Slack’s first public earnings are a speed bump on its way to owning enterprise

Slack, meet quarterly earnings reports.
Slack, meet quarterly earnings reports.
Image: REUTERS/Brendan McDermid
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Slack’s first earnings report as a public company on Sept. 4 revealed growing pains, after going public this summer as one of the fastest-growing cloud companies in history.

Slack reported second-quarter revenue of $145 million, a 58% jump over the same quarter last year. But it also saw losses surge ten-fold to $360 million (partially from the cost of going public) and annual revenue growth slow to 82% compared to 110% a year prior. The company’s stock price fell 13% to $26 on the news in after-hours trading (recovering somewhat the next day), its lowest point since its direct listing on June 20 when it went the price rose high as $42.

Slack may see more such pain for quarters to come, but it argues the hurt is only temporary. The company is building infrastructure to support larger enterprise businesses, and shifting attention away from just serving smaller tech companies. While outages didn’t do it any favors in 2019—it reported $8.2 million in compensation for service outages—the company said service would improve as it builds to handle its enormous growth. “We continue to hit limits that we didn’t realize were built into the system,” CEO Stewart Butterfield said on a call with investors. He framed the payouts as part of an “outrageously customer-centric” policy rather than a reflection of shaky infrastructure. Slack promises “99.99%” reliability, at least one decimal point more than most rivals, which will likely continue to be a drain on customer expectations as it builds out its infrastructure.

All of this is a bump on the road to a bigger prize: breaking Microsoft’s iron grip on work communication. Microsoft generated $34 billion in revenue in the last quarter alone, much of which came from cloud services. On that front, Slack presented progress. The number of customers paying more than $100,000 per year rose to 720, a 75% gain over the year prior. More than 100,000 customers are now paying for Slack, which is a 37% increase over the same quarter last year. While many customers who use the free service—from parents organizing a soccer league to small businesses—will never turn into paying customers, Slack sees it as the best way to set expectations about how online collaboration should feel. “We love those [free customers] because they expose Slack to new people and that drives more customer growth down the line,” Butterfield said during the call.

The company is now relentlessly pursuing corporate teams with thousands of users by adding security, administrative, and compliance features for large enterprises. Slack first won over startups (and newsrooms) with a simple, powerful chat interface that ditched the beige tones of traditional enterprise software for bright colors, irreverent messaging, and deep customization. It is now injecting that ethos into corporate America: work should be play (a philosophy from its origins as the game company, Glitch). “It was the first company to actually not fight fun,” Brett Hellman, founder of rival app Hall, eventually acquired by workplace software company Atlasssian, recently told Quartz. “Now it seems really obvious and everyone’s doing it.” It’s paying off.

At least 65 companies in the Fortune 100 use Slack, according to Slack’s S-1 filing (pdf), and Slack’s largest customer (which it didn’t name) has more than 100,000 users. So far, it has excelled at attracting the Silicon Valley set claiming Autodesk and Lyft among its most visible customers.  But for Slack to really succeed, entering the rarified ranks of companies earning billions of dollars annually, that will require winning over new industries. “It is mostly tech companies, or companies trying to be tech companies,” Rishi Jaluria, a senior research analyst at the financial firm D.A. Davidson, said of Slack’s current customer makeup. “You don’t see massive use in consumer packaged goods, finance, or oil and gas…They have to have broader usage across industries, not just tech companies.”

Butterfield noted on that call that a “Fortune 100 financial services firm” had just expanded Slack from specific teams to more than 50,000 employees across the company in product marketing, HR, legal, finance, and sales. Slack’s newly expanded sales team will be looking to replicate that success.

Butterfield is determined to make the modern workplace look like Slack: Email is out; chat is in. In the company’s quarterly earnings, Butterfield called this shift from email to channels “inevitable.” Slack would like to own that. It’s betting on deeper integration with the vast cloud software ecosystem, rather than monolithic software bundles that have dominated corporate software for decades.

Microsoft’s Teams is now Slack’s biggest rival,  claiming 13 million daily active users in the first quarter of 2019, compared to Slack’s 10 million—but how Microsoft measures daily users is unclear. Jaluria pointed to Slack’s engagement metrics—users spend nine hours per day connected to Slack, and 90 minutes actively using the platform—as the more important metric. Butterfield took a thinly veiled swipe at the company during the earnings call. The CEO, who took out a full-page ad in The New York Times in 2016 welcoming Microsoft’s new messaging app, said Slack would only win if it stands on its own. “We can’t rely on bundling or superior distribution or sunk costs of entrenched products,” he said. “In the long run, the measure of our success will be the value we create for customers.”

Correction: The spelling of Rishi Jaluria’s name has been corrected.