized as revenue in the next 12 months. We remain focused on penetrating the largest enterprises globally as we believe these organizations provide the largest opportunity for account expansion. In Q3, the number of customers with greater than $1 million in trailing 12-month product revenue increased to 148, up from 116 last quarter, including eight consuming more than $10 million.

Q3 was also highlighted by meaningful strides in our partner ecosystem. First, our relationships with our cloud service providers in the field continued to strengthen. This fiscal year to date, we have co-sold over $0.5 billion in total contract value with our cloud service providers. Second, we are seeing significant growth from our Powered By Snowflake program with the number of registered Powered By partners growing 137 percent quarter-on-quarter.

And the product revenue from those partners growing 173 percent year-on-year. Lastly, we are seeing growing engagement within the data cloud ecosystem, and we will continue to evaluate strategic opportunities to invest through Snowflake ventures. In the quarter, we announced strategic investments in Anaconda, OverlayAnalytics, and Roadway. The third quarter also saw meaningful gains in profitability and efficiency.

On a non-GAAP basis, our product gross margin was 74.6 percent. Scale, larger mix of compute consumption, and increased price per credit related to greater consumption of higher-priced product additions drove the outperformance. Operating margin was 2.5 percent, benefiting from revenue outperformance and a portion of planned Q3 headcount now starting in Q4. Our adjusted free cash flow margin was 6.4 percent, positively impacted by operating margin outperformance.

As a reminder, adjusted free cash flow excludes the impact of net cash paid or received on both employee and employer payroll tax-related items and employee stock transactions. This quarter, we saw $12 million positive impact from those items. We maintained our strong cash position with approximately $5.1 billion in cash, cash equivalents, and short-term and long-term investments Now, let's turn to our guidance and outlook. For the fourth quarter of fiscal 2022, we expect product revenues between $345 million and $350 million, representing year-over-year growth between 94 percent and 96 percent.

Our forecast calls for our top customers to continue growing from Q3 to Q4 but not at the same record rate we saw from Q2 to Q3. Daily customer consumption patterns determine our revenue forecasts. In many cases, consumption is driven by our customers own business cycles and growth patterns. In Q4 of last year, some of our largest customers experienced tremendous business growth with holiday travel returning to a more normal cadence.

We also expect a greater impact on consumption in Q4 this year than last year. Turning to margins. We expect, on a non-GAAP basis, one percent operating margin, and we expect $358 million diluted weighted average shares outstanding. As mentioned earlier, we pushed some hiring into Q4 but still expect to hire more than 1,200 employees in fiscal year 2022.

For the full year fiscal 2022, we expect product revenues between $1.126 billion and $1.131 billion, representing a year-over-year growth between 103 percent and 104 percent. Turning to profitability for the full year. We expect, on a non-GAAP basis, 74 percent product gross margin, negative four percent operating margin, and eight percent adjusted free cash flow margin. And we expect $357 million diluted weighted average shares outstanding.

For the remainder of the calendar year, we expect to remain in a predominantly remote work environment with limited travel. Our forecast reflects this plan. We're assuming an uptick of return-to-office expenses in the fourth quarter. When we anticipate an eventual return to the office, we do not have a specific timeline for that goal.

With the Snowflake Ventures portfolio growing in strategic investments in privately held and publicly traded securities, please keep in mind that we may see quarter-to-quarter fluctuations in our mark-to-market unrealized gains or losses going forward. We expect to recognize non-cash gains of approximately $20 million in the aggregate on prior strategic investments based on transactions that have closed so far in Q4. And lastly, we will host our Investor Day in person, the week of June 13, in conjunction with Snowflake Summit in Las Vegas. If you would like to attend, please email [email protected].

With that, operator, you can now open up the line for questions. And as a reminder, Christian Kleinerman, our SVP of products will be joining us for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Thank you. We have your first question from Raimo Lenschow with Barclays. Your line is open.

Excuse me, Raimo, your line is open.

Raimo Lenschow -- Barclays -- Analyst

I should unmute myself. Thank you. Congrats for your -- the -- on this really strong quarter. A question for Frank.

If I look at the data sharing progress you guys are making and also looking at some of the industry conferences that are happening this week where data showing starts kind of -- to -- play a more bigger role, where do you see we -- think we are on that journey in terms of other industries discovering the new world we are living in in terms of sharing data in the cloud? And what's possible and how different business model, different monetization models are possible? Because it feels almost like we are only seeing the tip of the iceberg here. And then a question for Mike. The gross margins that you're talking about now, is that kind of the way to think about it because you have done a lot of the negotiations or is there more room to look for in the coming years? Thank you.

Frank Slootman -- Chairman and Chief Executive Officer

Raimo, it's Frank. Generally, I agree with your assessment that we are just seeing the tip of the iceberg. You know, Snowflake was built from the ground up as a data sharing, you know, platform and we've been at it, you know, from the beginning. And you see a lot of other players, you know, following our lead in this regard.

But we are in the beginning. You know, what happens a lot in our field and in our business is that people look at modernizing legacy workloads. Those kinds of things often have priority, you know, over getting, you know, to data sharing, because we cannot even consider data sharing unless we get our data to the cloud. We start moving that workloads, we migrate our databases, and so on.

So, yeah, we are in the very early stages. But, you know, as you see from the metrics that we report on, there is a very, very steady aggressive growth happening quarter-on-quarter. But we sort of haven't reached that tipping point yet where sort of the floodgates are open and things are just expanding at a meteoric rate. But we're anticipating that that will happen at some point.

It's very nonlinear in the way the adoptions is going to develop.

Mike Scarpelli -- Chief Financial Officer

And Raimo, on your question on gross margins. I'm not giving guidance for next year or the longer term. We'll update that in June. All I will say is we still have a number of deployments around the world that are not at scale, which there is upside and our margins from that, coupled with as we get into these larger customer relationships that are going with our higher-edition product, they do attract higher margin.

Consistent with what I -- we said when we're going public, I don't think this is ever going to get into the mid-80s like some of the other SaaS companies. But clearly, our longer-term guidance was 75 percent and there's upside to that.

Raimo Lenschow -- Barclays -- Analyst

Perfect. Thank you. Congrats again.

Operator

We have your next question from Kirk Materne with Evercore ISI. Your line is open.

Kirk Materne -- Evercore ISI -- Analyst

Yeah. Thanks very much, and congrats on the quarter. You know, Frank, I was wondering -- actually I'm going to follow up a little bit on Raimo's question. Are there any industries where you're starting to see network effects take hold in terms of data sharing? I know you guys have taken a little bit, you know, faster posture in terms of going more verticalizing sort of your go-to-market.

I was just kind of curious in areas like financial services. You know, are you starting to see sort of network effects build based on sort of getting some of those really key ARR core accounts? And then just for Mike, can you just give us an update on where you are from a hiring perspective as we head into next year, you know, especially around, you know, sales capacity and things like that? Thanks.

Frank Slootman -- Chairman and Chief Executive Officer

Yeah, Kirk, it's Frank. Yeah, you definitely see network effects, you know, not so much by an enterprise, by an institution, but really by industry because the industry and sub-industry, they really induce and invoked a network effect because the entities have relationships and do business together. So, you know, some of the data clouds that we announced during the quarter like the financial service data cloud, and media and advertising, there's a huge amount of network effect in that area. And advertising, for a lot of reasons that people know, is under enormous pressures.

You know, there's this whole movement afoot to enrich data for advertising yield and effectiveness. And when we're trying to enrich data, you know, that then, you know, triggers data sharing and data attribution, you know, type of strategy. So, it's very strong there. But there is a difference in -- between industries.

Some industries are very leading edge, you know, they are leaning in very, very hard. Now, others just take longer and, you know, you also see by geography, it's different as well. You know, Europe and Asia, you know, are running whatever 18, 24 months behind or so. But everybody's going to get there, just some are just, you know, more out front than others.

Mike Scarpelli -- Chief Financial Officer

And Kirk, on your question on hiring, you know, I want to start by saying we're all about quality rather than quantity of people, and so we're very selective. We are slightly behind, but we're more than making that up this quarter. And as I said in my prepared remarks, we do expect to hire net 1,200 people this year, and we're happy with the people we're hiring, but we will not sacrifice quality over quantity.

Kirk Materne -- Evercore ISI -- Analyst

Thank you, all.

Operator

We have your next question from Derrick Wood with Cowen. Your line is open.

Derrick Wood -- Cowen and Company -- Analyst

Great. Thanks. Amazing quarter. I guess, first one for Mike.

I mean, this kind of revenue outperformance is kind of above the parameters we've thought about, certainly above what we've seen in the past few quarters. What were the biggest outside drivers, and what developments really led to this particularly -- particular quarter having such strong upside?

Mike Scarpelli -- Chief Financial Officer

What I would say is it was really driven by some of our largest mature customers with some things that was unique to their business that kind of surprised us on the upside. I don't think you're going to see that same repeat of a beat. At least, I'm not expecting that. I'm sure you guys would love it, but I just don't see that happening this quarter.

As we said before, a five percent to seven percent beat is a big beat for us with our model. So, it was exceptional performance last quarter. I'm actually disappointed we outperformed that much to be honest with you.

Derrick Wood -- Cowen and Company -- Analyst

Well, it's a good problem.

Mike Scarpelli -- Chief Financial Officer

I concur.

Derrick Wood -- Cowen and Company -- Analyst

Yeah. Well, that's good color. Maybe, Frank, you call that this media data cloud, you know, and how you're helping the advertisers and marketers harness more first-party data is what I've read in that release. And I guess, given, you know, all the developments going around IDFA and cracking down on third party and really the push to try to monetize first party, what kind of opportunity do you see in collecting and powering that first-party data, you know, in the media and entertainment and other B2C industries?

Frank Slootman -- Chairman and Chief Executive Officer

You know, it's really rippling through the entire economy, right? I mean, you really got to sort of view it in the context of, you know, the whole world going direct-to-consumer. You know, every industry is -- even people that have historically not been direct-to-consumer, you know, are moving toward direct-to-consumer. Now, that obviously triggers, you know, enormous investments and people trying to get up to speed on data operation, data science, and being able to run, you know, a real data-driven, you know, enterprise. In order to do that, you know, we need to have very, very, very refined, you know, data enrichment strategies to really tune and optimize and make these relationships work.

And that's what's fueling this enormous, you know, focus on data sharing and being able -- people being able to enrich their data with attributes that come from other sources. So, the ability to own your own data as an institution, as an enterprise, and to fully operationalize and mobilize is going to become incredibly important. I mean, even industries that historically have not been direct-to-consumer, I think of retail and things of that sort, retail, obviously, the brick-and-mortar type, they're all changing now under the influence of the likes of Instacart and DoorDash. So, it's all changing.

So, the interaction method, you know, becoming digital, you know, just -- is a real tailwind for companies like Snowflake.

Derrick Wood -- Cowen and Company -- Analyst

Yeah. Very exciting. OK, thanks.

Operator

We have your next question from Kash Rangan with Goldman Sachs. Your line is open.

Kash Rangan -- Goldman Sachs -- Analyst

Hi, thank you very much. What a spectacular quarter. Frank, curious to get your thoughts on the Fortune 500 count base that you have. You have 223 customers, you also have at the same time about 148 customers that are doing over $1 million in product revenue.

What is the overlap here? And how much more of a potential do you have in the Fortune 500 space? Because I'm surprised that, you know, that the overall revenue of the company, divided by the number of customers, it's about -- it's a relatively smaller number relative to where the company can gain in terms of market share versus broader enterprise software companies but, generally, could sell up to $1 million per account. It seems to me that the penetration wallet share is quite low, which leaves a lot of opportunity. Can you just address that overlap between the million-dollar customers and the Fortune 500 base and how much more potential there is with large accounts? Thank you so much.

Frank Slootman -- Chairman and Chief Executive Officer

Yeah, Kash. I agree with your statement. I mean, we are -- we have footprint, but we're very marginally penetrated, which is great. That's exactly what we look for.

You know, we typically, you know, when we start out with customer, whether it's Fortune 500 or otherwise, you know, it's a whole process that, you know, spans, you know, a long period of time. It's a journey, it's a relationship that you're going. They're legacy workloads, they are new projects, and it's something that grows and grows and grows. And, you know, you very clearly see that in our net revenue retention rates that people are literally evolving and learning and expanding, you know, as they go along.

They may not have a very clear view of what they will be doing or when, but they're literally learning and exploring, you know, as they go along. The other thing that I would say is that, you know, we shouldn't sort of view things in the historical way that, you know, the money is going to come from Fortune 500 companies. This is absolutely not the case. I mean, you'll be stumped if you look at the number of customers that we -- who are not Fortune 500 and how high their revenue contribution is.

And that's because these are newer enterprises, they are born in the cloud, and digital, direct-to-consumer-oriented, and they have a very different culture toward data and a very different orientation. They will definitely feature very, very prominently in our business mix. It doesn't mean that Fortune 500 isn't important, you know, it obviously is. But, you know, their adoption as traditional enterprises is often not as fast as the newer entities that we're dealing with, you know?

Kash Rangan -- Goldman Sachs -- Analyst

Thank you so much. And one follow-up for you, Mike, very quickly. As a result of the profitability inflection we're seeing in the business, does that make you more confident and maybe you potentially think about raising the long-term cash flow margin goal that you outlined a few months back? Thank you so much.

Mike Scarpelli -- Chief Financial Officer

We will be updating our long-term guidance at our Investor Day. I clearly do think there is upside to both our operating margin and free cash flow margin, and we will update it at that time.

Kash Rangan -- Goldman Sachs -- Analyst

Splendid. Thank you so much.

Operator

We have your next question from DJ Hynes with Canaccord Genuity. Your line is open.

DJ Hynes -- Canaccord Genuity -- Analyst

Hey. Thanks, guys. And yeah, congrats on the results, really impressive. Again, Mike, the standout to me is the net revenue retention.

So, Frank, I guess the question is as you think about driving growth in the base, where does the discovery of new use cases typically come from? Is it mostly customer-led? And how much can sales influence that expansion process? And I guess, like longer term, do you think you have to build out a customer success layer over time? I would love to just get your thoughts as you think about, you know, how this evolves over time.

Frank Slootman -- Chairman and Chief Executive Officer

Well, the, you know, first off, the entire company is a customer success layer, OK? That is not a department or, you know, or a function in our world. You know, there are some, you know, predictable ways in which things happen, but it depends on the type of enterprises that we deal with. You know, historically, you know, we've worked on legacy workloads, on-premise workloads, and we have a very predictable pattern. You know, we're moving data to the cloud and, you know, moving -- migrating databases.

That is a tried-and-true part of, you know, of our business. You know, others -- and this is a reason, you know, why verticalization is such an important trend is, you know, that has very little to do with legacy workloads. It has everything to do with preparing companies for their digital direct-to-consumer futures, you know, where they're trying to really mobilize data, monetize data, and make data really the core, you know, of what they're doing. And that is not just in -- those are not just in enterprises as you typically think of.

But even in enterprises like in retail, they are traditionally brick-and-mortar. They're becoming very, very focused on their data -- on the data that they have, the value that it has, and how they monetize that. So, these are very, very big things that are happening. Everybody is realizing they're sitting on something extraordinarily valuable if they can enrich it and mobilize it, you know, in the right way.

So, you know, demand comes from many different places. You know, the sales organizations are, you know, over the last year, are being redirected to really understand the customers' context. You know, what are their challenges? What are people doing? What are people not doing? How are they approaching it so that we can bring that value, you know, to our customers so it's no longer hey, you know, here's our architecture versus the next guy? You know, let's benchmark and POC these workloads to see how they do. That was historically what Snowflake did.

Now, we're completely leaned into the customers' context, you know, what are their issues, their challenges. And, you know, we are becoming experts at their business, and that is a big evolution. It's very exciting because it also elevates us inside the enterprise. You know, we're no longer, you know, talking exclusively to IT types and CIOs and so on, but, you know, we're now talking to the business side of IT.

This is a very different conversation.

DJ Hynes -- Canaccord Genuity -- Analyst

Yeah. Yeah. That makes sense. It's helpful color.

And then Mike, as a follow-up, so you made some comments with respect to how you're thinking about, you know, Q4 consumption patterns. And it made me think about complexities and forecasting a business like this. So, I guess the question really is like, do you find that it's getting easier or harder to model the business as it scales? I mean, I feel like, on the one hand, you probably benefit from customer diversity and, you know, additional data points around usage patterns. But on the other, you know, you're constantly trying to figure out kind of the patterns of new customers.

So, clearly, some puts and takes there. I would just love to get your thoughts.

Mike Scarpelli -- Chief Financial Officer

You know, I think it's getting better, and I've been very happy and I think the Q3 performance relative to our internal forecast is specific to some very large customers. Other than that, we've been pretty accurate with what we gave the field at the beginning of the year, consumption by customer forecast. So, I'm pretty pleased with that, and it does get easier as we have a larger and larger customer base. So -- and the beautiful thing is we use Snowflake to help in our modeling.

DJ Hynes -- Canaccord Genuity -- Analyst

The proof is in the pudding. Thank you, guys.

Operator

We have your next question from Mark Murphy with JPMorgan. Your line is open.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Yes, thank you very much, and I'll add my congrats on a thrilling quarter. Frank, I recalled it when the pandemic hit about a year and a half ago, you actually saw pretty healthy consumption trends because companies had to analyze data just to try to respond to the environment. I'm wondering -- and, you know, Mike, you referenced some activities specific to larger customers. Are there any similar developments that are driving extra consumption today or in Q3, for instance? Maybe frozen global supply chains or -- are driving activity for retailers or maybe this -- the new variant in pharma or, you know, inflation and interest rate volatility kind of driving some activity in financial services?

Mike Scarpelli -- Chief Financial Officer

When I look at the outperformance across our company, the outperformance is really being driven by a number of large customers whose businesses are growing dramatically, plus a couple of our Fortune 500 customers that are doing some specific things is really what's driving it. So, I can't say it has anything to do with the pandemic, supply chain, pharma looking at things based upon the customers that I see that had a really large outperformance. That doesn't mean there's not any of that in our customer base, but I just don't see that as the biggest drivers of our outperformance.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Yeah. OK. Then Mike, as a quick follow-up, when we look at the sequential change in RPO, it's quite a bit larger in Q3 than in Q2. And I was wondering if you could shed any light on that.

You know, to what extent is it driven by duration versus the booking itself, which I think you very clearly mentioned?

Mike Scarpelli -- Chief Financial Officer

Well, if you recall at the end of last quarter, a lot of people picked on our RPO and I said, don't worry, it's timing. And Q3 was going to have a big quarter of RPO, which we pretty much hit our targets internally as to where we thought it would be. There is timing on -- as an example, our first $100 million deal we did in 2020, clearly, that customer is not renewing every year because it's in RPO. We will do some big deals this quarter, too.

We expect Q4 is going to be a big RPO addition. But at the end of the day, it's not RPO and isolation, it's revenue, and it's more current RPO that is more meaningful.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Thank you very much.

Mike Scarpelli -- Chief Financial Officer

And that's why we that give you that 55 percent we estimate will be recognized over the next 12 months.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Got it. Thank you

Operator

We have your next question from Greg Moskowitz with Mizuho. Your line is open.

Gregg Moskowitz -- Mizuho Securities -- Analyst

All right. Thank you and congrats on a terrific quarter. So, we've been hearing more customer anecdotes to the tune of as these companies are growing, they're becoming less confident that other solutions they may be using for data warehousing, etc., can handle their future data volumes and performance needs and that, in turn, is driving more business to the Snowflake platform. Is that consistent, Frank, with what you're seeing?

Frank Slootman -- Chairman and Chief Executive Officer

You know, generally, we'll say yes.

Gregg Moskowitz -- Mizuho Securities -- Analyst

All right. That's short and sweet. And then just as a follow-up. So, I wanted to ask about international because the revenue growth that you reported this quarter was pretty stunning.

You know, clearly, that was a primary driver of the product revenue acceleration you showed this quarter. You know, the question here is are you seeing signs of an inflection in consumption overseas? Or was this more driven by consumption from a few of those larger customers that surprised you this quarter?

Mike Scarpelli -- Chief Financial Officer

What I would say, first of all, is we saw real outperformance relative to plan in bookings in Asia and EMEA. We also had a very, very strong North America, but of a much higher plan. Yes, in our Top 10, we have one European customer that is our largest and is growing very, very fast. But still, the majority of our growth in revenue is coming from our North American customers.

But we do see next year and beyond EMEA, in particular, and Asia starting to derive some of that as well, too.

Gregg Moskowitz -- Mizuho Securities -- Analyst

That's helpful. Thank you.

Operator

We have your next question from Brad Zelnick with Deutsche Bank. Your line is open.

Brad Zelnick -- Deutsche Bank -- Analyst

Great. Thanks so much, guys. And just phenomenal quarter, unbelievable results, even though I know, Mike, you're disappointed in how good they are. Maybe a question for you, Mike.

I think you called out, if I got it right, a half a billion booked in partnership with CSP partners. And I just wanted to ask, you know, how has -- obviously, good. But how is the evolution of the go-to-market been with those partners? And specifically, customers, when they consume prepurchased cloud credits by way of the CSPs, does that ever hit your RPO, and is that a factor we should be thinking about?

Mike Scarpelli -- Chief Financial Officer

So, first of all, I think it's going well with some of the CSPs. And of that, I would say it was over half a billion to date that we co-sold with them. I would say AWS is the majority of that, followed by Microsoft. Google is pretty much zero in that co-sell, but we still are adding more and more our number of customers, and GCP continues to increase.

In -- sorry, Brad, what was the other part of your question?

Brad Zelnick -- Deutsche Bank -- Analyst

It was just if customers consume prepurchase cloud --

Mike Scarpelli -- Chief Financial Officer

Oh, yeah.

Credits, so they have --

Yeah. So, some customers choose to go through marketplace, others choose to go direct. They generally choose to go to marketplace so they can draw down their commit with the cloud provider. That would still show up in RPO because we still get the contract from the customer.

We just do the invoicing and everything through marketplace for them.

Brad Zelnick -- Deutsche Bank -- Analyst

Got it. That's helpful. And maybe just a quick follow-up perhaps for Christian. You know, I just look back historically and price performance has always been a key purchasing criteria in the database market.

And I feel like Snowflake has done a phenomenal job elevating the discussion to a much higher plane. But I noticed off late there have been some competitive claims regarding performance. I'm just curious if A, how much of a priority or criteria is this across your typical sales cycle? And B, what, if anything, should we know about TPC benchmarks in Snowflake's competitiveness from a performance perspective?

Christian Kleinerman -- Senior Vice President of Product

Yeah. So, hi, Brad. Christian here. I think that at all points in time in Snowflake, we're investing in performance.

Every part of the system is getting faster and lower latency, but we're always looking at vis-a-vis price performance of customer workloads. Many of us at Snowflake have been in the industry long enough to know that the TPC benchmarks end up being a game with synthetic evaluations that very quickly get diverse from customer benefits. And at Snowflake, we're 100 percent focused on price performance for our customers. But it's not just price performance, its everything else.

It's the collaboration and the data sharing that was mentioned, as well as the data governance. That's how we think about the broader data cloud.

Brad Zelnick -- Deutsche Bank -- Analyst

Excellent. Thanks so much, guys, and congrats.

Operator

We have your next question from Kamil Mielczarek with William Blair. Your line is open.

Kamil Mielczarek -- William Blair and Company -- Analyst

Hi, everyone. Congrats on another incredible quarter, and thanks for taking my question. So, I have a follow-up on some of the comments made on the Fortune 500 customers. So, now, close to half of them -- well, you have close to half of the Fortune 500 customers today, but only about 15 percent of them are generating $1 million or more in revenue.

So, is it fair -- is it a fair expectation that most of them can reach and exceed that $1 million level in the next few years? And secondly, you said that it takes about nine months for your customers to reach that contractually targeted revenue. For your $1 million customers, how long does it take on average for them to move from that contract signing to that $1 million? And given you're landing larger customers now, do you expect that duration to come down over time?

Mike Scarpelli -- Chief Financial Officer

Well, it depends on the customer. Most customers don't sign a million-dollar capacity one deal, they typically will sign -- I think if you look at our average deal size, it's somewhere around $50,000 initially in signing a customer. And so, clearly, it takes some time. Yes, we signed some large customers in cap ones, but on average, it's not.

We think, on an average, when we laid out our model at our Analyst Day last year that we think we can get to our customers paying us over $1 million a year. On average, that will be $5.5 million. Right now, that 148 customers, on average, is $3.5 million. Clearly, the fact that we have 223 Fortune 500, those are only, on average, right now, doing $1.250 million.

There's a lot of upside in those numbers because it takes time to ramp these guys, and those have been added in the last couple of years, and it will take time.

Kamil Mielczarek -- William Blair and Company -- Analyst

That's great color. Thank you. And just as a quick follow-up, it's nice to see the positive operating income. We've talked in the past about Snowflake being in growth mode.

So, given now you're broken even, can you update us on how you're thinking about balancing margin expansion versus reinvesting in the business? And specifically, your headcount growth is roughly in line with last year. Can we see that accelerate if your margin starts to expand faster than expected?

Mike Scarpelli -- Chief Financial Officer

So, we laid out our long-term model at our Analyst Day last year. We will update that again in June. But I will reiterate again, we are a growth company, but it's not growth at all cost. We will only spend money if we think it makes sense.

And as I said before, we are hiring what we think is the right pace to get quality people in the door.

Kamil Mielczarek -- William Blair and Company -- Analyst

Great. Thanks, guys.

Operator

We have your next question from Brent Bracelin with Piper Sandler. Your line is open.

Brent Bracelin -- Piper Sandler -- Analyst

Good afternoon. I guess, I'm going to stick with the thread of accelerating product growth, where do we see companies at this scale, you know, delivering accelerating growth. I know you called out large customers, called out a couple of special projects within the Fortune 500. But as you just think about the composition of consumption in the quarter and the acceleration outside of those things, do you think the business could have accelerated even at and maintained triple-digit growth even without those anomalies this quarter? Just trying to double click around the acceleration you saw on the product side.

Mike Scarpelli -- Chief Financial Officer

Well, our over-achievement is partially driven by these large customers. We did see, generally, across the board, most of our customers have been exceeding their targets. Yes, there are some that are down, that happen every quarter, but there's a lot more that were above their forecasts. So, you know, it's hard to say, Brent.

But yes, I do think we still would have. If I pulled out a couple of those big customers, with their growth, we still would have been over 100 percent growth.

Brent Bracelin -- Piper Sandler -- Analyst

Perfect. Very clear. And then just -- you mentioned product add-ons as one of the contributing factors to improving product gross margins this quarter. Can you maybe give a little color on what -- one or two of the more popular product add-ons that are kind of --

Mike Scarpelli -- Chief Financial Officer

No, it was. -- we really don't -- we have one product, Brent. I said product addition. So, we have -- if you recall, we have a standard enterprise, Business Critical.

And yes, we have Virtual Private Snowflake, too, but not as many customers use that because they're comfortable from a security going with Business Critical. And it's more of our larger customers using enterprise or Business Critical that drive margin. And those additions have more features associated with them.

Brent Bracelin -- Piper Sandler -- Analyst

Got it. Very clear. Thank you.

Operator

We have your next question from Tyler Radke with Citi. Your line is open.

Tyler Radke -- Citi -- Analyst

Yeah, hi. Thanks for taking my question. Just wanted to go back to the outperformance that you saw, these two customers. Just wanted to clarify, Mike, was it something that was kind of one-time in nature or was this just projects that happened a lot faster, and so kind of the new run rate is faster and you're just not expecting, you know, that type of dynamic to play out going forward?

Mike Scarpelli -- Chief Financial Officer

One of the customers I know does a big project every year at that time of the year and it seemed to have consumed more. The others, I just don't expect them to grow. They're still going to grow their consumption, but I don't think they're going to grow their consumption at the same rate. And a lot of that is because we are seeing and we did see over the Thanksgiving holiday more people take vacation and, add our customers, which does have an impact on their business and how they use Snowflake.

And we do expect, over Christmas, there's -- and New Year's, there's going to be more people as well taking more vacation. And we do recognize revenue on a daily basis, and we do see dips in our customer consumption on those days. This is the highest holiday quarter of any quarter.

Tyler Radke -- Citi -- Analyst

Yeah, helpful. And maybe this one's for Frank. I mean, clearly the, you know, the results are really strong, nothing to really pick at. And I think when you talked about some of the verticals, you called out media, tech, retail that that were particularly strong.

If you think about maybe the verticals that were less strong, like what's the biggest thing holding folks back? Is it budget? Is it just kind of internal process change? You know, hiring environment? Just give us a sense on, you know, the customer constraints, you know, in verticals that are maybe not as strong.

Frank Slootman -- Chairman and Chief Executive Officer

Well, I mean, there are verticals like, for example, I mean, and we've talked about this on previous calls, the contribution we're getting from public sector is not, you know, where we think it will eventually be under surreal structural reasons. You know, why that is so and, you know, we're solving for, you know, for those issues and that business will come along. But, you know, there is a lot of friction. I mean, we're dealing with infrastructure that has existed, you know, for a very long period of time.

It is completely grafted into, you know, operational, you know, processes. You don't just unplug that stuff and plug something new and then you're off to the races, right? These are generational shifts and transitions that enterprises are taking. So, it's not like throwing the switch. These are very, very carefully orchestrated transitions over a long period of time.

It takes a lot of resources, it takes a lot of people. And then, you know, once they sort of get to the other side, yeah, then you see the acceleration happening. We see that over and over again that once they are replatformed, you know, then all of a sudden, because of the nature of the Snowflake platform itself, sky is the limit because they're just -- the platform is so accommodating of so many different workloads, and it just works. So, then the friction is -- and we've gone from a lot of friction to almost no friction.

But sometimes, to -- our customers should rim because things are running, you know, are running away from them maybe a little bit too quickly, and we help them with that. But that's really what Snowflake does. Once you get on the platform, you know, the friction is very, very low to spinning up new workloads and new projects and new programs. And that's what you see as benefiting from.

Tyler Radke -- Citi -- Analyst

Thank you.

Operator

We have your next question from Keith Weiss with Morgan Stanley. Your line is open.

Keith Weiss -- Morgan Stanley -- Analyst

Excellent. Thank you, guys, for taking the question. I think this one is for Mike. But -- when I'm looking at your guys' results, I mean, you guys have been doing really well for an extended period of time.

And this quarter was pretty remarkable. But it seems like in the last two quarters, you've seen, if anything, like an upward inflection in terms of the dollar-based net expansion rate improving. And Mike, your willingness to kind of bring up the sort of out-quarter guide and sort of like it's more of beat-end big raise cadence now than it was than the initial quarters out of the gate. Is there something that changed two quarters ago that gave you guys more visibility or more confidence in the business or that inflected in the business that explains what we're kind of seeing the numbers here?

Mike Scarpelli -- Chief Financial Officer

I think it's a couple of things. One, we talked about that when Frank came on board pre going public, we really shifted to going after some of the largest companies in the world, not that we weren't going after them before. But I would say we more aggressively the way we lined up for salesforce. And it takes a number of years to ramp those customers, and we're seeing a lot of these companies starting to mature right now.

Two, a lot of the things we've been doing with new product features like Snowpark and the Powered By, we're seeing the benefits of that taking place. And not to mention, the network effect with data sharing and other things that we're starting to see, we see them in stable edges. It's kind of starting to come to fruition.

Frank Slootman -- Chairman and Chief Executive Officer

Verticalization.

Mike Scarpelli -- Chief Financial Officer

Sorry?

Frank Slootman -- Chairman and Chief Executive Officer

Verticalization.

Mike Scarpelli -- Chief Financial Officer

Verticalization is the other one, too. That whole media cloud, that is a huge thing for us, not to mention financial services cloud. And I think we're getting much better, our salespeople at selling the business value into those verticals.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. And maybe one follow-up. If there are investor concerns around Snowflake, and there's not too many investor concerns, but it's -- within consumption models, the bills could build up pretty quickly. And you guys see that in terms of your customers get pretty -- some of your customers get pretty big pretty fast.

But we've seen in examples of where customers get sticker shocked over time and it becomes kind of bad marketing and difficult for companies to deal with. How do you guys avoid that? How do you sort of ensure that your customers are seeing value from the solution, but don't get that sticker shock on -- that the consumption model could bring up, hey, listen, we're using more of this than what we had expected?

Frank Slootman -- Chairman and Chief Executive Officer

This is Frank. You know, one of the great things about running a consumption model is that we charge back, you know, who is spending the compute, you know, which business units hold. Business units can decide, you know, where they want to run these workloads, you know, how often they want to run it, how they want to provision it. So, they're really in charge.

It's not sort of a runaway utility model. People can selectively decide, you know, which workloads they want to run and what is the business case for it, and that's the way it's supposed to work. That really mitigates the sticker shock because people can make investment decisions, you know, as they go along and as it warrants it. You know, we're seeing with some of our large banking customers, you know, they went from, you know, recomputing loan rates on a monthly basis to doing it every night.

Well, they have a business case for it. Does it cost money? Yes, it costs money. So, in other words, you know, we -- what's really happening is in the beginning, people have sticker shock, yes, because their build goes from, you know, from x to 2x to 10x or whatever it is. But we're really resetting, you know, what is normal and what is appropriately spent, you know, for this class of computing.

It is very different than what it historically has been. Because of A, you know, what we're now capable of, but B, also the necessity. You know, given the comments that we made earlier about direct -- the trend of direct-to-consumer and full-on digital transformation. I mean, you can choose to sit on your heels and wait it out, but, you know, I wouldn't recommend that.

Mike Scarpelli -- Chief Financial Officer

Yeah, I'll also add, too, is we really stress with customers to take training and how best practices around how to use Snowflake, how to optimize your queries, and we go into our largest customers. And I'll tell you, last quarter, one of our Top 10 customers, we saw a big decrease in their consumption, more than what we were forecasting. Why? Because our RSAs went in there and helped optimize that customer. But you want to know what? When we do that, that customer then moves more workloads.

And we're seeing this quarter already, they're tracking ahead of our forecast because they're using it in a more optimized way, and the customer sees the value they're getting out of Snowflake. So --

Christian Kleinerman -- Senior Vice President of Product

Let me add a quick comment. Also, on the topic of performance, we are very intentional that each time that we make the system faster, we're improving also the economics of Snowflake. And we hear very consistently from our customers that those are very welcomed surprises where the economics of the platform are getting better without them having to do any upgrades or changes to the platform.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. That's super helpful, guys. Congratulations on an awesome quarter.

Mike Scarpelli -- Chief Financial Officer

Thanks.

Operator

We have your next question from Gray Powell with BTIG. Your line is open.

Janet Zhang -- BTIG -- Analyst

Hi, this is Janet Zhang on for Gray Powell. Congrats on the corner, and thanks for taking the question. So, I was wondering, what do you think is the best forward-looking predictor of revenue? I know last quarter, you know, there was a focus on RPO, which can move around. So, how much weight do you think we should put on things like RPO or customer ads versus just the pace of net new product revenue in a given quarter?

Mike Scarpelli -- Chief Financial Officer

I would say the first thing is the guidance we give. The second thing is historical revenue growth patterns, coupled with the current portion of RPO to build your models.

Janet Zhang -- BTIG -- Analyst

Got it. That makes sense. Thank you so much.

Operator

We have your next question from Karl Keirstead with UBS. Your line is open.

Karl Keirstead -- UBS -- Analyst

Great. Maybe I'll direct this one to Christian. The data science ML workload opportunity seems to be huge, and I think everybody on this call took notice of your data science-related announcements at your recent Snowday. I just wanted to ask you how ambitious Snowflake is about going after those workloads and how willing are you to go up against the likes of Databricks, DataRobot, DataIQ, and others? Or do you view them more as partners? Thank you.

Christian Kleinerman -- Senior Vice President of Product

Yeah. Hi, Karl. The way we think about it is we want to help our customers bring the computation to do data science and machine learning on to Snowflake so that they don't have to copy the data out and miss out on the benefits of data governance, etc. As such, the big investments we've done have been all-around extensibility.

That's where you see Snowpark, that's where you see Python. And we're partnering with all the companies that you mentioned for them to drive consumption and compute on Snowflake. So, what we want is to have those solutions come and run natively on Snowflake.

Karl Keirstead -- UBS -- Analyst

OK. Got it. Good luck chasing that opportunity. It seems material.

Christian Kleinerman -- Senior Vice President of Product

It's very large, yes.

Operator

We have your last question from Brent Thill with Jefferies. Your line is open.

Brent Thill -- Jefferies -- Analyst

Frank, I look forward to the book. When you think about unstructured data, I know you made an announcement to push harder here. Can you talk to us about, you know, what you're seeing from customers' interest level? And are you starting to see customers go into production? Or is that a 2022 event? Thanks.

Frank Slootman -- Chairman and Chief Executive Officer

Thanks for the plug on the book there, Brent. I'm going to ask Christian to address this question.

Christian Kleinerman -- Senior Vice President of Product

Yeah. So, unstructured data went into public preview at our Snowday. We are seeing quite a bit of adoption. We're seeing images, documents, even speech recordings getting stored into Snowflake.

And we're seeing customers start to leverage Snowpark to do programming in Java to get value out of those files. So, it's looking pretty good from the early adoption, the few weeks that it has been in public preview.

Brent Thill -- Jefferies -- Analyst

And Mike, you mentioned media and financial services as it relates to verticals. If you had kind of the next two verticals on ready reserved, ready to take off, what would you say those are sitting on the tarmac ready to roll into 2022 if you had up in commerce?

Mike Scarpelli -- Chief Financial Officer

I think healthcare is going to be a big one. You know, I think in the longer term, I do think public sector will be a big vertical we're working on. And retail is a very, very big vertical force that will take off. Listen, we're doing well across the board.

We're just really highlighting we're doing exceptionally well in media and financial services.

Brent Thill -- Jefferies -- Analyst

Got it. Thank you.

Frank Slootman -- Chairman and Chief Executive Officer

Thanks, everyone.

Operator

We're showing no further questions at this time. Presenters, please continue.

Frank Slootman -- Chairman and Chief Executive Officer

Thanks, everyone.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jimmy Sexton -- Head of Investor Relations

Frank Slootman -- Chairman and Chief Executive Officer

Mike Scarpelli -- Chief Financial Officer

Raimo Lenschow -- Barclays -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Derrick Wood -- Cowen and Company -- Analyst

Kash Rangan -- Goldman Sachs -- Analyst

DJ Hynes -- Canaccord Genuity -- Analyst

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Gregg Moskowitz -- Mizuho Securities -- Analyst

Greg Moskowitz -- Mizuho Securities -- Analyst

Brad Zelnick -- Deutsche Bank -- Analyst

Christian Kleinerman -- Senior Vice President of Product

Kamil Mielczarek -- William Blair and Company -- Analyst

Brent Bracelin -- Piper Sandler -- Analyst

Tyler Radke -- Citi -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Janet Zhang -- BTIG -- Analyst

Karl Keirstead -- UBS -- Analyst

Brent Thill -- Jefferies -- Analyst

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