SLack earnings

From the Q2FY21 CC, Butterfield-
We measure network adoption by the number of Connected Endpoints in a graph and as the number of endpoints has increased, growth has accelerated, from 140% year-over-year growth in Q4 to 160% in Q1, and to over 200% in Q2.
Many of these endpoints are on teams that had not previously upgraded to a paid plan or even teams that are brand new to Slack. To encourage adoption and virality, in late March we introduced 90-day trials for teams that are invited by a paid customer, making the connection experience seamless. Those trials started to expire in late June and in just six weeks contributed over a thousand new paid customers out of the 8,000 total paid customers added in the quarter

RPO +80% y/y; CalculatedBillimgs dropped to y/y growth of 25% plus(11m or 10% in COVID concessions)

Q1. Q2
RPO+97%;calc bill+38%. RPO+80%;calc Bill+25%(+10% COVId adj)
RevGr49.6%; GM 87.3%. RevGr49% ; GM 89%

Stock dropped another 13% from the 25% drop after last earnings. What am I missing?

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Stock dropped another 13% from the 25% drop after last earnings. What am I missing?

All the numbers look good except for Billings and Backlog. Here they are:


                    Q220          Q320         Q420         Q121         Q221

RPO                 $215,300      $279,300     $328,100     $379,100     $388,500  
DEFerred Revenue    $286,523      $303,924     $376,714     $381,073     $383,407 
Backlog             -$71,223      -$24,624     -$48,614     -$1,973      $5,093
Billings Gr.%       $174,800/52%  $186,100/47% $254,700/37% $206,000/38% $218,200/25%

So their RPO is slowing and so are their billings gr. Their Backlog is anemic but that could be because they have a lot of customers that buy their product by the month. So fewer long term contracts. Any contract under a year they do not count as their RPO. But Their Revenue growth is slowing a little too. I think the biggest problem investors are having is that their just isn’t any clear visibility into their business with the shorter contract lengths.

Andy

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Thanks for responding Andy,

Per their CC, they sell by the seat and did have more churn. Maybe I’m still trying to find an analog to AYX (trying to learn something I can take forward to avoid the surprise I felt during the AYX CC).

There are a lot of moving parts with this one. And they’re short term contracts does lend to poorer visibility. I agree.

78% increase growth Q/Q for those spending a million or more $/yr and the success rate with Channels look great no?

Jason

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That was supposed to be year over year growth (78% growth in customers spending 1 million or more) not Q over Q Sorry

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Is revenue growth accelerating or not? Not. The more you have to look into extraneous, proxy data, the more likely your looking at trees and missing the forest.

No, it does not look so good. I can say that $13 billion marketcap for Slack, such a name and presence, appears to be bargain basement. But in a world where most of what we follow are hitting highs w multiple expansion, is it just the “market getting it wrong, again”(as these is not a short term issue)w Slack, or is Slack really just not dominating its market and remaking the world?

I will stick to the straight forward numbers and not draw Hope from the proxy data. Proxy data is what is put forward when the under,Hong. Umbers underwhelm. Things liKE RPO and segmentation numbers. Growth here is declining, they had to file an antitrust suit against that, which they claimed was not a competitor, and the stock has not only lagged but is actually negative in return.

Maybe I’m being too literal these days when being obtuse would better serve here, but there seems to be a lot here pointing to the fact that Slack will continue to underperform.

And btw/ since my forum runs on Slack, I personally love the platform. The stock however…

Tinker

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78% increase growth Q/Q for those spending a million or more $/yr and the success rate with Channels look great no?

Hi Jason, I agree all their other numbers did look great, even their Revenue only dropped a little. Their Operating Margins were up substantially (20%) but they do have debt on the balance sheet now which isn’t worrisome because it will probably be paid out in shares. With Ayx they did tell everyone what was going to happen, it’s just that people thought they were sand bagging. With Slack it’s going to be really hard to know what’s going to happen. They could have a big beat or a big loss all depending on churn of monthly users so it makes it trickier than other investments.

Andy

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One thing more Jason. I agree with Tinker is that they are guiding next quarter for Revenue to be down to 32 percent growth. That is really shocking.

Andy

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Thanks Andy,

I really appreciate Tinker and I sold out of FSLY when it reached $83 the first time because there were not yet at 62% rev gr and 60% margins and I didn’t want to invest in hope, as he often says. He may yet be correct regarding Fastly and Slack, not that he said that directly about Fastly.

But did you hear the call? Butterfield has done drunk his own cool-aid or something cause man he was on fire about Connect creating a ‘third funnel and how Slack is the Castle in the cloud that will be the “center of gravity” for work-from-anywhere.

I don’t see revenue dropping, not these last three quarters right at 49% growth. And Q1 And Q2 together being $418m leaving $452 for Q3 and Q4 together to reach the just raised FY Guide to $870m in revenue. So looks flat to me and in COVID times that seems prudent, as far as guidance goes.

Then we have a Billion run rate growing at a steady 50% (my agreeing that Connect and Channels with Rimeto for extra juice will, from the CC,”create a moat to the center of the earth of liquid iron and nickel just like the core itself”.

Well, maybe I drank some cool-aid too.

Anyway, I’m in for 6.5% for at least three more months.

Jason

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Calculated Billings are a concern. The narrative that Slack is a “Covid-trade” or a “WFH-trade” just doesn’t seem to be true. Businesses don’t need Slack the same way they need ZM, CRWD and others. Potential customers aren’t focused on shifting from email in the middle of a crisis in the same way as they are focused on getting video-conferencing up and running.

In the 10Q under section “Update on Covid”, sub-section “Calculated Billings” they call it a lumpy metric because they practice what they call “Fair” Billing.

Only amounts invoiced to a paid customer in a given period are included in Calculated Billings. While we believe that Calculated Billings provides valuable insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-over-quarter or year-over-year comparative measure. These reasons include, but are not limited to, the following: (i) a variety of contractual terms could result in some periods having a higher proportion of annual subscriptions than other periods, (ii) as we focus on sales to large organizations, the lengthening of our sales cycle, and the variability in the timing of the execution of these larger transactions, (iii) fluctuations in payment terms affecting the billings recognized in a particular period, and (iv) seasonality in our billings, with a greater proportion of our billings occurring in our fourth quarter, following typical enterprise software buying patterns. Because of these and other limitations, you should consider Calculated Billings along with revenue and our other GAAP financial results.

Other than Calculated Billings they had solid results:

Income Statement:
Revenue increased 48.9% yoy to approx $216 million in the quarter. They had guided for 44% at the high end.

Balance Sheet: (From 31 Jan 2020 to 31 July 2020)

Cash & cash equivalents + marketable securities increased 95% yoy to ~ $1.5 billion from ~ 785 million

Long-term debt is at ~ $630 million in the form of Convertible Senior Notes. This is up from $0 yoy

Class A + Class B shares outstanding increased 4.86% yoy, and 1.21% sequentially to 570,524,602

Cash flow statement:
Cash from operations improved yoy to ~ $14 million from ~ 300 thousand. And improved sequentially from ~ 8.7 million. They have a 6.7% Op cash flow margin compared to 0.22% last year. And 4.33% last quarter

FCF improved yoy to ~ $10.7 million from NEGATIVE $7.8 million. And improved from $3.6 million last quarter. They have a FCF margin of 5% this quarter compared to (5.43%) last year. And compared to 1.83% last quarter. They also guided to FCF breakeven for this Fiscal Year compared to (9.84%) last fiscal year

Company Specific metrics:
Calculated billings increased 25% yoy.

Calculated billings yoy rates going back in quarters is: 24% (this Q), 38% (last q), 47% (Q4 '20), 47% (Q3 '20), 52% (Q2 '20), & 47% (Q1 '20)

Net Dollar Retention Rate was 125% compared to 138% last year. Going back in quarters it looks like this: 125% (This Q), 132% (Last Q), 132%, 134%, 138%

Paid Customer adoption was 30%. Going back in quarters it was: 30% (this Q), 28%, 25%, 30%, 37%

Adjusted numbers:
Adj GM was 88% compared to 87% last year, and 89% last quarter

Adj OM was NEGATIVE 3% compared to NEGATIVE 38% last year, and NEGATIVE 8% last quarter!

Adj NM was NEGATIVE 1% compared to NEGATIVE 36% last year, and NEGATIVE 7% last quarter!

Adj EPS was net breakeven compared to NEGATIVE 14 cents per share last year, and NEGATIVE 2 cents per share last quarter!

Valuation:
TTM P/Sales is ~ 18

An investor has to consider whether a decelerating Calculated Billings rate this quarter portends much lower revenue and a deterioration in profitability in the future. Either way, Slack is not benefitting on aggregate from Covid19, and they do have competition from Microsoft. So someone would have to believe they have a superior product that will win out despite those challenges. To me, that uncertainty is why they have a relatively “low” valuation.

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An investor has to consider whether a decelerating Calculated Billings rate this quarter portends much lower revenue and a deterioration in profitability in the future. Either way, Slack is not benefitting on aggregate from Covid19, and they do have competition from Microsoft. So someone would have to believe they have a superior product that will win out despite those challenges. To me, that uncertainty is why they have a relatively “low” valuation.

Slack is just an elevated means of email/chat. It’s really just a luxury, not a necessity. Companies that needed Slack already had it, those that didn’t need it before COVID don’t necessarily need it now. There is always email, text, regular file sharing, etc. And for quick chat sessions you have a lot of competition from Microsoft, Cisco, etc. It’s nice to have everything in one place, searchable, accessible from anywhere, but I don’t think companies are jumping to spend money on Slack given economic uncertainty.

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Slack is just an elevated means of email/chat. It’s really just a luxury, not a necessity.

It has a lot more potential to much more than you elevating email/chat though I don’t know how many companies integrate Slack with all their other systems. I have seen some pretty cool demos where Slack can be your interface to access other systems like Workday and SFDC. But Maybe most implementations are using it for basic functions in which case there are probably alternatives already being used

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‘Slack can be your interface to access other systems like Workday’

And Atlassian
FY21CC Butterfield,CEO:
We talk about Slack as a lightweight fabric for systems integration in the broad sense, but you know companies like Atlassian can look at Slack as a lightweight fabric for integration of their own product suites for their customers, and that’s something that’s really attractive.
I use this example a lot, but it is still my favorite. I paste a link to a Google doc into a channel in Slack, and it’ll say ‘Hey! 7 of the 13 people in the shared folder have access to the doc. Would you like to give it to them?’ and I can just press the button at all of it is automatically taken care of. And the only way you could do that is if the users are mapped across their systems and you understand who’s who and you can control all the access controls. That’s a level of convenience that I think we all can collaborate to bring to customers, to remove friction, to get more value out of software, and that’s really the thing at the heart of that relationship with Atlassian.
When I talk to Mike Cannon-Brookes, that is the number one thing that we talk about. How can we make that easier? How can we make it simpler? How can we streamline it? So it’s not just Atlassian of course, but a lot of up take and a lot of interest among the independent software vendors that we talk to more or less every week and expect more progress there.

This and much more; but, this example give a good sense that it’s more than chat and email, right?

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This and much more; but, this example give a good sense that it’s more than chat and email, right?

There are certainly reasons it makes things easier, especially integrating other services. But are these things that really can’t be accomplished by email or some other free chat service? What I’ve learned from observing my wife working for a large healthcare corporation and seeing how hospitals are run by big corporations, these niceties are really luxuries. Telecommunications and security are necessities during a rapid shift to work from home. Saving users a bit of time is not. The idea that Slack would have seen a boost from the pandemic never made sense to me. (https://discussion.fool.com/i-don39t-get-the-feeling-that-work-f…)

In fact, I’ve started using Slack for organizing family activities, integrating calendars, and saving important documents. It’s very powerful. But a necessity? I just don’t see it. And in a time where many companies are trying to cut costs, I don’t see them jumping to add Slack. I have no doubt they’ll continue to grow but it’s just not something companies need to add in order to survive in the work from home environment.

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I know anecdotes are no-no on this board. My apologies if this is inappropriate. I’m sharing my views as some of the comparisons with email / chat seem to be losing sight of the real value prop.

I’ve been a Slack user for the last 3+ years. What I value most about the platform is the convenience and flexibility. Is it a necessity now? No. Is it becoming essential? Yes. Email and chat platforms, while essential, are becoming cumbersome to use and administer. Communicating, archiving, searching and following up are so much more convenient with Slack, not to mention the utility in integrating with other tools and applications or platforms (ex., Atlassian, VOIP calls). That improves productivity.

It’s that evolution that’s promising for Slack in the enterprise context, driving more automation and collaboration, both intra-company and inter-company. We’re a few quarters or perhaps a few years away from realizing the impact of such automation and convenience.

Slack is focused on that future and gradually enabling that now for their customer base. Pre / post covid comparison is only nominally relevant in this context, but I’m willing to wager that the utility value is multiplying with remote work. For a distributed workforce, this is so much more valuable than traditional tools. I suspect adoption will be gradual and perhaps accelerate as IT investments shift towards more automation and improving productivity. I believe Slack is better positioned to capitalize on that future.

The non-enterprise base may continue to churn as some of the paid features may not be as essential, ever. Ex., we use Slack to communicate between HOA committee members and never had to go beyond normal chat type messages. Regular emails may continue to serve that base just fine.

However, I do believe enterprise automation tools as a basket may continue to grow at a healthy rate, just not as much as the hyper growth companies. Accordingly, I’ve limited my investment at this stage, ~2.5% of my overall cost basis and <1% of portfolio value.

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At the risk of appearing to pound the table too hard here, I’ll go ahead and answer, the best I can, the question of ‘nice to have vs need to have’.

We all remember the AYX CC where they talked about having completed a ‘large deal in financial services where there needed to be several approvals in different countries ant this was all done remotely’ something like that right?

This is the CEO of Slack describing how Slack does more than increase productivity but makes money for the user: It sounds similar to me.

Productivity vs Rev Generation
Butterfield FY21 CC
Me as a business person, the use cases that I’m most excited about are sales related, and just [inaudible], it’s actually just really good. I mean it’s great to have – for a complex sales process which can involve legal negotiations and security of use and the vendor approval process and commercials and all of that stuff to have the leaders, the managers on the sell side and the buy side, both kind of have oversight of the conversations that are happening. It’s a lot less to tuck into work. It’s much easier to bring someone in, you know all the reasons that that channels are better, but the other reason why I like this use case is you can – and that’s an argument for by Slack get revenue, which is different than by Slack getting productivity.
I’m 100% sure that the ROI, the productivity sale is massive, you know like 100x or something. We don’t actually charge that much in the grand scheme of things, but of course you know that’s always a harder sale to make, whereas buying our product to get revenue is a lot easier.

Am I reading too much into this? If anyone has a concrete example of how this functionality in Slack worked for them, I’d love to hear it.

Thanks,

Jason

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I ended up selling my position after having been holding since their IPO. Been a fan of their product for awhile, and I believe it’s superior to Teams as well.

They should be doing extremely well in this environment. There was even a well researched Seeking Alpha podcast about Slack benefiting more than Zoom from this environment. That has not panned out at all and for various reasons they are nonperforming.

Getting sick of them always talking about concessions they are giving customers. This was happening even pre-covid when they claimed they missed their service level agreement for up-time, and refunded all customers affected with $7 million in a quarter. The customers were not even asking for their money back either.

Their sales team seems to be doing poorly and they almost never talk about sales in the earnings call. It’s a big contrast to companies like CrowdStrike and Cloudflare which place an emphasis on enterprise sales and unit economics.

Slack is a vital tool for many organizations, but the issue is they do not charge enough for their product. It’s on a per user basis and traffic has spiked massively. This is why the usually lose a lot on actual earnings, although it was somewhat promising they broke even on non-GAAP earnings. Slack’s prices should be much higher than they are as I saw some actual billings for them and was shocked how low the price was.

The company just seems too product focused and on trying to do good. In their previous earnings call they spent longer than I’ve ever heard any company talking about supporting the current social movements. Would be better if they spent just a little time looking to reward investors instead of sabotaging themselves to “do good”.

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wpr101, in my opinion your post is very short-sighted, especially your last comment Would be better if they spent just a little time looking to reward investors instead of sabotaging themselves to “do good”..

Slack is a text book example of a “Product-led growth company”. You can read more about it here: https://productled.com/product-led-growth-definition/

“Product led growth (PLG) is an end-user focused growth model that relies on the product itself as the primary driver of customer acquisition, conversion and expansion. Many of the fastest growing software companies, including standout public companies, employ PLG.”).

Some take aways from the report “2020 SaaS Product Benchmarks Report” (https://openviewpartners.com/productbenchmarks/)::slight_smile:

  • “Product Led Growth is your secret weapon.”
  • Product Led Growth (PLG) Companies perform much better than normal SaaS companies, especially since COVID-19. (in terms of multiples on the stock market)

Here you can find an Index containing only PLG-companies: https://openviewpartners.com/product-led-growth-index/

I am not saying WORK is a good or bad investment, just wanted to make that point clear.

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Wpr101, ‘slack doesn’t charge enough’

I agree it’s a ‘Product led company’ for now.

From the CC-
“Also of note this quarter, the successful completion of the largest initial deployment of Slack ever to over 450,000 users.” (Conversion to paying customers once a company has deployed Slack is high).

+8,000 paying customers Q/Q. Surpassing 130,000 Total paying customers.

I say when average price per seat is under $10, if you make that $11 or $12 no one will cancel, especially now with they’re Connect feature is wrapping up everyone whose using Slack, albeit more or less for each customer, with the Strong’ Network Effect (as opposed to the ‘weak’ network effect when you don’t have to pay to use it) and profits will shoot through the roof and Share price with it.

Any problem with that logic?

Jason

Sorry that should have read conversion rate from paying to not paying is low. I said it is high. It should have read ‘not’ high.

That takes the table pounding sound out it right?

I say when average price per seat is under $10, if you make that $11 or $12 no one will cancel, especially now with they’re Connect feature is wrapping up everyone whose using Slack, albeit more or less for each customer, with the Strong’ Network Effect

It’s not just about raising their price a few dollars because their pricing is a magnitude off of where it needs to be.

From the Slack website it’s $12.50 per seat/month if billed annually, and $15 if billed monthly.

For example, let’s take a 100 person company. We get 100 * 12.5 * 12 = $15,000. That’s extremely cheap for enterprise software which is critical. The same company may easily paying 200k per year for an Amazon bill, 100k for a HubSpot subscription, and 100k for Tableau.

Also consider how much data is going through Slack’s systems for just $15,000. You have every message, every file, and free phone calls. It’s why they are consistently not making money.

Yes, they are product focused but their pricing is off and they neglect sales. Could have just as easily been in product focused companies such as CrowdStrike, Zoom, or Cloudflare which are also sales/price focused. The difference is they understand they are running a business and not a charity. Slack is the only SaaS company I know which is giving “concessions” every quarter. Other companies are have delayed billings for companies impacted by covid, but not concessions.

Lastly, consider I’ve been holding since the IPO of a $38 price and the company is at $25 now. Would have done much better allocating the money elsewhere.

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