Q4 2020 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Flex technologies fourth quarter earnings call. At this time all participants are in listen only mode. After the speakers presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone if your core any further assistance. Please press star zero.
I would like to hand your conference over to your speaker today, Jesse Helsing head of Investor Relations. Thank you. Please go ahead.
Good afternoon, and thank you for joining us on todays conference call to discuss slacks fourth quarter and full year fiscal 2020 financial results on the call. We have store Butterfield co founder Chief Executive Officer, and Alan Chen 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 period.
Options and should not be 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 at SEC filings earnings press release and supply.
Middle 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 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 Web site 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.
Thanks, Jackie Thank you all for joining todays call.
I want to start by acknowledging that we're presenting misinformation environment a pronounced uncertainty.
We already see shifting customer behavior from an increased interest in remote work in house luck can be helpful that transformation to the potential for hesitation around purchase decisions.
At this time, we don't have a clear idea of the net impact of the macro environment on our business, which is another way of saying that there's more uncertainty than normal in are forecasting you'll see this reflected in our guidance.
Having said that we have no uncertainty we're in the right market with the right product at the right time, we're confident about the opportunities to drive further innovation and growth.
We had a strong close most of the quarter and the year, we remain very excited about a year ahead.
Alan will cover the details of our fiscal 2020 results and guidance your fiscal 21 pretty short revenue for the quarter was 182 million a 49% versus Q4 fiscal my team well revenue for the full year was 630 million up 57% year on year.
We added 5000, net new paid customers in the quarter, bringing the total to more than 110000.
Finally, we continue to show leverage non-GAAP operating margin improved 18 percentage points year over here.
We expect continued operating leverage in the or had.
No I want to focus on three important priorities for this year was our first continuing to expand our leadership in the enterprise segment second accelerating our growth in SMB and self serve by increasing the rate at which new teams are successful in Soc and third expanding our share channels feature set to drive new use cases communication across organizational boundaries.
Starting with our enterprise business, we saw exceptional growth at the high end ending the quarter with 70 customers from whom we have $1 million or more in annual spend.
That's an increase of 32% from last quarter and nearly 80% from a 39 million dollar plus customers. We had at the end of fiscal 19.
We also entered a year with 893 customer spending more than $100000 annually up from 575 at the end of fiscal 19.
Both million dollar and hundred thousand dollars plus traction speaks to our continued momentum in the enterprise segment if the markets.
We also continue to win not just against the status quo, but head to head against Microsoft teams.
For about five largest deals in the fourth quarter where against teams.
New and expansion deals for the quarter demonstrate the breadth of our global enterprise penetration across all industries.
They include nationwide KPMG HP, Rocky 10, Kyocera Sainsburys.
He joined Air Canada, TD, Ameritrade, United Technologies, Goober, Glaxosmithkline, Vodafone Sirius XM and you see NTT data UK and the U.S. Federal government.
Our largest customers are also some of the largest companies in the world.
Seven of our 10 largest customers are members of the Fortune 117 of our top 20 customers are members of either the global or Fortune 500.
They also tend to be Microsoft customers as noted last quarter. The majority of our million dollar customers also use office to 65 and they made the choice to invest in Soc anyway.
Behind these numbers are a lot of good stories, which are just starting to be understood and appreciated now.
We'll be telling more of them in a year ahead.
We continue to win in the largest companies of world. It because its organizations continue to move from E Mail and two channel based messaging platforms. Slack stands alone is the only offering that is truly enterprise grade.
We have significant advantages and scalability platform depth and integrations complaints features security and usability that our customers value when undertake a digital transformation initiatives.
The best evidence for this is our momentum across regulated industries, including in the federal government.
This quarter that momentum continue with the department of Veterans Affairs willing ups luck to where the 20000 employees as part of a broader transformation effort.
They join more than a dozen other agencies are departments within the federal government, who are growing there's lock usage.
Also this quarter what are the largest defense contractors in the United States signed a multiyear multimillion dollar agreement to expand their slack usage to more than 50000 knowledge workers.
They chose lockup for Microsoft teams impart because of our ability to scale our strengths in security and they'll be relied on the enterprise key management feature to remain compliant.
While we do our best to help customers understand these fundamental differences between slack in its competitors it doesn't always work.
That's why it's interesting to see the results of Indepth evaluations of slack and competitive products, particularly Microsoft teams, which began years ago begin to come to their conclusions customers overwhelming we tend to expand their slack usage once they understand the fundamental differences.
One of our many teams displacement from this quarter was a fortune 100 retailer who have you pause there slack expansion at 10000 users about a year and half ago went on to deploy makes our teams to around 30000 other employees in an attempt to evaluate the service.
The process was plagued the challenges from a near complete lack of engagement to architectural deficiencies, which caused the overwhelming administrative complexity.
The result was so frustrating both for end users and administrators that last quarter. They ended their Microsoft teams evaluation and signed an agreement to go wall to wall on flock.
The reasons where simple.
Black scales elegantly for both end users and administrators slack superior user experience and platform capabilities, resulting beyond gauge mint.
Thank you once she is the way people worked together to software people have to actually use the software to work together.
And when that happens people stick with it.
We see extremely low churn across our entire customer base.
In fiscal year 2020 customer retention on a percentage basis 400000 dollar plus customers was in the high nineties.
Looking at smaller customers tells a similar story the percentage rate for customer spending between 1000 $100000 here within the low to mid nineties.
Finally, a note on the enterprise ecosystem.
The fourth quarter, we closed a number of large deals alongside partners such as that laskin box opt out into.
We see more value to unlock there on the go to market side and also with tighter integration.
In the first half we plan to launch new integrations with voice and video offerings, including Amazon Chime Osisko Jabber, Microsoft teams Ringcentral Im phone.
Moving on our second strategic priority for this year is increasing the rate which team succeed in converting just luck, we expect us to have impact in our SMB segment, which is primarily addressed by our self service distribution strategy.
In fiscal 2008, we added 22000, net new paid customers most of whom our smbs.
That's a large number of customers weren't enterprise software company, but we believe there are millions of addressable customers and he has to be segment and we think there are opportunities for us to accelerate our growth on this side of the business.
We have a lot of raw material to work with every week about a million prospects visitor web site and tens of thousands of new teams are created.
Given this volume of interest our major focus is making more of the teams who gets started up slack successful more quickly.
A wide variety of business is useless and while surveys indicate two thirds of her tenure geezers are already non technical.
We still have work to do makes a lot more accessible for non early adopters.
The first half of this year, we planned to launch a dramatically improved user interface. This is the first fundamental overhauled the slacken user interface since we launched and we're very encouraged by the results of early testing.
We're also investing heavily in experience for users, reducing friction and helping them understand how slack works and what they'll get out of it.
Well continue to update you on the progress here, but given the size of the addressable market, we feel ongoing investment in this part of the business will generate high returns overtime.
Our third party for this years your channels, which allow for seamless communication across organizational boundaries using stock.
Despite a big break for most of our customers during the holidays. We ended the quarter with over 32000 paid customers using channels up from over 26000 last quarter.
The rate accretion is even more impressive.
The number of sure channels created per week in the last week of January was up about 50% from the last week of October.
And among our biggest customers we've seen the biggest success almost 90% of 100000 dollar plus customers are using shared channels to communicate outside the boundaries of their organizations.
We have an ambitious road map for share channels. This year. The most important release will be the ability for three or more organizations to share channel up to now sure channels have been limited to one to one showing.
These multi award share channels will massively expand the use cases for share channels unlocking more complex collaboration across and between the companies customers vendors and partners.
Well highlight more of the road map here in the quarters ahead.
We'll also update you on the business impact early data indicates a strong correlation between share channels adoption and customer retention and expansion is obviously exciting I want to caveat do we have more work to do to understand how the network is evolving and how will impact our business.
I will disclose more in the coming quarters about how the network model is evolving and how we think it could drive revenue growth over time.
Before handing over to Alan I want to conclude with some comments about the overall state of the company.
I feel a renewed optimism that comes from having risen to meet the challenges over the last few years.
It is not easy or simple to go from hundreds of employees to thousands or tens to hundreds of thousands of customers, but what each order of magnitude certain things begin getting easier.
Our investments in foundational technology and infrastructure improvements over the last few years are starting to pay off the same is true of our investments in leadership and organizational structure.
The work, we're doing today would have been impossible for us a year ago, we're down to position to accelerate the pace of innovation and extend our lead.
In the meantime, this new channel based messaging platform categories, taking shape.
Customers are starting to appreciate the differences the most demanding customers have realized this lack of the only option for enterprise scale and enterprise quality and others are following their lead.
Our strategy is clear.
We're transforming business communication.
And by building the best platform for customers to execute on their own transformation efforts, we are helping to find the future of work.
We are doing this all while becoming a stronger business that can grow both at the top and bottom line at the same time.
I'm looking forward to another year strong growth and innovation without handed over to Alan.
Thank you Stewart and thanks again to everyone for joining us I will go through our fourth fiscal quarter results in detail before moving onto guidance for the first quarter and full year fiscal 2021.
Total revenues in the fourth quarter were $182 million growing 49% year over year.
Our Q4 calculated billings were $255 million growing 47% year over year.
Fiscal 2020 calculated billings were $765 million and grew 48% year over year.
Billings in the second half of fiscal year 20 were negatively impacted by approximately $5 billion of credits issued in the second quarter.
For many performance obligations were $320 million up 18% quarter over quarter, and 77% year over year.
As mentioned on the last call 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 slack.
In terms of geographic breakdown, 37% of our total revenue came from outside the U.S., which is in line with Q4 last year, we continue to invest an international expansion, particularly within our direct sales organization.
Fiscal year 2020, we opened offices in Munich, Paris, Sydney and Osaka.
As of the end of Q4, we surpassed 110000 paid customers up 25% year over year.
As a reminder, in the second half of fiscal year 2019, net new paid customer growth benefited from the Atlassian acquisition, which contributed approximately 1800 customers in the second half of fiscal year 2019.
We remain focused on expansion within existing customers and growing our large enterprise customer base and ended the quarter with 893 paid customers with greater than $100000, an annual recurring revenue, which is up 55% year over year.
As Stuart mentioned, we ended the year with 70 customers with greater than $1 million annual recurring revenue. This is up from 39 a year ago.
Million dollar customers will continue to be a milestone disclosure moving forward.
Paid customers with greater than $100000 annual recurring revenue represented 47% of revenue in the fourth quarter up from 41% in a year ago quarter.
For the full year when her thousand dollar Pos customers represented 46% of revenue up from 40% in fiscal year 2019.
We expect revenue contribution from $100000 plus customers to continue to increase moving forward.
Our strong customer retention and ability to expand within existing customers have resulted in a consistently high net dollar retention rate, which was 132% at the end of our fourth quarter.
As Stuart mentioned, our customer attention for 100000 dollar plus customers is in the high Ninetys percent and has been fairly consistent over the last three years.
Our customer attention for customers that span between $1000 and $100000 is in the low to mid Ninetys percent and has also been consistent for the last three years.
These customers collectively represent over 95% of our annual recurring revenue.
This is a onetime disclosure, but one that we think is helpful. In understanding the unit economics of our business.
Moving forward I'll be discussing non-GAAP financial measures Q4 fiscal 2020 gross margin was 88% versus 87% a year ago.
R&D expenses were $58 million or 32% of revenue, we continue to invest into slacks user experience scalability platform and new features such as share channels and expect R&D to roughly grow in line with revenue in fiscal year at 21.
Sales and marketing expenses were $86 million or 47% of revenue. We could you just see year over year leverage in sales and marketing despite sales head count growth greater than 50% year over year.
Gina expenses were $39 million or 22% of revenue. We could you do expect gionee expenses as a percentage of revenue to decline moving forward.
Our operating loss in the quarter was $23 million, representing an operating margin of negative 13%.
Free cash flow was negative $1 billion free cash flow includes $11 million of capital expenditures related to the build out of office space.
Stock based compensation and related employer payroll taxes were $67 million in the quarter. As a reminder, due to the performance based vesting condition of our Rs use stock based compensation recognition has accelerated in the first year after going public.
Now I'll turn to guidance for the first quarter, we expect revenue in a range of $185 million to $188 million representing growth of 38% at the midpoint.
We expect non-GAAP operating loss in a range of negative $42 million to negative $38 million.
We expect non-GAAP EPS in a range of negative seven cents to negative six cents.
Your modeling Q1 basic shares outstanding of approximately 557 million for fiscal 21, we are initiating revenue guidance of $842 million to $862 million or 35% growth at the midpoint.
We are initiating billings guidance of $970 million to $1 billion in terms of billing seasonality. We currently expect the first half to represent about 40% a full your billings as we have discussed before we expect our business to become more back end weighted due to the growth of our enterprise business and particularly this year the timing of renewals are.
We expect about $10 million of billings that occurred in Q1 fiscal 2020 to be renewed in the latter three quarters of the year in fiscal 2021, we encourage investors to focus on trailing 12 month billings in our full year billings guidance as the best measures of underlying growth in our business.
Additionally, we are taking into consideration, our best guess or the potential impact from cobot 19.
We have pause all non central travel I'm encouraged employees work from home as have some by customers and prospects.
While the pipeline currently remains healthy we see risk due to increased customer uncertainty and travel disruption, particularly in the enterprise segment.
The aforementioned risk we believe it is crude into bacon somewhat slower growth than the first house, particularly Q1 versus the rest of the year our guidance reflects lists.
To provide additional color, we expect sequential billings growth from Q wants to Q2 to be faster than it wasn't fiscal 2020 on the positive front. We are seeing customers begin to work remotely and many are looking to slide to help manage this over the last week, we have observed a significant spike in created teams, which typically start out as free.
We are initiating non-GAAP operating loss guidance in a range of negative $130 million to negative $120 million.
We expect full your stock based compensation expense and related employer payroll taxes to be less than 32% of revenue in fiscal 21 and to be lower in the second half as a percentage of revenue than the first half we're initiating full year EPS guidance in a range of negative 21 cents to negative 19 cents.
We are modeling full year weighted average basic shares outstanding of approximately 566 million.
We expect full year free cash flow in a range of negative $20 million to breakeven.
For fiscal year 21, Capex, we expect approximately $40 million of capital expenditures related to office space Buildouts.
To close we drove over 1000 points of leverage in fiscal 2020, while making substantial investments in the public company process sales marketing International expansion and park development in fiscal year 21, we plan to continue to invest into what we view as a very large opportunity and the channel based messaging tougher market walk into.
To drive leverage in the business.
Finally, we started to create share channels with many funds and analysts for Investor Relations Communications and coordination.
If you aren't investor analyst I would like to create a share channel with the slack IR team. Please let us know and we will introduce you to the future of B to B communication.
With that I'll turn it over to the operator for questions.
As a reminder to ask a question you'll need to press star one anew telephone to withdraw your question press the pound or housekeeping. Please stand by Lilly compiled acuity roster.
Your first question comes from Alex Zukin with RBC capital markets. Your line is open.
Hey, guys. Thanks for taking my question. So maybe Stewart first what are you seeing from.
Customers as they accelerate their work from home adoption with respect to their usage patterns on slack from existing customers and then any kind of impact on conversion rates.
And then I guess, just a follow up in terms of.
If we look at the guidance in terms of the conservatism you applied.
The result of the code that situation is there any way to think about what's the filter you've used as that.
Slipping.
Lending sales cycles by how much further clarity there would be great.
Sure I'll, let Alan I'll speak to the guidance I think.
The headline is there's just a massive outpouring of interest on the customer site and it's really all over to play suddenly theres existing customers, who are accelerating some of their plans a lot of it.
Is changing.
The World look a little different 24 hours ago, and look different 24 hours for that before that so a lot of this is unfolding in real time.
There's a lot of energy inside the company and people are really activated.
There's a great opportunity to help we've been running a lot of Webinars. Our Christmas assessed teams are activated.
So because there's such a large number of customers because there just because the spending somebody industries is little bit hard to generalize, it's kind of an all of the above in terms of possible response.
And proactive outreach to all of our large enterprise customers.
And.
He is getting the huge number of inbound we are seeing at the top the funnel new team creation.
Like pretty dramatically and that's very strongly correlated with the country's headlines settlements.
Pretty good idea of what's causing that.
Takes a while difficult because we've always had a free product. We've always had limited trials. It takes a while the get up and running successful it takes a while after that before they begin paying so.
Very difficult to forecast I wouldn't we haven't been using that word conservatism inside it and get more prudent handed over to Alan Prudence Shim says tell you a little more.
Yes, Alex we're definitely seeing a surgeon interest overall, but that's primarily in the self serve area and as Stuart mentioned, we've always had a free plan. So you're definitely seeing a lot more usage, but in terms of where that's going to show up in the results I think that's got take some time to play out I think you called that right enterprise is definitely way, where I tried to be a bit more for data service.
Describing we have some pretty large deals a lot of new customers were also working with and the lack of travel and the challenges in coordination for these complex deals.
Pipeline is healthy and the people and we have to sales capacity, but it's really hard to predict the close rates when the deals will close in the quarter. So I think we're just trying to reflect a bit more uncertainty that we're seeing in the macro environment and just to give one last bit of color. There last week, so not not in Q4.
But we closed deal with one of the world because asset managers that got an email from the CTO. The day, he signed saying Hey look I signed just ask why this was the last one lucky on signing before the doors closed. So I mean, the good news. There is the clock is considered important enough of an investment that people are still making it and one that customer which is great.
But.
Its little hard to.
Have visibility into how the second part of that story is going to impact us going forward.
Okay.
That's helpful color. Thank you guys.
No problem.
Your next question comes from Brent Bracelin with Piper Sir Your line is open.
Thank you and appreciate the color there I guess one for stood a follow up for for Alan If I could Stuart.
Basic question, but I think it's an important question given the context of what's happening here you talked about this massive outpouring of interest.
In this remote work concept.
Intuitively I get video conferencing and the value of video conferencing for wrote workers, but as you think about the role for channel based messaging can you just remind us why is an important why is it resonating with remote workers.
Not quite as intuitive as as video conferencing and then one quick follow up for Alan If you could thanks.
Yes, you're right. That's it's a really it's a great question because I think there isn't.
Yes, great for remote work because it's great for it because it's great for communication and communications a foundation of everything that a team crestor together. So is it you know in person meetings are being replaced by video calls we see that happening for US I spent a lot more time on zoom in the last couple of days than they have in weeks prior to that.
Yes.
We did this is not a scientific estimate, but we feel like 50% of knowledge workers time has spent I really basic axa communication and coordination. So all of that quarterly business reviews. All of the road mapping sessions. The daily stand that means the status reports the slide decks that are.
For meetings that are there just updating people.
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If you can get any leverage on that huge investment in time. It has a disproportionate impact. So I think what we see ourselves is doing here is helping organizations transform how they operate ultimately achieving more alignment and from that hopefully more agility and that's going to be increasingly important in much a pretty dynamic environment.
I wouldn't say, though that you look at some of the leading companies that have been kind of all the distributed from the beginning of are all remote companies like envisioned Wordpress get lab, all happy plot customers.
Are there into the spectrum, though you look at I.B.M., and obviously that but that story got some attention 350000 people in hundreds of locations across the U.S. thousands of locations around the world.
It's not the same thing as everyone every each individual working from home, but there is a massive.
Amount of coordination that's required on it on a population that distributed so I think we see it.
Being important for Rohrlich ultimately because it's important for work.
Just to add to that Brent before the follow up.
Flock is enterprise grade in us as soon as mentioned a data supervised bill for large companies, but especially as people think about working at home now with Soc that can be enterprise grade at home and I think thats going to be particularly relevant for businesses in terms of how to communicate how the collaborate because that coordination element is still relevant whether you are physically separated or you have organizational and separation.
Regardless of the size of absorption of the organization itself.
Got it and then just quick follow up your Alan.
Look at kind of the guidance, you're clearly taking some conservatism around kind of.
Travel restrictions, it's about 50 60 million kind of below what we thought it might be.
You have two components, there that that I view at risk one the enterprise business, 47% of business that obviously it could be impacted and then international as well, it's 37%. The mix have you baked both assumptions that both of those two areas kind of could be potentially impacted on a new billings front is that the right way to think about the risks you've baked into the guide.
You know between those two Brian I would definitely lean more towards the enterprise I think that's something where are you being in the field having reps in the field. That's that's a big part of the of the movement. There I mean, obviously some of that as international but the larger part of our international is a coverage is based off of our self service model. So international remains an area of investment for us on the enterprise side of things.
But I think you are seeing little bit both but I would lean towards the end of price dynamics I was highlighting earlier.
Helpful color. Thank you Stacy.
Thank you thank you chip.
Your next question comes from Richard Davis with Canaccord. Your line is open.
Hey, thanks very much.
I mean look one other thing.
We're going to happen you have to try to sell more to existing customers just.
I think the channel stuff what fit there, but the other thing that we get some time, so we've talked to customers and they.
Really like you're probably the only kind of wish list that we sometimes get.
As it sometimes companies will say gosh. It out we get this giant channel sprawl and that kind of make some of the threads hard to monitor and so and I know and you guys know that does the business process issues not a product issue, but how can you help your clients not let you know this thing grow like kudzu or is there other technical thing.
You can add to the software either that on the docket, whether that search summary, or recommendation engine or something like that to kinda.
Just make it after that initial rushed.
Because that's really the only literally they only wish list thing that we hear on it. Thanks.
Thanks, Richard that it's it really isn't question so.
They're also kind of an all of the above answer because.
Most companies and this is not about slot customers, specifically, but most custer companies.
Under invest in.
Discipline around communication and trainings like he started at a big energy company. There is not like a day, one onboarding about how to use email effectively or how to be a great communicator.
That's how people are spending their time, so I think there is.
There's there's education issues and there's customer support programs you can run and we can help a change management and we didnt increasingly successful, but where we compete to get the status quo. It's people who have 20 years of kind of ingrained experience around you know this is a pretty different environment.
Having said that I don't mean to suggest its its user error I think theres a lot of work we can do on a product side to guide people to more effective behaviors.
I mentioned in his prepared remarks that we have a kind of grounds up overhaul of the you I have stopped that that's coming producing very dramatic difference.
Doing some pre testing with the.
Administrators inside of enterprise customers, who tend to have the highest volume really excited about that really happy with that.
And it the other end a little bit no for me personally where we're at extreme user of slack.
The company and I am individually and extreme user within that population and it is it's hard to it's hard to imagine hard to keep up because what it don't get.
Hi, administering email is.
Ask west essentially whatever's left over after I deleted archived and done the quick responses. So that's another thing that we're building.
We have had a feature called.
Highlights, which is essentially of all the messages you haven't read yet these ones appear to be the most important and we have an incredible signal to based on including who you're most likely to reach when you have unread messages from a bunch people channel overlaps the contents of the messages that degree of response that attached in terms of reactions or.
Bookmarks or reminders and.
Looking for increased surface area to deliver that and kind of you'll see all three of the threat I just mentioned there.
Better and easier tracking.
Grounds up you I and the kind of machine learning applications that we can towards that will really come together and.
Yes, big investment for US we want those customers to be thrilled we want them recommending slack, we want and want to be expanding inside at those enterprises and we're deeply committed to being successful there are Richard I mean, that's we're hearing the same feedback that's where our investment is going for this you're making a big bet in terms of the self service experience and I think as Stuart mentioned a lot of the pay off.
From investments we've made to date is going to allow us accelerate some of the functions. It features and functionality. It I think you're really speaking to.
And the oldest Adam a couple of quick points at the end the search has improved aspen actually from a year ago and big investment there isn't a in the quality.
And.
Ultimately because we're going to have a trade off between.
Literally in large organizations, two or three or even for orders of magnitude more access to information that's going on across the company.
And that the other side of the scale there is.
That's a lot I got it got to keep up so we'll build increasingly better tools to help people manage that and we had a great road map for this year in terms of product innovation more broadly, which I'm sure we'll be talking about but.
There is a fundamental shift too.
How someone interacts with the whole organization the degree of transparency and I think that's going to be really important as organizations tried to become more agile.
Excellent. Thank you.
Your next question comes from Michael turn with Wells Fargo. Your line is open.
Hey, there. Thanks, good afternoon I want to go back to just some of the self service enterprise comments. They think you're seeing good continuation of growth, you're an enterprise, but how do you strike the right balance between the two is that the investments you've made an enterprise grid and some of these conversions.
Allow you to kind of go back to self serve or is it a more sort of continuous back and forth between the two I just I just think it's I think it's hard to strike the right balance that I'd just be curious to hear more and how you think about.
The mix between the two.
Great question, and here's one way to look at it we're a bigger and more mature company than we were a year ago I mean in terms of the leaders and we bought in in terms of the population in terms of the experiencing we have in terms of the investments we've made in technology over the last year. So at the last.
Last call, we kind of ended up repeating this phrase a lot that where we invest we see results and frankly my attention has been on enterprise I would say for the last even two years.
And a lot of executives that whole set of disciplines that we had to build up.
There was no blueprint for us to copy in how a product like this in a brand new categories being sold into the enterprise, having done that and having a cheaper and some scale having.
Opened more and more offices around the world enabled more and more of the Salesforce my attention individually is definitely back on the self serve side because look dish.
Two other half million businesses in the U.S. five or more employees, even if we kind of arranged them from most to lease.
A metal bolted decent and stuck at our current rate, it's gonna take a decades just to get the top quartile of those businesses.
This is enormous market and we're just beginning to accelerate so I would love to see.
That acceleration in.
On the sell side that I know that we're capable of and a lot of that is just attention around what the initial user experience as.
Comprehension of what the product isn't what it's going to do for you and we're investing all over the place so.
Principally in the product, but also in our marketing efforts to help people understand.
Michael Obviously, we think the store measure a huge tam.
Category and that we are leading.
I would probably summarize it in terms of product market fit so with enterprise, we lacked product market fit early on we had to build the product we had a build to go to market motion to make that happen and as we saw successor over a multiyear period, you're going to see a multiyear kind of benefit for that as well on the self serve side I think we similar we recognize that on for a product market fit perspective, we're in.
No longer dealing with early adopters and so it's important for us to address that make that multiyear investment for the multiyear payoff in both on the product side.
On the go to market front.
Thanks.
One more in the good news seems like given this uncertainty around you've already invested in the platform's ability to scale with things like enterprise grid and in some of the added features but any observations to share given some of the uptick in usage or like we've seeing as.
Organizations become more geographically distributed and maybe your own organization is as well what what gives you confidence that the platform can flex up what what that potential uptick in demand.
Well so for our largest customers we end up doing a lot of stress testing that goes way beyond.
Where we're at today, that's increasingly important nets are selling into more conservative organizations large organizations those with more.
Rigorous compliance processes and we are exceeding those all over the place I think there was a really really big investment over time I would say the last three years.
Particularly over the last year to get to the point, we're scaling is largely automated and we handle now.
In great instances organizations with hundreds of thousands of users in millions of channel ascendiant tens of millions and messages a day on.
And despite that we add four nights at that time during Q4 for so definitely a leader in software.
Meeting our competitors.
Millions and millions of connected users, which we've had from the beginning you know like people talk about the ratio of D.A. I may you for us its millisecond active users to daily active users because the usage is so intense there is some increase there, but I think it's well within the error bars of what we're usually able to handled out and we're going we're going to be staying ahead there the.
Interesting one from a technical perspective has been the introduction of share channels, because it used to be relatively easy for us to kind of.
What's called Shard, the data stores against an individual company because there was no cross company communication.
Part of the Big engineered investment over the last year was to lay the groundwork for potentially a message it could be coming in from any of the other millions and millions of slack users around the world.
But that's I mean that I think is not going to be easily replicable by anyone and I think it's one of the reasons that we're so excited about share channels, especially in the enterprise context to get mentioned already 90% of our largest customers are using share channels and.
It's not going to be that long for us to get that close to 100.
And as that.
Kind of increasing returned I never network effect starts to start to kick in I think we'll see that proliferate through the network of vendors and suppliers customers and kind of the global supply chain. Michael I think it's really important to remember we are purpose built architecture. So we were built to handle this sort of challenges and use cases and so whether.
Our user is logging in from home or their logging from work. We are agnostic in terms of load and were in to bring the enterprise grade experience, whether you're at home or at work.
Appreciate the responses. Thanks.
Okay. Thank you.
Your next question comes from Willpower with Baird. Your line is open.
Great. Thank you, yes, so I wonder just to circle back to the comments on higher usage and I know a lot of those are in the free categories. That's something that you're kind of seen across geography is I know, Japan as an example.
Big an important market and obviously as you look at virus infection started it probably in that region.
Are you seeing the same kind of characteristics that you saw there in terms of usage adoption that move to Europe than the U.S.. So just to be interesting to kind of here what.
What you're seeing across geography, Sir.
Yes, there's definitely there is a strong correlation between the uptick and at that very top of the funnels for us. That's new team is getting created and then there's a process after that it inviting people and getting them to the point. It had been successful some correlation between the countries that you're seeing in the headlines and and that top of the funnel you said shall I mean, we're.
Right now in Italy in or where they put out way.
In in South Korea, and Japan still elevated but.
Got it has followed the the.
The spread I guess.
And definitely gives us an indication of what that where the interest is coming from I think there's maybe a little bit of open question that we have an opinion about which is how much of this is Chris the short term.
Interest spiked there's a lot going on people are elevated all over the place it how much of this kind of signals a longer term shift I think it's going to be a little bit about because.
Those are really radical shift and behavior that happened over a short period of time are going to have some lingering effects that I think organizations, who previously had been really resistant to distributed where prices are probably going to open up a little bit admit I would include our ourselves in that but probably more importantly, and going back several questions.
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Every organization should be investing in their ability to communicate and to stay coordinated to stay aligned and become more and more agile and never mind worked for help from home we never mind. The pandemic for second just even if this was purely and.
Financial shock at this purely.
Economics.
The disruptions to global supply chains, and that did uneven hits to different industries, I think we're going to be massively disruptive and organizations are going to have a harder time be maintaining that agility. So the investment in communication is going to even more important and we'll with this is different than let's say an AD campaign uptick you'd see where it's just very very top of funnel.
Only about kind of website traffic or create teams we are starting to see a lift NVS more affected regions of real usage and that's always been a hallmark of Soc that we drive real engagement people are sending messages, creating channels inviting people. So.
As we've mentioned earlier, we're investing both in the product and the kind of go into product market fit more broadly so that those people can also be successful and our team is really mobilized to stick to that whether it's through in person resources are online resources as well.
Okay. Thank you.
Your next question comes from thousands vary with William Blair. Your line is open.
Hey, guys actually Arvind Bhatia on for Yvonne Thanks for taking your questions Stuart you mentioned.
That you're seeing more wins against teams more head to head kind of.
Competitions just wanted to.
Ask you to maybe unpack that a little bit for us what's what are the main drivers or what kind of.
Where customers are evaluating broke team than black and they say no slack is the is my my product Detroit platform, but I want to invested for messaging and then kind of related to that maybe can you just maybe talk about them maturation of this market a little bit are you seeing more formal RFP in general are you seeing messaging on the CIO role.
Road map on CIO investment plans.
Yes, great Great question, and I think what we used the so.
No one ever said.
Oh Boy, we get a choice between slacken teams and teams are the superior product and therefore, we're going to go in that direction I think the interests and the kind of that the.
Incineration that has gotten customers is it's already on our machines, it's already distribution it's free.
We should we should feel that we should give a sense and see if.
If it's going to be adequate to support users and maybe im mistaken or not a belief that.
Tactical employees are.
No more valuable and this is not going to be as important.
Platform for in place outside of technical walls. So.
Over the last couple of years, you've seen these evaluations and if not RFP based is not feature shack list. It essentially we're super happy with Slack. We think it's great. We have tens of thousands more employees were going to evaluate the free alternative that's already installed all of it place and see if you can work.
And I think.
People ended up as I highlighted that all very very frustrated with that process. Both the kind of people responsible for administrative and servicing the.
And users themselves and it's just.
Fundamentally different user experience, but.
It's not so much that there's three areas, where I think we had an enormous advantage and we're aiming to widen the gap. The first is just scalability.
Well the camera on this before 5000 user limit, but probably more importantly, a limit of 200 channels. If you want to add a 201st you had a hard to lead the whole history of a shadow you just can't use it as a channel. These nashi platform you just can't use it in the same takes teams excuse me in the same way that people you stop there is no clinically integrated there is no support for hundreds of thousand.
Since if people there is no support for millions of channels or the massive archives second one is platform.
I don't know what we're at right now, but five or six acts the number of third party apps, but also just an order of magnitude more interest from developers more active developers mitrovich or framework and luxury hard surface area set of capabilities are making available to developers and then a third what is your channels I just I do not believe it's possible for anyone to replicate we've done.
There are other technical side in the next several years and we have we're very early in the roadmap as I mentioned multi or channels that are coming so with all of that it fun.
'cause it's not we already have an HR I ask her to have this ERP component and we already have a CRM and we're evaluating another one were switching from the status quo from from a set of behavior largely invisible to people because there were fish swimming in the email ocean.
And it can be harder for people to realize the differences. If you don't know that Youre do you want that category right like if you already had a CRM and I tell you might have future X Y and Z. You can say all that those I can see what else would be valuable and I would want to switch them for a lot of customers who are little bit more distant from this it's.
We're told that these are the same kind of products and one's free so we're going to check it out.
I completely forgotten what the second part of the question what type of ours on large let me just you know when you think about slack and what our customers tell us is not to measure ROI, they're thinking about in terms of digital transformation, they're not just thinking about in terms of shot or messaging. They really want to have a platform that enables the type of change in order.
Residual behavior and agility that is really required for modern work and so I think what's a core part as engagement. So we mentioned a fortune 100 customer there just saw a completely different engagement when they were comparing the tool side by side.
And I think when you see real engagement is come the crux for generate ROI on some degree you really just kind of get what you pay for right. So I think when customers wrote started I appreciate that might you know teams because more of a almost like a glorified sharpen browser, whereas sockets for digital transformation, Yes, just said I just made platform one of the bullet there but.
To be clear.
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Fuck as a lightweight fabric for systems integration that pulls together all these different systems is a real multiplier on the value of the installed software that that our customers have it does make.
End users lives easier.
And it does allow things like you know, if you're using slack and share and salesforce or the same time and do you have a product like troops are even if you're just relying on the inbuilt integrations.
Your salesforce is going to be much more up to date because of where the communications happening is where the update should be happening and the integration of those workflows is invaluable that's not something that people had before there is no direct comparison and so it's it's I mean, it takes people awhile to understand the capabilities of and how it can be valuable to them, but one last thing if I understood.
If you want to you software to change the way people work people have to actually is the software and I think that's where we have an enormous advantage and brand continue to invest in eight years experience to ensure that we get the engagement. Yes. This is the early category to your second point I mean is still very early category. We're not at this kind of RFP everything is very well defined stage, yet and so we're still investing a lot.
Of energy to educate the marketplace.
Thanks, that's very helpful. In Alan maybe just a quick quick follow up.
For you I know, we've talked about the impact of current of ours on your business in terms of the uncertainty and travel restrictions, but in any change to your investment plans on you mentioned international.
Investment a lot or you are you still monitoring that or is that still going on it as.
As planned in light of kind of the heightened colonel virus.
Impact here.
Yes, I think we're following the guidelines that have been set out there probably harder for me to speak specifically I would say generally look at our growth phase model. We are still in the growth phase, albeit with some pretty different macro conditions. Now. So we are over so prioritizing growth here, but we're also being very disciplined and thoughtful unintentional where our too.
Vast and I just want a highlight on the guide points us to getting to cash flow breakeven at the high end so.
Consistent with what we have said in the past, we're going to invest and grow up are also going to make real study progress to casual break even and even in the midst of this macro environment think us even more prone to do so.
Perfect. Thanks for taking my questions.
Your next question comes from Keith Weiss with Morgan Stanley. Your line is open.
Thanks. This is Josh bear on for key questions on the leverage that we're seeing in sales and marketing.
Part of it looking at the filings the advertising spend is down by 24 million this year versus last year.
We've talked a little bit previously about some of the timing of that AD spend so just just wondering like how the marketing and advertising spend.
Occurred in the quarter.
Pushed out and.
Mike would you expect that to pick up in Q1 kind of given the opportunity that we're seeing here.
Yes, Josh more broadly I think it just took a step back for the full year or first half we were out of market largely and we start to pick that backup in the end of Q3 into Q4. So the plan is to continue to to run add programs marketing programs. Both on the brand side of things as was overall enterprise support through the first half of the year.
Sure.
Then we're going to continue to invest in other ways throughout the remainder of the or as well. So I would just looking back at our growth phase targets. Some somewhere in the high Fortys percentage ranges is the right steady state for us in terms of sales and marketing investment.
Got it thank you.
Your next question comes from Heather Bellini with Goldman Sachs. Your line is open.
Great. Thank you.
And you might have been answered, but I guess I just wanted to hit on a couple of things back in the September timeframe, you guys talked about having some funnel conversion issues in the middle of the funnel just wondering if you could share with us kind of what what you've seen since then and what you've learned this kind of you've made some pivot.
And obviously it sounds like.
From a from your you sounded more front footed this quarter versus Microsoft and maybe you did you know three or four months ago. So I mean, maybe it's just me picking that up but I'm. Just wondering you know what do you think is driving that mine share back because I remember back three or four months ago, you guys retire.
And that helped Microsoft with got had gotten a lot better in terms of marketing.
No there product wasn't there, but it seemed like that was having an impact I'm just wondering kind of what's changed that's dry that's driven.
You know it driven kind of your your comments, where it seems like you know now that seems to be less of an issue that maybe it was for that short period of time. Thank you.
Thanks Heather.
Well it anything to the last question. It's just it's honestly, it's the passage of time I mean, you can only by so much consideration from in the mining customers by saying. These are the same thing when they're just not the same thing so customers will try it and they'll discover Oh I.
I can't his teams for whatever but for.
Now I get it and move on.
And there's a massive investment on their side in increased awareness they've got the awareness they've got the consideration and that just expires after after some point so.
Yes. This has been more or less since we've had an enterprise business, we've been competing with them I think.
At this point I hope we have demonstrated.
Because there are third earnings.
We're not slowing down and enterprise.
And our my attention personally is going back to accelerating seltzer side, so going back to the first part of your question.
I think what we learned a bunch of stuff.
And.
Some of that is it a little too detailed again to here, but if I could choose one thing it's really the degree of comprehension that people have coming into the process that determines how successful they are going to be because otherwise some of the comp than any other questions. He got to fill out a formula to put the name of your workspace, what's the workspace how do I use this.
That's that's really the challenge that we have to overcome because it's not a familiar category because it's not just like.
Replace with something that I already do.
So as we've come to discover that we've made changes.
On the landing pages, even changes and the team creation process. We just rolled out that the Q1 hundred percent of customers. We are in Tesoro, while a new feature called welcome play. So when you do finished creating.
A new team, we give you a lot more guidance on how to set up and the.
All kind of grounds up you I overhaul I already mentioned is going to have very very strong positive impact on the experience for new users because it's going to be a lot of clear a lot simpler and can be much more able to kind of.
Unveil features at the time when they make the most sense for people, which is going to help them become better and more successful slack users.
We've made investments in infrastructure and some larger projects subcon without we've gone through where were now able to innovate more rapidly on the self serve side of things. So I think you're seeing that they're going to play out over the course of the year.
And then just on the enterprise point I would just highlight the fact that our retention remains very strong and turn it really hasn't been a factor for us. So when you think about being considered a competitive dynamic there we've been able to maintain very high retention and very low churn in the mix. So.
More competitive environment.
Thank you very much.
Your next question comes from Raimo Lenschow with Barclays. Your line is open.
Hi, this is not pre conti talking for Raimo Lenschow.
Fixed prophetic man.
I just wanted to go back to the billing.
Guidance again, 29% at the midpoint and you ended the year.
Henry 32% expansion rate so I'm just wondering if.
You know basically how you got to that number it's your existing client base.
If extension rates are coming down or through just managing a little bit higher than.
And what you used to.
I think it's both of those dynamics as we've been saying over the past.
In the past.
The enterprise business has.
Has grown usually a much bigger base of revenue that you're growing off of there. So the natural trend on enterprise. That's all retention rate has has been coming down but in line with our expectations and we're in we're also really investing in new customers as well and so making sure that we're accelerating our investment in new but having said.
All that it's very hard to predict any of these things in a very uncertain macro environment I wouldn't try to over analyze expectations set given the current conditions for saying even in the markets today.
So we're trying to take a very prudent approach and balancing.
What we can control and the operation side of things with the with this macro volatility.
Great.
And on bookings so sequentially it looks like it came down.
But total bookings I'm wondering if there's anything to call out in terms of duration.
Quarter.
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No nothing in particular I think we just we continue to.
Invests and grow within our enterprise customer base. So I don't think theres anything specific to call right now.
Thank you.
This concludes our time for the question answer session I will turn the call back over to steward Butterfield for closing remarks.
Alright. Thank you so much and thank you everyone for the for the questions.
I think if I can reiterate a couple of the things that came up over the course of the call the.
Probably at the headlines and where we seem to the bulk of the questions around the impact of krona virus and.
I think it's a mixed little too soon to TALF, we're trying to take a prudent approach when it comes to guidance.
We are in a state of just like all hands on deck in response to what we're seeing from customers.
The enterprise wins I think.
However, discount you kind of like established where we're at and when you start to think about.
Defense contractors, and the DNA and the scale of the enterprise customers.
I feel really confident about that train our attention back to accelerating seltzer and you know I know that many of you are.
Existing customers. Some of you I know you organizations are evaluating plaque right now if there's any way we can be it helped called US I think you all have Jesse cell phone number so just feel free to tax and maritime Dare night and he will connect you to the right people in our customer success organization.
Thank you so much.
This concludes today's conference call you may now disconnect.
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