Slack WORK produced a decent enough quarter but the strong growth rates weren’t enough for investors, especially considering the growing competition and Slack’s own shortcomings. Shares slumped after-hours, but honestly, they should get back up. This is a good company in an attractive market-
Solid Quarterly Results
Slack posted better-than-expected revenue and loss per share in its fiscal second quarter, the first reported quarter after it went public.
Revenue came in at $145 million, 3.1% better than the estimated $141 million, negatively impacted by service-level disruptions that required the company to offer customer credits to the tune of $8.2 million. Without this, revenue would have been up 66.5%.
Paid customers grew 37% to 100,000. Customers generating annual revenue of at least $100,000 grew 75% to 720.
Being a software company, it has high gross margins, which shrank 911 basis points (bps) from last year to 78.5%. All components of opex grew triple-digits, with R&D increasing the most, followed by G&A and then S&M.
Other income increased 49.2%, but wasn’t enough to offset the impact of rising opex. As a result, the company reported a GAAP net loss of 98 cents per share on a GAAP basis compared to 26 cents last year and better than the Zacks Consensus Estimate of -$1.03.
But the GAAP number includes $307.0 million of stock based compensation related to its listing conditions, so management says that loss for the ongoing business was actually 14 cents.
Guidance for the third quarter was for revenue of $154-$156 million (up 46%-48% year over year), non GAAP operating loss of $49-47 million, non GAAP net loss of $0.09-$0.08 on a share count of 544 million.
For fiscal year 2020, Slack is targeting revenue of $603-$610 million (up 51%-52% year over year), non GAAP operating loss of $180-$16 million including around $30 million of one-time direct listing expenses, non GAAP net loss of $0.42-$0.40 a share on a share count of 399 million, calculated billings of $740-$760 million (up 43-47%), net cash burn of $100-$110 million including the direct listing expenses and $21 million of one-time direct listing related cash taxes
Shares Crashed After-Hours
There could have been a number of reasons for the 13.7% slump in share prices in extended trading, after riding up over 8% during the day. Unlike some other software companies, recent economic concerns and currency rates were unlikely to have contributed since management said that the net dollar retention rate was 136%.
What likely impacted share prices was the erosion in gross margin, which was also likely impacted by the service-level disruptions. The company typically offers credits to customers, if up time is less than 99.9%, so we can only hope that Slack can get its act together.
Decelerating growth rates may also have contributed, especially given Microsoft’s success at pushing its own collaboration tool Team by including it in its cloud bundle. Investors could be worried that Microsoft’s gain is Slack’s loss. To a certain extent, and in the near term, it could be. But overall, the market certainly seems big enough for two players. Microsoft’s push could even be positive for Slack, because it is definitely increasing awareness and because Slack doesn’t bundle the service.
Another positive is the operating cash flow, which turned positive in the quarter. The company must expect to generate very strong cash flows to meet the guidance for the rest of the year. It’s hard to view this negatively.
WORK shares carry a Zacks Rank #3 (Hold). The industry is however ripe for the picking, so buy-ranked CPI Card Group PMTS, Luna Innovations Inc. LUNA, or Tessera Holding Corp. XPER. You can also see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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