Q2 2020 Earnings Call
All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if youd like to withdraw your question simply press the pound key.
Thank you Mr. Jesse Hulsing you may begin your conference.
Thank you good afternoon, and thank you for joining us on todays conference call to discuss slack second quarter 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 todays call, we may make forward looking statements, including but not limited to statements regarding our guidance on 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 Companys SEC 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 in 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 website at Investor that slack HQ Dot com.
I would now like to turn the conference call over to Slacks, co founder and Chief Executive Officer, Stuart Butterfield Stuart.
Thanks Jesse.
We had a quarter record results with revenue growing 50% year on year.
We exceeded 100000 paid customers in the quarter and now have 720 customers with more than $100000 of annual recurring revenue I figure, which was up 75% since last year.
I'll talk more about our exceptional growth in the enterprise segment in a moment.
Last quarter of course, we also completed our listing process I want to acknowledge the strength of execution by our accounting legal finance business technology and communications Department, along with hundreds of others across the company and of course, our partners and advisers.
The transition to being a public company is just one hallmark of what we see is the company entering a new phase. The next five years will be very different than the first five years.
We came out of the gate with near perfect product market fit for a very earliest customers they tended to be smaller and more technical teams.
But over the years as we launched the enterprise grid product scaled the teams of over 100000 users added key features for security administrative control and compliance we began to see real product market fit for the large enterprise use case.
Now that fit is clear.
This quarter saw when after we had and the largest companies in the world I want to start off by highlighting a few of those.
A fortune 100 financial services firm, which has been a slot customer for years with continual expansion throughout the company added thousands more active users and is now going wall to wall for their more than 50000 employees across functional walls and couldn't marketing HR legal finance and sales.
The Saar commitment to their needs and we partnered together to deliver suffer security features which are critical to their security team.
At the same time, our success team has deep in the trenches partnering and change management and training and sharing best practices.
What we were able to achieve together in this case was deep engagement from end users productivity wins across all parts of the company and a healthy foundation for increasing the sophistication of their usage and thereby driving more value from their investment as luck on the system that met their regulatory and compliance requirements.
Of course like most of our large enterprise customers. They want an office you 65.
They still cieslok, because only slack was capable of meeting their needs.
Increasingly in regulated industries, we are seeing significant traction because slack when security and compliance with scalability and open platform and a great user experience.
In addition to exciting wins in health care following our ability to support HIPPA compliance a large Midwestern insurance company also expanded to thousands of years this quarter.
Slack as a key plank in their transformation effort and plays an essential role as it does elsewhere, so lightweight fabric for systems integration.
The leverage more than 500 integrations and could you paid your duty Dynatronics jira in an extensive set of internally developed integrations to drive more return overall investment in software.
This is another office, we 65 customer and they trust lock it because only slacks open platform integrates with the full range of internally and externally developed tools they use.
With more than 800 apps unwrapped directory, ranging from partners like Atlassians, Salesforce Sep and zoomed to slack for services like lot of school ruined troops are open platform continues to play an important role in enterprise adoption.
We also see customers, creating their own apps integrating slack in to their internal systems and workflows in a typical week more than 500000 of these custom integrations are actively used.
Slacks value extends far beyond simple messaging and enterprises increasingly see that.
In one of the world's largest media conglomerates, we expanded further this quarter to support over 45000 active users across nearly every department in function in the company.
An office to 65 user they've consolidated usage across a dozen or so business units each our enterprise grade product with Centralizes administration provisioning and control or any number of Federated work spaces.
They chose us because only slot can give them the flexibility and scalability to create a structure that mirrors the waiter organization really works.
I want to emphasize the critical nature of true scalability for enterprise customers only slacks enterprise good product can support the scale and structure of the largest organizations in the world.
We have customers a 10 2040 60000 active users and grid all the way up to our biggest customers, which now kept well over 100000 active users.
And it's not just the U.S., where we're seeing success in the enterprise segment more and more we see the same thing in all major markets in Europe , one of the best known global banks expanded usage and upgraded to grid and one of the world's largest retailers home goods made the transition from email to channels. This past quarter signed a multiyear multimillion dollar deal.
In a survey its lucky's employees during their initial pilot, 83% reported it made them more productive and 95% led to less use of email.
Of course, the only way that slack increases productivity is that people use it in this case as many others the customer chose slack because their own employees told them that slack makes them more productive.
Meanwhile, Japan, where we are in the process of opening a second office in a soccer to compliment our fast growing Tokyo headquarters the business continues to outperform.
This quarter, we scored major wins in enterprise new million dollar deals with one of the major telecom providers in one of the largest systems integrators.
In every case, our sales team had the advantage of a lot of very happy end users. Our history of strong bottoms adoption is a vital factor in our success, we only when people choose clock and the only choose lock Haven provides real value to them. There is no other path, we can't rely and bundling or superior distribution or sunk costs have been tranche products in a long run the measure of our success will be the value we create for customers.
Accordingly, we focus relentlessly on the quality of the product experience and finding new opportunities to better serve our customers.
The good news is that the opportunities are endless.
Our mission is to make People's work enough simpler more pleasant and more productive and in each of these dimensions. We believe we can keep improving for decades to come.
That brings me to one or the other highlights in this quarter.
In July we released the rebuilt version of our desktop client that has dramatically improved performance. It starts faster. He is far less memory and is much less CPQ intensive. This new version was also engineered with a modular extensible approach that provides a foundation for us to rapidly and regularly improve the user experience.
Feedback has been phenomenal and it's just the beginning.
The user experience matters, because slack is where work happens.
For a paid users it's nine hours a day connected and 90 minutes of active usage every working day.
It's the first work happy check in the morning, and the last two check at night without that kind of engagement that aggregated attention don't actually get the benefit of the transformation from in boxes channels. The transformation from individual first approach to communication to an organization first approach.
And we believe this transformation is inevitable.
That brings me to the last point I wanted to make before handing it over to Alan later this month share channels will be out of beta and available to all slot customers.
This is the most important addition to slack since we first launched.
Sure channels allow customers to securely collaborate with external partners suppliers and their own customers and channels, while still maintaining their internal controls and compliance policies.
More than 20000 paid customers have already dr. channels during our beta program, a number that far exceeded our expectations at the program's launch.
Well, it's incredibly exciting is that as the size of the cohort has increased the intensity of usage has also increased.
That means that the average number of share channels and use my shirt channels using customers has increased as more customers joined the beta.
And the same thing is true with the size and density of the largest network cluster, resulting in a lower number of how much hops from any to randomly selected participants.
We are already seeing customers choose slack because of shared channels, we had a big win in this quarter with a major American Sports League beginning to use share channels to communicate with the franchises network made it but the league the teams and their partners.
We even saw a large media streaming service required is creative agency to adopt block. So they could you share channels to collaborate.
In some cases, because your channels were so important to them larger customers postponed or upgrade to enterprise grid until channels beta became available and grid. This June .
This is our first real network effect across customers.
We oriented businesses Sicad increasingly turned dynamics anywhere we can find them and that's definitely something we've seen in the platform ecosystem and the network inside of individual companies stock gets more valuable as more people are on it.
But now we expect to be able to increase the value for all of our existing customers as new customers start using slack.
This was obviously an exciting quarter.
Not just the listing but the building momentum in enterprise the major technical upgrades and most of all to progress this year channels, which we believe will unlock massive new opportunities for us in the years ahead.
With that I'll hand, it off to Alan.
Thank you Stuart and thanks again to everyone for joining us I will go through our second fiscal quarter results in detail before moving on to guidance for the third quarter and full year fiscal 2020.
Turning to Q2.
Results reflect our ongoing progress and what we view as a generational shift from E mail messaging and channels.
Total revenues in the second quarter were $145 million growing 58% year over year.
Revenue growth was above the high end of guidance. Despite an 8 million dollar one time revenue headwind from credits issued in the quarter related to service level disruption in the quarter.
Our uptime was 99.9% or three nights in the quarter, but this was below our commitment of 99.99% or four nights.
Service level disruption of this magnitude is unusual for us.
Compounding the financial impact of the downtime was an exceptionally generous credit pelt multiplier nor contract standing from when we were a very young company.
We've adjusted those terms to be more in line with industry standards, while still remaining very customer friendly.
We do not expect the revenue impact of this magnitude again.
Our Q2 calculated billings were $174.8 million growing 52% year over year trailing 12 month calculated billings were $625 million and grew 65% year over year.
Calculated billings were minimally impacted in the second quarter by the crest, we issued a headwind of just under $1 million.
Okay billings in the second half of fiscal year, 20 will be more significantly impacted due to the way we account for credits.
In terms of geographic break down 37% of our total revenue came from outside the U.S., which is up from 36% in Q2 of fiscal year 2019.
As of the end of Q2, we surpassed 100000 paid customers up 37% year over year.
We remain focused on expansion within existing customers and growing our large enterprise customer base and ended the quarter with 720 paid customers greater than $100000 annual recurring revenue, which is up 75% year over year.
This growth in large customers is further testament to our strong adoption within enterprise customers.
We expect large customer growth to exceed total paid customer growth for the foreseeable future as we invest more heavily in enterprise sales and customer success.
Our strong customer retention and ability to expand within existing customers have resulted in a consistently high net dollar retention rate, which was 136% at the end of our second quarter.
Moving forward I'll be discussing non-GAAP financial measures gross margin was 87% versus 88% a year ago.
Turning to Q2 operating expenses.
R&D expenses were $55 million or 30% of revenue.
We continue to invest heavily in 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 second half.
Sales and marketing expenses were $67 million or 46% of revenue.
Leverage in sales and marketing in the first half is largely due to a year over year decline in advertising and marketing program spend.
We expect sales and marketing expenses accelerate in the second half and exceed 50% of revenue.
Gionee expenses were $61 million or 42% of revenue.
Genie expenses were elevated this quarter due to the expensive direct listing related costs of $28 million.
We expect unit expenses as a percentage of revenue to decline moving forward.
Our operating loss in the quarter was $56 million, representing an operating margin of negative 30%.
Free cash flow was negative $8 million free cash flow includes $8 million of capital expenditures related to the build out of office space.
There are some puts and takes to free cash flow due to the direct listing free cash flow was negatively impacted by the $28 million of direct listing expenses as was $19 million of direct listing related employer cash taxes related to RSU vesting.
Free cash flow was positively impacted by $21 million of payroll taxes that were collected in Q2, but will be paid in Q3.
Stock based compensation expenses related employer payroll taxes were $307 million in the quarter.
Reflecting that the performance based vesting condition for outstanding Arse use was satisfied upon the completion of our direct listing.
Now ill turn to guidance for the third quarter, we expect revenue in a range of 154 million to $156 million representing growth of 47% at the midpoint.
We expect non-GAAP operating loss in the range of 49 million to $47 million, we expect sales and marketing as a percentage of revenue to increase in Q3 and exceed 50% of revenue.
We expect non-GAAP EPS in a range of negative nine cents to negative eight cents. We're modeling Q3 basic shares outstanding of approximately 544 million.
For the full year, we are raising our revenue guidance to a range of $603 million to $610 million representing growth of 51% at the midpoint.
We're also raising our full year calculated billings guidance to a range of 740 million to $760 million or 45% growth at the midpoint.
The credits we issued in Q2 related to service level disruption will provide a 5 million dollar headwind to full year calculated billings, we expect Q3 calculated billings to be up slightly versus Q2, we are raising our full year non-GAAP operating loss guidance to a range of 180 million to $176 million for the full year, we expect to record approximately $30 million of one time expenses related to our direct listing.
We expect full year stock based compensation expense and related employer payroll taxes of $470 million.
We're raising full year EPS in a range of negative 42 cents to negative 40 cents, we're modeling full year weighted average basic shares outstanding.
Approximately 399 million.
We expect full year free cash flow in a range of negative $110 million to negative $100 million.
In the third quarter, we expect $21 million of cash outflows related to the previously mentioned employee tax withholding. So please keep this in mind as you model.
For the full year total onetime cash expenses related to direct listing fees and cash taxes are expected to be about $48 million for fiscal year 2000.
We're also pleased with continued progress toward our growth phase goal of free cash flow positive, which remains a priority.
With that I'll open it up for questions.
At this time I would like to remind everyone in order to ask your questions and please press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the queue in a roster.
Your first question will come from the line of Heather Bellini of Goldman Sachs. Please go ahead. Your line is open.
Great. Thank you I had a question for.
The word I guess, maybe two questions first one Stuart your comments about shared channel coming out of beta how should we think about how quickly the network effects that you mentioned could kick in and I guess, you know could we actually see the growth in customers with over 100000 today or are you added 75. This quarter 70 last quarter, but could we start to see the year over year growth there start to accelerate would that flywheel and then I just had one follow up that was related to the downtime that you saw just wondering I don't think you guys mentioned that typically what caused the downtime was just wondering if you could share that with us. Thank you.
Sure I'll take those in order.
So for the first one.
The honest answer is we don't really know we have a lot of theories and we watch the dynamics of the existing data group really closely 20000 is a big number and the average number of share channels in use per share channels using customer has increased that whole time as easy and has increased.
The density of the network so the distance between energy arbitrary selected.
Points has decrease of network has gotten denser.
What we don't know yet is the degree to which that is going to be a driver of increased usage in those markets, where we already do well. So if you think about Stockholm, Berlin, Tokyo Bay area Seattle Austin.
Our hope is that we see some increasing return dynamics for increased go to market efforts.
The problem is we don't know well, especially if we get to 30% of the knowledge workers in a metro does it make it easier to get to 70%.
To get to 50% mix easy to get 90%, we'll see what we do know is that it is a driver pay conversions. So the way we look at that is.
Customers, who upgrade to a paid plan and then create share channel within the first weeks, it's a pretty good indicator that was one of the factors driving their decision and we're also starting to build up an update us nothing to report right now on the likelihood of someone who received an invited begins using share channels. As a result of invite and then goes on to invite someone else. We've seen very strong second and third order affection that yes, and others I'll just add when we look at our customer example, fastly, it's doing customer support through share channels now and I think when we brought it to grid or seamless pull effect from these large organizations in particular that are drawing and our partners and their vendors in a way that we didn't think was really possible, we're creating new use cases inside wasn't sure channel so a customer and the customer service provider or talking in a shared channels to customer support and more of a real time way. It really shows the power of what slacken do to accelerate that type of work.
Great. Thank you and the downtime.
Yes.
The what caused it to answer it depends how literal in specific we want to get the the actual answer might even be over my head in true technical terms.
But if you want to move a little bit further afield from that the more distant answer is.
Scaling so we continue to hit limits that we didnt realize were built into the system and.
At one point, we were eight people first getting started we thought that would be a great tool for a person software development into them about our first team with 100 users and we had to re imagine a whole bunch of stuff not just technically but from the user experience that we've got teams 1000 people and then 10000 and now we're well over 100000 with several customers.
And we're still figuring some of those things up having said that this is a big area of investment we've made some great hires on the infrastructure side, we've put a lot more tooling and taste in place a lot more automated testing and we definitely have a commitment because we feel it we understand we are among the heaviest like uses ourselves and so any disturbance in availability.
The cause of the problem. The last thing I want to note, though for that pretty service credits.
There's a bunch of things we do that are unusual besides what Alan mentioned, which is the payout ratio. One is customers don't have to request, we just proactively give it and almost no outages I don't know every detail for this quarter, but almost no outages affect all customers in fact, most of them effective of 1% or half a percent or 3% of customers at any given time.
And we give those service credits to every customer even if they were not specifically affected.
So those policies are outrageously customer centric, which is part of our background in our orientation and.
That is one of the reasons you see that effect is not necessarily proportionate to the outage because if we had the same necessarily as.
Salesforce or Microsoft or any of our peers in the industry, we wouldn't have paid or anything because we would have hit the threenine, they're committed to its our four nines and the rest of the policies that make a difference.
Great. Thank you so much.
Your next question will come from the line of Brent Bracelin from Keybanc. Please go ahead. Your line is open.
Thank you and I have one for Stuart in a hallmark for Alan if I could I guess Stuart in your opening remarks, you discussed a fortune 100 going wall to wall with Slackening also mentioned there was also through six customer.
I guess my question here is how often are you seeing these wall to wall opportunities as this.
Our broader trends, you're seeing and if so why now.
Well so it is a broader trend I think if you map the the customer size to the percentage of slack.
End users inside the customer you would see more or less a straight line in other words, it's much harder the larger that the company gets.
Not because of some deficiency in suffered some deficiency in the customer, but just because it's a lot of human deep do you think about.
Our customers that have 100000 users.
One of them I think is wall to wall or very close another one is far from wall to wall in both those cases.
You're talking about tens of millions of hours.
People's time and attention that shifting over the course of the year. There is a huge change management effort and there are also some time for people to realize the benefits in those functions those job functions, where it's not immediately obvious. So I'd like slack is an incredible tool for a group of accountants trying to close the quarter or to complete an audit because pretty those conversations are channels increases the visibility in all the other benefit that we would explain for anyone same thing for recruiters organizing University job fair.
Keep going with these examples but they're not as obvious that people have been using this.
Method of working for years on the technical side and as we start to adapt those workflows to build those integrations into.
You offer the user education that support change management to work with the customers I think you will see that.
Rate increase there's always going to be harder the bigger the customer we've got a lot of customers that are wall to wall with a thousand or 5000 or 10000 users and as they get bigger the number declined yeah. Brent just to put a finer point of this is Alan I mean, what is industry specific we're creating new category. So teaching people getting them use the slack converting from email it's going to take time, especially if you're an organization of tens of thousands of employees, if not well over 100000 employees and I think what Stuart was highlighting is there are really three reasons why customers choose slack and one is that's really around the product that we can offer and our products uniquely can provide first the scale, but these enterprises need so tens of thousands of seats can only be supported on slacks enterprise grid second is open platform that we talked about so we've got 1800 apps and 500000 weekly kind of custom integrations being useful connecting all the tools that you use and then lastly, the share channels some of which we've already talked about we are able to support all different communication inside and outside of a company and thats really unique to slots at.
Price grid offerings.
Got it helpful color, there and just as a follow up for you you Alan Im just trying to look at the normalized run rates here the business, if I add back that million nsls credits. It looks like revenue growth was closer to 67%. During Q2, it looks like calculate billings growth was closer to 60%. My question here is how should we think about the normalized run rate of the business versus this SLF credit adjustment was there a lingering impact or for should we.
Consider this outage.
Absolutely credit as kind of a one quarter drag on growth billings, and obviously that retention as well.
Yes on the revenue side, Brian you are right I think as more onetime nature and so I think just said we are not show 66% year over year growth for revenue adjusted for the credits, but for the full year, our the way that the accounting works, we will see a headwind in billings of about 5 million and that was reflected in our guidance. This quarter, so pretty minimal headwind, but it really got show in the second half and a little bit in Q1 of next year.
Got it thank you.
Your next question will come from the line of Avant Siri of William Blair. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions here I guess I wanted to touch first on the opportunity here.
Im to attract a paid customers given sort of the 500000 plus sort of three organizations on the platform I, just what kind of conversion activity even seen from these three customers, especially since you've been enhancing the value proposition the paid tiers and I guess, where do you prioritize as amongst the growth avenues available to new customers expansion up so where does the spin I have a quick follow up thank you.
Yes. So that's a great question the priority is definitely getting teams to be successful and Buck.
There are efforts that we can put in there to to see that a higher degree of those monetize without the big challenge. The Big Challenge is someone was aware of slack that a favorable enough impression that they develop some intend to go to the website. They follow through on the team creation a sense of invites those people, except we innovate. They began to you that you have that that's a very.
I didn't even go through all the steps that thats, a very broad funnel, it's only the last step which is the paid conversion.
Honestly less of a priority for us right now compared to getting those teams successful. So when we say the total number of organizations uses but it can be a little bit confused because there are no free users are free organizations is left that have 100000 200000 people and those are all in the pay category. There are a lot that are temporary teams that are created for a specific purpose like a home renovation project or planning a wedding theres lot of organizations using cycling that we don't think we will ever monetize such as organizing and.
Scheduling teams for Kids' Soccer League those are still great for us we love those because they expose lack to new people and that drives more customer growth down the line, but there's no expectation that we will monetize those I think that putting that effort to that would be foolish compared to looking at the enormous number of people who raise their hand, and say I want to try flock and let's see if I can make it work inside of that company and.
The.
The.
The medium ish job that we do supporting them right now I mean like it will be great. If there was at least a PDF its a top five tests, you're getting your team on slacking, we made that available.
I think there is a lot of upside down a lot of upside we can provide in helping those teams be successful and you'll see that reflected in paid customer growth much more than you would.
And to convert those other outliers, but on its Alan just to add to that I think of it as almost a dual one a one be priority one ace definitely adding more customers and we've got as you mentioned hundreds of thousands of opportunities on a regular basis that we have which we're really trying to help them understand what Soc is right. That's part of that being a new category. That's part of transitioning people from email, which they've known for decades. So thats a long term investment for us and were to keep focusing on that but once he is also growing our existing customers that you are seeing the net dollar retention rate at 136% or seen the enterprise traction. It's working so once we convert people over we can get them to wall to wall because of our investment in sales and marketing of our investment in education and all the different supporting tools to help them get there.
Got it got it got it and then I guess as you think about sort of this focus on sort of getting the paid customers the shifty, but the enterprise or the really healthy growth and 100, K., you've talked about adding direct sales and customer success teams I guess.
That is a party and where are we in the process I guess and how do you feel about that team attacking enterprise.
Today sort of where are we in sort of the ramp of that team.
So the time of productivity and sort of how you feel about where you are and where the investment might come from thank you.
Yes, no problem, so I will let Alan speak to the ramp up time and time to profitability. We're still very early in this process and in the same way that we don't.
We're not where we want to be in providing support for self serve customers to make it over the line success. We're still in the very early days are providing our sales teams with the tools that are going to be most effective in helping them get customers to understand Soc. So their operating environment and we want to be as critical for us to maintain this where theyre very happy end users who are telling the people responsible for the purchase decision Hey, we less luck it makes us more productive please.
Get out of the way and let us expand.
It's it's not necessarily that said, but when you start talking about thousands or tens of thousands of people and the complexity of those systems.
But.
We are doing great in the sense that we are opening in we just opened in Chicago, we're opening in Osaka, we're opening in Munich in Paris.
You will see that expansion to continue I think we have great mature teams in the Bay area in New York.
In the Hoover.
Denver, Toronto, but we're global organization your customers all around the world and so there is always more to do there.
And bond Italian.
Over the last three years, we've been investing very specifically in sales and customer success. Because we saw this transition big companies that really have been looking for this and really what you're seeing the last year or so is the pay off for that I mean, adding 70 75 customers a quarter is really a testament to the great work. Our sales organization is doing and theyre, helping these huge organizations adopt flat at the tens of thousands of users scale, if not get our largest customers over 100 100000 users and when I look at it from an investment perspective, the sales and marketing efficiency remains very healthy. So we've got a lot of room to continue to invest very aggressively into this our sales team.
From.
I think is still very young and we've got a lot of runway to continue to push on this as Stuart mentioned, our first Chicago Office. Just opened this year just to give you a sense of how early we are in this town. So we've got a long long way to go global opportunity ahead of us and we're going to continue invest very aggressively behind it.
You want to add just one last point here that your sales force.
Members are going to be listening to this and if you want to do a shout out because I think unlike most enterprise.
Companies. The addition of sales.
Over the last couple of years has been incredibly positive impact on the culture. We have a one of a kind sales organization has some phenomenal leaders, but we also have just 100.
Moving in there who have adopted this lackey dose and to your customers a great deal of respect and we're very very proud of that I just wanted to make sure that they heard that given that they're going to be listening.
Absolutely as we thanks for taking my questions just color is really helpful and yes kudos yourself. Thanks.
Your next question comes from the line of Richard Davis of Canaccord. Please go ahead. Your line is open.
Hi, Thanks, So one marketing question one tech question, so in terms of marketing.
Sales do you guys have enough data about your kind of superior engagement statistics to kind of use as a wedge.
Against the competition and sales pitches, but do you feel like you have enough you could always use more and then the second question is.
How do you see the evolution of embedding.
When users and weren't a hybrid or at least recommendation engines in the slack that helps surface relevant information to me as a slack user. Thanks.
So both great questions, you know I would say that to the first one is much more often the customer has better visibility into what's going on inside their companies and when there are evaluations of multiple services. They can see the level of engagement and they both quantitatively and qualitatively.
So we do have great data.
And we also have a bunch of great stories. So they kind of go hand in hand to talk about how a given work flow is.
It's transformed the.
At our customer conference.
I came out with last year the year before.
We had a large American software company up on stage talking about there.
Well during their busy season of adding three or 4000 customer support agents on top of their 10 or 11000 full time employees and how all of that was manages lap the quality reviews by supervisors, the escalation and ticket the tree origin, and that's the pigment business critical function and migrating to slack you just don't see that with any other too. There is no. Other tool that is where what happens there is no other tool that hey, we need to sort out the Q3 marketing budget, we're going to do that and <expletive> Hey, we're a bunch of network operations engineers and we have to diagnose. This production is and we're going to get on flat. So I think.
That contrast is pretty stark in their mind the customers there are.
We say customer within the company. We also mean that people, making a purchase decision mean the end users. There are people in that process. It can be pretty far removed from the everyday usage as luck and may feel like they don't see a big difference and they understand the distinguishing factors, but a deeper you get and the more experienced customers the more obvious and start that going to be yes, rich as Alan when we think about engagement. If you talk about the nine hours a day 90 minutes of active usage, what does that mean it means weve got to invest behind the best user experience and the thing about that is it really means that we've got to help people understand why is shifting all that time to Soc is useful right. So first we have to make it easier to do but then there is to your point about kind of change management with on the technology side of things is such a big human element to getting people, who have been trained and email for decades and getting them over into this new tool. So I think data is one element of it but really particularly on enterprise you see customer successes, such a vital part of helping people holding their hand from the old way of working too.
This new way of working in a real meaningful shift it's not yet another tool to add onto third collaborations suite. This is the one that takes over this is the one that we're pleased and adds more value than all the other before it so.
Yes, I just wanted to make sure that that was really capture there and actually I'm going to have a very quick point, we happened to be working out of one of our newer hey offices today, taking this call and.
Were on the other side of the wall as our search and discovery team, that's where you're seeing the biggest applications in AI today and a lot of that is training. The search results model based on the behaviors of people that's not brand new that's not groundbreaking we didnt invent any of the stuff.
But there are real tangible results that come from the application of those technologies to those core user experience comes.
There's there's a handful of those that are worth mentioning including our highlights project and figure out the surface area to deliver those has been more of a challenge in the actual creation of the results, but the one that most recently launched was people here because you think about.
Your inside of a large organization.
10000, 50000 100000 people.
Sometimes when you do a search you're looking for a specific document you either know or suspect again like someone showed me his presentation last week I want to just retrieve that one.
Sometimes you are looking for information about this topic and then looking for someone who can connect me to someone on looking for someone who is an expert on a topic that we are doing better and better.
And that turned out to be incredibly valuable to larger the organization.
Super Thank you so much.
Our next question will come from the line of Raimo Lenschow of Barclays. Please go ahead. Your line is open.
Hi, Thanks for taking my question two if I may.
First as you kind of sell into more into the enterprise.
And when you see our vendors like it probably will try to do that and ask it kind of started more of them to do and where are you from the department into more of the center you know a lot of them went into like then stumbling folks like compliance on that sort of stuff can you talk more than what you are seeing as you talk with the center and what did they move through in all report seems so we've got a bundling et cetera. What are you seeing in terms of the conversation that are going on there.
So we've had a pretty steady stream of improvements over the years and kind of we look at these in order of importance really really early on the process. If some of the ones that are either easy or reach a large audience.
Now I forget type one type two study yet.
So that is things I see assays are more recently earlier this year encryption key management, which has unlocked a huge amount of use cases, which would otherwise been locked off the ability for companies to maintain their HIPPA compliance while still uses lack that's got us into a lot of healthcare deals.
Overall I'm not even sure. This week I think we are now officially announcing international data residency, which is obviously an important consideration for customers in Europe . So I think we've been incredibly successful in picking up and figuring out the.
The improvement to customers really need obviously time is finite and there is we're going to use that those in sequence, but we've tended to choose the ones that are going to have the biggest impact for a large number of customers as early as possible.
Raimo overall.
We have been entered investing in the enterprise for years now and Thats not just on the product side on those two highlights. Most key features that's all the compliance that you expect along the way as well.
Yes, Okay perfect makes sense and then the other question I had is like this you think about direct field into ramping them up just give us an idea. How early you are on that life cycle can you just give us an idea like you know in terms of as you kind of give us concrete numbers, but just give us an idea like how many major cities you are in or something like that you can help us understand how early we are on the journey.
Well. This is Alan we're focused on a top eight the top 10 markets. So think of it as similar to kind of the G. Eight.
That's out there and we're still very early in those markets. So were mentioned first office in Munich first office in Paris, I mean from a Germany and France perspective. This year. So just to give you a sense of how early that is first office in Chicago in the U.S. So even within the GHG 10, we've still got a lot of runway to invest behind it.
Particularly outside of the Americas.
Okay makes sense okay.
Thank you.
Your next question will come from the line of Keith Weiss of Morgan Stanley . Please go ahead. Your line is open.
Hi, This is Josh bear on for Keith.
One for Stuart and one for Alan I guess, you focused on scale and absent integrations and share channels as far as differentiation I'm wondering if you could talk a little bit about the potential for low code and no code within the slack platform, where are you investing what can we expect.
On the product side and monetization.
I have literally been spending a number of hours. This week with the team figure the best way to get those.
No code workflow builders into the App and tied to channel.
I am this is something that is incredibly excited about and specifically the ability for systems outside the slack to initiate or trigger a workflow inside of slack.
And then at the end of that process.
As the process inflect has a call back you are out to something outside and where I think thats going to be especially exciting is knitting together bunch of services in this kind of lightweight fabric for systems integration. So if you imagine.
Someone pushes a button inside of workday to approve an offer going out that notification comes into slack.
And someone can press the button to generate the offer letter stored in box and sent out by a docusign.
Instead of building and squared integration, a customer ends up building and integrations or better using the existing integrations and slack to tie those things together. So if you have a big investment in.
A massive system of record and what you want is to change the approval process or purchase orders or or something like that.
Often it has been for customers.
Go get a statement of work and a couple of months later, the big ESI gives you that.
18 month 3 million dollar estimate for change it if we can make that those kinds of changes a lot more lightweight I think we'll see customers being a lot more value out of the investment they already have in those large systems of record doesn't mean, I'm really really excited about and we already see people, creating simple workloads. Lastly, we'll say is and this is more kind of a sociology work observation much greater continuum.
Work flow like behaviors are some things that are formally captured theres a database scheme.
Theres rules or business logic, and Auditability and then there is things like if you want to book the conference over the night for you have to talk to this person because that reserved for someone and.
We saw this in our own evolution as a company from its a tiny company, where every single job offer was manually approved and when we did that was selected hats and last one change the name and the salary paste into the channel and someone gives you the thumbs up.
Now we have much more structure and process around that but you see that continuing everywhere and the degree to which were able to get those.
No code, especially but no code local solutions into the hands of customers the better off we're going to be in the more valuable we are going to be able to deliver.
Yes, Josh its own just.
When we look at the platform. The philosophy is whatever tools to use we want those at your experience of those tools to be better and slack and so we've got a huge partner ecosystem, which is one part of the equation I think what you're highlighting is how do we make sure that all users can access the power of that open platform right. So it's not enough that we've got zoom and often box and all these different tools connected to slot I think what the loco No code were able to bring that power and the accessibility to to the rest of the users that are not technical north or not programmers and I think thats, a really exciting opportunity where everyone. Can then take advantage of the off the platform.
That's great and Alan can you remind us of the.
The timing and size of the contribution from last in hips have chat and stride coming into your model just as far as looking out for comps and seasonality and customer adds on revenue.
So that was a partnership that we kicked off a year ago in July it ran for about six months through the end of the year.
And the contribution there was in the low single digit thousand of teams over that entire period. So you had a little bit of that in July from a comp perspective, you're going to see more of that in the second half into more material way.
So when I think about kind of the customer adds were at the level that we think.
We would expect to see over the next couple of quarters here, if not a little bit incrementally higher from where we are.
Based on some of the costs.
Great. Thank you.
Next question will come from the line of Mark Moerdler of Bernstein Research. Please go ahead. Your line is open.
Thank you very much.
I have two questions if you don't mind.
First looking at the service disruption.
As I understand it was hit by close by hitting limits now you're rolling out share channels, which is going to increase data density and usage why shouldnt why won't that potentially continue we could see I understand it won't impact revenue the same way, but why wouldn't that potentially continue if you get the usage you're hoping for on the shared channel and then again a follow up right. After.
Yes.
The specifics of that of that question again, maybe a little bit over our head or our ability to.
To convey.
Bottom line is there are investments on an ongoing basis in monitoring the different sub systems puck is a much much more complex tool than people might imagine you mentioned like hey types and texting a box and press a button and it showed up in somebody else's computer, but if you imagine that our biggest customers.
It's not just the 10 I think maybe in some cases like hundreds and millions of messages that are going across every day every week. It's every other little change that has to be communicating people going online offline people, creating new channels people archiving or deleting messages people changing their status.
And the distribution of those it comes out to hundreds of thousands of events per second.
We have been successful in scaling to that.
Between 99.9 present in 99.99% and every quarter in most quarters, 99.99%.
So we're up for those challenges there are occasional hiccups and those affect everyone in the industry has effect.
Companies that are far larger and have dealt with far more scale than us. So I want to say is impossible, but I do want to say they were up for that challenge.
No that makes sense I appreciate and then as a follow up since slack bills based on you know to an extent based on D.A. use.
Is there any seasonality specifically in the business that we should think about other words the summer would be lower usage because more people are on vacation and therefore revenue will be lower but they come back in the fall is there any way to think about that and also maybe I missed it but can you give some color on the deal you trend.
So mark this is Alan on the seasonality I think you see some of that in the customer adds. So Q2 is typically a weaker quarter just for the reasons you highlighted and then you see some of those seasonal patterns in prior years, and we expect some of that to continue but notably the difference being some of the at lasting tailwind we had last year.
As far as Dia, you, we really set on a milestone basis. So.
We recently exceeded 10 million at beginning of this year and as we approach the promises we will share that back with.
With the analyst community.
Perfect I really appreciate it thank you.
Excellent.
Your next question will come from the line of will power of Baird. Please go ahead. Your line is open.
Great. Thanks, a couple of questions maybe the first one for Alan just to just to come back to guidance looking at.
Fiscal Q3 revenue implies I guess, a modest sequential uptick if you exclude the billing credits or others back in fiscal Q2, I guess, just trying to understand how much does conservatism versus any other factors seasonality et cetera, we should be thinking about.
So we'll I think on revenue from a cost overall from a guidance largely perspective, I'd say, we want to be realistic in terms of the visibility that we have going into the quarter and and then as we go through the quarter officer and deliver against those against those expectations, So probably more conservatism, but I consider that.
Being private pragmatic about how we set expectations with folks.
You just never know whats going to happen. If you look at this quarter as an example of that sometimes sometimes things happen a bit that we're not in so in the plan originally.
Okay, Yeah that makes sense and then I wanted to come back to share channels. It just seems like a really nice opportunity and already seeing really nice uses I'm just trying to think about the potential revenue lift I mean, it feels like at a minimum helps from a customer retention or maybe moves more customers up into the enterprise grade I mean is that the way to think about it or is there additional.
ARPU additional ARPU lift opportunity at some point because I know the way it's structured today, it's kind of a car to part of the core product. How do you think about that longer term in terms of.
Revenue lift.
So great question definitely retention and I think that that's a clear and obvious one.
I mentioned that we have seen because this is a paid only feature for now and we are open minded it has been driving some.
Paid adoption and Thats, obviously very encouraging as your ARPU I would say probably not I don't want to say never on that but what I do think is it lays the groundwork for.
Incremental ARPU opportunities down the road to not charging for share channel themselves, but establishing those secure connections because.
I think the important thing to understand unless you've actually used in this might not be clear, it's not like email or anyone can just anyone imessage their administrators on both sides opt in they have complete control they have the ability to allow or not allow different people into that share channel.
We are working through all of the different combinations and possibilities around digital loss prevention and other compliance features.
And the intersection of conflicting message retention policies and all that so that's a huge advantage. It also creates us really secure connection and its intended for use by.
Alan mentioned, the example of Fastly, there's a number of software customers that are delivering premium support our customers access to their customers over pure channels, but it's everything it's creative agencies as professional services firm outside counsel.
We can be.
Suppliers and.
Manufacturers and we've seen all of these different used cases, and if you imagine.
The infrastructure to support those relationships I think there are possible ARPU opportunities, where we think that it can have a more direct.
Impact on revenue in the shorter term is just that paid customer acquisition I think via the density of the network.
If your customers demand to be met in stock and we have seen that either the much larger company demanding that vendor you start to communicate.
Or customers.
Who are the same size or smaller.
Requesting net that based on a share channels to deliver support and success services.
That's very encouraging and.
I would love a world where it was one click simple set up for an offer from one company to share channel with another that even if the reset the recipient there wasn't already asked like user it was like click the link and unpack the whole thing get yourself set up in stock.
And started a free trial and eventually lead to an upgrade yes.
Well this is Alan just to add to that I think it's really important that this also can accelerate potential for wall to wall expansion. So one of the things that we hear is that.
People think Soc is only for technical users will share channels is one of those areas, where we're seeing a lot more non technical use cases, where whether its customer support or marketing or with creative agencies. There's a whole set of new use cases that are available in fact because of share channel. So we think it's not only a competitive advantage as a competitive moat because once people do their work through share channels, that's really hard to go back and do anything differently.
Yes, it seems like a good opportunity thanks.
Your next question comes from the line of appetite Kidron of openness Oppenheimer. Please go ahead. Your line is open.
Hi. Thank you. This is George I wanted for time.
Alan.
Just following up on your earlier comments on the outlook how much macro conservatism are you building into that and is that part of any of the discussions you are having with in our enterprise.
Hey, George So in terms of macro I think thats always a consideration and we want to get part bake that into how we think about the outlook overall and with customers in general there isn't too much discussion about this because we know that they are spending more on software and slack really providing more value to all of the software that they use that I think customers find a really compelling and they see that return in a more holistic way because they're expanding ultimately wall to wall because they see that value in the in the productivity lift that they're seeing so.
Macro right now is it's part of the conversation, but it's definitely not a deep focus.
Yeah, and just kind of building out on the asset comments earlier, what type of go to market leverage are you seeing from your strategic partners at this point, whether it's salesforce Oracle or the full suite of partners that you have.
So there's a really broad range there so some of those are.
Discount offers are bundling that are embedded in purchase receipt.
For people, who are doing kind of mass market self serve some of those are.
Looking at account mapping and going into customers presenting to collect in front and talking about our integration.
The whole spectrum I would say, it's very early days very experimental attitude towards this it's an empirical question, we'll see what works and when we see something working we will we will double down, but I would say it hasn't had.
It's not a big factor in growth looking backwards over the last couple of years as one of the things that we're looking forward to kind of shift from this early phase first five years first 1000 customers through the next five years. The next set of hundreds of thousands of customers.
I mean, I think can be a real driver because we want to be the one or 2% of the software budget at the multiplier and the value of the other 98 or 99%. So those integrations are very important to us.
And we want to win.
By helping others went whether the customer side or the partner side, because then the world wants us to win.
Thank you.
Your next question comes from the line of Rohit Kulkarni of MKM Partners. Please go ahead. Your line is open.
Great. Thank you.
Just on the direct listing can you comment on.
In your point of view was it the overwhelming success and.
You're talking about the cost of direct lifting looked at any of the benefits.
Well from a fundamental standpoint that you felt from the listing.
Which was pretty innovative and second I have just one follow up on advertising.
So Richard this is Alan the direct listening, we think was a success the way we measured it though wes around the amount of.
Or how healthy of a trading market we could create.
Through the listing and after there afterwards, and so sitting here are two and half months. After the lifting our float is at least two three times higher than the typical IPO, which is 10% of your shares outstanding so by removing the constraints on buyers and sellers I think we have a much healthier contributing.
Pattern in our market in our stock today.
Okay, great and in terms of advertising ramp.
Oh veteran homeownership would receive the direct benefits as an would we see.
Kind of any any level of.
Kind of benefits directly in the SMB customers or at what time do you expect the benefits to start showing up simply given the last three to four maybe six months or so you havent.
Done a lot of advertising and now now that you would be doing more at what point should would it start factoring in and one just clarification have you ever given any data points that on what proportion of current customers are using shared channels and where do we see the vitality or at what point do you see the wider to kick in and getting more.
Kind of organic customer growth as such.
Yes. So for the last question is actually it's pretty simple because it's it's 20000 net of a 100000% to 20%, but I want to be clear that those are customers that had to opt into the data does it.
I wasn't pretty we didn't make it simple for people. It wasn't this smooth through the process either to opt into the beta or to send or.
Receive and set up this year generally mutations so theres a lot of.
Upside there I think we'll be in a position to talk about the impact.
Once it goes to general availability next quarter or maybe the quarter after going back to the advertising question I think it's a really good.
Observation so to the extent that it has a short term immediate impact in other words someone saw Billboard and they thought Dang I should try that and they went to the website signed up it's going to be pretty small numbers and that is one of the goals is to drive awareness, but the dynamic that is interesting and slack.
Maybe not perfectly unique is.
Unlike a consumer decision.
I saw an ad for.
Direct to consumer underpants on Instagram and that was enough for me to go and buy them.
I'm going to make that decision and then we've got a rope a bunch of other people in and we collectively have to decide that slack is something we want to continue using so the indirect benefit to that awareness or thats kind of shaping the understanding that position in this last helping people get what the benefits are in the value I think where it shows up later in expansion or in the initial adoption conversation because if someone has heard of it before I think it makes a difference when they receive the invite you how likely they are to accepted.
When someone has the competence and comes at knowing this is a solution that other people have used it a social proof the customer stories I think that makes a difference so.
One thing we have never done on paid advertising at all whether you're talking about direct response going online more demand gen oriented stuff or out of home printing more brand focused is be in market on a sustained basis with a simple message that we want to get behind for a long period of time and.
I'm the CEO . So that's on me I mean it was.
It fits and starts and you've kind of done one thing another we'd like ramped it way out, but then way down we have a great new CMO, we have a lot of discipline that team is in good shape and over the next.
Six months are really probably the next 18 months, we expect to be that a plank that we can lean on to help drive growth through the business.
Okay, great. Thank you.
Your next question will come from the line of Theresa recall of Citi. Please go ahead. Your line is open.
Hey, Thank you very much. This is you got the critical informal Walter Pritchard I have a question probably best directed that Alan and I've been assessing all the billing growth patterns and.
I just I just wanted to.
I just needed a little bit of help when you put them commercializing them.
Q onto Q3 of last year.
You grew billings pretty consistently around 70% and then you had a very fabulous Q4 close to 100% year over year billings growth and then that growth has since dropped to around 47% in Q1 and it hasn't really improved our margin because you know this quarter. It was around 62% and when I'm looking at the top end of your billings guidance for the full year. It implies on an h. still you'll be drilling around 45% and so given that you had a very very good Q4 last year you know what does the danger that you maybe for Steve Dussek at 30% billings growth by the end by the end of the year ending the year and the same time, what are you trying to signal to us regarding gross billing beyond this fiscal year, given just the tapering of growth. Thank you.
Yes. Thanks for the question. So when we look at billings and particular guidance on billings, we lapped last year was an important transition period, where we saw a much more seasonality in the second half of the year relative to the first half and Thats because of our investments in enterprise and the traction that we're seeing there. So like a typical enterprise software company Q4 is the largest quarter in january's largest month by far and I think we're seeing not line up again for this year as well in terms of the pipeline from a guidance perspective, because of the lumpiness and the ability for deals to push out even a week or two that really could mean the difference between coming at your target or not and so I think our guidance philosophy has always been we are going to guide to what we have visibility into Q4 being as lumpy as it is as concentrated as it is means that we will continue to provide better visibility to close we are to go into Q4.
Thanks very much.
That's all the time, we have for questions today, I will now turn the call back over to the centers for closing remarks.
All right well I just want to thank everyone.
This was an exciting experience, but one thing we can accurately predict.
Forward looking statements is every quarter is going to have a heavier years and have four quarters I want to be in this position for a long time. So it's nice to get to know people and to understand the question.
This is the first one we really want to establish a pattern of trust and transparency. So looking forward over the next couple of quarters, you can expect to.
See a continued to report on a consistent set of numbers.
And to to build a more accurate story.
About what we're seeing in the market with the customer growth in adoption and where we see everything going in the future.
This concludes today's conference call you may now disconnect.