Slack shares fell almost 20% after hours, as it reported earnings results that beat Wall Street expectations, but still showed slower growth than many expected.
Slack's revenue of $215.9 million for the second quarter showed 49% revenue growth from a year prior, on par with the growth the work chat company saw in the previous two quarters. However, compared to other remote work beneficiaries like Zoom, which reported a 355% year-over-year revenue increase last week, Slack's numbers have been underwhelming to many observers.
"Any other year, this would be solid. But the growth of Zoom, [Microsoft] Teams, [Cisco] Webex and others in the space leaves a lot of questions as to whether Slack will see continued growth," said Dan Newman, an analyst at Futurum Research.
So despite beating the consensus view for the quarter on its earnings, it wasn't a blockbuster win like Zoom, which is what investors were expecting, analysts told Business Insider.
If Slack was going to show growth like Zoom did, "it likely would have been last quarter, but this quarter should also have been strong," Futurum Research analyst Newman said. "And given the work from home boom, the company failed to impress in either quarter."
Rishi Jaluria at D.A. Davidson was more optimistic, and said he thinks this is "a case of just the near-term headwinds outweighing the longer-term tailwinds."
On a call with analysts following the earnings release, CEO Stewart Butterfield said many of Slack's customers are themselves facing economic pressures in the pandemic.
Slack has seen more paid customer "churn" and a decrease in expansion within existing paid customers since the beginning of the year, according to a quarterly filing. That means more paid customers are reducing the number of people in their organization using Slack, or electing to not renew subscriptions.
Analysts also speculate that competition from rival Microsoft Teams could be playing a factor in why Slack hasn't seen rapid growth.
Impacts of the pandemic
While Slack did sign on new customers — 8,000 new paid customers during the quarter, to be precise — overall growth wasn't as fast as Wall Street was expecting.
Slack's growth in the first quarter of this year was also underwhelming, so given the results reported Tuesday, Slack's now had two quarters of growth on par with pre-pandemic levels, while its peers have show much more growth.
Butterfield said on the analyst call that many companies were scrutinizing budgets more during the last quarter and that "the urgency at the moment favors short-term solutions to solve immediate problems," suggesting that this dynamic is not benefiting Slack. CFO Allen Shim also said that the current situation makes its sales cycle longer.
For the first half of the year, Slack gave customers affected by the pandemic $11 million in concessions to help lighten their financial burdens, though $7 million of that was in the first quarter alone, Shim said on the analyst call. He added that less than 20% of its customers are in industries directly impacted by the pandemic.
As businesses shrank and reduced spending on Slack, it also saw 50 customers who were paying between $100,000 to $150,000 annually drop down to paying between $50,000 to $100,000 a year for the service. Last year, during the same quarter, only 10 customers moved from the higher paying bracket to a lower paying one.
"When our customers downsize, freeze hiring or hire more slowly, net dollar retention is negatively impacted," Butterfield said. "That impact is direct. And because of our fair billing policies and the substantial number of smaller customers on monthly plans, it shows up much more quickly than it would for others in our industry."
Competition from Microsoft Teams
Some analysts also say Slack's growth could be holding steady as opposed to skyrocketing due to competition from Microsoft Teams. Microsoft offers Teams as part of its Office 365 bundle of productivity apps, so many companies already have access. That makes it a convenient option for companies who had to pivot quickly to remote work.
"I believe IT is standardizing more, embracing Teams, which most already have as part of O365," Newman said.
Dan Ives at Wedbush agreed and said Microsoft Teams remains a "clear competitive threat."
Even before the earnings report, analysts speculated that Slack is under increasing pressure from competition with Microsoft Teams. In July, Slack filed an antitrust complaint with the European Commission against Microsoft and its Teams software.
Butterfield however brushed off concerns that competition with Microsoft has a major impact on Slack's growth. On the call with analysts he said "win rates" against Microsoft Teams are the same. "So while no doubt that it causes some friction and it's another thing for us to overcome, it doesn't put any kind of ceiling or limit on our growth."
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