HEAD IN THE CLOUDS: Slack Goes Public and Cloud Vendors Chase Use

This week, I take a closer look at Slack Technologies Inc.’s (Slack) going public and their recently reported earnings as well as what cloud vendors really want besides revenue from their customer base.

Implications of Slack Going Public and Recent Financial Results

Following the approach that Spotify Technology took back in April 2018, Slack is set to go the direct listing route on June 20^th rather than the traditional IPO path.  By going at it in this manner, the listing will not come with any sort of capital raise and Slack will not be issuing new shares to investors.  The fact that Slack currently has $1.1B in total assets has a lot to do with taking this path.  Based on current estimates, Slack is predicted to be valued at more than $23B in Australian dollars ($16-$17B in US dollars).

What now?  Will Slack be able to ramp adoption of paying customers and increase revenue along the way?  Will they become a true and viable enterprise vendor?

Early this month leading up to listing on the New York Stock Exchange (to be listed under the ticker WORK), Slack announced its FY2020 Q1 results.  They reported an impressive 67% increase to a total revenue reaching $134.8M for the quarter.  While they reported a gross profit of $116.2M (86.2% gross margin) they also reported an operating loss of $38.4M or 28% of total revenue.

In terms of guidance, Slack reported that they expect revenue growth to actually slow in Q2, falling to 52% with total full year revenue reaching $590M to $600M, up 47% to 50%.  Other key takeaways:

• Slack now has more than 10 million users worldwide spanning across 600,000 organizations
• The company has 95,000 paying customers (up 42%)
• 645 of those paying customers (less than 1%) are spending more than $100K per year (the coveted annual contract value or ACV), up 84%.

While workplace chat and collaboration is a place where enterprises are ramping their spending as part of their larger digital transformations, given the current highly competitive landscape (Microsoft Teams, Google Hangouts, Workplace by Facebook, Zoom, and Webex Teams), it is going to be a long and challenging road ahead to get enterprise customers to adopt.  In addition to continuing to get audiences within enterprises to demonstrate the value of their offerings, Slack will have to continue to look to partnerships, like the one they have with Dropbox, to find ways to penetrate enterprises at an accelerated rate moving forward.

Having had a chance to work with many enterprises and the executives that lead them, I can say that Slack is starting to come up much more frequently when they are looking for alternatives or net new solutions to fill a gap.  With regard to alternatives, this is most often the case when an enterprise’s Microsoft Office 365 subscription is coming up for renewal (Microsoft Teams is part of their Office 365 subscription) and the enterprise is more than happy to evaluate an alternative like Slack because they have been limited in their ability to move away from Microsoft and are eager to at least evaluate an alternative when the opportunity presents itself.  When enterprises are considering net-new workplace chat and collaboration initiatives, Slack often gets invited to the party (often part of a larger pool of participants, though – see list above) given the likelihood that Slack may already be known and it resonates well with their changing and younger workforce.

Cloud Vendors Want Revenue but They Really Want Use  

Let’s start with the obvious — Cloud vendors like Salesforce, ServiceNow, Microsoft, AWS, Google Cloud, Workday, etc., want increased revenue through landing and expanding within enterprises.  The highly coveted annual contract value (ACV) and the deferred or unearned revenue that comes with subscription contracts are valuable upfront and longer term, both important areas where cloud vendors want to show growth and prospects of more growth in the future.

Cloud vendors also really want enterprises to actually use the products and subscriptions they are signing up for.  Regarding SaaS cloud vendors like Salesforce and ServiceNow, it is important to ensure users are actually using all the features (or most) in their cloud subscription (e.g., Sales Cloud Unlimited and ITSM Pro, respectively).

When it comes to cloud platform vendors like Microsoft, Google Cloud and Amazon, they want their customer’s meters to run as fast and as frequently as possible.  For Microsoft specifically, they want their customers to rapidly draw down on their Microsoft Azure monetary commitment through ramped use of the various Azure services available.

Simply put, it is actual use that leads to “stickiness” and it is “stickiness” that leads to “lock-in.”   Once a vendor has lock-in, they have significant leverage to add on more products or higher editions to the portfolio (i.e., upsell) and increase pricing come renewal.  Use also deepens and widens the moat around your castle to better keep out the competition.