Slack delivered a very strong quarter, but it managed to be a disappointment for many investors who believed WFH would cause revenues to soar. The quarter was a beat by $14M over the top end or 7.2%. The long term thesis is setting up quite well.
Slack isn’t showing revenue growth like Zoom or DataDog or Crowdstrike or Livongo to name a few. The nature of its product taking longer to implement doesn’t allow for that type of growth. That is not to say Slack can’t provide significant alpha. I’m beginning to believe they can for a very long time and are showing sustainable competitive advantages.
Let’s take a look at the important metrics.
Sales grew 49.6% to $201.7M which was a very slight acceleration from last quarter (49.1%). Gross margin increased to 89% from 87% a year ago. Net retention was flat from last quarter at 132%. Deferred revenues increased 56% to $375.3M. RPO increased a massive 97% to $379M*. Those are great metrics for almost any company save the super high fliers.
*RPO is calculated differently for Slack than most companies as they don’t include monthly nor annual subscriptions. They only include multi-year deals explaining why the number is low compared to overall revenues. Monthly and annual are captured in deferred revenues that also grew wonderfully.
The numbers are beginning to validate the real thesis here. We can’t ever be sure how it will play out, but trends are suggestive of a very strong company for years to come. The first thing we cannot ignore is Gross Margin of 89% in the very upper echelon of the companies we follow. RPO growing at 97% given how it is calculated based only on long term deals is very impressive and is showing enterprises value their solution and are going all in. 49% of sales came from the cohort over $100,000 ARR up from 43% last year.
Let’s then consider the stickiness of the product. Imagine Slack is the primary means of collaboration within your company and even outside of it (shared channels). You pay something like $6 per user per month. Slack integrates with a bazillion other applications. It is far better than email for collaboration. It is secure. Are you really going to rip that out? If a few years down the road, Slack decides to charge $7 per user, are you going to bail? I don’t think so. How about when they charge $8 per head an increase of 33% from today? Big deal for Slack. Not so much for your big organization. Not going to bail.
Slack signed up 90,000 new organizations this quarter of which 12,000 were paid subscriptions. They have 122,000 paid subscriptions in place with millions of users. While those numbers were influenced by the pandemic and are likely to mitigate throughout the year, they represent a very large base of evangelists.
As a final point on stickiness and network effects, shared channels is a key factor. Here is what the company had to say about shared channels:
Shared channels adoption accelerated in the quarter with over 41,000 paid customers now using shared channels, up from 32,000 at the end of Q4. We saw emerging network effects that drove growth in connected endpoints to over 250,000 in the quarter, up triple digits year over year.
Companies have poor alternatives, and they want to collaborate outside their organization. If they use an email list, it’s too disorganized and jumbled for a meaningful conversation. If they use a consumer messaging service, they sacrifice security or compliance. Shared channels give all the benefits that our customers have gotten from channels, organizing information and creating context but now for their external communications in an environment that they control.
This capability is unique to Slack and takes advantage of our purpose-built architecture to handle the complex considerations required to connect different organizations, all while maintaining the enterprise-grade security and scale that only Slack can provide.
In Q1, we entered the pilot phase for multi-word share channels, which will take shared channels from being a one-to-one connection between two collaborating organizations to a connection that can support as many as 20 distinct organizations working together securely, each with their own compliance settings, such as message retention policies. For me personally, the experience has been kind of magical. I’m in a multi-org shared channel with the CEOs of 15 other SaaS companies, including Shopify, Twilio, Splunk, Atlassian and Okta.
I’ll be interested to hear how others think and feel about the company.
Take care,
A.J.