Snowflake (SNOW) Q3 Earnings: Revenue, Margins, and AI Costs

Snowflake Inc. (SNOW), a dominant player in the cloud data warehousing space, recently released its quarterly earnings report. For those unfamiliar, Snowflake provides the "AI Data Cloud," a platform that enables organizations to consolidate data into a single source of truth, run analytics, and build AI applications. Unlike many software companies that charge a flat subscription fee, Snowflake operates on a consumption-based model—similar to a utility bill—where customers pay for the compute and storage resources they actually use.

In this post, we will dig into the company's income statement from their latest 10-Q filing to see how the business is scaling, where the money is being spent, and what the financial data reveals about their strategy.

The following flow chart illustrates Snowflake's financial performance for the three months ended October 31, 2025:

Top-Line Growth and Segment Margins

Snowflake reported Total Revenue of $1.21 billion for the quarter, representing a robust 29% increase compared to the same period last year.

The revenue mix is heavily skewed toward Product Revenue, which accounted for $1.16 billion (roughly 96% of the total). The remaining revenue comes from Professional Services and Other, which generated roughly $54.5 million.

A closer look at the margins reveals distinct strategies for these two segments. The Product segment reported a healthy Gross Margin of 72.3%, reflecting the scalability of the software platform. In contrast, the Professional Services segment operates at a negative gross margin of -28.5%. This suggests Snowflake is willing to take a loss on implementation and consulting services to onboard customers to their high-margin software platform efficiently.

The Cost of Innovation and Expansion

While revenue growth remains strong, Snowflake continues to operate at a GAAP operating loss. For this quarter, the company reported an Operating Loss of $329.5 million. To understand the drivers behind this, we must look at the company's substantial Operating Expenses:

• Sales and Marketing (S&M): This remains the largest expense category at $550.4 million, or approximately 45% of revenue. Acquiring and retaining enterprise customers in a highly competitive cloud market requires a significant, high-touch sales force.
• Research and Development (R&D): The company spent $494.0 million on R&D. As Snowflake pivots aggressively into AI and machine learning capabilities—such as Cortex AI and Snowpark—maintaining a technological edge requires capital-intensive engineering talent.

It is worth noting that Stock-Based Compensation (SBC) plays a massive role in these figures. A significant portion of these operating expenses is paid in equity rather than cash. For the quarter, total SBC was $412.3 million. While this preserves cash flow, it is a significant non-cash expense that impacts GAAP profitability.

Retention and Future Visibility

For SaaS (Software as a Service) and consumption-based companies, retaining customers is just as critical as acquiring new ones. Snowflake reported a Net Revenue Retention (NRR) rate of 125%.

• Definition: NRR measures how much existing customers spend today compared to a year ago. A rate of 125% means that, on average, a customer who spent $1.00 last year is spending $1.25 this year.

While 125% is considered an elite retention metric, it represents a slight deceleration from 127% in previous periods, suggesting that large enterprises may be optimizing their cloud spend. Despite this, the company has a massive backlog, with Remaining Performance Obligations (RPO)—essentially contracted future revenue—jumping to $7.88 billion, providing strong visibility into future growth.

Market Context and Risks

Snowflake operates in a unique "frenemy" ecosystem. Its primary competitors are the massive public cloud providers—Amazon (AWS), Microsoft (Azure), and Google (GCP)—yet Snowflake's software runs on top of their infrastructure, making them critical partners as well.

The filing highlights risks inherent to Snowflake's consumption model. Unlike subscription models where revenue is fixed, Snowflake's revenue fluctuates based on actual usage. As enterprises scrutinize IT budgets and shift focus toward AI investments, Snowflake’s ability to prove value through its new AI Data Cloud features will be the deciding factor in its path toward GAAP profitability.