Why Slack?

Greetings – I have been a longtime fool and lurker on this board and probably made my original post when I first found the board in 2018. My investing mindset has changed with everything I have learnt and continue to learn on this board.

Coming out of my shell I decided to do a post on Slack (WORK) after its recent earnings in attempt to contribute and learn through the feedback. It is not a Datadog or Zoom by any means but I believe will be a disruption to enterprise communication & collaboration.

SLACK –
Numbers Revenue Q1- $202 million | 50% growth YoY.
Net Dollar Retention rate – 132% (flat)
Gross Margin 89% vs 87% a year ago (improving)
Calculated billings were $206 million, growing 38% YoY (approx. $17 million of headwinds due to COVID accommodations to customers)
Q2 guidance - Revenue $206M-$209M, representing growth of 43% at the midpoint.
Full year guidance - $855 million to $870 million, representing growth of 37% at the midpoint

I picked up Slack sometime during the March lows. My initial understanding of Slack was that it was a competitor to Microsoft Teams. I work for a small med device company in operations and we have been using TEAMS for all our meeting since it is free with the Microsoft Office. I previously worked for a large med device company where this was true as well. I have never used Slack and my understanding was that it was similar to TEAMS but had this thing called “channels” for collaboration. Reading through the recent transcript my opinion of channels is that it is a powerful tool for collaboration both internal and external. It is basically trying to get you out of using emails/inbox to collaborate using a channel. They call it the “Digital office”

“<So the movement from inbox to shared channels, as you’ve heard me talk about probably too much at this point, that’s inevitability. That’s a huge advantage. “

“Slack is not specifically a tool for remote work. As a channel-based messaging platform, we improved communication to help organizations create alignment, become more productive, and ultimately become more agile, wherever their employees are. And unlike the many video conferencing solutions in the market such as Zoom, RingCentral, Google Meet, Microsoft Teams, Amazon Chime and BlueJeans, we aren’t a digital substitute for physical in person meetings. Instead, Slack acts more like a digital office, a persistent place for users to connect and find information**.”**

The big piece here is the use of channels for “external” collaboration that I seemed to miss before that is on the uptick.

Companies have poor alternatives if they want to collaborate outside their organization. If they use an email list, it’s too disorganized and jumbled for 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.”

“Increasingly, shared channels are blending the power of Slack’s platform with external collaboration. Last week, Adobe released an updated Creative Cloud integration that will now allow users to share Creative Cloud assets, get notifications and stay up-to-date on design projects in the shared channel. For our many joint customers planning marketing campaigns or developing new creative content with external partners, this will be incredibly powerful. And with all that we’re still just getting started.

User Growth –
The stock took a hit after the earnings call maybe because they were expecting a Zoom like scenario and the run up driving this expectation. However, they have had their best quarter in their history by far! I’m not sure if the 12k /90k (13%) is a good conversion but believe this is a step in the right direction and is the CEO’s personal focus, he expects to convert a large number in the next year.

“In the quarter, we added over 90,000 net new organizations using Slack, more than we added in all of our last fiscal year. We also added 12,000 net new paid customers, more than any other quarter in the history of the Company.”

“For our paid users, average time spent actively using Slack each day increased from just under 90 minutes at the end of Q4 to over 120 minutes per day at the end of Q1.”

I added to my position and plan to continue learning about Slack. It is up against Microsoft, but I don’t believe TEAMS sees it much beyond a voice and video chat tool. It’s a feature for Microsoft and Zoom, Slack, Smartsheet seem to be coming at it with a best of breed solutions and a laser sharp focus.

Foolonely

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Thanks for sharing your thoughts. I heard that MS is doing a lot of ads on TEAM and my take on that is that MS realizes finally the huge potential for this part of the business. The way I think about it is that it is free advertising for SLACK and will ultimately accelerating boosting the TAM for this area. It is good for SLACK actually because they are laser focused on this whereas MS lacks the flexibility and focus on TEAM as this is a small part of their portfolio. I may be wrong but this area with COVID-19 is becoming more essential for enterprises. MS has caught up with TEAM somewhat but my guess is that they will not be able to keep up with innovation because of their size and lack of focus and compatibility. I hope that SLACK takes advantage of their size and shorter innovation cycle to continue pressing forward and eventually crush MS TEAM.

I posted similar some thoughts yesterday

https://discussion.fool.com/work-q1-34527956.aspx

Thanks for these thoughts, all great points

They showed real progress in the operating and net margins

Adj Op margin improved yoy from (25.05%) to (8.25%). That’s a 17 point improvement yoy, which is good. Adj op margin going back 5 quarters is now (8.25%), (12.71%), (10.72%), (38.37%), (25.05%).

Adj net margin improved yoy from (21.26%) to (6.61%). Adj net margin going back 5 quarters is (6.61%), (11.51%), (7.26%), (35.58%), (21.26%).

Both of these metrics are improving over time

Add to that a DBNER of 132%, gross margin of 88%, and revenue growth of 50% and it’s a stellar quarter.

But they only guided to 39% next-quarter revenue growth at the high end.

I think Slack has a winning product, and will be successful long-term. They have a product-market fit, and are developer-friendly. They are displacing email. And because of that they are an existential threat to Microsoft. But I don’t think they will get there at the revenue growth that I want as an investor. I have a 7% long position, but am contemplating giving them another quarter.

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gmcnatt - They guided 43% for Q2 which they should be able to beat at which point they should have better visibility into the year. Like some other companies they are playing it safe. The CEO admitted that switching from email is not easy nor does it happen overnight. I don’t believe they need to go after all email nor that all companies need Slack. They got Verizon & Amazon as customers this quarter.

Switching gears I have a few lower growth companies like VEEVA and DOCU that have done quite well with 30-40% growth rates.

foolonely

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you’re correct, thank you

They guided to 38% revenue growth for the FY. They will beat, but this is a very rapid deceleration

They guided to 38% revenue growth for the FY. They will beat, but this is a very rapid deceleration

I don’t think focusing on the 38% FY guide makes sense. Just last quarter they guided for 38% growth, and achieved 50%.

From the Q4 2020 call: For the first quarter, we expect revenue in a range of $185 million to $188 million, representing growth of 38% at the midpoint.

For fiscal '21, we are initiating revenue guidance of $842 million to $862 million or 35% growth at the midpoint.

From last weeks’ Q1 2021 call: Total revenues in the first quarter were $202 million, growing 50% year over year.

For the full year, we are raising our revenue guidance to a range of $855 million to $870 million, representing growth of 37% at the midpoint.

With Q2 guidance at 43% at the midpoint, it looks very likely they will hit 50%+. At that point FY guidance should be raised as well. Low balling the FY guidance is very common practice for our companies, so I don’t see it as a concern. And FY 20 growth was 57%, so I wouldn’t consider slowing down to 50% a very rapid deceleration.

They are being prudent with forecasting for the back half of the year, like many other companies such as OKTA, AYX, etc. I think the only reason they’re being punished for it is the huge expectations some people had for them based on the eye popping revenue growth from Zoom.

In the enterprise segment, some sales cycles have accelerated due to work from home, but others have slowed, particularly in impacted industries. Our pipeline remains very healthy. But on balance, there’s less visibility into how IT spending will trend for the remainder of the year, particularly if the economic effects of the COVID-19 pandemic persist or worsen.

They’ve also shown strong customer growth, just as Bear pointed out that Docusign did:

In the quarter, we added over 90,000 net new organizations using Slack, more than we added in all of our last fiscal year. We also added 12,000 net new paid customers, more than any other quarter in the history of the Company.

Paid customer growth:

Q319:8K

Q419:7K

Q120:7K

Q220:5K

Q320:5K

Q420:5K

Q121:12K

In addition they also announced adding Amazon as a customer. I would expect that adding a gigantic customer like that to be a huge positive for driving the network effect of their business.

In Q1, Amazon chose Slack because of our scalability, the strength of our platform and the unique ability to securely and productively collaborate with customers and partners using shared channels. We also expanded our strategic partnership with Amazon Web Services, which includes robust integrations between Slack and a number of AWS services, including AWS Chatbot, AWS Chime, AWS Sandstone, AWS Cloud Formation and AWS Key Management Services. Slack will also use AWS Chime to support our native calling capabilities. Finally, we’re excited to announce that AWS is now Slack’s preferred cloud provider.

I’m holding my ~5% position.

Kyle

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One thing I forgot to point out is that pricing is per active user. So that may also be why we haven’t yet seen much revenue and billings impact from the spike new customers. As usage within each company grows there will be more active users and more revenue from that customer.

Kyle

I have established smallish position (4%) in WORK for the following reasons:

  1. GM is one of the highest among our stocks - around 89%. Perhaps only Ayx has better GM. GM is one of the best approximations for moat.

  2. All margins are trending in right directions - improving operating and net margins, improving cash flow margins.

  3. DBNER is 130%+ which id very good, shows stickiness of the product and expansion within existing clients.

  4. Revenue growth should stabilize in higher 40s/lower 50s.

  5. Accelerating customer growth, acquired several big clients this quarter like Amazon and Verizon.

  6. Very sticky product.

  7. Founder-led, high insider ownership. Although CEO is not of Eric Yuan caliber IMHO.

  8. Billings growth was meh, but deferred revs and RPOs grew ok, I think the growth should be in 40/50 as mentioned.

Best regards,
Vic

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This is a good opinion on the AWS deal, and spells out for me the potential of Slack.

https://diginomica.com/slack-amazon-partnership-apps-not-vid…

cheers
Greg

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