Q3 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the swaps technologies third quarter earnings call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question during the session you'll need to press star one on your telephone if you require any further assistance. Please press star zero I.
I would now like to hand, the conference over to your speaker today, Jesse holding head of Investor Relations. Thank you. Please go ahead Sir.
Good afternoon, and thank you for joining us on todays conference call to discuss Slacks third quarter fiscal 2020, <unk> financial results on the call. We have Stewart Butterfield co founder and Chief Executive Officer, and Alan Shim, Chief Financial Officer. During the course of today's call. We may make forward looking statements, including.
But not limited to statements regarding our guidance in future financial performance market demand product development growth prospects business strategies, and plans ability to attract and retain customers and ability compete effectively.
These forward looking statements are based on management's current views and assumptions and should not be relied relied upon as of any subsequent date and we disclaim any obligation to update any forward looking statements actual results may vary materially from today's statements.
Information concerning our risks uncertainties and other factors that could cause results to differ from these forward looking statements are contained in the company's FCC filings earnings press release and supplemental information posted on the Investor section of the company's website. Our discussion today will include certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to.
Not as a substitute for or an isolation from GAAP measures.
Our non-GAAP measures exclude the effect of our GAAP results out of stock based compensation and certain other items.
You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures.
In our earnings release and on our Investor Relations website at Investor That's like HQ Dot com.
I would now like to turn the conference call over dislikes co founder and Chief Executive Officer, Stuart Butterfield Stuart.
Thank you everyone for joining todays call, we had a great quarter revenue was 169 million up 60% year over year garnered more than 5000 net new paid customers in the quarter, bringing the total above 105000, and we continue to show leverage non-GAAP operating margin improved 26 percentage points year over year.
Today I want it on three points first our continued outstanding momentum in the enterprise segment, where we surpassed 50 paid customers with over a million dollars an annual recurring revenue for the first time.
Second our accelerating pace of innovation on the product side with some exciting new launches.
Finally, I'll spend some time and what we're seeing this year channels, which launched halfway through the corner for me personally. This is the most exciting thing to happen for collaboration since we first launched slack.
So starting with enterprise, we use paid customers with over $100000, an annual recurring revenue as a proxy for large enterprise customers and this quarter, we set a new record by adding 101 of those customers for a total of 820 100 K customers.
67% increase over Q3 last year included strong growth in the largest enterprises. Another 11 of the Fortune 500, and international business with a third of the new 100 gig customers are outside of the U.S.
We also saw great growth at the high end of this range and do we have more than 50 pay customers with over a million dollars in annual Crane revenue.
Last year. This time, we had just over 30 and we're happy to see this number tracking to the growth in a broader based on hundred K customers.
The overwhelming majority of these million plus customers nearly 70% or also office 365 customers in general we continue to see tremendous adoption across customers at the office suite.
They choose luck, despite having a bunch of alternative for this market. It is free they choose soc because the skills to the complexity and breadth of their enterprise because it is open integrated with all the software they use across our business and because of the careful attention we pay to user experience, which creates a deeply loyal and committed fans.
These enterprise wins in Q3 included companies across nearly all segments healthcare retail financial services education logistics media in manufacturing innovative companies such as Glaxosmithkline, Vodafone IMAX, Sirius XM and guard myth continued to slack.
Moving on we've been doubling down on the strength of our product we've made improvements to the basics application performance reliability, new user Onboarding and compliance features important to customers and regulated industries and we've extended our platform made with the launch of workflow builder, which increases the number of people who can develop on slide by allowing nontechnical users to create advantage simple workflows.
Well build it was launched in mid October and by the end of the month over 10000 unique work for US were created at an active you sounds like.
Platform is also instrumental in helping caused many of those million dollar plus contracts on this quarter, particularly among customers who use office was 65, and so who have access to multiple overlapping legacy collaboration tools effectively for free.
Let's take a look at those customers an office 365, using the fortune 100 retailer expanded to tens of thousands of users on slack. They relied integrations with many tools like zoom Jira service now and concur.
Also among the office 365 customers moving $2 million plus contracts on slug was a mid western sure and another was one of the largest technology companies in Europe . It was expanded to tens of thousands of users nearly one third of its global employee population. These over a thousand integrations most of them custom built.
We want a million dollar plus contract with a highly regulated trading firm based in the Midwest Dolby vision, our encryption key management feature to remain compliant. This customer has over 100 bots and custom applications integrated about slack. Despite also beet harvesters 65 customer.
In fact, we are seeing significant momentum across regulated industries.
This quarter, we landed in expanded at multiple Fortune 500, and global 500 financial services in health care companies.
We also closed our largest federal government deal to date a million dollar plus deal at a customer that is you guessed. It also an office, we 65 customer.
Our platform strategy and the strength of our ecosystem continues to drive value for customers by making the software they use more valuable because they use luck.
We ended the quarter with over 700000 active developers in November we crossed over 2000 apps in the after factory.
Good luck is increasingly the developers platform of choice.
In Q3, we watch over 160, new features and have a strong roadmap for the next few quarters.
Excited to keep delivering innovative new features to become important drivers that business value for our customers.
The product side, we feel like we're still at the very beginning.
That brings us to the most important innovation in the category since slack first launched share channels.
Sure channels allow twos lucky's in companies to create a channel that is shared between them and extend messaging between users at the two organizations.
All this happens with administrator control reporting and compliance functionality.
After an extensive beta period, we launch your channels. The general availability in mid September growth has been explosive. Despite the fact that was released halfway through Q3, we ended the quarter with 26002 channels using paid customers that's up 30% in that quarter alone.
We see salespeople closing deals and shared channels and customer success team supporting their customers on church house.
Your channels are used by HR teams working with external recruiters marketers working with creative agencies and abroad price professional services firms serving their clients.
Sure channels are unique to slack no competitor has bought anything similar to market.
Not surprisingly the started out an impact in the field as an example share channels were a key reason for multi thousand user we in health care focused Federal agency that uses office to 65.
The agency will use your channels to communicate with external vendors and partners.
All of this the enterprise momentum the pace of innovation and the growth in the network of share channels easy organizations combined to drive the business forward.
Adoption of your channels and larger customers has been especially rabbit, 80% of our hundred K customers now you shared channels to collaborate with partners vendors customers anymore.
We're starting to see novel New platform applications built specifically for use on share channels.
The power and the dynamics of this network can be hard to understand merely for both descriptions recent at least a blog post listen visualizations of the network. We believe get a sense of how extensively share channels are being used and I'd encourage everyone to check it out.
Finally, before handing things over to Alan I want to Galeazzi escalation in competitive narratives. Microsoft has announced that there are now 20 million people using teams around 10% of their office 365 user base.
When they first announced a shutdown of Skype for business. We expect this all the way back in 2015, Microsoft announced that link at 100 million active users.
We have no reason to assume that any of those were lost would link was rebranded as Skype for business. The products still drove end users desktop sleep phones and conference rooms.
Now the Skype for business users are being enforced migrated to teams it's reasonable to expect more at the same.
Let me hit Us snag, we'd expect them to announce 50 million in the next six months and then 100 million within the next year.
Although Microsoft markets teams as a slot competitor and there's no doubt this causes confusion in the marketplace. In practice. These are different tools used for different purposes, and our customers achieve markedly different results.
Just look at the week engagement numbers that Microsoft themselves reported about teams and the much deeper levels engagement you see amongst lucky users slack represents a new category of software and regardless of which Apple opens when you click on a calendar reminder, for video call. If you need to work closely with colleagues in an environment that they can integrate deeply with all the software use there's a clear choice.
Our customers know it.
That's why we've continued to add office P 65, using enterprise customers at the 100000 dollar plus level and at the million dollar plus level. Just you can expect more skype for business users forced over to teams you would expect more these customer wins from us as well.
With that I'll hand, it over to Alan.
Thank you Stewart and thanks again, everyone for joining us.
We'll go through our third fiscal quarter results in detail before moving onto guidance for the fourth quarter and full year fiscal 2020.
Total revenues in the third quarter were $169 million growing 60% year over year, our Q3 calculated billings were $186 million growing 47% year over year.
Trailing 12 month calculated billings were $684 million and grew 59% year over year.
Our uptime was 99.999% or fivenines in the quarter, we continued to invest in maintaining industry leading uptime.
For many performance obligations were $279 million up 30% quarter over quarter, because we've taken the practical expedient under NSC six so six our PEO disclosure is reflective of contracts greater than one you're in length.
It excludes annual and monthly contracts, which are captured and deferred revenue.
Accordingly, RPL growth is driven primarily by growth in multiyear enterprise license agreements. These multiyear deals tend to be larger and often reflect a decision by our customers to standardize on block.
In terms of geographic breakdown, 37% of our total revenue came from outside the U.S., which is up from 36% in Q3 last year.
We continue to invest in international expansion, particularly within our direct sales organization. This year, we opened offices in Munich Harris, Sydney and plants opened an office in Osaka in December .
As of the end of Q3, we surpassed 105000 paid customers up 30% year over year as a reminder, and the second half of last year net new paid customer growth benefited from that lasted acquisition, which contributed approximately 1800 customers in the second half of fiscal 2019.
We remain focused on expansion within existing customers and growing our large enterprise customer base and ended the quarter with 821 paid customers with greater than $100000 annual recurring revenue, which is up 67% year over year.
Stuart mentioned, we also exceeded 50 customers with greater than $1 million annual recurring revenue for the first time with 53.
This is up from 32, a year ago million dollar customers will be a milestone disclosure going forward.
We expect large customer growth to exceed total paid customer growth for the foreseeable future as we invest more in enterprise sales and customer success.
Hi, good customers with greater than $100000 in a are represented 47% of revenue in the third quarter up from 39% into your go quarter.
Our strong customer retention and ability to expand within existing customers have resulted in a consistently high net dollar retention rate, which was 134% at the end of our third quarter.
Moving forward I'll be discussing non-GAAP financial measures.
Gross margin was 88% or is it 8% year ago.
R&D expenses were $54 million worth 32% of revenue, we continue to invest into slacks user experience scalability, our platform and new features such as share channels and expect R&D expenses to grow roughly in line with revenue growth in the fourth quarter.
Sales and marketing expenses were $78 million or 46% of revenue.
While we continued to see leverage in sales and marketing the third quarter. This is due in part to the timing of marketing campaign spent we expect higher marketing expenditures to bring sales and marketing as a percent of revenue over 50% in the fourth quarter.
Gionee expenses were $36 million or 21% of revenue. We continue to expect gionee expenses as a percentage of revenue to decline moving forward.
Our operating loss in the quarter was $18 million, representing an operating margin of negative 11%.
Free cash flow was negative $19 million free cash flow includes $10 million of capital expenditures related to the build out of office space free cash flow was negatively impacted by $21 million payroll taxes related to the directly thing that were collected in Q2 appeared in Q3.
Excluding those payroll taxes, we were free cash flow positive in the quarter.
Stock based compensation and related employer payroll taxes were $76 million in the quarter. It's important to note that due to the performance based vesting condition of our our US use stock based compensation recognition is accelerated in the first year after going public.
We expect stock based compensation as a percentage of revenue to trend down meaningfully over the next year.
Now I'll turn to guidance.
For the fourth quarter, we expect revenue in a range $172 million $274 million representing growth of 42% at the midpoint.
We expect non-GAAP operating loss and a range of $36 million $34 million.
Expect sales and marketing as a percentage of revenue to increase in Q4 and exceed 50% of revenue.
We expect non-GAAP EPS in a range of negative seven cents negative six cents. We're modeling Q4 basic shares outstanding of approximately 550 million.
For the full year, we're raising our revenue guidance to a range of $621 million to $623 million representing growth of 55% at the midpoint.
We are raising the low end of our full year calculated billings guidance and now expect a range of 745 million to $760 million or 46% growth at the midpoint.
There are two dynamics to keep in mind for the fourth quarter calculated billings. The first is that as our enterprise business has grown the fourth quarter has become increasingly large deal driven the fourth quarter also is our most Bakken we did quarter of the year, our pipeline coverage is higher quarter over quarter and year over year, but the range of outcomes is a bit wider due to the size of deals and the pipe.
Line and when we are projecting them to close.
Due to these factors were maintaining but not raising the high end of our calculated billings guidance.
We continue to expect that the credits we issued in Q2 related to service level disruptions will provide a 5 million dollar headwind to full year calculated billings Q3 calculated billings were negatively impacted by an estimated $1.5 million from the credits we issued last quarter.
As customers with these credits or build and credits are applied to their bills. The outstanding balance of credits from the second quarter service level disruptions are reduced.
We are raising our full year non-GAAP operating loss guidance to a range of negative 144 million to negative $142 million, which includes approximately $30 million onetime expenses related to our direct listing.
We expect full year stock based compensation expense and related employer payroll taxes, a $470 million.
We are raising full year EPA us in a range of negative 32 cents to negative 31 cents.
Modeling full year weighted average basic shares outstanding of approximately 399 million.
We expect full year free cash flow in a range of negative 85 million to negative $80 million.
For the full year total one time cash expenses related to the direct listing fees and cash taxes are expected to be about $51 million. We do not expect any direct listening related expenses in the fourth quarter.
For fiscal year 2000, Capex, we now expect approximately $60 million of capital expenditures predominantly related to the buildout of new office space to accommodate our growth.
We continue to make steady progress toward becoming free cash flow positive.
I'll provide an update on timing related to our growth phase targets on the fourth quarter earnings call with that I'll turn it back to Stuart.
Thanks, Alan before we get to Kuni I'd like to welcome to new members to our board of directors.
She would Jordan is a CIO of Morton Lifelock and previously held senior positions Cisco and Walt Disneyworld. She has fantastic perspective on digital transformation and she brings the voice of our customers right into the boardroom.
The second new directors, Mike Mcnamara He was CEO flux for 12 years and grew the business to over 25 billion annual revenue, Mike brings and operators perspective to the board dive value immensely.
Last today, we also announced that Sciammas play Appalachia will be stepping down from our board.
She month was a very early investor in slack and if you know him you know he's one of a kind.
Thank you Matthew your time wisdom, and invaluable contribution to the growth of slack.
With that operator, we're ready for questions.
Certainly as a reminder to ask the question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q and a roster.
Your first question comes from the line of Richard Davis with Canaccord. Please go ahead. Your line is open.
Hey, thanks.
A question and maybe a harder one so the simple question as you announced their services partner program, maybe if you could just talked about where you'd like to see that in two to three years and then the second one store I think you kind of talked about this.
But I think a lot of one of things people don't understand about your company is that you're selling really against non consumption.
Rather than the classic application Rip and replace.
Linked ended that Facebook that that they outreach scale. If there are way as an outsider that we should think about.
When do you guys reach critical mass that you're at scale and and I know that's an almost impossible question, but that is spit out I think that's important for people to remember that its non consumption really that you're competing against thanks.
Yes, so starting with a second what I think non consumption or maybe slightly differently consumption of email and just on.
Inefficient way of doing the same thing I think it's a really good point and.
From our perspective right now scale is a long way off I mean, because there we have 105000 paid customers. There are millions of customers just in the U.S. that have five or more employees.
See slack in addition to all the enterprise wins that we talked about earlier and we will continue to detail, which is lucky as a dentist office and tax preparers, and florists and city police departments and administrations.
Unfortunate one of those it will work for many.
So I think skills, the one way off and I think the part of your question the non consumption to consumption is really transformative.
I don't want to go out and make a comparison to like social media and smartphone influence on culture.
Is pretty dramatic you talked about a 100000 people at a slot using customer average at 90 minutes of activities as a day 150000 hours a day three quarters a million hours a week 640 million hours of your employees time mediated by far and if you have on valves employees, you probably have around 10 billion in payroll.
That is an impact that is completely out of proportion to what people think of when they might think like were switching messaging products.
Got it.
Oh, I'm, sorry, and the services partner program.
The first of all the legacy at scale and what we hope to do.
With the ESI community and.
With consultants generally is.
As you can make it easier for them, but I couldn't be happier in just the same way that for whatever third party software tools like natural products that our customers buy we want to make their experience of those tools better because they use slot.
We want to help does ESI is working on big integrations of systems of record.
Realize those workflows in a simplified way and slot deliver their applications and a clear well have the notifications and approvals flow a lot more smoothly and we're increasingly getting them tools. So we introduced that.
Workload built at this holder corridor, which was.
No code very simple anyone can use it the next step there obviously is to open that up to.
Okay attic interfaces. So people can establish really simple workflows and slack and save them the trouble of developing a new application. So the ideal is both more value delivered by the the ESI community to the customers in less time.
So exciting early results there and some good partnerships and interesting discussions, but still very exploratory Richard its Alan I, just add that overall, our open platform strategy continues to be a real strategic advantage and you're seeing the ecosystem more broadly benefiting we've got over 2000 outside the our directory over 700000 developer.
First in over 550000 custom applications. So that's really building on the investments.
A strict strategy of having this open popcorn strategy, including the kind of go to market element.
Super Thank you so much.
Your next question comes from the line of Keith Weiss from Morgan Stanley . Please go ahead. Your line is open.
Excellent. Thank you guys for taking the question.
And very nice quarter.
Really impressive.
Additionally to sort of those enterprise customers the customer integrated an honor Kay. Good question number one did did the general availability to share channels that have any impact in terms of sort of acting as the people are pushing kind of more customers.
Across transom forward that enterprise customer base or might sort of fleeting sort of two coincidental event and number two.
When we think about the enterprise customers and sort of the growing percentage of revenues that's coming from.
Customers over 100 cake, how should we think about the impact on sort of the average price per user because I know when you go into like a really large customer they're always going to want a bigger discount for that kind of volume how should we think about that trade off between sort of percentage of revenues coming from over 100, Jay versus kind of what our expectations would be for going forward.
ARPU.
So great questions.
I would say that the general availability of share channels, probably had some really minor impact on the enterprise because.
Enterprise customers were added to the beta late and we definitely saw people because this upgrades to grid because share channels usage was so important to them I don't think I'm going to be a major driver by any measure now and I think.
More broadly well get excited about your channels and we see some really promising early results obviously.
When we see someone upgrade and then immediately creates your channel and we think Thats a driver of the usage.
Theres some interesting stories will be sharing about.
Service providers actually paying for their customers slack usage, because they feel like I can deliver better service that way, but this is like a driver for the business at scale three to five years out as opposed to something that's going to make a difference like next week.
By Q1.
Results, we should be able to give a better better idea the dynamics there, but we're not even modeling the impact of share channels ourselves at this point because they are just too early to say for the for the second question.
It's I mean, there's two ways to look at it.
We have had a lot of focus on the enterprise business over the last three years, and where we invest in where we focus we see progress and we see results. So it's not just releasing enterprise grade product in the first place, but if things like encryption key management early this year, but yesterday literally on the final lease of international data resident team, which is important for lot of customers, but there's a whole host.
That administrative tools and compliance features that go along with that.
And starting to bring some of that focus.
To the self service destined to thinking about how to actually really scale that because two things happened at the same time, one is I love the baseline.
Consumers are divinely discontent. The bar is continues to be raised on usability on man.
Degree of Onboarding help you need performance characteristics of the clients in People's expectations, but also we're just moving to a much broader audience. So it's more mass market and we have to do more to simplify and make the experience accessible to people.
I think just like the focus we've had an enterprise it demonstrated real results, we'll see the same thing of the software business.
It's.
That on the enterprise side of things, we still think there are tens of thousands of enterprises out there are so our focus is still adding customers and expanding within those customers I think you're right that as you get paid within a customer there was a degree of efficiency that the customer expect so pricing still as an output for us relative to the are focused on adding customers. Thanks, Dan within those customers. So no we're prudent about.
Driving efficiency for customers in a way that makes sense given kind of that.
As buying pattern. So we're continuing to invest there I expect to say it can continue to add upon this record quarter that we had an enterprise results and risk keep investing a suicide and continue delivering solid results.
Got it thank you guys.
Yes.
Your next question comes from the line of Brent Franklin from Piper Jaffray. Please go ahead. Your line is open.
Thank you taking the questions here one for student to follow up for Alan Stuart you talked about share channels I know, it's early but but having some help relative to some some new enterprise wins in the quarter. My question really is around the technology. There how hard was it so kind of rollout shared channels just remind.
Yes, what were some of the technology hurdles you had to overcome.
So to roll that out and how hard would it be first on your competitors.
To to copy what you're doing there and then again one quick follow up trailing.
Sure. So I mean that the short answer is it would be really really hard.
Spent the last two years working on this and there's a bunch of subtlety. So.
One thing is both sides of vis vis relationship want to have control. They will have visibility they want to understand the message retention policies. They wanted to how the availability for E discovery and leave a halt and digital loss prevention and all that kind of stuff.
But you still want to be able to create and then sobra these relationships and retain the data on both sides.
You also want to be able to incorporate applications and have them have appropriate permissions that are shared by both sides. So theres a lot of tactical heavy lifting and obviously you go from a model where lets say, there's 10000 people using slot.
Where do we have to worry about 10000 people to potentially we have to worry about millions of people because they can create channel with more or less anyone.
I would point out that we're starting from a relatively new code base.
Well not carrying a legacy tactical that I think if we were strapped to you know.
Half dozen different products that were all on average about 20 years old it will be very very difficult to replicate this yes, I mean, just adds up Brent.
For us the channels you atomic unit is trying to see it was recognized in the industry I think garner put out to report that describe this it's not the team is the channel and that means that.
Being purpose built and having the architecture that allows for that is very proprietary to us and so you can accomplish this with a legacy kind of stitching together of different systems, you have to really have a specific intent to build it this way.
But super helpful. Then Alan just a quick follow up for you as we think about record number of new net ads on the enterprise side, if I back into kind of all the mass market transactional kind of customer cohort. The net adds are slowing there and I didn't know what that was a function of if it was a function of just comp.
Titian, if it's a function of.
Productivity like one of the factors there as you think about you're focused on the enterprise, what's happening on that and transactional side of the business. The smaller customers a lot of self serve paid customers there, but what's happening. There. There are there things you can do to kind of re accelerate kind of customers outside of that.
Enterprise space. Thanks.
Yes, I mean to Echo what Stuart said earlier, I think where we focus on where we invest we know that we will deliver results and enterprise has been a primary area of focus for us both on product and go to market over the last couple of years and you're seeing that every quarter, we're winning more and more enterprise customers. This quarter alone. It was grabtaxi in Asia Sirius XM in the West Glaxo Smith quite in the UK, So you're seeing it global.
Fleet across much of different sectors. So I think we're very pleased with that I think.
The the corollary to that is on the self serve side, we see a ton of opportunity. I mean, this is still a very very large market and I think in terms of than that as you will see your senior level off here this quarter and we'll obviously guide us when we think it will reaccelerate, but that's really the intent for us to invest there and to see those results over the coming quarters, we know.
With that there's a lot more we can do to make this category a lot easier to understand what for customers investors for all stakeholders and we're trying to build something different Harold we're trying to do.
They will.
Transformative type of platform for all people work and that takes time to educate and we're thinking about this and kind of a multi quarter multiyear type of investment.
Got it helpful color. Thank you.
Your next question comes from the line of Mark Moulder with Bernstein Research. Please go ahead. Your line is open.
Thank you for taking my question and congratulations on the quarter.
Two questions.
First one is your largest customers have obviously quickly adopted shared channels, which is great can you give some color and maybe it's too early on the impact share channels within the customers are they starting to are you hearing of them getting their partners and customers to adopt slack due to shout channels and then I've a follow up question.
Yes, absolutely. So I mean, we're obviously have user of our own product and what we've seen is our sales and success teams using it with customers and that has because we haven't.
I had a great penetration in enterprise software maker market generally, we're starting to see that happening all over to place of people delivering premium support and customer success programs people getting deals closed faster.
But.
I'll give you just one super re story.
Because both post coming about this.
We noticed a small audiology.
Steve Software company called Smart care that had invited in 17.
The allergy Test center. So there's places where you may get you hearing aid tested and they were in Wyoming and Vegas in New York, We thought how that's crazy that this they're bringing and obviously, we will presumably new users to suck. It wasn't just that they were creating the instance set me up inviting the customers to become administrators of and then paying for their customers use it because they knew that fit.
Dysfunction that their customers had with so much higher another anecdotal one of Wouldnt, we're out in London for our Frontiers conference. There one of the executive briefing centers I participated in with.
London based.
Legal firm, who is here increasingly from their digital first banking clients.
They were getting requests to serve them overseer channels and what is the slack thing and how can we best use it. So I mean, there's a lot of those are.
Anecdotes, there are hundreds or thousands of those and we're starting to see to use cases emerge, but the exciting thing for US is those are discovered by customers I was not like.
Things that we are creating it's very inventive kind of generative usage and it's a really exciting platform and we're just getting started I mean, the roadmap from here Mark is.
Not just once a one but want to many and expect to see more of these stories and more of these use cases become the norm in terms of how people are transforming work with block.
And then follow up just just a confirmation employee stock comp has increased as you had guided to.
Fusion effective that through the employee base completed or should we see any additional significant change in the stock comp.
Well I think as we noted in the call with as it has accelerated right now postal a thing so it will take I would say another year or two to really worked through the existing grants our pre listing and then I would expect to normalize overtime.
Perfect. Thank you much appreciate.
Your next question comes from the line of on surgery with William Blair. Please go ahead, Sir your line is open.
Hey, guys. Thanks to my question nice job here.
I wanted to touch a little bit above the premium opportunity a little bit you mentioned in the past or maybe using a few months ago that 50% of the daily active users were paying that's pretty high numbers in terms of premium models go that's as we think about the next few years do you think this number sticks around 50% where do you think there's the opportunity to increase this biotic maybe more premium good.
Maybe changing pricing a little bit.
Increasing conversion they got up for a quarter two but over say three to five years, how do you think that ratio changes.
I think we'll continue to go up I mean, we don't have a model for that because there's a there's a lot of usage in the premium side that is like.
Time bound events things like planning their wedding or home renovation project or organize it can't socket for the season.
And.
To be clear, we love that it's great Britain slack to new customers and they tend to introduce to their companies but.
My conjecture that is going to tend to increase just because its tended to increase over the years that the very first time, we reported daily active users and paid seats.
I would have been probably in 2015, maybe in 2014 and it was around 20% there and it was late.
Hi, Twentys than Thirtys.
For use in house cost, 60%, yes, but behind this more reflection of the fact that we are doing so well and enterprise and the sales motion in particular I think as you expand expansions are larger off of what was started as an organic base even at these large customers and as they expand their all paid so they can skip over that free da you Mark.
And so that's what you're seeing on mix really trend towards a higher percentage of pay because as these expansions hopping on enterprise, you're seeing that percentage shifts towards more paid because they are starting off has paid.
Got it got it actually that the leads into my next question. When you look at those 1 million HCV customers I guess two parts one.
How long could take.
I know that never know what exactly say, but on average to get them. There is there more room for them to go above a million dollars philosophy, which I suspect. There is and then when you look at this sort of 800 100 KGB customers.
Think about those are all those candidates to get Snorre $2 million. Thanks.
I would say not all of them are candidates with all of them are big enough, but many of them are and there's many that are candidates that aren't even at 100000 dollar stage can take a long time I mean just being.
Totally candid someone signs up for slack, they don't really get it so they're busy. They later on invites and why it takes a while that seem to get going now you have five people than they people. So getting from there to like we have an enterprise license agreement and there's 10000 people and there's a change management program and our success team is underground.
That can take six months in the best case, it can take years.
So I think that's it that's another reason why you see the percentage of paid increase over time, it's because it takes to go wild isn't really big transformation. There wasn't the last time, we looked at this you know when we said what is the clearly that's ham within our existing large customers what was in the low double digit percentages. So it's you know three four fivex higher in terms of expansion opportunity just within that exist.
Thing base, the kind of give you another angle audit.
Yes, thats exactly thats very helpful. But you guys a nice job actually my question. Thank.
Thank you.
Your next question comes from the line of Willpower with Baird. Please go ahead, Sir your line is open.
Great. Thanks, a lot I guess two questions.
Just wanted to come back to the strong enterprise growth looking about 100000 dollar customer additions in the quarter.
I mean, how much that's driven by.
Some combination of sales productivity and new logos versus just continue to drive users I'm just trying to understand what's really driving that acceleration I guess last couple of quarters.
Yeah, I mean, well as we were saying that it's a function of about thing we've been investing in this for years and we're seeing more with traction with our enterprise customers and also just more understanding of slack as customer spend time with us. They can appreciate the difference in the value that we're providing relative to the competition. There are seeing this as transformative enabling their digital transformation and.
Something far beyond communication, we give them the platform we give them now this network value share channels. So I think you're seeing it.
These things intersect, where the understanding of the product I understand category and then now that building relationship over time with more sales capacity out there is leading to both new and expansion driving.
Got that enterprise strength, you're seeing.
Okay. Okay, and then just a financial question nice improvement in the guidance for both I guess operating profitability and free cash flow any further color right. There just on other source of the outperformance relative to the prior guidance on two fronts.
Well I think it's it's a reflection of this is a software SaaS model I mean, we have very strong fundamentals high gross margins and strong retention dynamics. So I think we've always said as part of the growth phase. The first priority is to invest in growth and you're seeing that we're going continue to invest in growth continue to invest in innovation and we're leading in those areas, but you're all.
So going to see more leverage and I think this is really a part of our deliberate effort to continue to drive more efficiency in the business as we invest in growth. So I think both have always been kind of a dual track goal for us and we're really just executing against that.
Okay. Thank you.
Your next question comes from the line of Raimo Lenschow with Barclays. Please go ahead, Sir your line is open.
Mr. Lenschow. Please go ahead your large sorry.
Yes.
He.
If you look at the the competition without maybe it's like so would that mean marketing message throughout the active users, but that's kind of also almost like a folds number because it doesn't really tell you anything about engagement levels.
How do you how do we fair, we or what are you thinking about reacting to that like.
If you'll look at the slack usage.
We'll hear it looks.
Well it would seem a lot higher but I'm just wondering how what's a way for you to kind of communicate that thank you.
You know.
As you have ideas for how to communicate I would love to hear because we're trying a lot of stuff I think it's going to take some time medicine to take a couple more quarters should people to really appreciate it but I mean, the confusion deliberately created the view kit, making a mistake about that.
And it's not just I think he we under count the difference a little bit if you talk about just like there's more engagement here and a little bit less here because that makes it just purely quantitative where I think is a qualitative difference. There's a lot of people who have desktop void phones that were Skype for business and are now team. So they pick up the phone and make a call and they are teams user.
As nothing to do what people do you use flat for why people are switching to slack the strength of the platform or any of that so.
I wanted to just be candid and say, we havent figured out the right way to message that I think.
Trying to get ahead of it and get people to understand you were going to hear a 30 million daily active user announcement and the 50 million daily active user Acenine hundred million daily active user Nelson. Good then I'm going to people use link so of course, they're going to get there.
I think our priority is really.
Serving the customers continuing to adapt not getting to drawn into that distraction, but we do.
Half to.
Head on when we go talk to us because theres can be a population of.
Some people are built all these incredible integrations inside this customer and people are fanatical and they say its transforming the way they work and you, which a population outside that were people don't are familiar with it and the kind of several children say don't we want to get team to free.
Getting past that can take us a couple of months working takes a couple of years people have done multiyear valuations of teams that have ultimately spoiled and they've gone back and expanded their stock usage and if we could figure out a way to to get that happening.
A month or a week or a day, we would love to have rolled that out very broadly I mean, when we see 70% of our top 50 customers. Our office are also office 385 customers, it's clear to us that the customers. Appreciate the difference in what the transformation that we can provide versus the more communication.
Legacy tools that they already have so we want to continue investing that continue investing customer success continued investment how people want to change their organizations culture and may become more agile and we think that thats.
And that will take time a source. That's that's a new category were spent a lot of time in education, and we know we solve a long way to go.
Perfect. Thank you.
Your next question comes from the line Gregg Moskowitz with Mizuho. Please go ahead. Your line is open.
Okay. Thank you very much for taking my question and good afternoon, guys. I guess the first one is for Stuart shared channels has had what are the most successful beta program I can recall in software at least as measured by user adoption. So what might be a realistic penetration rate for share channels say three years or so from now how should we be thinking about that I mentioned.
Hi looks for us round.
Yes, so like I said, we don't even model it internally because we don't understand the dynamics will end up but if you're talking about adoption inside of slot customers.
Well I totally approach, 100%, so 80% of our largest customers are already said channels users. The reason for that is our suggestions are there. They can explain to people. They can given these cases that can help and get it set up that can help make it consistent with their existing compliance set ups and all that.
The other.
100000, plus customers don't have that luxury but they are independently discovering it and there's two things we should say one we're very early in the stages kind of the the commercialization product work around the base of share channels and by that I mean.
In the beta you had to know the the person you wanted to invites workspace you are out which is kind of seriously company named dotcom, but its hidden in the iOS apps hidden in the desktop that you have to kind of go out of your way to find it so our our CTO tomorrow talked about that as the customers walking over broken glass in order to get it set up that's now a lot easier.
Can you send someone to link and then the administrative approval process kicks in but we want to go much farther than that that includes free trial offers for the invitee. It includes the option mentioned before for the Infighter to pay for the Soc usage of their corresponds but like barely begun experimenting with that so I think both as.
The future convenience for customers and also as a way to actually be a growth driver, but the second thing I'd say is right now your channels is just between two stock using organizations there are.
Enormous set of use cases that involve three or more I mean, just think about that the architect the engineering firm and the customer or come up as many as you want.
That is going to be a driver of adoption and spread because every time someone gets an invite two a share channel there. Many many times more likely to send an invite themselves. There's a network effect of that kind of compounds over time. So if you could have three or five people participating that's a huge balloon and there's a whole roadmap the on that that I could literally talk about for hours.
But I want to issue we have time for questions.
Okay. That's very helpful. Thanks, Stuart and then just for LNG you had very good revenue upside this quarter, although the billings was only modestly above I think where consensus was Conversely, you RPL was strong and grew by 30% sequentially. As you as you noted in your prepared remarks, so aside from the impact from the credits in Q2 was there anything that you had called out here.
In terms of duration or any other puts and takes that we should be aware of.
No nothing in particular I think the momentum has been strong as we've been highlighting and enterprise, we have more opportunity and self serve so I think we're going to continue to invest in that area as well. So I think you'll see the results of that as we talk more about next year.
Great. Thank you.
Your next question comes from the line of Ryan Mac Williams from Stephens, Inc. Please go ahead. Your line is open.
Thanks, taking my question just one for me today, what the initial success was shared channels and work flow builder.
Our next big future rollout, how do you think about central upsell opportunity in new feature can provide versus instead, both in your existing Pete offering.
That's a big question I think I think we're a long way away from.
Operating new products, especially if you're if we're thinking about those as products that are intended to drive ARPU just because the market is ready for single digit percentage penetrated and we've got to focus on that we have to focus on continuing to deliver more value to our existing customers. If they get more value and we get the same amount of money. All good we want these people to be fanatics, we want them to recommended.
The next job, we want key department to be thrilled with how easy it is for them to administer it how much time their savings we want to executive team to be thrilled by the productivity increases so I mean, thats, so thats the focus for London.
I think what you'll see is because slack is horizontal.
Extending across a whole organization or whole team or whole workgroup division or whatever it's a slightly different dynamic than what you've seen in the past with enterprise software companies, where we choose a vertical you get some customers you choose and adjacent seeing you sell the new product to the old customers I'm, not saying that that doesn't happen for us in the future, but it's a little bit different when you turn things 90 degrees and you're thinking.
About what's a with a horizontal adjacency and for US I think thats principally around platform and its around workflows, it's about making that easier for systems integrators and making it.
Easier for customers to get new applications up and running so you think about the 550000 custom integrations that were developed by customers to integrate with their internal software. That's a number that works the 2000 apps on or after after after which is also a new record, but there's a huge amount of activity. If we can make that easier I think thats a real win for us.
So the real win for customers they don't have to provision a new server.
They can get those things up and running I think that the serverless function approach to development is a great step forward, especially for the relatively simple kinds of applications that people are developing.
Then I think theres, a huge opportunity for us around the distribution.
For our partners because.
Do you imagine your brand New SaaS company.
Youre looking for your first hundred customers 99 of them are going to be using slack. So if you can get in front of them are being healthy than trying to them. That's a big win yes, just just to reiterate on the share Charles point I mean, you. The the network effects. So we believe are possible. They take time to compound, but do we think thats definitely a priority for us to continue investing and we think the payoff for that will be significant and we're obviously would.
We're going to invest in that near term for what we think reversing a bit long term payout.
Perfect. Thanks, Garen great quarter.
Thank you.
Your next question comes from the line of Walter Pritchard with Citi. Please go ahead, Sir your line is open.
Hi, this is one of them.
Hi, Alan on the below last year, you had an incredible radical in Q4.
Pretty close down pretty hard and Brian who'd like to screw might be kind of monitoring the recorded a little bit more closely could you help us understand how you're thinking about seasonality here I mean, you've given the guidance, but maybe a people into Q1 and how that may either same are different from what happened last year and then how to follow up.
Walter we had an exceptional quarter in Q4 last year and I think this year, we are setting up to a stronger pipeline and we think there's going to be even more pronounced seasonality.
All right kind of the Crs wall and I think what you're seeing on the guide is just really a prudent approach to how we want to set expectations relative to the visibility that we think you kind of lose with the fact that you've got more enterprise heavy.
Distribution of billings and so we're trying to balance out with the fact that this enterprise momentum while great. It does lead to little bit less.
Visible in terms of timing so I think the momentum as guide your sales capacity is up pipeline is up so we're going to the quarter with lot of confidence.
We're balancing that out just given the more enterprise driven nature of the results.
Got it and then I guess a question on the economics of the enterprise customers I think last quarter, you talked about this and you're talking about again this quarter. How are you thinking about sort of the customer acquisition costs. Some of these more recent enterprise customer adds and it feels like you might be spending a little bit more to to get there is application and how do you get comfortable with that as you go forward with your can.
I'll mixes of trying to focus more on the larger customers.
You know, it's important balance out with we've had a tremendously efficient machine with the self serve feeding enterprise business and we think that's going to continue to be the strength of slack.
As we grow and as we scale, we want to continue to even more aggressive we see so much opportunity out there and we're just getting started in western Europe in earnest. We just opened our office in Paris and in Munich Office in Tokyo, It's just about little over your old. So we still see a tremendous amount of opportunity internationally in developed markets and even in the U.S. itself. We just opened Chicago, we don't.
We just opened up.
Larger presence in.
Other parts of the U.S. as well so were we still see a lot of opportunity here and we want to make sure that we are accelerating our approach to acquire more of those customers. We still see a very efficient dynamic there in terms of our ability to to do that.
Again, if you would like to ask a question press star one on your telephone.
Your next question comes from the line of Rohit Kulkarni with MKM Partners. Please go ahead. Your line is open.
Okay. Thank you and congrats on great quarter.
No we have to wait another three months for the next year's guidance, but as you have kind of ramping offered able to do you probably much faster than what.
Speed as modeling and wondering whether you wanted to comment on why or why not.
It would you wouldn't have several quarters of free cash flow positive next fiscal year, and then I know everybody is talking about shed channels I was at the spec confidence and the what.
Very good.
I don't and very cool feature and then can you talk about how large enterprises, though to using that and to what extent adoption and stickiness is.
Being a good affected by the looks a little bit of.
Sure It will take us in reverse I'll do I'll handle the work for the other question.
We're seeing it for everything and I think Theres, a real interesting spectrum.
And the one and if you have a supply chain to manage you need a real official system of record and you'd be able to run reports against a database and have all that stuff kind of officially log most companies are many companies have this whole host to other workflows, which.
Our more by convention so they're not captured in any database you can't run reports on them, but it's how contracts get approved how deals and discounts get approved by the sales desk.
It could be like trivialize booking a conference room, where we're putting a security incident, where there is an intruder on the campus. We actually use I worked for gold or extensively in our own security operations Center, So theres a whole host of opportunity there and I think.
We're seeing customers are docket for things that we never really imagine what we need to do next is give it more surface area kind of in fact decline in fact that our software to make it more visible to people. So when there are.
Channels that are set up for specific kind of workflows. Those workflows are made more visible and we also need to get.
Creators those workflows more tools for kind of branch in logic and events that can be triggered.
But the lapping I would say is there's a real important tie into the platform more generally because you should be able to invoke those workflows programmatically so from outside tools or from your own internal software. That's not part of slack and then have the result of those workforce also post that so thats something that we're really focused on and I think this is.
I'm glad you it's back to get Great and I think it's great that you noticed that it's a little bit more obscure. So I think it can take the market a little on catch onto that and it take customers would allow but where we've seen them adopted weve been I'm really excited and making the rehab.
And wrote on on the profitability question, we're focused on acquiring more customers thats actually kind of ties nicely to Walter's question previously I mean, as we think about the growth base. The first priority is investing in growth and you're seeing that both on the R&D front as well as the go to market side of things and the reason why we specifically highlight cash flow breakeven as really the target is that as.
As we see more opportunities to invest we believe we're still early in this category in the opportunity is so large that really the most printing for us to do is to continue to go after acquiring more customers growing them out and building on more of the capabilities that you're hearing through talk about whether its work will builder and share channels and other off.
As of innovation that we continue to work on so I think thats really the balance.
Youre going to hear from us that we want to keep we see so many opportunities to continue investing in growth and that through the priority, but we're balancing that out quite getting to.
Degree of leverage and efficiency that cash flow breakeven.
Would indicate.
Okay. Thanks, Chris.
Your next question comes from the line of Rishi Jaluria with D.A. Davidson. Please go ahead. Your line is open.
Hi, guys. This is.
Thanks for taking the questions today.
I know there a number of VC backed companies that are slowly applications.
Sure.
Just wondering where you see the number of companies like this trending over time.
Or anything.
Encouraged.
Yes.
Yes, so I mean, we're doing okay, maybe two cubic path. One is just the development platform at our developer the developer relations efforts broadly that team is on the road all over the past all time, so look at across the last but also in Europe , and Asia, helping to educate developers.
Also.
We're still early in this process, so still taking a lot of input from them on what kind of features and functionality they need to be able to deliver better experiences to the end users.
We also have flock fund, which has been tremendously successful I there might be an update to this number but the last one I heard was nine slack first companies that we invested in being acquired by someone else. So there's a lot of interest out there in those kinds of efforts and there's also a kind of its real interesting.
Experimental intersection.
Between.
I really want to collect platform enhancers on the outside roping that mix systems integration easier and the flat platform. So standard lab.
Couple of SPD law I'd.
Just released a new integration and it makes it easier for people to get new applications up and running so there's really a continuum between at the one hand internal developers of which there are 600000 registered voters, sorry, 700000 I'm sorry.
Many of those inside of the customer companies doing their own systems integration. The third party products like the ones. You mentioned that are like sold directly and we want to obviously be able to support those because that's it's good for them. The customers are buying it's obviously good for the customers and of course is good for us and then.
No systemic tool to help develop on both sides of that help people deliver better through quite well and help internal developers develop better integration.
Okay great.
Okay.
Teams.
Changes in buying behavior longer sales cycles.
Yes.
So when it.
It definitely comes up it doesn't always come up I think that customers tend to understand that we have the superior product and almost all of them say that.
The reality is.
The last three years, we launched enterprise grid, we have been in competition team has been out but there is just such an enormous market and I think it's helpful to think of those in terms of concentric circles. You know like all the companies are world, we integrate all the big company. They really don't use Microsoft we do great other pickup because we'll use Microsoft we still do great big companies are willing to use up.
Specifically, we still do great because almost all of our enterprise wins are earned that population.
I don't want to could you give me a question that it's not an inconvenience because it definitely does forced the conversation and what we see is yes. There is a population of thousands or 5000 people happily isn't clock inside of the company and people paying.
Got it Euro dollar budgeting approach. This is the new item I don't understand it I'm not sure what I said, we're talking about we at least have to evaluate teams because I am told by my my wrapper My channel partner whoever that barrel equivalent products and we need to force that evaluation that evaluation.
Like I said earlier be really quick, but more often quite long and it takes time for people to say Oh I get it just doesn't work.
And to expand their stock usage, so it's a little bit of book.
I would just maybe conclude with against 70% of our top 50 customers use officers 65. So there's a lot that we can educate the marketplace on particular with customers about the differences here and then those I understand that difference and appreciated by slack right. There is really no option there because we're the only laeken scale and we don't have legacy architecture kind of holding us.
Back so.
We're very confident in our ability to compete and we think there's a huge opportunity in front of us and we're focused on driving value for customers.
Great. Thanks, guys.
Thank you very much thank you.
There are no further questions at this time last.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.