Class action claims Snowflake is an overhyped sales blizzard

Investors unhappy after 2022 revenue guidance cut

Snowflake is the subject of a would-be class action lawsuit alleging it made misleading statements and failed to disclose important data about sales practices and its commercial model between September 16, 2020, and March 2, 2022.

After it launched, Snowflake became the poster child for putting data warehousing in the cloud, taking advantage of distributed computing and offering customers a pay-as-you-go model.

In early 2019, Snowflake was worth a nominal $1.5 billion, according to an investment round. On September 15, 2020, it launched an initial public offering at a valuation of $33 billion. In December 2020, the market capitalization had swelled to a staggering $120 billion. Today that figure stands at around $58 billion.

The class action suit, launched by law firm Robbins LLP on behalf of individual Suzanne Flannery, alleges that during the "Class Period" Snowflake "systematically oversold capacity to customers, which created a misleading appearance of the demand for Snowflake's products and services."

The legal document [PDF] also claims Snowflake gave customers discounts leading up to its IPO, which it alleges "temporarily boosted sales" even though this would not be sustainable thereafter. The move, or so it claims, led to later "platform efficiency adjustments" that reduced client consumption, in turn allowing customers to "roll over a material amount of unused credits" thereby reducing future sales.

The litigants allege that the fallout from these practices meant Snowflake's product revenue and remaining performance obligations were "artificially inflated leading up to and during the Class Period."

The complaint then says that on March 2, 2022, Snowflake slashed its forecast for product revenue growth for the fiscal year to 65-67 percent, "far below the triple-digit growth and purportedly ongoing favorable business trends highlighted by defendants."

On the related earnings, Snowflake CFO Michael Scarpelli said Snowflake customers were consuming at a reduced rate, which he blamed on "platform enhancements."

"On this news, the price of Snowflake Class A common stock fell nearly 28 percent over several trading sessions, damaging investors," the suit claims.

The Register has contacted Snowflake to offer it the opportunity to respond to the allegations made in the lawsuit.

On the same call, Scarpelli argued that improving the efficiency of the platform was good for business in the long run.

"Certain product improvements create a revenue headwind for our business," he said. "We undertake these initiatives because they benefit our customers and expand our long-term market opportunity. Last year, we called it improvements in storage compression that reduced storage costs for our customers. Similarly, phased throughout this year, we are rolling out platform improvements within our cloud deployments. No two customers are the same, but our initial testing has shown performance improvements ranging on average from 10 percent to 20 percent."

More recently, Scarpelli admitted that other technical changes were creating revenue "headwinds" because of the adoption of the Apache Iceberg table format, which allowed Snowflake's analytics engine to produce results on data outside its platform.

On the most recent investor call for Snowflake's Q4 of its fiscal 2024, ended January 31, he said that together with tiered storage prices, Iceberg would have around a 6.2 percent impact in the financial year.

"The amount of revenue associated with storage is coming down. But on top of that, we do expect a number of our large customers are going to adopt Iceberg formats and move their data out of Snowflake where we lose that storage revenue and also the compute revenue associated with moving that data into Snowflake."

Back in January last year, The Register predicted that Iceberg would change the economics of the cloud data warehouse industry.

A group of companies including Dremio and Tabular have grown up to help manage governance and cost between Iceberg tables and analytics engines. Dremio, for example, has argued that using its platform and Iceberg can help control Snowflake costs. ®

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