Holding ESTC & Will Likely Add to WORK Tomorrow

I’ll try to get a more in depth earnings review out tomorrow but a quick summary:

ESTC reported strong earnings with a lower billings number and losses that probably spooked the market. The stock is down 15% after hours. I have a 7% position and I’m comfortable with it where it’s at.

ESTC Second Quarter Fiscal 2020 Financial Highlights

● Total revenue was $101.1 million, an increase of 59% year-over-year, or 63% on a constant currency basis. Beat high end of guidance by $4.1 million

● SaaS revenue was $20.6 million, an increase of 106% year-over-year, or 114% on a constant currency basis.

● Calculated billings was $125.3 million, an increase of 41% year-over-year, or 45% on a constant currency basis.

● Deferred revenue was $201.3 million, an increase of 58% year-over-year.

● Non-GAAP operating loss was $18.4 million; non-GAAP operating margin was -18%. Better than guidance by 3.1%

● Operating cash flow was $0.3 million with free cash flow of -$1.4 million.

● Cash and cash equivalents were $305.2 million as of October 31, 2019.

● Total subscription customer count was over 9,700, compared to over 8,800 in Q1.

● Total customer count with ACV greater than $100,000 was over 525, compared to over 475 in Q1.

● Subscription revenue represented 91% of total revenue.

Financial Outlook The Company is providing the following guidance:

For its third quarter of fiscal 2020 (ending January 31, 2020):

● Total revenue is expected to be between $106 million and $108 million.

● Non-GAAP operating margin is expected to be between -26.0% and -24.0%.

● Total revenue is expected to be between $415 million and $417 million.

● Non-GAAP operating margin is expected to be between -23.0% and -22.0%, including approximately -2% related to the acquisition of Endgame.

For its fiscal year 2020 (ending April 30, 2020):

● Total revenue is expected to be between $415 million and $417 million. Increased from guidance of $406 million to $412 million from last quarter.

● Non-GAAP operating margin is expected to be between -23.0% and -22.0% improved from -24.5% to -22.5% after last quarter, including approximately -2% related to the acquisition of Endgame.

Slack (WORK) also reported a very strong quarter and I believe the threat from Teams is very misunderstood. Teams is not a threat to Slack in my opinion.

WORK Third Quarter Fiscal 2020 Financial Highlights:

  • Total revenue was $168.7 million, an increase of 60% year-over-year. Up from 58% YoY growth last quarter and beat their guidance by $12.7 million.

  • Calculated Billings was $186.1 million, an increase of 47% year-over-year.

  • Non-GAAP gross profit was $148.9 million, or 88.3% gross margin, compared to $92.5 million, or 87.5% gross margin, in the third quarter of fiscal year 2019.

  • Non-GAAP operating loss was $18.1 million, or 11% of total revenue, compared to a $39.6 million loss in the third quarter of fiscal year 2019, or 37% of total revenue. Their guidance for this quarter was $47 million so this is a great improvement.

  • Net cash used in operations was $9.1 million, or 5% of total revenue, compared to cash used in operations of $28.4 million, or 27% of total revenue, for the third quarter of fiscal year 2019. Free Cash Flow was $(19.1) million, or 11% of total revenue, compared to $(43.5) million, or 41% of total revenue for the third quarter of fiscal year 2019.

Recent Business Highlights:

  • Third Quarter Highlights:

    • Ended the quarter with over 105,000 Paid Customers, up 30% year-over-year.

    • Net dollar retention rate was 134%.

    • The number of Paid Customers with greater than $100,000 in annual recurring revenue was 821, up 67% year-over-year.

    • The number of Paid Customers with greater than $1 million in annual recurring revenue exceeded 50 for the first time.

    • Announced general availability of shared channels and Workflow Builder.

    • Ended the quarter with over 26,000 Paid Customers using shared channels, up from over 20,000 at the end of last quarter.

Financial Outlook:

For the fourth quarter of fiscal year 2020, Slack currently expects:

  • Total revenue of $172 million to $174 million, representing year-over-year growth of 41% to 43%.

  • Non-GAAP operating loss of $36 million to $34 million.

  • Non-GAAP net loss per share of $0.07 to $0.06, assuming weighted average shares outstanding of 550 million.

For the full fiscal year 2020, Slack currently expects:

  • Total revenue of $621 million to $623 million, representing year-over-year growth of 55% to 56%. Up from guidance of $603 million to $610 million last quarter.

  • Non-GAAP operating loss of $144 million to $142 million, including approximately $30 million of one-time direct listing related expenses. Improved from guidance of $180 million to $176 million after last quarter.

  • Calculated Billings of $745 million to $760 million, representing year-over-year growth of 44% to 47%.

  • Free Cash Flow net burn of $85 million to $80 million, including approximately $30 million of one-time direct listing-related expenses and $21 million of one-time direct listing related cash taxes related to RSU vesting.

And a couple of the most important highlights from the conference call:

This one of their advantages over Teams

Allen Shim

Yeah. Richard, it's Allen. I'll just add that, overall our open-platform strategy continues to be a real strategic advantage for us. And you're seeing the ecosystem more broadly benefiting. We've got over 2,000 apps on in the app directory, over 700,000 developers and over 550,000 custom applications. So, just really building on the investments and strategy of having this open-platform strategy, including the kind of go-to-market element.

Shared channels is going to be huge

Stewart Butterfield

So great questions. I would say that the general availability of share channels probably had some really minor impact on the enterprise, because enterprise customers were added to the beta late, and we definitely saw people resistant upgrades to grid, because share channels usage was so important to them. But I don't think that's going to be a major driver by any measure now.

And I think just more broadly, while we're very excited about share channels and we see some really promising early results. Obviously, when we see someone upgrading and immediately create share channel. We think that's a driver of the usage. There's some interesting stories. We'll be sharing about service providers actually paying for their customers' Slack usage because they feel like can deliver a better service that way. But this is like a driver for the business at scale three to five years out as opposed to something that's going to make a doing next week.

By Q1 results, we should be able to give a better idea of the dynamics there. But we're not even modeling the impact of share channels ourselves at this point, because it's just too early to say.

Lots of total addressable market left for Slack to take. Even within their existing customers

Allen Shim

The last time we looked at this, when we said, what is the, particularly, the TAM within our existing large customer's, it was in the low double-digit percentage. So it's 3, 4, 5x higher in terms of expansion opportunity just within that existing base to kind of give you another angle at it.

They will get more efficient with scale

Allen Shim

Well, I think it's a reflection of – this is a software SaaS model. I mean, we have very strong fundamentals, high gross margins and strong retention dynamics. So I think we've always said as part of the growth phase, the first priority is to invest in growth, and you're seeing that. We're going to continue to invest in growth, continuing 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 a part of our deliberate effort to continue to drive more efficiency in the business as we invest in growth. So I think both have always been kind of a dual-track goal for us, and we're really just executing against that.

Finally, talking directly about the Teams narrative

Raimo Lenschow

Sorry, sorry. Sorry I was on mute. If you look at the competition without naming is like, so the main marketing message around the active users. But that's kind of also almost like a false number because it doesn't really tell you anything about engagement levels and how do you – is there a way – or what are you thinking about reacting to that in terms of like, if you look at the Slack usage that you see out in the field there, it looks – the engagement level seems a lot higher. But I'm just wondering how – what's the way for you to kind of communicate that? Thank you.

Stewart Butterfield

If you have ideas for how to communicate, I would love to hear it, because we're trying a lot of stuff. I think it's going to take some time, and it's going to take a couple of more quarters for people to really appreciate it. But I mean, the confusion is deliberately created. I mean, you can't make any mistake about that. And it's not just -- I think we undercount the difference a little bit. If you talk about just like, there's more engagement here and a little bit less here because that makes it just purely quantitative where, I think, it's a quality difference.

There is a lot of people who have desktop VoIP phones that work Skype for Business and are now achieved. So they pick up the phone and make a call and they are -- a team user has nothing to do with what people do. You Slack for why people are switching to Slack, the strength of the platform or any of that.

So I mean I want to just be candid and say, we haven't carry out the right way to message that. I think trying to get ahead of it and get people to understand that you were going to hear 30 million day active user announcement and the 50 million daily active user announcement and 100 million daily active user announce, because the 100 million people using link.

So, of course, they're going to get there. I think our priority is really serving the customers, continuing to not getting too drawn into that distraction. But we do have to head on when we go to talk to customers, because there's going to be a population of 1,000 people who have built all these incredible integrations inside this customer and people are fanatical, and they say it's transformed where they were, and you reach a population outside that, where people don't -- aren't familiar with it and they kind of shrug their shoulder and think that we already get teams to free. Getting past that can take us a couple of months or it can take a couple of years. People have done multiyear valuation of teams that have ultimately failed and they’ve gone back and expanded their Slack usage. And if we can figure out a way to get that happening in a month or a week or a day, we would love to roll that out very broadly.

Allen Shim

I mean, when we see 70% of our top 50 customers, our office -- also Office 365 customers. It's clear to us that the comers appreciate the difference and what the transformation that we can provide versus the more communication, legacy tools that they already have.

So we want to continue to invest in that, continue to invest in customer success, continue to invest in how people want to change their organization's culture and may become more agile. And we think that that's something that will take time as stores. So it's a new category. We're spending a lot of time in education, and we know we still have a long way to go.

That’s all for now. Big day for earnings tomorrow. We have OKTA, PD, CRWD, and ZM reporting. Thanks for reading and subscribe if you want a free hug.