Companies looking to build AI tools on top of their data are turning to Snowflake, driving robust revenue growth

Snowflake projects more product revenue for the current quarter than analysts had been expecting.

Snowflake has established itself as a major software winner in the age of artificial intelligence. And after posting an earnings beat and lifting its revenue forecast for a key segment, investors now have more reason to be upbeat about the cloud-based data storage provider.

CEO Sridhar Ramaswamy attributed the strong quarter to growing adoption of Snowflake's (SNOW) AI products "The results demonstrate how the AI transformation that's sweeping enterprises is compounding Snowflake's advantage," he told MarketWatch. "More and more customers are migrating their data and data work onto Snowflake so that they have an AI-ready data foundation."

For the July quarter, Snowflake reported revenue of $1.55 billion, up 35% from a year before and beating Wall Street expectations of $1.48 billion. Product revenue of $1.49 billion also surpassed estimates of $1.42 billion. This revenue category includes sales of professional services.

Adjusted earnings came out to 62 cents. Analysts polled by FactSet were expecting 45 cents.

Snowflake's stock is up 13% in after-hours trading Wednesday.

Strong AI momentum led Snowflake to issue an upbeat outlook. Snowflake forecast October-quarter product revenue of between $1.588 billion and $1.593 billion, which comes in above the $1.504 billion consensus estimate.

The company expects full-year product revenue of $6.07 billion, which would represent 36% growth from the prior year. That's up from its previous outlook calling for $5.84 billion, or 31% growth, in the January-ending fiscal year. Analysts were expecting $5.85 billion.

Ramaswamy said that the company's growth is being driven by the company's AI-native products, which are expanding Snowflake's user base to new lines of businesses. Snowflake's AI coding agent CoCo reached general availability in February and is now adopted by over 9,100 accounts. Snowflake CoWork, an AI agent which helps businesses understand and analyze their data, expanded to 5,800 accounts.

"Both of these products are achieving rapid penetration within our customer base," Ramaswamy said.

He added that the growth acceleration is also stemming from other products including Snowflake Notebooks, a digital notebook that helps users write code and work with data.

In May, Snowflake signed a $6 billion, five-year agreement with Amazon (AMZN) Web Services for access to Amazon's Graviton chips, which investors cheered as a sign that Snowflake's customers would be able to build and deploy AI applications more efficiently.

The partnership has been a cost-effective move for Snowflake, as AI workloads require lots of expensive computing power. "It locks in the price that we pay for many of the key components of our business like storage as well as compute," Ramaswamy said.

The cost of running AI workloads did show up in adjusted product gross margin, which came in at 74.7% for the quarter, down from 75.8% a year ago. This measure tracks how much revenue the company retains after incurring the costs required to make its products.

Still, Snowflake reported an adjusted operating margin of 15.3% for the quarter, a 410-basis-point expansion relative to a year before. For the October quarter, the company expects a 15.5% operating margin, with this metric looking at the portion of revenue that is retained after removing production and operational costs.

-Christine Ji -Hannah Pedone