Slack (WORK) isn't the first unprofitable company to go public in recent memory, and it certainly won't be the last. It's rather rare for tech companies to be profitable when they go public (Zoom Video, which made its market debut in April, is unusual in this regard). The key consideration is whether those companies have a path to profitability on the horizon.
First things first, though, and Slack wants to get to cash flow breakeven before worrying about its GAAP bottom line.
CEO Stewart Butterfield. Image source: Slack.
Cash flow over accounting profits
In an interview with Bloomberg, CFO Allen Shim and CEO Stewart Butterfield discussed Slack's prospects going forward. Shim said Slack is primarily focused on cash flow that can be invested in the enterprise messaging company's future:
Well our primary focus right now is to invest in growth. And as we continue to build on what we think is a new category, that's going to be our focus for a long time. But we've also said to investors that our near-term priority is to drive toward cash flow breakeven. We have high confidence in the strong unit economics of our business that we can still invest very aggressively while driving toward that near-term profitability mark.
CFO Allen Shim. Image source: Slack.
Butterfield elaborated on why cash flow is more important than GAAP profitability:
In [software-as-a-service], there's a lot of deferred revenue so accounting profitability isn't that much of a priority. As Allen was saying, bringing in more cash than we put out on an ongoing basis is a priority because it allows us to control our own destiny. The ideal for us though is that we continually find new ways and new opportunities to invest to further grow the business, so we don't need a lot of free cash flow. Just a little bit.
Earlier today, Butterfield noted that the reason Slack used a direct listing to go public instead of a traditional IPO was that the company simply doesn't need to raise capital right now, so there's little reason to dilute existing shareholders. Getting to cash flow breakeven would further reduce the need to raise capital, and Slack already has nearly $800 million in cash reserves.
A familiar capital-light model
For reference, here's how Slack's operating cash flow and capital expenditures (the two components of free cash flow) have performed over the past three fiscal years (Slack's fiscal years end in January):
Data source: Prospectus. Chart by author. Fiscal years shown.
The company notes that in 2017 and 2018, it made some cash payments related to tender offers and share repurchases, which Slack considers compensation (since it's buying back shares that were granted as equity-based compensation). After adding those payments back, here's what adjusted free cash flow looks like:
Data source: Prospectus. Chart by author. Fiscal years shown.
Slack utilizes a capital-light model that's becoming all too familiar these days by outsourcing cloud hosting and infrastructure to third-party providers, namely Amazon Web Services (AWS). Slack spends about $50 million per year on AWS. Much of Slack's capital spending over the past fiscal year has been leasehold improvements, which jumped from $26.2 million to $86.3 million.
Slack's San Francisco office. Image source: Slack.
The company opened a new office in San Francisco last year in order to get its employees into one building after rapidly growing head count, which more than doubled from January 2017 to nearly 1,700 at the end of April 2019.
