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Slack does not expect a repeat of high customer additions


As the shift to work-from-home increased adoption and engagement, Slack CEO Stewart Butterfield said, “Remote work will be a much bigger part of the working world moving forward,” during the company’s earnings call on June 4. The company expects the pandemic to dry up IT budgets available to its customers, thereby affecting the demand for Slack as well as increasing its attrition rates. Furthermore, in its SEC filing, it said that its salespeople’s inability “to travel to potential customers and of our customer success team to conduct in-person training and consulting work” could negatively impact expected spending from new customers, increase sales cycle times, negatively impact collections of accounts receivable. The company said to prepare for potential surges in demand, it may incur additional costs and make additional investments.

AWS to remain, preferred cloud provider, as Slack becomes AWS’ intra-office communication system: The same day as the company announced its earnings, it also announced a multi-year agreement with Amazon Web Services under which Slack will migrate its Slack Calls (voice and video calling) to Amazon Chime — AWS’ communications service —, AWS will remain Slack’s preferred cloud provider and Slack will use AWS services including storage, computation, database, security, analytics and machine learnings, and AWS will use Slack for intra-AWS communications. AWS Chatbot and Amazon AppFlow will also be integrated with Slack.

Customer churn likely to continue but to focus more on small, medium businesses

Although Slack added over 90,000 new organisations in Q1, only 12,000 of they are new paid customers. Thus, in FY21, the company will focus on converting these free customers, who were compelled by the pandemic to use Slack, into paying customers.

25% business from small, medium businesses: Shim said that about 25% of Slack’s business comes from companies with fewer than 100 employees. This SMB base saw a higher churn rate than historical norms in March and April. He also said that 20% of Slack’s business comes from most directly affected industries such as travel, hospitality, commercial real estate, ridesharing, retail.

Expect continued paid customer churn: In its SEC filing, the company said that it did not expect the spike in new customers, associated with initial shelter-in-place orders, to recur, but expects its elevated paid customer churn to continue because of the pandemic. CFO Allen Shim expects the net new customer additions to level out in the remainder of the year.

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Custom billing contracts offered to customers: The company entered and expects to enter, more custom contracts and billing arrangements with new and existing paid customers to offset challenges faced by the customers due to COVID-19. These arrangements may be less profitable than their standard contracts and include provisions like deferred payments, payments in instalments or over longer periods, and billing concessions.

Operational Numbers

  • Number of customers (organisations using Slack): 750,000+ from 660,000+ in Q4FY20
  • Average daily hours connected to Slack: 10+ from ~9 in Q1FY20 and Q4FY20
  • Average minutes of daily active usage: 120+ minutes from 90+ minutes in Q1FY20 and 85+ minutes in Q4FY20
  • Paid customers: 122,000, 28% YoY from 88,000 in Q1FY20 and 4.7% QoQ increase from 105,000 in Q4FY20
  • Net added customers: 12,000 from 5,000 in Q4FY20
  • Paid customers with more than $100,000 plans: 893 (49% revenue), 49% YoY increase from 575 in Q1FY20 and 8.7% QoQ increase from 821 in Q4FY20
  • Customers using shared channels: 41,000+ from 32,000+ in Q4FY20

Source: Slack

Financial Numbers

  • Total revenue: $201.65 million, 50% YoY increase from $134.82 million
  • Calculated billings: $206 million, 38% YoY increase
  • Gross profit: $176 million (87.3% margin), 51.5% YoY increase from $116.2 million in Q1FY20
  • Operating Loss: $76.15 million (37.8% of total revenue), 98.4%YoY increase from $38.4 million (28.5% of total revenue) in Q1FY20
  • International revenue: 38%, marginally up from 37% share in FY20

Source: Slack

Note that Slack’s first financial quarter runs from February 1 to April 30.

Download: Financial Statement | Press Release | Presentation | Earnings Call Transcript

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