With a large part of the population working remotely and the use of work-from-home solutions soaring in popularity, expectations were high going into Slack Technologies' (NYSE:WORK) second-quarter financial report.

Prior to the earnings release, the stock had gained 30% so far in 2020, easily outpacing the Nasdaq Composite, which was up just 21% during the same period. It seemed the stage was set for a blowout performance. And through the results were largely better than expected, one key metric sent the stock plummeting, wiping out much of its gains for the year.

A screenshot of Slack's threaded message platform.

Image source: Slack.

The remote-work boost continues

Slack reported revenue of $215.9 million, up 49% year over year, leading to a non-GAAP (adjusted) loss per share of $0.00. The break-even result was unexpected, as the company has been reinvesting heavily in future growth and under normal circumstances it would have been cause for celebration. To put the top- and bottom-line numbers in context, analysts' consensus estimates were calling for revenue of $208.3 million and an adjusted loss per share of $0.03, so the results were clearly ahead of expectations. 

There were other metrics that inspired confidence. Slack's customer base continued its impressive growth, adding 8,000 net new paid customers, bringing the total to 130,000, up 30% year over year. Larger enterprise clients -- the company's bread and butter -- grew at an even faster clip. Customers with annual recurring revenue (ARR) greater than $100,000 jumped to 985, an increase of 37%. Clients with more than $1 million in ARR grew to 87, generating the highest growth rate, up 78% year over year.

Existing customers continued to spend more as well, as evidenced by Slack's net dollar retention rate of 125%. Put another way: Current clients were spending 25% more this year than they did last year, adopting additional products and services or adding more users.

Robust new product adoption

Slack also pointed out that one of the key drivers of its paid customer growth was an acceleration in the adoption of Slack Connect. The recently introduced set of tools allows users to collaborate with users both inside and outside their organization and is designed to extend its channel-based messaging and even replace email, according to the company. 

As a result, Slack ended the quarter with more than 380,000 endpoint users on Connect, an increase of 200% year over year, with 52,000 paid customers migrating to the platform, good for growth of 160%.

A person sitting cross-legged on a wooden floor using a laptop showing videoconferencing and workplace collaboration software.

Image source: Getty Images.

Trouble just below the surface

With those numbers as a backdrop, it would seem at first glance that everything was going well for Slack. Unfortunately, one leading indicator appears to spell trouble for the workplace collaboration software specialist.

Slack reported calculated billings, a sales growth metric that factors in changes in deferred revenue, of $218 million. It increased 25% year over year, down from 52% growth in the prior-year period. This marked the lowest reported growth rate in more than two years. For context, prior to going public in early 2019, Slack saw calculated billings growth of 102% and 79% in fiscal 2018 and 2019, respectively.  

In fact, the year-over-year growth rate of calculated billings has shown a slow but steady decline in each of the past five quarters.  

On the conference call, CFO Allen Shim explained that in the current quarter, calculated billings was negatively impacted to the tune of $4 million, related to coronavirus-related concessions to distressed customers. He also said the company faced "contract duration-related headwinds," bringing total concessions for the first half to about $11 million. Slack is expecting those headwinds to abate somewhat in the current quarter. 

What the future could hold

For the upcoming third quarter, Slack is guiding for revenue in a range of $222 million to $225 million, which would represent growth of about 32% at the midpoint of its guidance. That's a marked slowdown from the 49% increase it posted this quarter and 50% growth in Q1. The technology company is also forecasting an adjusted loss per share of about $0.06.

Given Slack's practice of providing conservative guidance, it's entirely likely its top-and bottom-line numbers will be better than the company would have us believe. Investors will be watching closely, however, to see whether Slack continues to offer concessions to keep customers from abandoning ship. If it does, things could get much worse.