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Slack Is Beefing Up Its Balance Sheet

By Evan Niu, CFA - Apr 8, 2020 at 9:00AM

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The enterprise messaging company prices an upsized bond offering to raise capital.

Earlier this week, enterprise messaging and collaboration platform Slack (WORK) announced a $600 million proposed offering of convertible senior notes, which included an option for institutional investors to collectively buy up to $90 million more of the debt. The company subsequently said it upsized the deal to $750 million while pricing the convertibles. In other words, Slack had no trouble finding buyers for its paper.

Here's what investors need to know about Slack beefing up its balance sheet.

Stewart Butterfield on the floor of the NYSE

CEO Stewart Butterfield. Image source: Slack.

Building the war chest

For context, Slack finished its most recent fiscal year that ended in January with around $769 million in cash and cash equivalents but excluding restricted cash. The $750 million that Slack is looking to raise will meaningfully strengthen the tech company's financial position, nearly doubling that cash while buying it time as it continues to work toward cash flow breakeven.

"And I just want to highlight, the [guidance] points us to getting to cash flow breakeven at the high end," CFO Allen Shim said on the last earnings call. "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."

The company is not yet profitable and free cash flow and operating cash flow remain negative for the time being. Operating cash flow last fiscal year was negative $12.4 million, and free cash flow was negative $62 million.

In an interview with CNBC, CEO Stewart Butterfield acknowledged that the company was really trying to get ahead of potential economic impacts from the COVID-19 pandemic. "We're not immune to the overall macroeconomic conditions, but the initial response for slack has been a massive surge in interest," Butterfield said.

The chief executive pointed to a data point he had previously shared  in an epic  tweetstorm: In the first two months of the fiscal quarter, Slack has added 9,000 new paid customers, compared to the 5,000 new customers that Slack added in each of the prior two full quarters. Average utilization per user is also skyrocketing.

Butterfield also added that the offering was oversubscribed, which is partially what allowed Slack to upsize the deal and raise even more capital. Slack's customer base is quite diverse, including companies in the travel and hospitality sectors that are getting destroyed by the coronavirus outbreak. Offsetting some of that exposure is the fact that other large organizations are accelerating their Slack deployments, according to Butterfield.

The convertibles carry a 0.50% interest rate and will come due in 2025. The bonds will have an initial conversion price of $31, or a 27.5% premium to where the stock closed on Monday. In connection with the offering, Slack has entered into capped call transactions, a common hedging strategy that companies use when issuing convertibles that reduces the potential dilution related to any note conversions.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Slack Technologies. The Motley Fool has a disclosure policy.

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