Slack drops 10%+ after its revenue growth, guidance fail to impress

Today Slack reported its earnings results for the three months ending April 30, 2020, the first quarter of its fiscal 2021.

The well-known SaaS chat service posted revenue of $201.7 million, up 50% compared to its year-ago period. Slack also reported an adjusted per-share loss of $0.02, and per-share losses of $0.13 when counting all costs. Analysts aggregated by Yahoo Finance expected the company to lose $0.06 per share against $188.12 million in revenue.

Immediately after its earnings report, shares of the company are off around 13%, after dropping around 4.4% during a down day for companies that share its business model (software as a service). Our first read of the stock decline is that investors had expected the firm to more aggressively beat expectations and had priced the company more richly in anticipation of stronger results.

Those expectations, if so, were not unfounded. The company had previously discussed how quickly it was growing thanks to the COVID-19 pandemic, which pushed many organizations to buy new software services to allow their workers to labor at a distance.

Slack’s earnings come after Zoom, a SaaS video communications company, and CrowdStrike, a SaaS cybersecurity firm, both posted outsized growth due in part to an accelerated digital transformation and remote work’s necessities for new tooling.

That boom in usage was mentioned by the firm, which reported that it “added a record of over 90,000 net new organizations on either a free or paid subscription plan.” According to its earnings release, Slack added 12,000 net new customers in the same period. Given the instant market reaction to shed its equity, it’s clear investors had expected the company to sign up more paid and fewer free plans. If they had succeeded in doing so, Slack could have driven more revenue in the quarter.

Slack noted that it expects “$206 million to $209 million” in current-quarter revenue, representing growth of 42% to 44% on a year-over-year basis. The company also expects to lose $0.03 to $0.04 per share in the three-month period on an adjusted basis.

Regardless of the market’s reaction to this particular quarter, Slack is well-capitalized, having sold $750 million in convertible senior notes, adding capital to its balance sheets at a slim interest rate of 0.50%. It can take this punch.

Not all the news in Slack’s earnings document will irk investors. There were some bright lights. First, its revenue growth did accelerate a bit compared to its preceding quarter’s 49%. And, its 132% net retention rate is still top-of-the-line. Even more, the firm GAAP gross margin improved to 87.3%, another impressive metric.

But investors, it appears, expected more revenue growth acceleration than Slack ultimately delivered.

As a final note, Slack’s “miss” of a sort will undercut some narrative that SaaS business would, generally, see their revenue growth accelerate. Slack joins Salesforce and Smartsheet in turning in earnings recently that did not delight the investing classes.