Snowflake Inc.’s (NASDAQ:SNOW) artificial intelligence business helped fuel a third straight quarter of accelerating revenue growth, while the company’s own numbers reveal that the shift toward AI workloads comes at a cost: lower product gross margins.

AI Growth Is Real, But So Is the Margin Hit

CFO Brian Robins told analysts during the company’s second-quarter earnings call that Snowflake now expects a 74% non-GAAP product gross margin for the fiscal year, a downward revision he attributed to the success of its AI business.

“This revised outlook includes a higher revenue mix from fast-growing AI workloads, which carry a lower contribution margin,” Robins said, adding that the shift in mix between AI products and Snowflake’s core data platform was the direct driver of the change.

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Operating Margins are Up

Despite the gross margin pressure, the AI data company’s overall profitability improved this quarter, with non-GAAP operating margin expanding more than 400 basis points year-over-year to 15%, and the company raised its full-year operating margin guidance from 13.5% to 14.5%.

The CFO pointed to cost discipline elsewhere in the business as a factor, adding that “we offset growing cloud costs with slowing headcount expense.”

Year to date, Snowflake has added just 334 employees, including 173 from an acquisition, compared with 935 in the same period last year, even as revenue growth accelerated.

A Double Beat Quarter

Snowflake reported second-quarter revenue of $1.55 billion, beating analyst estimates of $1.48 billion, according to Benzinga Pro, while adjusted earnings came in at 62 cents per share for the quarter, beating estimates of 45 cents per share.

It expects third-quarter product revenue in the range of $1.588 billion to $1.593 billion, up approximately 37.5% year-over-year.

Price Action: Shares closed Wednesday at $305.84, then surged 23.14% in after-hours trading to $376.60.

Benzinga edge rankings indicate that Snowflake’s stock has a Momentum score in the 93rd percentile and a positive price trend across the short, medium, and long-term.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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