Slack Technologies, Inc. (NYSE:WORK) CEO Stewart Butterfield: “Network Effect and Compounding Tailwinds”




Slack Technologies, Inc. (NYSE:WORK) Q2 2021 Earnings Call Highlights

Stewart Butterfield, CEO

Stewart Butterfield, CEO

“…Let me start with what I’m most excited about and that’s accelerating growth in new paid customers. This is the fundamental driver of the entire business, from compounding expansion on the self-serve side to the most valuable source of enterprise pipeline.

Net new paid customer adds grew at a faster rate in June and July compared to April and May. That trend continued in August, even after the typical vacation-related slowdown for the month, indicating that paid customer additions are potentially finding a new baseline rate.

We attribute part of the uptick to the “work from home” driven increase in the importance of the category, but we believe an even bigger portion of the impact comes from incremental product drivers. Those are first, continued improvements to the self-serve experience for new team creators and joiners, leading to more successful teams; second, improvements to paid conversion driven primarily by new trial offers; and third, the emergence of inter-company collaboration as a new path into the product via Slack Connect.

The core product experience improves every quarter, with a particular emphasis on simplifying and removing friction from the process of creating or joining a new team. Our focus in this area has delivered results. Small changes create minor compounding tailwinds. We continue to invest here and expect Slack to get better and more obvious for new teams each quarter, driving increased yield from our self-service funnel.

It’s worth noting that the full impact of this growth will show up over time. Historically, it has taken new cohorts of paid teams several years to hit their peak revenue contribution. We expect the strength you saw in Q2 to materialize in a more pronounced way at the end of this year and into the next.

Moving on, a quick update on Slack Connect. I mentioned it earlier, as a driver of new paid customer acquisition, but we also believe it serves as a key product differentiator and an important factor in retention. Connect provides a very rare combination in Enterprise software; A giant leap forward in both end user experience and security and compliance. Whereas so often customers are asked to trade one off for the other, we can provide both.

In June, after an extensive open [data] period, we officially launched Slack Connect and released “multi-org shared channels,” which allows up to 20 organizations to share a single channel. This enabled a large number of new use cases and uptick was rapid. Marketing support and ongoing product improvements have added even more fuel to the fire.

We measure network adoption by the number of Connected Endpoints in a graph and as the number of endpoints has increased, growth has accelerated, from 140% year-over-year growth in Q4 to 160% in Q1, and to over 200% in Q2.

Many of these endpoints are on teams that had not previously upgraded to a paid plan or even teams that are brand new to Slack. To encourage adoption and virality, in late March we introduced 90-day trials for teams that are invited by a paid customer, making the connection experience seamless. Those trials started to expire in late June and in just six weeks contributed over a thousand new paid customers out of the 8,000 total paid customers added in the quarter.

Trial starts are increasing as the network grows, so we expect Slack Connect’s contribution to paid customer growth to increase substantially in the second half. We further expect that trend to continue, especially as we drive increased utilization inside enterprises with the launch of compliance and security features, such as author-aware encryption key management in shared channels.

This product-driven growth is very encouraging, providing us with a scalable way to sustain customer growth. Our pace of execution on the product side is accelerating; the new user experience is going to improve further and in the second half we’ll announce a number of new features for Slack Connect. Stay tuned for more updates at Slack Frontiers, our user conference, on October 7 and 8.

Our continuing product leadership with features like Connect, our extensible platform and workflow integrations, and our significant architectural and scalability advantages, are all propelling growth in the enterprise segment. We added 17 new million dollar customers in the first half, ending Q2 with 87, up 78% year-on-year.

New and expansion deals this quarter include Sony Network Communications, Shopify, IRIS Ohiyama, Kindai University, Peloton, LPL Financial, NTT Data Corporation and Al-nye-lum Pharmaceuticals.

Across industries, our value proposition is resonating with market leaders and companies at the forefront of digital transformation. For example, four of the six largest North American telecommunication providers are now $1 million customers on Slack. This echoes the pattern we see across many other industries where the market leader chooses Slack.

We are also achieving significant depth of adoption within verticals such as financial services. For example, HSBC doubled its investment. HSBC is one of the largest banking and financial services institutions in the world, serving millions of customers. The shift to remote work has accelerated HSBC’s Slack adoption, providing them with a secure platform to drive internal alignment and deliver innovative solutions for their customers.

Northwestern Mutual ranks Number 111 on the Fortune 500 and offers life insurance, disability insurance, long-term care insurance, and financial advising services across the United States. After an extensive evaluation of Slack against competing products, Northwestern Mutual chose Slack as its preferred collaboration tool. With Slack as an enterprise-wide tool, Northwestern Mutual plans to streamline their processes for innovation and meeting clients’ financial needs.

Leading life, accident and health insurance throughout the Americas, Pan-American Life Insurance Group chose Slack and accelerated its adoption when employees were transitioned to remote work. Slack was able to meet Pan American’s high standards of security and compliance, streamline communications with vendors and partners and maximize their technology investments. Pan American found Slack to be the best tool to bring its 2,000 plus employees together. Also of note this quarter, the successful completion of the largest initial deployment of Slack ever to over 450,000 users.

We continue to deliver on our company priorities outlined at the beginning of the year. Accelerate paid customer growth, grow in network and win in the enterprise. I’m proud of our ability to execute, especially against the backdrop of a complex set of changes in the environment.

As I mentioned earlier, in Q2 we felt some macro-related headwinds in the installed base. We price on a per-seat basis and when our customers downsize, freeze hiring or hire more slowly, net dollar retention is negatively impacted. That impact is direct and because of our fair billing policies and the substantial number of smaller customers on monthly plans, it shows up much more quickly than it would for others in our industry.

On the Enterprise side, there is also more budget scrutiny, especially for new categories with longer adoption curves. Even when leaders understand the deep impact that Slack can have for them, the urgency of the moment favors short term solutions that solve immediate problems. CIOs have a lot on their plates right now.

The pandemic has obviously had both positive and negative effects on our business. We believe the positive changes will have greater impact and will persist as part of this permanent structural shift in the way we work. On the other hand the negative effects will dissipate as we emerge from the pandemic and related economic uncertainty.

In the meantime, we have rapidly adapted our go-to-market tactics to the current environment, leaning into our product leadership as well as ROI-based, use-case specific selling and marketing oriented around distributed/remote work. We are also investing in CIO-outreach and using Slack Connect as a lever to drive broader deployment discussions. As IT departments begin their return to longer term strategic priorities, we see these messages resonating.

These sales efforts are complemented with new trial programs and new distribution partnerships, including the recently announced deepening of our partnership with Atlassian. Historically, where we focus we see results and this is certainly an area of focus.

To wrap up, I want to reiterate that the core driver of long-term growth, paid customer additions, accelerated meaningfully in the first half. We believe there are drivers in place that will sustain this momentum, including our rapidly growing network for intercompany collaboration, Slack Connect, which is accelerating as it scales.”