Slack Stock Takes a Post-Earnings Dive

slack

Slack’s Q2 earnings were less than impressive…

Shares of Slack Technologies dropped about 15% on Wednesday after the company’s Q2 earnings report failed to wow investors.

Despite having a solid quarter overall, weak guidance overshadowed the company’s performance. And some investors are losing confidence in the communications company.

Slack specializes in workplace communications and managed to beat Wall Street expectations for earnings and revenue. But its revenue forecast renewed concerns regarding the company’s potential to turn a profit. The lower-than-expected sales projections also indicate that the company is facing strong competition from companies like Microsoft.

This report is Slack’s first earnings release since going public on the New York Stock Exchange earlier this year.

Slack Q2 2020 Earnings Highlights

Here are the key points from Slack’s Q2 2020 earnings report:

  • Loss Per Share: 14 cents, compared to an expected loss of 18 cents per share
  • Revenue: $145 million, compared to an expected $140.7 million

“Revenue growth was 58% year-over-year, despite a one-time revenue headwind from credits issued in the quarter related to service level disruption,” Slack CFO Allen Shim said in the report. “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 $100,000 in annual recurring revenue, which is up 75% year-over-year.”

The company also reported a 37% year-over-year increase in paid customers to over 100,000, net dollar retention of 136%, and a 75% year-over-year increase in customers that spent more than $100,000.

Guidance

Even though the company reported strong earnings, Slack’s weak guidance has decreased investor optimism.

For Q3 2020, Slack expects:

  • Total revenue of between $154 million to $156 million, which would represent a 46% to 48% year-over-year increase.
  • Operating loss of $49 million to $47 million.
  • Net loss per share of 9 cents to 8 cents.

For the full fiscal year, the company expects:

  • Total revenue of $603 million to $610 million, which would be a year-over-year increase of 51% to 52%.
  • Operating loss of $180 million to $176 million, $30 million of which is directly related to the company’s direct public offering.
  • Net loss per share of 42 cents to 40 cents.

“The rate of growth as you get larger is going to go down,” CEO Stewart Butterfield stated in an interview. “But that’s still very strong growth. The thing that we do is focus on the value we’re creating for customers. It’s going to be a long transformation.”

Where Does Slack Go From Here?

Slack is yet another unicorn IPO struggling to reach profitability. While investors remain concerned, the company maintains a positive outlook regarding its future growth.

In the earnings report, Butterfield said, “This is an entirely new category of software enabling a once-in-a-generation shift in the way people work together. We believe channel-based collaboration is so superior to email-based communication for work, that this shift is inevitable.”

Even so, Slack needs to increase its base of paying customs and encourage demand from large businesses to achieve significant growth.

Slack will also be competing with some of the largest tech companies in the world, such as Microsoft, Facebook, and Alphabet. Microsoft’s Teams app for workplace communication, in particular, poses a major threat to Slack’s growth. Microsoft recently released statistics that indicate its app may be more widely used than Slack.

To regain investor confidence, Slack will have to outperform its current growth expectations.

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