HEAD IN THE CLOUDS: Slack and Zoom Report Q2 FY20 Earnings

This week, I provide my thoughts on Slack and Zoom’s recent Q2 FY20 earnings and what current and future enterprise customers need to understand and pay attention to.

Slack’s Revenue Growth Slowing  

Last week — September 4^th to be exact — Slack reported its Q2 FY20 earnings and beat the Street’s revenue expectations.  There was certainly a lot of anticipation leading up to Slack’s announced earnings given the fact that this was its first earnings report since becoming a public company.  Before I jump into my thoughts, here are a few highlights:

• Revenue = $145M (58% growth)
• Forecasted Q3 Revenue = $154M to $156M
• Forecasted Full Year Revenue = $603M to $610M (51% to 52% growth)
• 100K+ Paying Customers (37% growth)
• 720 Customers that Pay $100K+ Annually (75% growth)

Slack’s revenue growth is certainly noteworthy and looks impressive, but the fact of the matter is that Slack’s revenue growth has actually been slowing down (58% this quarter compared to 68% last quarter) and based on the full year revenue guidance provided (51% to 52% growth), growth is expected to continue to slow down.  That, my friends, is something that needs to be corrected.

The question becomes, how is Slack going to correct the slowing growth?  The answer, or at least part of it, can be found in the Q2 FY20 earnings press release, where CFO Allen Shim said, “We remain focused on expansion within existing customers and growing our large enterprise customer base.”  This approach to accelerating revenue growth through expansion is not unique to Slack and it is not surprising to hear. The “land and expand” strategy Shim describes is very much at the heart of the cloud vendor playbook.

What is also critical for Slack is the second part of Shim’s statement.  If Slack wants to accelerate revenue growth but also become a true enterprise cloud vendor (which it does), it needs to land more enterprise customers.  It is really that simple.  Well, in theory, it should be simple, but there is the issue of Microsoft (Microsoft Teams) and Cisco (Webex Teams) standing in the way.  Both Microsoft and Cisco have incumbency and strong long-standing relationships to call upon to keep Slack out.  It is not to say Slack is not getting more opportunities to make their pitch and in some cases being selected, but it is certainly going to be a tough road ahead to accelerate both adoption and revenue growth.

Beyond the strength of its competition, the fact that Slack also reported that they had $8.2M in credits to customers for service-level disruptions over the quarter is very problematic.  The $8.2M credit itself is not the issue as they are not refunds, but the fact that they had significant outages in the first place is the issue.  Specifically, Slack had three outages causing them to miss their 99.99% uptime SLA.  If Slack wants to become an enterprise cloud vendor, this is not something that is going to land well with enterprises.  Enterprise executives that are going to make the decision to jump to Slack cannot afford to have outages that cause significant disruptions.

To make things worse, Slack has also recently lessened the magnitude of credit available to customers and extended the measurement period to make it easier to make the uptime SLA.  The optics tied to this alone are not good for Slack.  Not only was there a significant outage recently (three, to be precise) but now if an outage were to occur in the future, customers will have fewer credits available to them.

If you are an enterprise and are considering Slack, it will be critical to prepare appropriately for the aggressive push Slack is going to make to win/grab your business and logo.  Beyond achieving the proper pricing, level of protections, and contractual flexibility, it is essential that you obtain commitments from Slack regarding SLA adherence beyond the watered-down, inadequate new standard.

Zoom Posts a Surprise Profit and Raises Full Year Guidance

Zoom also reported Q2 FY20 results last week, just one day after Slack.  Even though this was not Zoom’s first earnings since going public like Slack, there was a significant amount of anticipation leading up to last week’s report given how competitive the collaboration market is these days and given Zoom’s success to this point.  Here are a few highlights:

• Earnings of $5.5M
• Revenue of $145.8M (96% growth)
• Forecasted Q3 Revenue = $155M to $156M
• Forecasted Full Year Revenue = $587M to $590M
• 466 Customers that Pay $100K+ Annually (104% growth)

Posting a surprise profit, strong revenue growth, beating analysts’ expectations while also raising full-year revenue guidance, are all positive signs for Zoom and its founder and CEO Eric S. Yuan.  Analysts were expecting Q2 revenue to come in around $130M and Zoom had previously forecasted full year revenue to reach between $535M to $540M.

Having 466 customers that pay at least $100K in annual revenue, representing an impressive 104% growth, is also a step in the right direction as they work to make themselves a true cloud enterprise vendor.

Beyond expanding and growing their current base of already loyal customers, if Zoom is going to be successful long-term and become the video conferencing and collaboration cloud vendor of choice for enterprises, it is critical that they continue to find ways to first get an audience within the enterprises they are trying to penetrate and next, get in front of the decision makers.  The goal will turn to converting these enterprises as quickly as possible.

Enterprise customers, through sheer size, will also drive $100K customer growth and accelerate revenue growth moving forward.   Does that sound familiar?  It should because I just mentioned this is the same pursuit that Slack currently has.  And if you look at the numbers, both companies are in very similar places in terms of revenue even though Zoom’s revenue growth is almost double that of Slack.  Slack, though, has about 250 more customers that are paying $100K per year.  Also similar to Slack, Zoom’s road ahead is not going to be easy as large incumbents, Microsoft and Cisco, sit in Zoom’s way.

Zoom’s partnering with Slack as they have is a great way for both Slack and Zoom to achieve their ultimate and shared goals of becoming true enterprise cloud vendors.  Slack is focused on team collaboration and Zoom is focused on cloud meetings (admittedly an oversimplification on my part).  Combined, they would provide a strong “all-in-one” collaboration suite to go up against Microsoft Teams or Cisco Webex Teams and Google Hangouts.  Enterprises will be more likely to move away from an incumbent like Microsoft and/or Cisco that is currently providing more of an “all-in-one” collaboration suite offering, if they felt they would be able to move to another “all-in-one” offering.

If Slack and Zoom deepen their partnership through product mapping, go-to-market strategy, and possible joint pricing and/or product bundling, they will become more dangerous in their shared pursuit of grabbing valuable enterprise market share.  This is not to say that this is the only means to their sought-out ends, but from my perspective, it may be their best shot.  I have had the opportunity to speak with many enterprise executives about this, and if Slack and Zoom are able to remove the very real friction that currently exists in moving away from Microsoft and even Cisco, they will significantly improve their chances to get the shot they are both looking for.

The recently announced partnership with Verizon Business Group, who will market Zoom’s unified communications platform to its global customers, is also a smart move and should pay off if executed effectively.