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Slack Sees a Spike in New Virtual Teams Amid Coronavirus Panic

By Daniel Sparks - Mar 13, 2020 at 9:59AM

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But the company is still being prudent about its guidance, baking in global uncertainty.

Going into its earnings report on Thursday, many investors were watching Slack Technologies (WORK) closely. The provider of a fast-growing online workplace-collaboration platform has been viewed as a company that could actually benefit from the trends accompanying the coronavirus outbreak -- in this case, mainly travel restrictions and many companies' decisions to allow their employees to work from home.

The company's financial results highlighted more strong growth, an expanding profit margin, and an improving adjusted loss per share. In addition, management indicated that fears of the COVID-19 coronavirus outbreak had led to a spike in the creation of new virtual teams on its platform.

Slack leadership standing outside the New York Stock Exchange the day of the company's direct listing

Image source: Slack Technologies.

Slack's fourth-quarter results

Fourth-quarter revenue was $181.9 million, up 49% year over. This easily surpassed management's guidance for revenue between $172 million and $174 million. In addition, it beat analysts' average forecast for $174.2 million. 

Slack saw good improvement in its bottom line as well, helped by its soaring revenue and a fatter gross margin. The tech company's adjusted gross margin expanded from 87.1% in the year-ago period to 88.3% in the fourth quarter of fiscal 2020. Slack's adjusted net operating loss improved from $37.5 million in the year-ago period to $23.1 million. This translated to an adjusted loss per share of $0.04, beating analysts' average forecast for a loss per share of $0.05.

Helping the quarter was strong growth in paid customers and outsize growth in customers that generating more than $1 million in annual recurring revenue. Slack's paid customers rose 25% year over year to 110,000. Meanwhile, customers contributing $1 million or more in annual recurring revenue rose 79% year over year to a total of 70.

Looking ahead

In light of growing work-from-home trends amid the coronavirus panic, investors were likely hoping for Slack's guidance for Q1 to come in meaningfully above analysts' average forecasts. But this wasn't the case.

Slack said it expected first-quarter revenue between $185 million and $188 million, implying 37% to 39% year-over-year growth. Not only does this represent a meaningful deceleration from 49% growth in Q4, but it was also below analysts' consensus forecast for revenue of $188.4 million. Slack guided for an adjusted loss per share between $0.06 and $0.07, about in line with analysts' forecast for a loss per share of $0.07.

While Slack's guidance may seem timid, management did say in its earnings call that it saw new team creation for remote workers spike in areas affected by the coronavirus over the past week. But it said this phenomenon was unfolding in real time and that it's difficult to forecast how many of these new teams will convert into paid customers. Furthermore, CFO Allen Shim indicated that the company is being conservative about its guidance in order to reflect "increased customer uncertainty and travel disruption, particularly in the enterprise segment." But Shim also said the company's customer pipeline currently remains healthy.

Overall, management was optimistic. "While we invest in innovation and delivering more value to our customers," Shim said in the company's fourth-quarter earnings release, "we also are showing significant leverage and remain on track to hit our growth phase target of free cash flow positive."

For the full year of fiscal 2021, Slack said it expects revenue to grow 34% to 37%, or between $842 million and $862 million.

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