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Slack CEO: Microsoft views 'us as an existential threat'

Brian Sozzi
Editor-at-Large

Slack co-founder and CEO Stewart Butterfield has come out firing on tech monster Microsoft and its uber-hyped (usually by its own executives) new workplace collaboration tool Teams.

One could easily appreciate the ferocity Butterfield, 46, showed on an earnings call with Wall Street Wednesday night.

Teams has reached 20 million daily active users as of mid-November, up an astounding 50% from July, according to Microsoft. Although there continues to be serious question marks in tech circles on the quality of the Teams’ user base given how the tech giant measures users. In the minds of many techies, Microsoft is simply counting Teams users if they make a voice call (among other clever tactics).

Not exactly the same thing as being actively engaged with a piece of software around the clock at work as many Slack users tend to be. The cutting-edge Yahoo Finance newsroom could attest to high levels of engagement on Slack daily. This writer doesn’t know anyone using Teams.

Slack co-founder and CEO Stewart Butterfield.

Nevertheless, that hasn’t stopped Microsoft’s bizarre obsession in touting user growth for Teams at conferences and via press releases. Butterfield tells Yahoo Finance that has caused confusion in the marketplace, making it harder for Slack to sell what most experts would agree is a superior product. Slack’s product costs enterprises money, Teams comes bundled for free with the juggernaut that is Office 365.

“If you look back in time six to nine months ago, we underestimated the amount of confusion in the marketplace inserted by Microsoft. They are the biggest company in the world and are obviously pre-occupied by us, putting out press releases on us, I mean we are one hundredth their size in market cap . I think it goes to show that they view us as an existential threat,” Butterfield says.

He adds, “It’s important for us to counter that narrative. We need to do a better job dispelling that confusion.”

Butterfield and Slack did their best job on that front in the third quarter.

Now onto Slack’s earnings

Slack did anything but slack off in the third quarter even with the dark cloud of Microsoft hovering above.

Slack reported third quarter revenue of $168.7 million, handily beating its guidance for $154 million to $156 million. Non-GAAP loss per share came in at two cents compared to Slack’s outlook for a loss of 9 cents to 8 cents a share. Nice win here for Slack.

Other good wins on paper were Slack’s growth rates across the board and growing penetration among deep-pocketed enterprise customers. Overall sales improved 60%, a quicker pace from the second quarter rate of 58%. Slack had 821 paid customers greater than $100,000 in annual recurring revenue, up 67% from a year ago. The company added that it had 50 customers with $1 million or more in annual recurring revenue. A year ago that number was 30 customers.

Strong achievements by any measure.

Slack’s new shared channels tool — which allows organizations to communicate to one another —is also off to a hot start. The company hit 26,000 paid customers using shared channels, up from 20,000 sequentially.

The Slack Technologies Inc. logo is seen on a banner outside the New York Stock Exchange (NYSE) during thew company's IPO in New York, U.S. June 20, 2019. REUTERS/Brendan McDermid

Butterfield is quite optimistic on the sales potential for shared channels, but isn’t willing yet to put a number on how big the service could become. For the tech geeks out there, that would be akin to Butterfield sharing the product’s TAM or total addressable market.

Says Butterfield, “Strategically [shared channels] could be the most important thing we will ever do at the company on the product side.”

But where the Street will probably continue to have a bone to pick with Slack — a minor one at that — is on slowing growth rates. Slack’s closely watched billings growth clocked in at 47% compared to 52% in the second quarter. One source on the sell-side told Yahoo Finance the Street would like to see Slack’s billings growth stabilize around 50%.

Meanwhile, Slack outlined a fourth quarter sales growth rate of 41% to 43%, cooling from that blistering third quarter pace of 60%. The fourth quarter loss per share is seen in a range of 7 cents to 6 cents a share. Analysts were looking for a loss of 8 cents a share.

Slack’s stock initially fell about 3% after earnings hit, but promptly reversed course to gain roughly 3.5% in after-hours trading.

The bottom line

The verdict remains out on whether Wall Street is ready to warm up to a former unicorn tech company that is still losing money, but the company is clearly pioneering workplace communication and isn’t too far away from profitability because of it. Microsoft’s agitation in Slack’s space doesn’t help either.

Butterfield declined to share when Slack would turn a profit, but emphasized how lucrative a software recurring revenue is.

Sounds like Microsoft with Office 365, non-helpful Teams collaboration tool and all.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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