This wasn't just your typical case of the Mondays. Shares of enterprise collaboration platform Slack (NYSE:WORK) whipsawed yesterday, jumping 15% during the regular session only for trading to get halted shortly before the close pending a news release. Once trading resumed in after-hours about an hour later, the stock fell by 7%.

Here's what all the fuss was about.

Slack on Mac

Image source: Slack.

"IBM has been Slack's largest customer for several years"

Business Insider sparked the initial pop by reporting Slack had landed IBM (NYSE:IBM) as a major customer, and Big Blue was planning to move all 350,000 of its employees over to the chat app. The original report, which has since been updated, made it sound like IBM was a relatively new customer.

In fact, IBM has been a Slack customer since 2014. Slack had shared a customer story on its blog back in 2017 about how IBM uses Slack in software development, and another post from 2019 explained how Slack helped IBM unlock value throughout its technology stack by leveraging both standard and customized third-party apps; CEO Stewart Butterfield has framed Slack's interoperability as a value multiplier. The post last year noted that IBM had 165,000 employees actively using Slack, although it was unclear if that was on a daily or monthly basis.

Expanding the deployment would still be a clear win, but investors remained confused around how much upside the news represented. The trading halt -- which sparked speculation that Slack was about to be acquired -- was imposed in response to the article so that Slack could clarify. "IBM has been Slack's largest customer for several years and has expanded its usage of Slack over that time," Slack wrote in a regulatory filing signed by CFO Allen Shim.

Further undermining the article's original language, Slack noted that it was not updating its guidance for the fiscal fourth quarter -- it had already baked its growing relationship with IBM into its forecast, which calls for revenue of $172 million to $174 million. That dampened the investor excitement (which was misplaced to begin with), causing shares to sell off in extended trading.

Large customers that generate over $100,000 in annual recurring revenue are incredibly important to Slack's business. The good news is that this cohort continues to grow, jumping 67% to 821 at the end of the fiscal third quarter. Slack had no customers that represented 10% or more of revenue through April 2019, according to its prospectus.

Overplaying insider sales

Adding even more fuel to the fire, Cheddar prematurely reported that insider selling may be the cause of the halt and could be hurting investor sentiment, pointing to fresh regulatory Form 4 filings that showed CEO Stewart Butterfield and CTO Cal Henderson (Slack's two co-founders) had sold shares recently as part of Rule 10b5-1 trading plans, which allow insiders to set up prearranged trading schedules to avoid violating insider trading laws. Last Thursday, Butterfield sold 2,500 shares and Henderson unloaded 1,500 shares.

However, that news was also not quite news. Butterfield sells 2,500 shares literally every day, which is reflected in his steady string of daily Form 4 filings, and the same is true of Henderson (except he unloads 1,500 shares per day). Company insiders often use initial public offerings as an opportunity to cash out a chunk of shares in an orderly fashion, but since Slack went public with a direct listing instead of a traditional IPO, Slack execs have set up trading plans to slowly sell shares without disrupting the market.

One of the reporters mistakenly refers to Slack's debut as an IPO, while the other overplays the relevance of the insider activity by implying the sales were done in response to the pop. The transactions occurred last week, as there is always a lag associated with Form 4 filings. Additionally, trading had not yet resumed when Cheddar ran its segment.

Slack has not yet scheduled its fiscal fourth-quarter earnings release.


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