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Slack Technologies (NYSE:WORK)
Q4 2020 Earnings Call
Mar 12, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to Slack Technology fourth quarter earnings call. [Operator instructions] I would now like to hand your conference over to your speaker today, Jesse Hulsing, head of investor relations. Thank you. Please go ahead.

Jesse Hulsing -- Head of Investor Relations

Good afternoon, and thank you for joining us on today's conference call to discuss Slack's fourth quarter and full year fiscal 2020 financial results. On the call, we have Stewart Butterfield, co-founder and chief executive officer; and Allen Shim, chief financial officer. During the course of today's call, we may make forward-looking statements, including, but not limited to, statements regarding our guidance and future financial performance, market demand, product development, growth prospects, business strategies and plans, ability to attract and retain customers and ability to compete effectively. These forward-looking statements are based on management's current views and assumptions 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 SEC filings, earnings press release and supplemental information posted on the investors 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.slackhq.com. I would now like to turn the conference call over to Slack's co-founder and chief executive officer, Stewart Butterfield. Stewart?

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Thanks, Jesse, and thank you all for joining today's call. I want to start by acknowledging that we're presenting this information in an environment of pronounced uncertainty. We already see shifts in customer behavior from an increased interest in remote work and how Slack can be helpful in 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 our forecasting.

You'll see this reflected in our guidance. Having said that, we have no uncertainty that we are in the right market with the right product at the right time, and we're confident about the opportunities to drive further innovation and growth. We had a strong close both in the quarter and the year, and we remain very excited about the year ahead. Allen will cover the details of our fiscal 2020 results and guidance for fiscal '21.

But in short, revenue for the quarter was $182 million, up 49% versus Q4 of fiscal '19, while revenue for the full year was $630 million, up 57% year on year. We added 5,000 net new paid customers in the quarter, bringing the total to more than 110,000. And finally, we continue to show leverage. Non-GAAP operating margin improved 18 percentage points year over year.

We expect continued operating leverage in the year ahead. Now I want to focus on three important priorities for this year. Those are: 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 on Slack; and third, expanding our shared channels feature set to drive new use cases in 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 the $39 million-plus customers we had at the end of fiscal '19. We also ended the year with 893 customers spending more than $100,000 annually, up from 575 at the end of fiscal '19. Both $1 million and $100,000-plus traction speaks to our continued momentum in the enterprise segment of the market.

We also continue to win not just against the status quo, but head-to-head against Microsoft Teams. four of our five largest deals in the fourth quarter were 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, Rakuten, Kyocera and Sainsbury's.

They joined Air Canada, TD Ameritrade, United Technologies, Uber, GlaxoSmithKline, Vodafone, SiriusXM, NEC, NTT DATA 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 100 and 17 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 $1 million customers also use Office 365, and they made the choice to invest in Slack anyway. Behind 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 the year ahead.

We continue to win in the largest companies in the world because as organizations continue to move from email and to channel-based messaging platforms, Slack stands alone as the only offering that is truly enterprise grade. We have significant advantages in scalability, platform depth and integrations, compliance features, security and usability that our customers value when undertaking digital transformation initiatives. The best evidence for this is our momentum across regulated industries, including in the federal government. This quarter, that momentum continued with the Department of Veterans Affairs rolling out Slack to more than 20,000 employees as part of a broader transformation effort.

They joined more than a dozen other agencies or departments within the federal government, who are growing their Slack usage. Also this quarter, one of our largest defense contractors in the United States signed a multiyear, multimillion dollar agreement to expand their Slack usage to more than 50,000 knowledge workers. They chose Slack over Microsoft Teams, in part because of our ability to scale and our system security, and they'll be relying on our Enterprise key management feature to remain compliant. While we do our best to help customers understand these fundamental differences between Slack and its competitors, it doesn't always work.

That's why it's interesting to see the results of in-depth evaluations of Slack and competitive products, particularly Microsoft Teams, which began years ago begin to come to their conclusions. Customers overwhelmingly tend to expand their Slack usage once they understand the fundamental differences. One of our many Teams displacements from this quarter was a Fortune 100 retailer, who having paused their Slack expansion at 10,000 users, about 1.5 years ago, went on to deploy Microsoft Teams to around 30,000 other employees in an attempt to evaluate the service. The process was plagued with challenges from a near complete lack of engagement to architectural deficiencies, which caused 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 Slack. The reasons were simple. Slack scales elegantly for both end users and administrators. Slack's superior user experience and platform capabilities result in real engagement.

And if you want to change the way people work together through software, people have to actually use the software to work together. 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 for our $100,000-plus customers was in the high 90s.

Looking at smaller customers, tells a similar story. The percentage rate for customer spending between $1,000 and $100,000 a year was in the low to mid-90s. Finally, a note on the enterprise ecosystem. In the fourth quarter, we closed a number of large deals alongside partners such as Atlassian, Box, Okta and Zoom.

We see more value to unlock there on the go-to-market side and also with tighter integrations. In the first half, we plan to launch new integrations with voice and video offerings, including Amazon Chime, Cisco Jabber, Microsoft Teams, RingCentral and Zoom Phone. Moving on. Our second strategic priority for this year is increasing the rate at which teams succeed in converting to Slack.

We expect this to have impact in our SMB segment, which is primarily addressed by our self-service distribution strategy. In fiscal '20, we added 22,000 net new paid customers, most of whom are SMBs. That's a large number of customers for an enterprise software company, but we believe there are millions of addressable customers in the SMB 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 one million prospects visit our website and tens of thousands of new teams are created. Given this volume of interest, our major focus is making more of the teams who get started on Slack successful more quickly. A wide variety of businesses use Slack, and while surveys indicate 2/3 of our tenured users are already nontechnical, we still have work to do to make Slack more accessible for non-early adopters. In the first half of this year, we plan to launch a dramatically improved user interface.

This is the first fundamental overhaul to Slack's user interface since we launched, and we're very encouraged by the results of early testing. We are also investing heavily in the experience for new users, reducing friction and helping them understand how Slack works and what they'll get out of it. We'll continue to update you on the progress here. But given the size of the addressable market, we feel ongoing investment into this part of the business will generate high returns over time.

Our third priority for this year is shared channels which allow for seamless communication across organizational boundaries using Slack. Despite a big break for most of our customers during the holidays, we ended the quarter with over 32,000 paid customers using shared channels, up from over 26,000 last quarter. The rate of creation is even more impressive. The number of shared 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 our $100,000-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 a channel.

Up to now, shared channels have been limited to 1:1 sharing. These multiorg shared channels will massively expand the use cases for shared channels, unlocking more complex collaboration across and between the company's customers, vendors and partners. We'll highlight more of the roadmap here in the quarters ahead. We'll also update you on the business impact.

Early data indicates a strong correlation between shared channels' adoption and customer retention and expansion. This is obviously exciting. But I want to caveat that we have more work to do to understand how the network is evolving and how it will impact our business. I'll disclose more in the coming quarters about how the network model is evolving and how we think it can drive revenue growth over time.

Before handing it over to Allen, 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 of the last few years. It is not easy or simple to go from hundreds of employees to thousands or from tens to hundreds of thousands of customers, but with 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, and we are now in a position to accelerate the pace of innovation and extend our lead. In the meantime, this new channel-based messaging platform category is taking shape. Customers are starting to appreciate the differences.

The most demanding customers have realized that Slack is the only option for enterprise scale and enterprise quality, and others are following their lead. Our strategy is clear. We are 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're doing this all while becoming a stronger business that can grow both its top and bottom line at the same time. I'm looking forward to another year of strong growth and innovation. And with that, I'll hand it over to Allen.

Allen Shim -- Chief Financial Officer

Thank you, Stewart, and thanks again to everyone for joining us. I will go through our fourth fiscal quarter results in detail before moving on to 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 million of credits issued in the second quarter. Remaining performance obligations were $328 million, up 18% quarter over quarter and 77% year over year. As mentioned on the last call, RPO 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 in international expansion, particularly within our direct sales organization. In fiscal-year 2020, we opened offices in Munich, Paris, Sydney and Osaka.

As of the end of Q4, we surpassed 110,000 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 1,800 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 $100,000 in annual recurring revenue, which is up 55% year over year. As Stewart mentioned, we ended the year with 70 customers with greater than $1 million in annual recurring revenue.

This is up from 39 a year ago. $1 million customers will continue to be a milestone disclosure moving forward. Paid customers with greater than $100,000 in annual recurring revenue represented 47% of revenue in the fourth quarter, up from 41% in the year-ago quarter. For the full year, $100,000 plus customers represented 46% of revenue, up from 40% in fiscal-year 2019.

We expect revenue contribution from $100,000 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 Stewart mentioned, our customer retention for $100,000 plus customers is in the high 90s percent and has been fairly consistent over the last three years. Our customer retention for customers that spend between $1,000 and $100,000 is in the low to mid-90s 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 Slack's user experience, scalability, platform and new features such as shared channels and expect R&D to roughly grow in line with revenue in fiscal-year '21. Sales and marketing expenses were $86 million or 47% of revenue. We continue to see year-over-year leverage in sales and marketing, despite sales headcount growth greater than 50% year over year. G&A expenses were $39 million or 22% of revenue.

We continue to expect G&A 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 million. 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 RSUs, stock-based compensation recognition is 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 the range of negative $42 million to negative $38 million. We expect non-GAAP EPS in a range of negative $0.07 to negative $0.06. We are 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% of full-year 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. For example, we expect about $10 million of billings that occurred in Q1 of 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 and our full-year billings guidance as the best measures of underlying growth in our business. Additionally, we are taking into consideration our best guess of the potential impact from COVID-19. We have paused all nonessential travel and have encouraged employees to work from home, as have some of our 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.

Given the aforementioned risk, we believe it is prudent to bake in somewhat slower growth in the first half, particularly Q1 versus the rest of the year. Our guidance reflects this. And to provide additional color, we expect sequential billings growth from Q1 to Q2 to be faster than it was in fiscal 2020. On the positive front, we are seeing customers begin to work remotely, and many are looking to Slack 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 the range of negative $130 million to negative $120 million. We expect full-year 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 are initiating full-year EPS guidance in a range of negative $0.21 to negative $0.19.

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 build-outs. To close.

We drove over 1,000 points of leverage in fiscal 2020, while making substantial investments in the public company process, sales, marketing, international expansion and product development. In fiscal-year '21, we plan to continue to invest into what we view as a very large opportunity in the channel-based messaging platform market, while continuing to drive leverage in the business. Finally, we started to create shared channels with many funds and analysts for Investor Relations, communications and coordination. If you're an investor or analyst and would like to create a shared channel with the Slack IR team, please let us know, and we will introduce you to the future of B2B communication.

With that, I'll turn it over to the operator for questions.

Questions & Answers:


Operator

[Operator Instructions] Your first question comes from Alex Zukin with RBC Capital markets. Your line is open.

Alex Zukin -- RBC Capital Markets -- Analyst

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 what f we look at the guidance in terms of the conservatism you've applied as a result of the COVID situation. Is there any way to think about what's the filter you've used? Is it slipping, extending sales cycles, by how much? And any further clarity there would be great.

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Sure. I'll let Allen speak to the guidance. I think the headline is, there's just a massive outpouring of interest on the customer side, and it's really all over the place. So I mean, there's existing customers who are accelerating some of their plans.

A lot of this is changing. The world looked a little different 24 hours ago and it looked different 24 hours before that and 24 hours before that. So a lot of this is unfolding near real time. There's a lot of energy inside the company.

I mean, people are really activated. There's a great opportunity to help. We've been running a lot of webinars. Our customer success teams are activated.

So because there's such a large number of customers, because they're spanning so many industries, it's a little bit hard to generalize. It's kind of an all of the above in terms of customer response. We've done proactive outreach to all of our large enterprise customers and we are getting a huge number of our inbound. We are seeing at the top of the funnel new team creation spikes pretty dramatically, and that's very strongly correlated with the countries that are in the headlines.

So we have a pretty good idea of what's causing that. That takes a while to filter because we've always had a free product. We've always had unlimited trials. It takes a while for it to get up and running, to be successful, it takes a while after that before they become pain.

So very difficult to forecast. We haven't been using the word conservatism inside. We've been using the word prudent. And I'm going to hand it over to Allen Prudent Shim to tell you a little more.

Allen Shim -- Chief Financial Officer

Yes. Alex. We're definitely seeing a surge in interest overall, but that's primarily in the self-serve area. And as Stewart 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 be showing up in the results, I think that's going to take some time to play out. I think you called it right. Enterprise is definitely where we are trying to be a bit more prudent as to what we're describing. We have some pretty large deals, a lot of new customers that we're also working with and the lack of travel and the challenges and coordination for these complex deals.

The pipeline is healthy and the people — and we have the sales capacity, but it's really hard to predict the close rates, when the deals will close in the quarter. And so I think we're just trying to reflect a bit more uncertainty that we're seeing in the macro environment.

Stewart Butterfield -- Co-Founder and Chief Executive Officer

And just to give one last bit of color there, last week, so not in Q4, but we closed a deal with one of the world's biggest asset managers. I got an email from the CTO the day he signed saying, "Hey, look, I signed. Just FYI, this was the last one, last few I'm signing before the kind of the door's closed. So I mean, the good news there is that Slack is considered important enough of an investment that people are still making it, and we won that customer, which is great.

But it's a little hard to have visibility into how the second part of that story is going to impact us going forward.

Alex Zukin -- RBC Capital Markets -- Analyst

That's helpful color. Thank you guys.

Operator

Your next question comes from Brent Bracelin with Piper Sandler. Your line is open.

Brent Bracelin -- Piper Sandler -- Analyst

Thank you and appreciate the color there. Appreciate the color there. I guess, one for Stewart and then a follow-up for Allen, if I could. Stewart, 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 in the value of video conferencing for workers. But as you think about the role for channel-based messaging, can you just remind us why is it important? Why is it resonating with remote workers? It's not quite as intuitive as video conferencing. And then one quick follow-up for Allen, if you could.

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Yes. Sure, Brett. It's a really a great question because I think Slack is great for remote work because it's great for work, because it's great for communication and communication is the foundation of everything that a team tries to do together. So it is 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 I have in weeks prior to that. This is not a scientific estimate, but we feel like 50% of knowledge workers' time is spent on really basic acts of communication and coordination. So all of the quarterly business reviews, all of the road mapping sessions, the daily standup meeting, the status reports, the slide decks that are for meetings they're just updating people.

If you can get any leverage on that huge investment in time, it has a disproportionate impact. So I think what we see ourselves as 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 what's a pretty dynamic environment. I would say, though, that as you look at some of the leading companies that have been kind of all distributed from the beginning were all remote companies like Envision, WordPress, GitLab, all happy Slack customers.

Other end of the spectrum, though, you look at IBM, and obviously, that story got some attention. 350,000 people in hundreds of locations across the U.S., thousands of locations around the world. It's not the same thing as everyone, each individual working from home, but there is a massive amount of coordination that's required on a population that's that distributed. So I think we see it being important for work ultimately because it's important for work.

Allen Shim -- Chief Financial Officer

Yes. And just to add to that, Brent, before the follow-up, Slack is enterprise grade. And as Stewart was mentioning, that is super valuable for large companies, but especially as people think about working at home. Now with Slack, they can be enterprise grade at home.

And I think that's going to be particularly relevant for businesses in terms of how they communicate, how they collaborate because that coordination element is still relevant, whether you're physically separated or you have organizational separation regardless of the size of the organization itself.

Brent Bracelin -- Piper Sandler -- Analyst

Got it. And then just as a quick follow-up here, Allen. If I look at kind of the guidance, you're clearly taking some conservatism around kind of travel restrictions. It's about $50 million, $60 million of kind of below what we thought it might be.

You have two components there that I view at risk: One, the Enterprise business, 47% of the business that obviously could be impacted; and then International as well, it's 37% of the mix. Have you baked both assumptions at both of those two areas kind of could be potentially impacted on new billings front? Is that the right way to think about the risk you've baked into the guide?

Allen Shim -- Chief Financial Officer

Between those two, Brian, I would definitely lean more toward the enterprise. I think that's something being in the field, having reps in the field, that's a big part of the movements there. I mean, obviously, some of that is international, but a larger part of our International coverage is based on 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 a little bit of both, but I would lean toward the enterprise dynamics I was highlighting earlier.

Brent Bracelin -- Piper Sandler -- Analyst

Helpful color. Thank you. Stay safe.

Operator

Your next question comes from Richard Davis with Canaccord. Your line is open.

Richard Davis -- Canaccord Genuity -- Analyst

Thanks very much. I mean, look, one of the things is probably going to happen is, you have to try to sell more to existing customers, just in I think the channel stuff would fit there. But the other thing that we get sometimes. So we talk to customers, and they really like your product.

The only kind of wish list that we sometimes get is that sometimes companies will say, gosh, we get this giant channel sprawl and that kind of makes some of the threats hard to monitor. And I know, and you guys know that this is a business process issue, it's not a product issue, but how can you help your clients not let this thing grow like Kudzu? Or is there other technical things that you can add to the software, either that's on the docket, whether that's a search summary or recommendation engine or something like that to kind of just make it after that initial rush, because that's really the only, literally the only wish list thing that we hear on it. Thanks.

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Thanks, Richard. It's a really interesting question. So also kind of an all of the above answer, because I think most companies, and this is not about Slack customers specifically, but most companies under invest in discipline around communication and trainings, like you start at a big energy company, there's not like a day 1 onboarding about how to use email effectively or how to be a great communicator. And yet that's how people are spending their time.

So I think there's education issues and there's customer support programs you can run, we can help with change management, and we've been increasingly successful. But when we compete against the status quo, it's people who have 20 years of kind of ingrained experience around email, and this is a pretty different environment. Having said that, I don't mean to suggest it's user error. I think there's a lot of work we can do on the product side to guide people to more effective behaviors.

I mentioned in the prepared remarks that we have a kind of a grounds up overhaul of the UI of Slack that's coming pretty soon. Very dramatic difference. We've been doing some pretesting with some administrators inside of enterprise customers who tend to have the highest volume. Really excited about that.

Really happy with that. And at the other end a little bit, and for me, personally, we are an extreme user of Slack, Slack the company, and I am individually an extreme user within that population. And it's hard to manage and hard to keep up because what I don't get, and that I kind of miss from email is a task list. Essentially, whatever is left over after I've deleted and 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 base that on, including who you're most likely to read when you have unread messages from a bunch of people, channel overlap, the content of the messages, the degree of response that it's had 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, the grounds up UI and the kind of machine learning applications that we can put toward that will really come together.

And it's an area of big investment for us. We want those customers to be thrilled. We want them recommending Slack. We want to be expanding inside of those enterprises, and we're deeply committed to being successful there.

Allen Shim -- Chief Financial Officer

Yes. Richard, I mean, we're hearing the same feedback. That's where our investment is going for this year, making a big bet in terms of the self-service experience. And I think, as Stewart mentioned, a lot of the payoff from investments we've made to date is going to allow us to accelerate some of the functions, features and functionality that I think you're really speaking to.

Stewart Butterfield -- Co-Founder and Chief Executive Officer

And I'll just add a couple of quick point at the end. But search has improved exponentially from a year ago. And big investments there in the quality. And I think ultimately, people are going to have a trade-off between literally in large organizations, two or three or even four orders of magnitude, more access to information that's going on across the company.

And at the other side of the scale that's a lot, I've got to keep up. So we'll build increasingly better tools to help people manage that, and we have a great roadmap for this year in terms of product innovation more broadly, which I'm sure we'll be talking about. But there's a fundamental shift to how someone interacts with the whole organization, the degree of transparency. And I think that's going to be really important as organizations try to become more agile.

Richard Davis -- Canaccord Genuity -- Analyst

Thank you.

Operator

Your next question comes from Michael Turrin with Wells Fargo. Your line is open.

Michael Turrin -- Wells Fargo Securities -- Analyst

Hey there. Thanks. Good afternoon.I want to go back to some of the self-serve enterprise comments. I think you're seeing good continuation of growth here in enterprise.

But how do you strike the right balance between the 2? Is it the investments you've made in 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 think it's hard to strike the right balance. And I'd just be curious to hear more on how you think about the mix between the two?

Stewart Butterfield -- Co-Founder and Chief Executive Officer

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 that we brought in, in terms of the population, in terms of the experience that we have, in terms of the investments we've made in technology over the last year.

So at the 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 these execs and the whole set of disciplines that we had to build up and there was no blueprint for us to copy in how a product like this in a brand-new category is being sold into the enterprise. Having done that and having achieved from some scale, having opened more and more offices around the world and enabled more and more of the sales force, my attention individually is definitely back on the self-serve side.

Because, look, there's 2.5 million businesses in the U.S. with five or more employees. Even if you kind of arrange them from most to least amenable to uses of Slack. At our current rate, it's going to take us decades just to get the top quartile of those businesses.

This is an enormous market, and we're just beginning to accelerate. So I would love to see that acceleration on the self-serve side, that I know that we're capable of. And a lot of that is just attention around what the initial user experience is, comprehension of what the product is and 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.

Allen Shim -- Chief Financial Officer

Michael, obviously, we think, as Stewart mentioned, a huge TAM in this category in 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 to build the go-to-market motion to make that happen. And as we saw success there 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 similarly recognize that from a product market fit perspective, we're 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 and on the go-to-market front.

Michael Turrin -- Wells Fargo Securities -- Analyst

Just one more. And the good news seems like given this uncertainty we're in, you've already invested in the platform's ability to scale with things like Enterprise Grid and some of the added features, but any observations to share given some of the uptick in usage you're likely seeing as organizations become more geographically distributed and maybe your own organization is as well. What gives you confidence that the platform can flex up with that potential uptick in demand?

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Well, so for our largest customers, we end up doing a lot of stress testing that goes way beyond where we're at today, and that's increasingly important as we're selling into more conservative organizations, larger organizations, those with more rigorous compliance processes, and we are exceeding those all over the place. I mean, I think, it was a really, really big investment over like I would say, the last three years, but particularly over the last year to get to the point where scaling is largely automated. We handle now, in great instances, organizations with hundreds of thousands of users in millions of channels sending tens of millions of messages a day. And despite that, we had four nights of uptime during Q4.

So definitely a leader in software, meeting our competitors and millions and millions of connected users, which we've had from the beginning like people talk about the ratio of DAU to MAU. For us, it's 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 air bars of what we're easily able to handle now, and we're going to be staying ahead there. The interesting one from a technical perspective has been the introduction of shared channels because it used to be relatively easy for us to kind of to what's called shard the data stores against an individual company because there was no cross-company communication.

Part of the big engineering investment over the last year was to lay the groundwork for, potentially, a message could be coming in from any of the other millions and millions of Slack users around the world. That's a thing 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 shared channels especially in the enterprise context. I think I mentioned already, 90% of our largest customers are using shared channels..

But it's not going to be that long for us to get that close to 100. And as that kind of increasing return dynamic or network effect starts 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.

Allen Shim -- Chief Financial Officer

Michael, I think it's really important to remember, we are a purpose-built architecture, so we were built to handle this sort of challenges and use cases. And so whether the user is logging in from home or they're logging in from work, we are agnostic to that in terms of load, and we're going to bring that enterprise grade experience, whether you're at home or at work.

Michael Turrin -- Wells Fargo Securities -- Analyst

Thanks.

Operator

Your next question comes from Will Power with Baird. Your line is open.

Will Power -- Baird -- Analyst

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 category.

Is that something that you're kind of seeing across geographies? I know Japan, as an example, big and important market. And obviously, as you look at virus impacts started in broadly in that region. Are you seeing the same kind of characteristics that you saw there in terms of usage, adoption, then move to Europe and the U.S. It'd be interesting to kind of hear what you're seeing across geographies there?

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Yes, exactly. There is a strong correlation between the uptick at the very top of the funnels. For us, that's new teams getting created. And then there's a process after that of inviting people and getting them to the point of being successful.

Strong correlation between the countries that you're seeing in the headlines and that top of the funnel usage. So I mean, we're seeing it right now in Italy in a really pronounced way. In South Korea and Japan, it's still elevated, but kind of has followed the spread, I guess. And definitely gives us an indication of where that 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 like this short-term interest spike. There's a lot going on. People are elevated all over the place? And how much of this kind of signals a longer-term shift? And I think it's going to be a little bit of both because those really radical shifts in behavior that happened over a short period of time are going to have some lingering effects. And I think organizations who previously had been really resistant to distributed workforces are probably going to open up a little bit.

I mean, I would include ourselves in that. But probably more importantly, and going back several questions, every organization should be investing in their ability to communicate and to stay coordinated and to stay aligned to become more and more agile, and never mind work from home and never mind the pandemic for a second, just even if this was purely a financial shock, if this is purely economics, the disruptions to global supply chains and the uneven hits to different industries, I think are going to be massively disruptive, and organizations are going to have a harder time maintaining that agility. So the investment in communication is going to be even more important.

Allen Shim -- Chief Financial Officer

Yes. And Will, 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 created teams. We are starting to see a lift in these more affected regions of real usage. And that's always been a hallmark of Slack 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 in the product market fit more broadly so that those people can also be successful, and our team has really mobilized to do that, whether it's through in-person resources or online resources as well.

Will Power -- Baird -- Analyst

Thank you.

Operator

Your next question comes from Bhavan Suri with William Blair. Your line is open.

Arjun Bhatia -- William Blair and Company -- Analyst

It's actually Arjun Bhatia on for Bhavan. Stewart, you mentioned that you're seeing more wins against Teams, more head-to-head kind of competition. Just wanted to ask you to maybe unpack that a little bit for us. What are the main drivers there? What's kind of the aha moment where customers are evaluating both Teams and Slack, and they say, Slack is my product choice.

It's a platform that I want to invest in for messaging? And then kind of related to that, can you just maybe talk about the maturation of this market a little bit? Are you seeing more formal RFPs in general? Are you seeing messaging on the CIO roadmap? On CIO investment plans?

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Yes. So great question. And I think what used to sell, no one ever said, boy, we got a choice between Slack and Teams and Teams is the superior product, and therefore, we're going to go in that direction. I think the interest and the kind of the consideration that it's getting from customers is, it's already on our machines.

It's already distributed. It's free. We should feel it out. Which should give it a sense and see if it's going to be adequate to support users and maybe to, be mistaken or not, a belief that technical employees are more important or more valuable, and this is not going to be as important platform for employees outside of technical roles.

So over the last couple of years, you've seen these evaluations. And it's not RFP based, it's not feature checklists. It's essentially, we're super happy with Slack. We think it's great.

We have tens of thousands of more employees. We're going to evaluate the free alternative that's already installed all over the place and see if it can work. And I think people have ended up, as I highlighted on the call very, very frustrated with that process, both the kind of the people responsible for administering and servicing the end users and end users themselves. I mean, it's a fundamentally different user experience, but it's not so much that there's three areas where I think we have an enormous advantage, and we're aiming to widen the gap.

The first is just scalability. So we've hammered on this before, 5,000 user limit, but probably more importantly, a limit of 200 channels, if you want to add 201st, you had to hard delete the whole history of a channel. You just can't use it as a channel-based messaging platform. You just can't use it in the same, you can't use Teams, excuse me, in the same way that people use Slack.

There is no equivalent to Grid. There is no support for hundreds of thousands of people. There is no support for millions of channels or the massive archive. Second one is platform.

I don't know where we're at right now, but five or six times the number of third-party apps. But also just an order of magnitude, more interest from developers, more active developers, a much richer framework and much richer surface area, set of capabilities that we're making available to developers. And then the third one is shared channels. I mean, just I do not believe it's possible for anyone to replicate what we've done there on the technical side in the next several years.

And we're very early in the roadmap. I mentioned the multiorg channels that are coming. So with all of that, because it's not we already have an HRIS, or we already have this ERP component, or we already have a CRM, and we're evaluating another one. We're switching from the status quo from a set of behaviors that were largely invisible to people because we're fish swimming in the email ocean.

And it can be harder for people to realize the differences, if you don't know that you already want that category, right? Look, if you already had a CRM, and I tell you, mine has future x, y and z. You can say, "Oh, that, those, I can see why those would be valuable, and I would want to switch with them. For a lot of customers who are a little bit more distant from this, we're told that these are the same kind of product and one's free so we're going to check it out. And I've completely forgotten what the second part of the question was, I apologize.

Allen Shim -- Chief Financial Officer

Arjun, let me just add, when you think about Slack and what our customers tell us, is that to measure ROI, they're thinking about it in terms of digital transformation. They're not just thinking about it in terms of chat or messaging. They really want to have a platform that enables a type of change an organizational behavior and agility that is really required for modern work. And so I think what's a core part of it is, is the engagement.

So we mentioned a Fortune 100 customer. They just saw a completely different engagement when they were comparing the tools side by side. And I think when you see that real engagement is the kind of the crux for generating that ROI. On some degree, you really just kind of get what you pay for, right? And so I think when the customers start to appreciate that, Teams becomes more of a almost like a glorified sharepoint browser whereas Slack is a platform for digital transformation.

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Yes. And I just said, I just made platform, one of the bullets there, but just to be clear, Slack 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 our customers have. It does make the end users' lives easier. And it does allow things like if you're using Slack and Salesforce at the same time, and you have a product like Troops or even if you're just reliant on the in-built integrations.

Your sales force is going to be much more up-to-date because where the communication is 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 something that takes people a while to understand the capabilities of and how it can be valuable to them.

But one last thing, just to understand Allen's point. Ultimately, if you want to use software to change the way people work, people have to actually use the software. And I think that's where we have an enormous advantage, and we're going to continue to invest in that user experience to ensure that we get the engagement.

Allen Shim -- Chief Financial Officer

Yes. This is an early category to your second point. I mean, it is still very early days of the category. We're not 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.

Arjun Bhatia -- William Blair and Company -- Analyst

Thanks. That's very helpful. And Allen, maybe just a quick follow-up, if I can for you. I know we've talked about the impact of coronavirus on your business in terms of the uncertainty and travel restrictions but any change to your investment plans? I know you mentioned international investment a lot.

Are you still monitoring that? Or is that still going on as planned in light of kind of the heightened coronavirus impact here?

Allen Shim -- Chief Financial Officer

Yes. I think we're following the guidelines that have been set out there, probably harder for me to speak to that 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're still prioritizing growth here, but we're also being very disciplined and thoughtful and intentional on where to invest.

And I just want to highlight, 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 in growth, but we're also going to make real steady progress to cash flow breakeven. And even in the midst of this macro environment, I think that's even more prudent to do so.

Arjun Bhatia -- William Blair and Company -- Analyst

Perfect. Thanks for taking my questions.

Operator

Your next question comes from Keith Weiss with Morgan Stanley. Your line is open.

Josh Baer -- Morgan Stanley -- Analyst

Thanks. This is Josh Baer on for Keith. Questions on the leverage that we're seeing in sales and marketing. And part of it, like looking at the filings, the advertising spend is down by $24 million this year versus last year.

And we've talked a little bit previously about some of the timing of that ad spend. So just wondering, like, how the marketing and advertising spend occurred in the quarter? Was any pushed out and like, would you expect that to pick up in Q1, kind of given the opportunity that we're seeing here?

Allen Shim -- Chief Financial Officer

Yes, Josh, more broad. I think just taking a step back for the full year, our first half, we were out of market, largely, and we started to pick that back up in the end of Q3 into Q4. So the plan is to continue to run ad programs, marketing programs, both on the brand side of things as well as overall enterprise support through the first half of the year. And then we're going to continue to invest in other ways throughout the remainder of the year as well.

So I would just look back at our growth phase targets, somewhere in the high 40s percentage range is the right steady state for us in terms of sales and marketing investment.

Josh Baer -- Morgan Stanley -- Analyst

Thank you.

Operator

Your next question comes from the Heather Bellini with Goldman Sachs. Your line is open.

Heather Bellini -- Goldman Sachs -- Analyst

Great. Thank you. A bunch of mine have been answered, but I just wanted to hit on a couple of things. Back in the September time frame, 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 you've seen since then? And what you've learned is kind of you've made some pivots? And obviously, it sounds like from you sound more front-footed this quarter versus Microsoft than maybe you did three or four months ago. So I mean maybe it's just me picking that up. But I'm just wondering what do you think is driving that mind share back. Because I remember, back three or four months ago, you guys were talking about how Microsoft had gotten a lot better in terms of marketing, even though their product wasn't there, but it seems like that was having an impact.

And I'm just wondering kind of what's changed that's driven kind of your comments where it seems like now that seems to be less of an issue than maybe it was for that short period of time. Thank you.

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Thanks, Heather. So basic to the last question, honestly, it's a passage of time. I mean, you can only buy so much consideration in the minds of the 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 can't use Teams for what I've been using that for.

Now I get it and move on." And there's a massive investment on their side in increased awareness. They got the awareness. They got the consideration and that just expires after some point. So this has been more or less since we've had in enterprise business, we've been competing with them.

And I think at this point, I hope we have demonstrated this is our third earnings. We're not slowing down in enterprise. And my attention personally is going back to accelerating the self-serve side. So going back to the first part of your question, I think what we learned a bunch of stuff.

And these are some of it is a little too detailed to get into here. But if I choose one thing, it's really the degree of comprehension that people have coming into the process that determines how successful they're going be. Because otherwise, some of the questions, you got to fill out a form, you got to put the name of your workspace. What's a workspace? How do I use this? That's really the challenge that we have to overcome because it's not a familiar category, because it's not just like a rip and replaced with something that I already do.

So as we've come to discover that, we've made changes on the landing pages, we've made changes in the team creation process. We just rolled out, I think, to 100% of customers. We were in test for a while, a new feature called welcome place. So when you do finish creating a new team, we give you a lot more guidance on how to set it up.

And the whole kind of grounds up UI overhaul I already mentioned, is going to have a very, very strong positive impact on the experience for new users because there's going to be a lot clearer, a lot simpler, and we're going to 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.

Allen Shim -- Chief Financial Officer

Yes. Heather, we've made investments in the infrastructure and some larger projects we've gone through, where we're 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 churn really hasn't been a factor for us.

So when you think about considering the competitive dynamic there, and we've been able to maintain very high retention and very low churn in the midst of a more competitive environment.

Heather Bellini -- Goldman Sachs -- Analyst

Thank you very much.

Operator

Your next question comes from Raimo Lenschow with Barclays. Your line is open.

Unknown speaker

This is [Inaudible] talking for Raimo Lenschow. I just wanted to go back to the billings guidance, again, 29% at the midpoint, and you ended the year at a 132% expansion rate. So I'm just wondering if, basically, how you got to that number, if your existing client base if expansion rates are coming down or if you're just landing a little bit higher than what you used to?

Allen Shim -- Chief Financial Officer

I think it's both of those dynamics, as we've been saying in the past, the Enterprise business, as that has grown, usually have a much bigger base of revenue that you're growing off of there. So the natural trend on enterprise net all retention rate has been coming down but in line with our expectations. And 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 overanalyze expectation set, given the current conditions we're seeing even in the markets today. And so we're just trying to take a very prudent approach and balancing what we can control on the operations side of things with this macro volatility.

Unknown speaker

Great. And on bookings. So sequentially, it looks like it came down a bit, total bookings. I'm wondering if there's anything to call out in terms of duration quarter-to-quarter?

Allen Shim -- Chief Financial Officer

No, nothing in particular. I think we continue to invest and grow within our Enterprise customer base. So I don't think there's anything specific to call right now.

Unknown speaker

Thank you.

Operator

This concludes our time for the question-and-answer session. I will turn the call back over to Stewart Butterfield for closing remarks.

Stewart Butterfield -- Co-Founder and Chief Executive Officer

All right. Thank you so much, and thank you, everyone, for the questions. I think if I can reiterate a couple of things that came up over the course of the call. Probably the headlines and where we've seen the bulk of the questions around the impact of coronavirus and I think it's mixed, a little too soon to tell.

We're trying to take a prudent approach when it comes to guidance, but 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 I hope that this kind of like established where we're at. And when you start to think about defense contractors and the VA and kind of the scale of the enterprise customers, feel really confident about that. Turning our attention back to accelerating self-serve.

And I know that many of you are our existing customers. Some of you, I know your organizations are evaluating Slack right now. If there's any way we can be of help, call us. I think you all have just Jesse's cellphone number.

So just feel free to text him any time, day or night, and he will connect you to the right people in our customer success organization. Thank you so much.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Jesse Hulsing -- Head of Investor Relations

Stewart Butterfield -- Co-Founder and Chief Executive Officer

Allen Shim -- Chief Financial Officer

Alex Zukin -- RBC Capital Markets -- Analyst

Brent Bracelin -- Piper Sandler -- Analyst

Richard Davis -- Canaccord Genuity -- Analyst

Michael Turrin -- Wells Fargo Securities -- Analyst

Will Power -- Baird -- Analyst

Arjun Bhatia -- William Blair and Company -- Analyst

Josh Baer -- Morgan Stanley -- Analyst

Heather Bellini -- Goldman Sachs -- Analyst

Unknown speaker

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