STOCK | 9/14/20 FRESH LOOK SLACK TECHNOLOGIES INC. (Ticker: WORK) LBIR Recommendation Stock Price: $25.6 (9/14/20) Company Size: 14.92B Author: Janice Quek Company Rank: 859 Sector: Technology Industry: Productivity Software Slack is a cloud-based work communication and collaboration software. IN THIS FRESH LOOK WE’LL COVER: u Summary of the Business Slack is a work communication and collaboration software designed to become a Grab-and-Goä “digital office” for workers. THESIS u Recent Developments The company registered good new customer An investment in Slack is a play on growth from pandemic-related remote work demand for enterprise communication measures. However, churn also increased due software. Slack is a cloud-based to employees furloughs and layoffs. Slack also platform built for businesses to send released Slack Connect and acquired Rimeto. messages, make video and phone calls, and collaborate internally and u Competitive Environment externally on work projects. It is one The company is one of the leading vendors in of the top vendors in this space, but this space, competing aggressively with product innovation and aggressive Microsoft for enterprise customers. However, sales in the enterprise will be two Slack appears to have the better product. areas it needs to continue to perform u Conclusions/Recommendations to remain in the lead. We think Slack has the potential to accelerate momentum as the economy recovers and as new products take flight. However, competition is intense, and we want to see a stronger pace of growth before changing our recommendation. SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 1 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: WORK | 9/14/20 FRESH LOOK Data as of 9/14/20 unless specified Revenue Fwd $876M Enterprise Value: 14.92B Market Cap: 15.81B (TTM): ($167.9 M) YTD Return: 14.15% Fwd (TTM) 16.7x RSI: 51.9 Price/Sales: (18.5x) Gross Margin 86.79% Revenue Growth 38.9% ROIC (TTM): -73.9% (TTM): (Fwd, YoY): 52-Week High: 40.07 52-Week Low 15.10 200-day Moving 27.28 Avg. EBITDA -291.2M CFO 24.6M FCF -8.0M Insider Transactions (2020): Insiders old 319,364 shares in the last three months Replace email with a ‘digital office’ platform SUMMARY OF BUSINESS û Slack’s main goal is to replace email with a Slack is a leading channels-based communication dramatically more effective and engaging way to platform built for the enterprise. The company communicate. The platform’s interface is earns its revenue from subscription fees it charges designed for users to send text and work content its clients for using its cloud-based software. akin to a social media chat tool in an easy to read format using channels, with each channel created Email and its limitations are hindering for a specific topic. The entire history of the productivity channel which includes conversations, documents and application workflows remain in For decades email has been the primary means of the channel for every member even if they were written communication between employees of a added at a later stage, giving everyone a complete company and with external parties for business picture of the discussion. Channels can be shared activities. While improvements and various tools channels to include external participants outside have become available to make emails more of the organization, and with the ability to organized and work collaboration easier, email integrate over 2,300 third-party apps and external still has several limitations that makes software systems, members do not need to leave communication inefficient and incomplete, the platform to access information, take action or leading to lost productivity. As organizations advance workflows. However Slack’s vision is look to new tools to improve communication, a more than just a communication tool. It envisions market for enterprise communication platforms itself as a “digital office” and “information hub”, has grown, valued at $28 billion today, according bringing people, applications and data on a single to Slack. Grandview Research expects that the technology stack. Within the last year, the global team collaboration software market is company has been expanding its capabilities expected to grow at a CAGR of 9% between 2018 through internal development and acquisitions, and 2025. broadening its set of differentiated applications on the platform. Slack Connect and Rimeto are two recent examples. (see Recent Developments SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 2 LEFTBRAINIR.COM . 630-517-9300 EQUITY 0.94 STOCK: WORK | 9/14/20 FRESH LOOK for details). In the near future, the company intends to deepen integration with certain vendors to strengthen interoperability dramatically, making LB•LOGIC Slack Connect and work within Slack more seamless, convenient and Rimeto are two ways the company superior in user experience. can expand its product line to strengthen the user experience. Other possible ways include customer chat services, more collaboration tools, or Financial and Operational Metrics products built for specific verticals. Slack has shown tremendous growth rates in the last 4 years, increasing its revenue at a CAGR of 81.6% between FY17 and FY20. Although a large number of users use its free service, the number RECENT DEVELOPMENTS û of paid customers has also grown from 59,000 at Slack’s Q2 was generally positive, albeit with the end of FY18 to reach 130,000 in just two and a some negative Covid-related dynamics. Work- half years. Engagement on the platform is high, from-home practices continued to drive increase and more customers are adopting its Slack in the number of new paid customers and Slack Connect product. About 94% of paid customers Connect, its newest product that support inter- are building their customer integrations. Net organizational communication on the platform, dollar retention rates on the platform are strong helped add a good proportion of new accounts (1 at 125%, although this metric has been falling, in out of every 8) through existing customer invites. part due to higher churn from Covid-19. While The company reported that net new paid the company is not yet profitable, its margins are customers grew at a faster rate in June and July, expanding. compared to April and May, most likely after the initial trial periods for many ended, which Slack mentioned as “potentially finding a new baseline LB•LOGIC We think that the rate”. However, the weaker Covid economic percentage of custom integrations are also a reflection of customers’ level of environment also elevated churn as customers engagement on the Slack platform. downsized, furloughed and freezed hiring. As When users customize their platform Slack bills on a per seat basis, and with fair billing with applications and tools that fit their workflow, it builds dependencies and policies that pause fees if employees stop using routine over time that makes switching the platform, this affected billings and net dollar vendors more unlikely. retention rate to some extent. Management also highlighted more budget scrutiny and postponing of software for new categories in the enterprise and those with longer adoption curves, which slowed expansion rates in the quarter. The company offered $4 million of Covid-related concessions to ease the financial burden of some distressed customers. Q2 aside, the company does not expect the sames rates to churn in subsequent quarters as the economy recovers. SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 3 LEFTBRAINIR.COM . 630-517-9300 EQUITY 0.94 STOCK: WORK | 9/14/20 FRESH LOOK Product Innovation and Company Expansion Financial and Operating Results Slack announced its acquisition of Rimeto, an enterprise directory software provider, in Q2. Against this backdrop, Slack announced total Rimeto has advanced profile and directory revenue of $215.9 million, an increase of 49% YoY features that provides detailed information about from Q2 of FY2020. It added about 8,000 net new an organization and its employees such as paid customers, up 30% YoY, of which 985 had departments, internal structure, work titles, annual recurring revenues (ARR) greater than employee skills, experience and current projects, $100,000, and 87 had ARRs greater than $1 so others can more easily connect and collaborate million. Churn was higher due to the more with them. Management sees Rimeto as a useful challenging economic conditions, and application to enhance connections within Slack, management saw contractions increased 3 enabling users to build networks with others percentage points above normal levels. In the from another organization, and to collaborate ARR>$100K segment, about 50 customers with more effectively with relevant professional ARRs previously in the $100,000 to $150,000 information about the person they are working category downgraded their contracts to the with. It is unclear how the company will $50,000 to $100,000 category, compared to 10 in monetize this solution, but it will be another the same quarter last year. On the bright side, capability built on the platform. these customers continue to maintain their subscription with Slack, versus reverting to email entirely for communication. Overall however, Slack also officially released Slack Connect in customer retention was still high in the mid-to- June after a soft launch earlier. Slack Connect high 90s for customers in the ARR>$100K allows employees of one organization to category and in the low 90s for those with ARR communicate with another using the platform. between $1,000 and $100,000. Net dollar retention Up to 20 organizations can share a single channel. rate fell to 125% in Q2 from 132% in the prior Slack Connect has shown very promising results. quarter. Calculated billings slowed to 25% YoY, At its Q2 earnings call, the company reported reaching $218 million in the quarter.