Reporting Next Week: Snowflake, Palo Alto Networks, Workday
Key Takeaways
• A slight improvement in second-half spending intentions for Snowflake, along with strong overall Net Score among large customer cuts, after last quarter’s beat-and-raise result
• Palo Alto Networks has seen a 12-percentage point increase among Global 2000 customers compared to our last second-half survey, pointing to traction with its aggressive platformization strategic approach
• Net Score for Workday remained stable and strong overall compared with our last 2H survey, though Adoption indications ticked down incrementally compared to historical levels
With the bulk of second-quarter software earnings now in the rearview mirror, we’ve seen mixed results across the sector as budget scrutiny continues to constrain IT decision makers. We again turn our attention to companies reporting next week and highlight ETR’s data behind Snowflake, Palo Alto Networks, and Workday from our most recent July 2024 Technology Spending Intentions Survey (TSIS). This article provides a summary of the content, but please feel welcome to contact our service team if you would like to see the full report.
Snowflake: Slight Positive Inflection in Global 2000 Intentions
Snowflake is set to report its FQ2 results on Wednesday, August 21st, after market close. Snowflake’s Net Score remains healthy after a notable rebound in JAN24 and is up 13 percentage points since OCT23, with one of the highest Net Scores in our entire TSIS vendor universe. It remains strong in the Database / Data Warehousing Software sector, trailing only its competitor, Databricks. Last month, we examined the competitive dynamic between the two vendors in our Snowflake & Databricks Shared Customer Survey, which asked 105 IT decision makers (half from Global 2000 customers) about use cases on each platform.
Additionally, Snowflake’s debut in the ML / AI sector and its realignment as a consolidated vendor within the Analytics / B.I. / Big Data sector show strong Net Scores and relative positioning. Among peers in this sector, Snowflake’s Net Score stands at the 53rd percentile, and its Pervasion level stands at the 76th percentile. Its ML / AI Net Score trails tech giants (AWS, Google, and Meta Llama) but leads several larger vendors (Oracle, IBM).
The company’s competitive strengths continue to come from its impressive platform abilities and use cases. This quarter, Feature Breadth and Product Technical Capabilities were the most frequently cited reasons for adopting a Snowflake product, at 50% and 48% of respondents, respectively (N = 82). We believe this allows Snowflake to continue to screen very well among critical large customer cuts, including the Global 2000, of which the company counted over 35% of the index’s total as of last quarter (up 8% y/y). This quarter, our G2000 respondents indicated a positive rebound in second-half spending intentions, along with a nearly 5-point increase in Pervasion (see below).
With an impressive 34% y/y product growth last quarter complemented by ~26% LTM Free Cash Flow margin, Snowflake trades at a premium 10x EV/Forward Sales valuation relative to the public software universe. Shares have fallen by roughly one third year-to-date, largely spurred by the lower than anticipated FY growth guidance and a concurrent CEO transition announcement in February.
Results last quarter fared better, with a strong sales beat and full year revenue guidance raise. However, this came as the company lowered its full year Adjusted FCF margin guidance three points to 26%, noting headwinds associated with GPU-related costs Snowflake continues to invest in new AI initiatives.
In June, we received additional color during the company’s investor day, which reinforced positive trends we’ve been see among the G2000. Management noted, “If you look at our Fortune 2000, the Global 2000, these guys are actually growing faster. And we expect that this will continue to outpace the overall growth of the company in terms of net revenue retention.” NRR for the company totaled 131% last fiscal year and 128% in the first quarter of this year.
Palo Alto: Uptick from Largest Customers, CrowdStrike Beneficiary?
The network security vendor is set to report earnings on Monday, August 19th, after market close. Like Snowflake, Palo Alto is seeing better spending intentions among G2000 ITDMs, as its Net Score within this cut grew incrementally more. This quarter, G2000 customer Net Score rose 12 percentage points from 31% in OCT23 to 43%, from a sharp rise in Increase citations and a reversion of Negative citations to OCT22 levels.
Looking at Positive indications (Adoptions + Increases), Palo Alto now sits at the 93rd percentile within InfoSec, while Pervasion is in the 96th percentile. Meanwhile, churn remains low, with Replacement citations in the 11th percentile compared with other InfoSec vendors, similar to other network security companies, including competitors Zscaler and Fortinet.
We note that this TSIS iteration was concluded two weeks before the CrowdStrike outage on July 19th, and this survey does not reflect any potential migration in spending intentions due to the incident. However, we conducted a CrowdStrike flash survey the day of the incident’s reporting and found that over half of ITDMs (N = 100) indicated they were reconsidering plans to consolidate around CrowdStrike or to reduce reliance on the vendor. NOTE: ETR also conducted a follow-up survey to gauge the ongoing impact and customer sentiment from that outage that was published today. Contact our service team if you would like to request access to that survey data and report.
While Palo Alto’s bread and butter lies in network security, it launched Cortex XDR for endpoint protection in February 2019. Our flash survey received a response from an ITDM who reported, “The spending on CrowdStrike is most likely to be scrutinized, and a shift towards more balanced deployed with SentinelOne EDR and Palo Alto Cortex is likely an answer to reduce risk.” In addition, management reported strong growth in Cortex XDR last quarter, citing a new government 7-figure deal for firewall subscription and XDR and commenting more generally on “…steady demand for XDR as a foundation of Cortex, where we are landing many new customers, and now we have north of 5,800 customers on XDR.”
Palo Alto shares have seen volatility following the company cutting its billings guidance in February, which sits at 10-11% y/y growth for the fiscal year. Management pointed to a significant shortfall in the US federal business in Q2 and higher deferred revenue embedded in platformization deals as factors pressuring this metric but stated that overall demand remained strong. Looking at the private sector data (ETR does not survey government ITDMs), we also see that demand is inflecting, although the timing to relieve top-line pressure remains a question.
Workday: Stable and Strong but Adoptions Slightly Down
Workday is set to report results after market close on Thursday, August 22nd. This quarter’s TSIS Net Score is up 3.6 percentage points since our last second-half survey in OCT23 and down by a few points y/y, indicating relatively stable net spending intentions. This is particularly true among Negative intentions (Decreasing + Replacing), which has been within a narrow band of 6-9% over the past two years. The company received a strong overall Net Score of 33% in this JUL24 quarter. However, we point to the decline in respondents indicating plans to Adopt the vendor in the second half of the year (8.4%), which sits below historical levels more typically in the low-to-mid teens. Workday counts more than 60% of the Fortune 500 as a customer, and this quarter, we also saw muted Adoptions in this cut and equaled Replacement citations at 7.1% each (F500 N = 103).
Workday’s stock has underperformed the software sector in recent months, with the stock falling over 15% after the company lowered full-year subscription revenue guidance. Shares have traded down over 17% YTD, and Workday now sits at a 5.9x EV/Forward Sales multiple, slightly above the mean for software. However, Workday also screens with a mid-growth profile as subscription revenue increased 19% y/y last quarter, and its FCF profile qualifies the vendor as a Rule of 40 company.
If you would like to see all of the present and historical data that ETR has on these three names (and the 700+ more companies that ETR tracks), please reach out to us to schedule an introduction or simply request access yourself.
Enterprise Technology Research (ETR) is a technology market research firm that leverages proprietary data from our targeted IT decision maker (ITDM) community to provide actionable insights about spending intentions and industry trends. Since 2010, we have worked diligently at achieving one goal: eliminating the need for opinions in enterprise research, which are often formed from incomplete, biased, and statistically insignificant data. Our community of ITDMs represents $1+ trillion in annual IT spend and is positioned to provide best-in-class customer/evaluator perspectives. ETR’s proprietary data and insights from this community empower institutional investors, technology companies, and ITDMs to navigate the complex enterprise technology landscape amid an expanding marketplace. Discover what ETR can do for you at www.etr.ai