Slack Technologies, Inc.
Q2 2020 Earnings Call Transcript

Published: 5 Sep 2019

Operator:

Good afternoon. My name is Gabriel, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Slack Technologies Second Quarter Earnings Call. . Mr. Jesse Hulsing, you may begin your conference.
Jesse Hulsing:

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Slack's Second Quarter Fiscal 2020 Financial Results. On the call, we have Stewart Butterfield, Co-Founder, Chief Executive Officer; and Allen Shim, Chief Financial Officer.
Daniel Butterfield:

Thanks, Jesse. We had a quarter of record results with revenue growing 58% year-on-year. We exceeded 100,000 paid customers in the quarter and now have 720 customers with more than $100,000 of annual recurring revenue, a figure, which was up 75% since last year. I'll talk more about our exceptional growth in the enterprise segment in a moment. Last quarter, of course, we also completed our listing process. And I want to acknowledge the strength of our execution by accounting, legal, finance, business technology and communications departments along with hundreds of others across the company, and of course, our partners and advisers. The transition to being a public company is just one hallmark of what we see as the company entering a new phase. The next 5 years will be very different from the first 5 years. We came out of the gate with near perfect product market fit for our very earliest customers who tended to be smaller and more technical teams. But over the years, as we launched the Enterprise good product, scaled the teams of over 100,000 users, added key features for our security, administrative control and compliance, we begin to see real product market fit for the large enterprise use case. Now that fit is clear. This quarter saw win after win in the largest companies in the world. I want to start off by highlighting a few of those.
Allen Shim:

Thank you, Stewart. And thanks again to everyone for joining us. I will go through our second fiscal quarter results in detail before moving on to guidance for the third quarter and full year fiscal 2020. Turning to Q2. Results reflect our ongoing progress in what we view as a generational shift from e-mail to messaging and channels. Total revenues in the second quarter were $145 million, growing 58% year-over-year. Revenue growth was above the high end of guidance despite an $8 million onetime revenue headwind from credits issued in the quarter related to service-level disruption in the quarter. Our uptime was 99.9% or 3 nines in the quarter. But this was below our commitment of 99.99% or 4 nines. Service-level disruption of this magnitude is unusual for us. Compounding the financial impact of the down time was an exceptionally generous credit payout multiplier, and our contracts dating from when we were a very young company. We've adjusted those terms to be more in line with industry standards while still remaining very customer friendly. We do not expect a revenue impact of this magnitude again. Our Q2 calculated billings were $174.8 million, growing 52% year-over-year. Trailing 12-month calculated billings were $625 million, increased 65% year-over-year. Calculated billings were minimally impacted in the second quarter by the credits we issued, a headwind of just under $1 million. Calculated billings in the second half of fiscal year '20 will be more significantly impacted due to the way we account for credits. In terms of geographic breakdown, 37% of our total revenue came from outside the U.S, which is up from 36% in Q2 of fiscal 2019. As of the end of Q2, we surpassed 100,000 paid customers, up 37% year-over-year. We remain focused on expansion within existing customers and growing our large enterprise customer base, and ended the quarter with 720 paid customers greater than $100,000 in annual recurring revenue, which is up 75% year-over-year. This growth in large customers is further testament to our strong adoption within enterprise customers. We expect large customer growth to exceed total paid customer growth for the foreseeable future as we invest more heavily in enterprise sales and customer success. Our strong customer retention and ability to expand within existing customers have resulted in a consistently high net dollar retention rate, which was 136% at the end of our second quarter. Moving forward, I'll be discussing non-GAAP financial measures. Gross margin was 87% versus 88% a year ago. Turning to Q2 operating expenses. R&D expenses were $55 million or 38% of revenue. We continue to invest heavily in Slack's user experience, scalability, our platform and new features, such as shared channels. And expect R&A expenses to grow roughly in line with revenue growth in the second half. Sales and marketing expenses were $67 million or 46% of revenue. Leverage in sales and marketing in the first half is largely due to a year-over-year decline in advertising and marketing program spend. We expect sales and marketing expense to accelerate in the second half and exceed 50% of revenue.
Operator:

. Your first question will come from the line of Heather Bellini of Goldman Sachs.
Heather Bellini:

I had a question for Stewart. I guess maybe two questions. First one, Stewart, your comments about shared channels coming out of beta. How should we think about how quickly the network effects that you mentioned could kick in? And I guess, could we actually see the growth in customers with over $100,000 in ARR? I know you added 75 this quarter 70 last quarter, but can we start to see the year-over-year growth there start to accelerate with that flywheel? And then I just had one follow up that was related to the downtime that you saw. Just wondering, I don't think you guys mentioned specifically what caused the downtime, I was just wondering if you could share that with us.
Daniel Butterfield:

Sure. I'll take those in order. So for the first one, the honest answer is, we don't really know. We have a lot of theories and we watched the dynamics of the existing beta group really closely, 20,000 is a big number. And the average number of shared channels in use per share channels-using customer has increased that whole time as the end has increased the density of the network, so the distance between issue arbitrary selected points has decreased so the network has gotten denser. What we don't know yet is the degree to which that's going to be a driver of increased usage in those markets where we already do well, so if you think about Stockholm, Berlin, Tokyo, the Bay Area, Seattle, Austin, our hope is that we see some increasing return dynamics for increased go-to-market efforts. Problem is, we don't know where those thresholds are, if we get to 30% of the knowledge workers in a nutshell, does it make it easier to get to 70%? Or do you have to get to 50% that makes it easier to get to 90%, we'll see. What we do know is that it is a driver of paid conversion, so the way we look at that is customers who upgrade to paid plan and then create a shared channel within the first week that's pretty hear that, that was one of the factors driving their decision. And we're also starting to build up enough data -- nothing to report right now, on the likelihood of someone who receives an invite and begins using shared channels as a result of the invite and then goes on to invite someone else. And we've seen very strong second and third order effects from that.
Allen Shim:

Yes. And, Heather, it's Allen, just to add. When we look at our customer example, Fastly is doing customer support through shared channels now, and I think when we brought it to Grip, you're seeing this pull effect from these large organizations, in particular, that are drawing in their partners and their vendors in a way that we didn't think was really possible. It was they were creating new use cases inside using shared channels. So a customer and the customer service provider are talking in a shared channel to customer support in more of a real-time way. I believe it shows the power of what Slack can do to accelerate that type of work.
Heather Bellini:

Great. And then the downtime?
Daniel Butterfield:

Yes. What caused it answer depends how literal and specific we want to get. The actual answer might even be over my head in true technical terms. But if we want to move a little bit further afield from that the more distant answer is scaling. So we continue to hit limits that we didn't realize were built into the system. And at one point when were 8 people first getting started we thought Slack will be a great tool for 8-person software development team, and then we got our first team with 100 users and we had to reimagine a whole bunch of stuff, not just technically but from the user experience. Then we got teams with 1,000 people and then 10,000 and then we were well over 100,000 with several customers. And we're still figuring some of those things out. Having said that, this is a big area of investment, we've made some great hires on the infrastructure side, we've put a lot more tooling in place, a lot more automated testing. And we definitely have a commitment because we feel it, we understand we are among the heaviest Slack users ourselves, and so any disturbance and availability, it causes a big problem. The last thing I want to note though, for the service credits, there is a bunch of things that we do with that are unusual besides what Allen mentioned, which is the payout ratio. One is, customers don't have to request it, we just proactively give it. And almost no outages, I don't know every detail for this quarter but almost no outages affect all customers, in fact most of them affect like 1% or 0.5% or 3% of customers in any given time. And we give those service credits to every customer even if they were not specifically affected. So those policies are outrageously customer-centric, which is part of our background and our orientation. And that is one of the reasons you see that effect. It's not necessarily proportionate to the outage, because if we had the same SLA as Salesforce or Microsoft or any of our peers in the industry, we wouldn't have paid out anything because we would have hit the 3 9 they're committed to, it's our 4 9 and the rest of the policies that make a difference.
Operator:

Your next question will come from the line of Brent Bracelin from KeyBanc.
Brent Bracelin:

I had one for Stewart and a follow-up for Allen, if I could. I guess Stewart, in your opening remarks, you discussed a Fortune 100 going wall-to-wall with Slack, I think you also mentioned there was also a 365 customer. I'm asking -- my question here is how often are you seeing these wall-to-wall opportunities? Is this a broader trend you're seeing? And if so, why now?
Daniel Butterfield:

Well, so it is a broader trend. And I think if you mapped key customer size to the percentage of Slack end users inside that customer you would see more or less a straight line. In other words, it's much harder the larger the company gets not because of some deficiency in software, some deficiency in the customer but just because it's a lot of human being. You think about our customers that have 100,000 users, one of them, I think, is wall-to-wall or very close, another one is far from wall-to-wall. In both of those cases, you're talking about tens of millions of hours of people's time and attention that's shifting over the course of the year. There is a huge change, management effort and there's also some time for people to realize the benefits in those functions, those job functions where it's not immediately obvious. So I think Slack is an incredible tool for a group of accountants trying to close the quarter or to complete an audit because putting those conversations to channels increases the visibility, and all the other benefits that we will explain for anyone. Same thing for recruiters organizing university job fair. I can keep going with these examples but they're not as obvious. People have been using this method of working for years on the technical side. And as we start to adapt those workflows and build those integrations and to -- you offer the user education that support change management to work with customers, I think you'll see that rate increase. But it's always going to be harder the bigger the customer. We've got a lot of customers that are wall-to-wall with 1,000 or 5,000 or 10,000 users, and as they get bigger the number declines.
Allen Shim:

Yes. Brent, just for the final point, this is Allen. I mean what is industry specific. We're creating new categories, so teaching people, getting them used to Slack. Converting them from e-mail, it's going to take time, especially if you're organization of tens of thousands of employees if not well over 100,000 employees. And I think what Stewart is highlighting is, there are really 3 reasons why customers choose Slack. And one is, that's really around the product we can offer and that product uniquely can provide, first, the scale that these enterprises need, so tens of thousands of seats can only be supported on Slack's Enterprise Grid. Second is this open platform that we talked about, so we've got 1,800 apps and 500,000 weekly customer integrations being used, so connecting all the tools that you use. And then lastly, as the shared channels play, which we've already talked about, we are able to support all different communication inside and outside of a company and that's really unique to Slack's Enterprise Grid offering.
Brent Bracelin:

Got it. Helpful color there. And just as a follow-up for you Allen. I'm just trying to look at the normalized run rates of the business. If our add back the $8 million and SLA credits, it looks like revenue growth was closer to 67% during Q2. It looks calculated billings growth was closer to 60%. My question here is, how should we think about the normalized run rate of the business versus this SLA credit adjustment? Is there a lingering impact? Or should we consider this outage, the SLA credit as kind of a one quarter drag on growth, billings and obviously the retention as well?
Allen Shim:

Yes. On the revenue side, Brent, you are right, I think it's more onetime nature and so I think adjusted, we have -- our math shows 66% year-over-year growth for revenue adjusted for the credits. But for the full year, the way that the accounting works, we will see a headwind in billings for about $5 million and that was reflected in our guidance. This quarter saw pretty minimal headwind but it's really going to show up in the second half and a little bit in Q1 of next year.
Operator:

Your next question will come from the line of Bhavan Suri of William Blair.
Bhavan Suri:

I guess I wanted to touch first on the opportunity here to attract the paid customers given sort of the 500,000-plus sort of free organizations on the platform. I guess what kind of conversion activity we've been seeing from free customers, especially since you've been enhancing the value proposition of paid tiers? And I guess where do you prioritize this amongst the growth avenues available to you, new customers, expansion upsell? Where does this fit in? And I have a quick follow up.
Daniel Butterfield:

Yes. So that's a great question. The priority definitely getting teams to be successful on Slack. They are efforts that we can put in there to see that a higher degree of those monetize. But that's a big challenge. The big challenge is, someone was aware of Slack, they had a favorable enough impression that they developed some intent to go to the website, they followed through on the team creation, they sent some invites, those people accept the invites, they began to use it. That's a very -- I didn't even go through all the steps, but that's a very broad funnel and it's only about last step, which is the paid conversion. That's honestly less of a priority for us right now compared to getting those teams successful. So when we say the total number of organizations using Slack it can be a little bit confusing because there are no free users or free organizations using Slack that have 100,000 or 200,000 people in them. Those are all in the paid category. There are a lot that are temporary teams that are created for a specific purpose, like a home renovation project or planning a wedding, there's a lot of organizations using Slack for things that we don't think we will ever monetize such as organizing and scheduling teams for a kids soccer league. Those are still great for us. We love those because they expose Slack to new people and that drives more customer growth down the line. Look there's no expectation that we will monetize those. I think that putting that effort into that would be foolish compared to looking at the enormous number of people who kind of raised their hands and say, I want to try Slack, I want to see if I can make it work inside my company. And the mediumish job that we do supporting them right now, I mean, like it will be great if there was at least a PDF that said Top 5 tips for getting your team on Slack and we made that available. I think there is a lot of upside there, a lot of upside we can provide in helping those teams be successful, and you'll see that reflected in paid customer growth much more than you would in attempt to convert those other outliers.
Allen Shim:

Yes. Bhavan, its Allen, just to add to that. Think of it as almost dual 1a, 1b priority. 1a is definitely adding more customers, and we've got, as you mentioned, hundreds of thousands of opportunities on a regular basis that -- which we're really trying to help them understand what Slack is, right? That's part of that being in new category, that's part of transitioning people from e-mail, which they've known for decades. So that's a long-term investment for us. And we're going to keep focusing on that. But 1b is also growing our existing customers, and you're seeing that net dollar retention rate at 136% you're seeing the enterprise traction, it's working. So once we convert people over, we can get them to wall-to-wall because of our investment in sales and marketing and our investment in education and all the different supporting tools to help them get there.
Bhavan Suri:

Got it. Got it. Got it. And then I guess as you think about sort of this focus on sort of getting the paid customers, the shift -- the enterprise sort of the really healthy growth of 100,000, you've talked about adding direct sales and customer success teams, I guess that is a priority. And where are we in the process, I guess? And how do you feel about that team attacking the enterprise today sort of where are we in sort of the ramp that team so the time or productivity? And sort of how do you feel about where you are and where the investment might come from?
Daniel Butterfield:

Yes. No problem. So I'll let Allen speak to the ramp-up time and time to profitability. We're still very early in this process and in the same that we don't -- we're not where we want to be in providing support for self-served customers to make it over the line of success. We're still in the very early days of providing our sales teams with the tools that are going to be most effective in helping them get customers to understand Slack. So they're operating in an environment, and we want to be as critical for us to maintain this where there are very happy end users who are telling the people responsible for the purchase decision, hey, we love Slack, it makes us more productive, please get out of the way and let us expand. It's not necessarily that simple, we start talking about thousands or tens of thousands of people and then the complexity of those systems, but we are doing great in the sense that we are opening in -- we just opened in Chicago, we're opening in Osaka, we're opening in Munich, in Paris. And you'll see that expansion to continue, I think we have great mature teams in the Bay Area, in New York, in Vancouver, Denver, Toronto. But we're a global organization, we have customers all around the world, and so there's always more to do there.
Allen Shim:

Yes. Bhavan, its Allen, again. Over the last 3 years, we've been investing very specifically in sales and customer success because we saw this transition of companies that really have been looking for this, and really what you're seeing in the last year or so is the payout for that. I mean adding 70 to 75 customers a quarter is really a testament to the great work our sales organization is doing and they're helping these huge organizations adapt Slack as the tens of thousands of users scale, if not -- again, our largest customers are over 100s -- 100,000 users. And when I look at it from an investment perspective, the sales and marketing efficiency remains very healthy, so we've got a lot of room to continue to invest very aggressively into this. Our sales team from -- I think is still very young and we've got a lot of runway to continue to push on this. As Stewart mentioned, first Chicago office just opened this year, just to give you a sense of how early we are in this TAM. So we've got a long way to go, we've got a global opportunity ahead of us and we're going to continue to invest very aggressively behind it.
Daniel Butterfield:

Let me add just one last point here. Because sales organization members are going to be listening to this. And I do want to do a shout-out because I think unlike most enterprise companies, the addition of sales over the last couple of years has been incredibly positive impact on the culture. We have a one of a kind sales organization. We have some phenomenal leaders, but we also have just hundreds of great human beings there who have adopted the Slack ethos and treat our customers a great deal of respect, and we're very, very proud of that. I just wanted to make sure that they heard that given that they're going to be listening in.
Operator:

You're next question comes from the line of Richard Davis of Canaccord.
Richard Davis:

One marketing question and one tech question. So in terms of marketing or sales, do you guys have enough data about your kind of superior engagements statistics to kind of use as a wedge against the competition and sales pitches? Do you feel like you have enough, you could always use more? And then the second question is how do you see the evolution of embedding, everyone uses the word AI, but at least recommendation engines into Slack that help surface relevant information to me as a Slack user?
Daniel Butterfield:

So both great questions. I would say that to the first one, it's much more often the customer has better visibility into what's going on inside their company. So when there are evaluations of multiple services, they can see the level of engagement and they -- both quantitatively and qualitatively. So we do have great data, and we also have a bunch of great stories, so they kind of go hand-in-hand to talk about how a given workflow is transformed. At our customer conference, now I can't remember if it's last year or the year before, we had a large American software company up on stage talking about their -- well, during their busiest season of adding 3,000 or 4,000 customer support agents on top of their 10,000 or 11,000 full-time employees and how all of that was managed in Slack. The quality reviews by supervisors, the escalation of ticket, the triaging, and that's like taking a business-critical function and migrating to Slack. You just don't see that with any other tool. There is no other tool that is where work happens. There is no other tool that, hey, we need to sort out the Q3 marketing budget, we're going to do that in Slack. Hey, we're a bunch of network operations engineers, and we have to diagnose this production issue, we're going to get it on Slack. So I think that contrast is pretty stark in the mind of the customers. There are -- when we say customer, we mean the company. We also mean the people making the purchase decision. We mean the end users. There are people in that process who can be pretty far removed from the everyday usage of Slack and may feel like they don't see a big difference. They don't understand the distinguishing factors. But the deeper you get and the more experienced the customer is, the more obvious and stark that's going to be.
Allen Shim:

Yes. I mean -- Rich, it's Allen. When we think about engagement, we talked about the 9 hours a day and 90 minutes of active usage. What does that mean? That means we've got to invest behind the best user experience, and the thing about that is it really means that we've got to help people understand why shifting all of that time to Slack is useful, right? So first, we have to make it easier to do. But then there is -- to your point about kind of change management on the technology side of things, there's actually a big human element to getting people who've been trained in e-mails for decades and getting them over into this new tool. So I think data is one element of it. But really particularly at the enterprise, you see customer success is such a vital part of helping people, holding their hand from the old way of working to this new way of working. And the real meaningful shift is not just another tool to add on to their collaboration of suites. This is the one that takes over. This is the one that replaces and adds more value than all the other suites before it. So yes, I just want to make sure that, that was really captured there.
Daniel Butterfield:

And as for the AI, I'll just make a very quick point. We happen to be working out of one of our New York City offices today taking this call, and we're -- on the other side of the wall is our search and discovery team. That's where you're seeing the biggest applications in AI today, and a lot of that is training the search results model based on the behaviors of people. That's not brand new. That's not groundbreaking. We didn't invent any of this stuff. But there are real tangible results that come from the application of those technologies to those core user experience problems. There's a handful of those that are worth mentioning, including our Highlights project and figuring out the surface area to deliver those has been more of a challenge than the actual creation of the results. But the one that's most recently launched was people search. If you think about the inside of a large organization, 10,000, 50,000, 100,000 people, sometimes when you do a search, you're looking for a specific document, you either know or suspect its name. But someone showed this presentation last week, I wanted to just retrieve that one. Sometimes, you're looking for information about this topic, and you're looking for someone who can connect me to someone or looking for someone who is an expert on the topic. That we're doing better and better, and that turns out to be incredibly valuable the larger the organization.
Operator:

Your next question comes from the line of Raimo Lenschow of Barclays.
Raimo Lenschow:

Two if I may. First, as you've kind of sell into -- more into the enterprise, and we've seen a number of vendors like Tableau try to do that, and as they kind of started more ventured away from the department into more the center, a lot of them went into like the stumbling blocks like compliance and that sort of stuff, can you talk what you were seeing as you talk with the center? And was it they will throw in or when we brought teams, are we going to bundle in, et cetera? So what are you seeing in terms of the conversations that are going on there?
Daniel Butterfield:

So we've had a pretty steady stream of improvements over the years, and kind of we look at these in order of importance. Really, really early on in the process, some of the ones that are either easy or reach a large audience. That's -- now I forget, SOC 1 Type 2, yes. So that is things I see as they are. More recently, earlier this year, encryption key management, which has unlocked a huge amount of use cases which would otherwise been locked off. The ability for companies to maintain their HIPAA compliance while still using Slack, that's got us into a lot of health care deals. Over -- I'm not even sure, this week, I think we are officially announcing international data residency, which is obviously an important consideration for customers in Europe. So I think we've been incredibly successful in picking this up and figuring out the improvements that customers really need. Obviously, time is finite, and there's -- we're going to choose that -- those in sequence, but we've tended to choose the ones that are going to have the biggest impact for the largest number of customers as early as possible.
Allen Shim:

Yes. I mean, Raimo, overall, we've been investing in the enterprise for years now, and that's not just on the products side although Stewart highlighted some of those key features. That's all the compliance that you would expect along the way as well.
Raimo Lenschow:

Yes. Okay. Perfect. Makes sense. And then the other question I had is like as you think about direct sales and ramping them up, just give us an idea how early you are on that life cycle? Can you just give us like in terms of -- you kind of give us concrete numbers, but just give an idea like how many major cities you are in or something like that to kind of help us understand how early we are in the journey.
Allen Shim:

Well, this is Allen. We're focused on top 8 to top 10 markets, so think of it similar to kind of the G8 that's out there, and we're still very early in those markets. Stewart mentioned first office in Munich, first office in Paris, I mean, from a Germany and France perspective and this year. So just to give you a sense of how early that is, first office in Chicago, in the U.S. So even within this G8, G10, we still got a lot of runway to invest behind it particularly outside of the Americas.
Operator:

Your next question will come from the line of Keith Weiss of Morgan Stanley.
Joshua Baer:

This is Josh Baer on for Keith. One for Stewart and one for Allen. You're focused on scale and absent integrations and shared channels as far as differentiation. I'm wondering if you can talk a little bit about the potential for a low code and no code within the Slack platform. Where are you investing? What can we expect on the product side and monetization?
Daniel Butterfield:

I have literally been spending a number of hours this week with the team figuring out the best way to get those no code workflow builders into the app and tied to channels. I'm -- this is something that I'm incredibly excited about and specifically the ability for systems outside the Slack to initiate or trigger a workflow inside of Slack. And then at the end of that process, the process in Slack has a callback URL to something outside. And where I think that's going to be especially exciting is knitting together a bunch of services in this kind of lightweight fabric for systems integrations. So if you imagine someone pushes a button inside of Workday to approve an offer going out, that notification comes into Slack, and someone can press the button to generate the offer letter stored in Box and sent out via DocuSign. Instead of building end square integration, a customer ends up building end integrations or even better, using the existing integrations in Slack to tie those things together. So if you have a big investment in a massive system of record and what you want is to change the approval process or purchase orders or something like that, often it has been for customers go get a statement of work, and a couple of months later, the big SI gives you that 18-month $3 million estimate for changing it. If we can make that -- those kinds of changes a lot more lightweight, I think we'll see customers getting a lot more value out of the investment they already have in those large systems of records. So it's something that I'm really, really excited about, and we already see people creating simple workflows. The last thing I would say is -- and this is more kind of a sociology of work observation, the much greater continuum of workflow-like behaviors or some things that are formerly captured. There's database schema. There's rules for business logic and audit-ability. And then there's things like if you want to book the conference room in the ninth floor, you have to talk to this person because that's reserved for someone. And we saw this in our own evolution as a company, from a tiny company where every single job offer was manually approved. And the way we did that was select the text from the last one, change the name and the salary, paste it into the channel and someone gives you their thumbs up. Now we have much more structure and process around that, but you see that continuum everywhere. And the degree to which we're able to get those no code especially but no code, low code solutions into the hands of customers, the better off we're going to be and the more value we're going to be able to deliver.
Allen Shim:

Josh, it's Allen. Just to add, when we look at the platform, the philosophy is whatever tools you use, we want those -- your experience in those tools to be better in Slack. And so we've got a huge partner ecosystem, which is one part of the equation. I think what you're highlighting is how do make sure that all users can access the power of that open platform, right? So it's not enough that we've got Zoom and Arco and Box and all of these different tools connected to Slack. I think what -- the low code, no code workflow will bring that power and that accessibility to the rest of the users that are not technical and not programmers, and I think that's a really exciting opportunity where everyone can then take advantage of the platform.
Joshua Baer:

That's great. And Allen, can you remind us of the timing and size of the contribution from Atlassian's Hipchat and Stride coming into your model just as far as looking out for comps and seasonality in customer adds and revenue?
Allen Shim:

So that was a partnership that we kicked off a year ago in July. It ran for about 6 months through the end of the year. And the contribution there was in the low kind of single-digit thousand of teams over that entire period. So you have a little bit of that in July from a comp perspective. You're going to see more of that in the second half in a more material way. So when I think about kind of the customer adds, we're at the levels that we think we would expect to see over the next couple of quarters here. It's not a little bit incrementally higher from where we are based on some of the costs.
Operator:

Your next question will come from the line of Mark Moerdler of Bernstein Research.
Mark Moerdler:

I have two questions if you don't mind. First, looking at the service disruption. As I understand, it was hit by -- closed by hitting limits. Now you're rolling out shared channels, which is going to increase data density and usage, why shouldn't -- why won't that potentially continue? We could see -- I understand it won't impact revenue the same way. But why wouldn't that potentially continue if you get the usage you're hoping for on the shared channel? And then again a follow-up right after.
Daniel Butterfield:

Yes. The specifics of that question, again, maybe a little bit over our head or our ability to convey. Bottom line is there are investments on an ongoing basis in monitoring the different subsystems, that is a much, much more complex tool than people might imagine. You imagine about -- hey, type some text in a box and press the button, and it showed up on somebody else's computer. But if you imagine, at our biggest customers, it's not just the tens and I think maybe in some cases like hundreds of millions of messages that are going across every day or every week, it's every other little change that has to be communicated. People going online and off-line, people creating new channels, people archiving or deleting messages, people changing their status, and the distribution of those, it comes out to hundreds of thousands of events per second. We have been successful in scaling to the -- between 99.9% and 99.99% in every quarter, and in most quarters, 99.99%. So we're up for those challenges. There are occasional hiccups, and those affect everyone in the industry. Those affect companies that are far larger and have dealt with far more scale than us. I don't want to say impossible, but I do want to say they were up for that challenge.
Mark Moerdler:

That makes sense. I appreciate. And then as a follow-up, since Slack bills based on -- to an extent, based on DAUs, is there any seasonality specifically in the business that we should think about? In other words, the summer would be lower usage because more people are in vacation and therefore revenue would be lower, but they come back in the fall. Is there any way to think about that? And also maybe I missed it, but can you give some color on the DAU trend?
Allen Shim:

So Mark, this is Allen. On the seasonality, I think you see some of that in the customer adds. So Q2 is typically a weaker quarter just for the reasons you highlighted. And then you see some of those seasonal patterns in prior years, and we expect some of that to continue. But notably, the difference being some of the Atlassian tailwind we had last year. As far as DAU, we released that on a milestone basis, so we recently exceeded $10 million at the beginning of this year. And as we approach different milestones, we'll share that back with the analyst community.
Operator:

Your next question will come from the line of Will Power of Baird.
William Power:

Yes, a couple of questions. Maybe the first one for Allen. Just to come back to guidance, looking at fiscal Q3, revenue implies, I guess, a modest sequential uptick if you exclude the billing credits or add those back in fiscal Q2. I guess just trying to understand how much of that is conservatism versus any other factors, seasonality, et cetera, we should be thinking about?
Allen Shim:

So well, I think on revenue, from -- overall, from a guidance velocity perspective, I'd say we want to be realistic in terms of the visibility that we have going into the quarter. And then as we go through the quarter, obviously, we're going to deliver against those expectations. So probably more conservatism, but I consider that being pragmatic about how we set expectations with folks. You just never know what's going to happen if you look at this quarter as an example of that, sometimes things happen a bit that weren't necessarily in the plan originally.
William Power:

Okay. Yes. That makes sense. And then I wanted to come back to shared channels. Just it seems like a really nice opportunity and already seeing really nice usage. I'm just trying to think about the potential revenue lift. I mean it feels like at a minimum, helps from a customer retention and maybe moves more customers up into the enterprise grid. I mean is that the way to think about it? Or is there an additional ARPU, additional APRU lift opportunity at some point? Because I know the way it's structured today, it's kind of part of the core product. How do you think about that longer term in terms of revenue lift?
Daniel Butterfield:

So it's a great question, definitely retention. I mean that's the clear and obvious one. I mentioned that we have seen, because this is a paid-only future for now and we are open-minded, it has been driving some paid adoption, and that's obviously very encouraging. As for ARPU, I would say probably not. I don't want to say never on that. But what I do think is it lays the groundwork for incremental ARPU opportunities down the road. So not charging for shared channels themselves but establishing those secure connections because I think the important thing to understand, unless you've actually used them, this might not be clear, it's not like e-mail where anyone can just send anyone a message. There are administrators on both sides, opt in. They have complete control. They have the ability to allow or not allow different people into that shared channel. We are working through all of the different combinations and possibilities around digital loss prevention and other compliance features and the intersection of conflicting message retention policies and all of that. So that's a huge advantage. It also creates us a really secure connection, and it's intended for use by -- Allen mentioned the example of Fastly. There's a number of software customers that are delivering premium support or customer success to their customers over shared channels. But it's everything. It's creative agencies. It's professional services firms, outside counsel. It can be suppliers and manufacturers. And we've seen all of these different use cases. And if you imagine the infrastructure to support those relationships, I think there are possible ARPU opportunities. Where we think that it can have a more direct impact on revenue in the shorter term is just that paid customer acquisition. I think the density of the network. If your customers demand to be met in Slack, and we have seen that, either the much larger company demanding that a vendor use Slack to communicate, or customers who are of the same size or smaller requesting that they establish your channels to deliver support and success services, that's very encouraging. And I would love a world where it was one click, simple set-up for an offer from one company to share a channel with another. But even if the recipient there wasn't already a Slack user, it was like click the link and unpack the whole thing, get yourself set up on Slack and start a free trial and eventually lead to an upgrade.
Allen Shim:

Yes. And Will, this is Allen. Just to add to that. I think it's really important that this also can accelerate potential for wall-to-wall expansion. So one of the things that we hear is that people think Slack is only for technical users. Well, shared channels is one of those avenues where we're seeing a lot more nontechnical use cases, where -- whether it's customer support or marketing or with creative agencies. There's a whole set of new use cases that are available in Slack because of shared channels. So we think it's not only a competitive advantage. It's a competitive moat because once people do their work through shared channels, it's really hard to go back and do anything differently.
Operator:

Your next question comes from the line of Ittai Kidron of Oppenheimer.
George Iwanyc:

This is George Iwanyc for Ittai. Allen, kind of just following up on your earlier comments on the outlook. How much macro conservatism are you building into that? And is that part of any of the discussions you are having with enterprises at this point?
Allen Shim:

George, so in terms of macro, I think that's always a consideration, and we want to, again, part bake that into how we think about the outlook overall. And with customers, in general, there isn't too much discussion about this because we know that they're spending more in software and Slack really providing more value to all the software that they use. I think customers find that really compelling, and they see that return in a more holistic way because they're expanding ultimately wall to wall because they see that value in the productivity lift that they're seeing. So macro right now is a part of the conversation, but it's definitely not a key focus.
George Iwanyc:

And just kind of building out on the Atlassian comments earlier. What type of go-to-market leverage are you seeing from your strategic partners at this point, whether it's Salesforce, Oracle or the full suite of partners that you have?
Daniel Butterfield:

So there's a really broad range there. So some of those are discount offers or bundling that are embedded in purchase receipts for people who are doing kind of mass market self-serve. Some of those are looking at account mapping and going into customers presenting the collective front and talking about integration. The whole spectrum, I would say it's very early days. We have a very experimental attitude towards this. It's an empirical question. We'll see what works. And when we see something working, we will double down. But I would say it hasn't had -- it's not a big factor in growth looking backwards over the last couple of years, and it's one of those things that we're looking forward to and kind of shift from this early phase, first 5 years, first 100,000 customers to the next 5 years, the next set of hundreds of thousands of customers, something that I think can be a real driver because we want to be the 1% or 2% of the software budget. That's a multiplier on the value of the other 98% or 99%. So those integrations are very important to us. And we want to win by helping others win, whether that's the customer side or the partner's side, because then the world wants us to win.
Operator:

Your next question will come from the line of Rohit Kulkarni of MKM Partners.
Rohit Kulkarni:

Just on the direct listing. Can you comment on -- in your point of view, was it an overwhelming success? And you talked about the direct cost for direct listing. Were there any other benefits from a fundamental standpoint that you felt from the listing which was pretty innovative? And second, I have just one follow-up on advertising.
Allen Shim:

Yes. So Rohit, this is Allen. The direct listing, we think, was a success. The way we measured it though was around the amount of -- or how healthy of a trading market we could create through the listing and afterwards. And so sitting here 2.5 months after the listing, our float is at least 2, 3x higher than a typical IPO, which is kind of 10% of your shares outstanding. So by removing the constraints on buyers and sellers, I think we have a much healthier kind of trading pattern in our market, in our stock today.
Rohit Kulkarni:

Okay, great. And in terms of advertising ramp, where and how should -- would we see the direct benefits? As in would we see kind of any level of kind of benefits directly in the SMB customers? Or how -- at what time do you expect the benefits to start showing up? Simply given the last 3 to 4 maybe 6 months or so, you haven't done a lot of advertising. And now that you would be doing more, at what point should -- would it start factoring in? And one just clarification. Have you ever given any data points around what proportion of current customers are using shared channels as in -- and where do we see the virality? Or at what point do you see the virality kick in, in getting more kind of organic customer growth as such?
Daniel Butterfield:

Yes. So for the last question, it actually is pretty simple because it's 20,000 out of 100,000 so 20%. But I want to make it clear that those are customers that had to opt in to the beta. Those are -- it wasn't pretty -- we didn't make it simple for people. It wasn't this smooth, easy process either to opt in to the beta or to send or receive and set up the shared channel invitations. So there's a lot of upside there. I think we'll be in a position to talk about the impact once it goes to general availability next quarter or maybe the quarter after. Going back to the advertising question. I think it's a really good observation. So to the extent that it has a short-term immediate impact, in other words, someone saw a billboard, and they thought, dang, I should try that, and they went to the website and signed up, it's going to be pretty small numbers. And that is one of the goals, is to drive awareness. But the dynamic that is interesting in Slack, maybe not perfectly unique, is unlike a consumer decision, I saw an ad for direct to consumer underpins on Instagram, and that was enough for me to go and buy them, I'm going to make that decision. And then I'm going to rope a bunch of other people in, and we collectively have to decide that Slack is something we want to continue using. So the indirect benefits of that awareness or that kind of shaping the understanding, the positioning of Slack, helping people get what the benefits are and the value, I think where it shows up is later in expansion or in that initial adoption conversation. Because if someone has heard of it before, I think it makes a difference when they receive the invite, how likely they are to accept it. When someone has the confidence and comes knowing this is a solution that other people have used, social proof, the customer stories, I think that makes a difference. So this is -- one thing we have never done on paid advertising at all, whether you're talking about direct response kind of online, more demand gen-oriented stuff or out-of-home print and more brand-focused is be in market on a sustained basis with a simple message that we want to get behind for a long period of time. And I'm the CEO, so that's on me. I mean that -- it was -- we had fits and starts, and we've kind of done one thing and another. We've like ramped way up and then way down. We have a great new CMO. We have lot of discipline. That team is in good shape. And over the next 6 months or really probably the next 18 months, we expect to be that a plank that we can lean on to help drive growth through the business.
Operator:

Your next question will come from the line of Jacek Rycko of Citi.
Jacek Rycko:

This is Jacek Rycko in for Walter Pritchard. I have a question probably best directed at Allen, and that's I've been assessing the billing growth patterns. And I just wanted to -- I just needed a little bit of help in contextualizing them. Q1 to Q3 of last year, you grew billings pretty consistently around 70%, and then you had a very fabulous Q4, close to 100% year-over-year billings growth. And then that growth has since dropped to around 47% in Q1. And it hasn't really improved that much because this quarter, it was around 52%. And when I'm looking at the top end of your billings guidance for the full year, it implies on H2, you'll be growing around 45%. And so given that you had a very good Q4 last year, what is the danger that you may be perceived as, say, a 30% billings grower by the end of the year, as we're ending the year. And at the same time, what are you trying to signal to us regarding growth in billings beyond this fiscal year given there's a tapering of growth?
Allen Shim:

Yes, thanks the question. So when we look at billings and particularly our guidance on billings, last year was an important transition period, where we saw much more seasonality in the second half of the year relative to the first half, and that's because of our investments in enterprise and the traction that we're seeing there. So like a typical enterprise software company, Q4 is the largest quarter, and January is the largest month by far. And I think we're seeing that line up again for this year as well in terms of the pipeline. From a guidance perspective, because of the lumpiness and the ability for deals to push out even a week or 2, that really can mean the difference between coming at your target or not. And so I think our guidance philosophy has always been we're going to guide to what we have visibility into, kind of Q4 being as lumpy as it is, as concentrated as it is, means that we will continue to provide better visibility the closer we get into Q4.
Operator:

And that's all the time we have for questions today. I will now turn the call back over to the presenters for closing remarks.
Daniel Butterfield:

All right. Well, I just want to thank everyone. This was an exciting experience, but one thing we can accurately predict on forward-looking statements is every quarter is going to have -- every year is going to have 4 quarters. I want to be in this position for a long time. So it's nice to get to know people and to understand the questions. This is a first one. We really want to establish a pattern of trust and transparency. So looking forward over the next couple of quarters, you can expect to -- we to continue to report on a consistent set of numbers and to build a more accurate story about what we're seeing in the market with customer growth and adoption and where we see everything going in the future.
Operator:

And this concludes today's conference call. You may now disconnect.

Slack Technologies, Inc. Q2 2020 Earnings Call Transcript

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Slack Technologies, Inc.
Q2 2020 Earnings Call Transcript