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What's Driving Slack's Billings Deceleration?

By Evan Niu, CFA – Sep 10, 2020 at 9:00AM

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Competition and COVID-19 are taking a toll.

Shares of Slack (WORK) tanked yesterday after the company reported fiscal second-quarter results on Tuesday. The workplace productivity specialist posted a notable deceleration in billings growth. That key metric was largely the reason why investors were disappointed, as pretty much all other headline figures either met or beat expectations.

Here's what's driving the slowdown.

Slack app interface

Image source: Slack.

COVID-19 concessions

As a quick refresher, billings is calculated as revenue minus the change in deferred revenue and essentially represents sales to new customers in addition to renewals or upsells to existing clients, which isn't recognized as revenue up front due to the subscription nature of those customer relationships.

Billings is a commonly reported metric for all software-as-a-service (SaaS) companies and is generally defined the same way. Strong billings growth will contribute to higher deferred revenue, which is a pipeline for revenue that will be booked in future periods but the company has already collected cash for.

Slack's billings in the fiscal second quarter increased 25% to $218.2 million, which was less than the company's revenue growth of 49%. Billings growth has been steadily decelerating for many quarters, which -- while somewhat natural as the business grows -- is also nonetheless discouraging for a stock that's trading at a premium valuation (around 24 times sales).

Chart showing Slack's slowing billings growth rate

Data source: Slack. Chart by author. Fiscal quarters shown.

Management attributed the ongoing slowdown in billings growth to various concessions that the company is offering to "distressed customers" that have been impacted by the COVID-19 outbreak and related macroeconomic uncertainty. This isn't a new development, as it's been about six months since the coronavirus was formally declared a pandemic, and Slack had discussed the concessions in June when it reported fiscal first-quarter results.

"As discussed last quarter, to support distressed customers, we have continued to offer credits, installment billings, and billing duration of less than one year," CFO Allen Shim said on the conference call with analysts. "In Q2, calculated billings were impacted by approximately $4 million of COVID-related concessions and contract duration-related headwinds."

The good news is that customer requests for these types of concessions have also started to slow down as the economy continues to reopen. However, much uncertainty lingers and Slack can't reliably predict the impacts in the coming quarters, according to Shim. "We plan to continue to help customers manage through this unique time and expect calculated billings to be negatively impacted and less useful as a measure of underlying growth during the COVID-19 crisis," the finance chief added.

The competition

Meanwhile, demand for remote collaboration tools is higher than ever before, as enterprise customers need to maintain productivity while shifting to remote-work models, which is creating intense competition for Slack from rivals like Microsoft and Zoom Video Communications. Slack added video calls to its platform way back in 2016, but Zoom has this year become a household name for such services. Competition may prolong the need to offer the concessions that are hurting billings.

CEO Stewart Butterfield downplayed the competitive fears, suggesting that the total addressable market is "just so big" that any impacts from competition would be negligible. "We're now in quarter 14 of competing with Microsoft," Butterfield noted. "We've won over and over again in Office 365-using customers."

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft, Slack Technologies, and Zoom Video Communications and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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