Slack Management Talks Enterprise Customers, Operating Leverage, and More

Slack‘s (NYSE: WORK) third-quarter results didn’t disappoint. The company’s revenue growth accelerated to a growth rate of 60% (up from 58% in Q1). The collaborative communication-software specialist’s non-GAAP (adjusted) loss per share was also better than expected. In response to the report, shares of the tech company jumped on Thursday, rising more than 4%.

To better digest Slack’s strong third-quarter results and get a better understanding of the key drivers of the company’s momentum, investors can tune into Slack’s third-quarter earnings call. During the call, management provided useful insight into a number of the catalysts behind the company’s impressive performance, as well as its potential for sustained momentum in Q4 and beyond.

Here are some of the key takeaways from the quarter.

Image source: Slack.

Slack is gaining traction in enterprise

Large customers, or customers contributing more than $100,000 in annual recurring revenue, are becoming increasingly important to Slack’s quarterly results. And this is a good thing since Slack has strong traction with these customers. Slack ended the quarter with 821 large customers — up 67% year over year.

Management expects strength in enterprise to persist. “We expect large customer growth to exceed total paid customer growth for the foreseeable future as we invest more in enterprise sales and customer success,” said Slack CFO Allen Shim in the company’s third-quarter earnings call. “Paid customers with greater than $100,000 in ARR [annual recurring revenue] represented 47% of revenue in the third quarter, up from 39% in the year-ago quarter.”

Impressive customer spend growth remains a key catalyst

While much of Slack’s 60% revenue growth in Q3 came from an increase in total customers, another important driver is the company’s ability to get its current customers to spend more. Slack’s net dollar retention rate measures this expansion within existing customers — and this metric is tracking well.

“Our strong customer retention and ability to expand within existing customers have resulted in a consistently high net dollar retention rate, which was 134% at the end of our third quarter,” said Shim.

Slack plans to deliver improved operating leverage

When asked about the meaningful upside Slack delivered on its top and bottom line during the quarter, Shim said it boiled down to a combination of the company’s investments in growth opportunities paying off and the scalability of Slack’s business. Shim explained:

We’re going to continue to invest in growth, continue to invest in innovation, and we’re leading in those areas. But you’re also going to see more leverage. And I think this is really part of our deliberate effort to continue to drive more efficiency in the business as we invest in growth.

Slack is already demonstrating meaningful operating leverage on a non-GAAP basis. The company said its non-GAAP operating margin improved by 26 percentage points year over year.

But investors shouldn’t get too excited about Slack becoming profitable in the near future. Shim said the company still sees “more opportunities to invest.” He believes the company is “still early in this category, and the opportunity is so large that, really, the most prudent thing for us to do is to continue to go after acquiring more customers, growing them out and building more of the capabilities.”

Still, if these investments pay off in more upside than management expects, the inherent scalability of Slack’s business model could lead to profitability sooner than anticipated.

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Daniel Sparks 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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