Even with a 49% uplift in sales and a 46% drop in expenses, Slack still can’t turn a profit

Slack reported 49 per cent revenue growth for its Q2 ended July 31, but its stock nonetheless suffered a pounding in after-hours trading.

The problem for Slack, even as it crept closer to actually breaking even, is that other companies, such as Zoom, have made hay during the pandemic. Slack should therefore have been in prime position to take advantage of the rapid move to homeworking, but growth, while steady, has not been as stellar.

Revenue for the quarter ended 31 July stood at $215.9m, up from $144.9 in last year’s Q2. CEO Stewart Butterfield noted the growth in paid customers, as well as Slack Connect, before mentioning “macro-related headwinds in the installed base” thanks to the company’s per-seat pricing.

“When our customers downsize, freeze hiring or hire more slowly,” he told analysts, “net dollar retention is negatively impacted.”

The company’s CFO Allen Shim added there was also a higher degree of “budget scrutiny [from customers] particularly for incremental investments, and we have seen sales cycles lengthen with some customers accordingly.”

Butterfield went on to say the pandemic had had “both positive and negative effects” on the business. He also remarked that the sueball lobbed by the company at messaging rival Microsoft “is a tactic” rather than a strategy. “We are doing it for us,” he said, adding “and we are doing it for the innovation, for competition and for the broader ecosystem and ultimately for customers.”

“We’ve won over and over again in Office 365-using customers,” he told analysts. It is worth noting that Teams appears to have done its fair share of “winning” as well.

Slack now lays claim to 130,000 paid customers (an increase of 30 per cent year on year) of which 985 spend more than $100,000 on the company’s services per year, and 87 account for over $1m in annually recurring revenue. 52,000 of those paid customers are also using Slack Connect, up from 41,000 in the previous quarter.

Profits still eluded Slack, though it dramatically cut losses by slashing total operating expenses from $477.5m a year ago to $256.11m this time round. That’s a fall of more than 46 per cent. Within those overheads, R&D fell almost 58 per cent to $94m; sales and marketing was down to $109.1m from $136.4m; and general and admin dropped to $52.78m from $123.35m

All this meant that Slack reduced pre-tax losses to $68.6m versus a loss of $363.65m in Q2 of the company’s fiscal ’19. Net loss was $73.1m compared to $359.6m.

More solid top and bottom line figures, but the markets were unimpressed as the stock price for the company tumbled in after-hours, going as low as $23.27 after the dizzying heights of $30.52 earlier in the day.

CFO Shim said Slack expects “to be free cash flow breakeven for the year” and raised revenue guidance to a range of $870m to $876m, a jump of 38 per cent at the midpoint. The next quarter is expected to grow 32 per cent at the midpoint of a range of $222m to $225m. ®

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