SLACK TECHNOLOGIES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our final prospectus filed with theSecurities and Exchange Commission , or theSEC , pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, onJune 20, 2019 , as amended by the prospectus supplement datedSeptember 5, 2019 , or the Prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and in our Prospectus. Our fiscal year endsJanuary 31 . Overview Slack is a new layer of the business technology stack that brings together people, applications, and data - a single place where people can effectively work together, access hundreds of thousands of critical applications and services, and find important information to do their best work. Slack has very general and broad applicability. It is not aimed at any one specific purpose, but at nearly anything that people do together at work. Slack is used to review job candidates, coordinate election coverage, diagnose network problems, negotiate budgets, plan marketing campaigns, approve menus, and organize disaster response teams, along with countless other tasks. Slack provides an easy way for users to share and aggregate information from other software, take action on notifications, and advance workflows in a multitude of third-party applications, over 2,000 of which are listed in the Slack App Directory. Developers have collectively created more than 550,000 third-party applications or custom integrations that were used in a typical week during the three months endedOctober 31, 2019 . Further, Slack's platform capabilities extend beyond integrations with third-party applications and allow for easy integrations with an organization's internally-developed software. Direct Listing OnJune 20, 2019 , we completed a direct listing of our Class A common stock, or the Direct Listing, on theNew York Stock Exchange , or the NYSE. Our restricted stock units, or RSUs, had a performance vesting condition that was satisfied upon the completion of the Direct Listing. In connection with this vesting, we recorded cumulative stock-based compensation of$245.1 million onJune 20, 2019 . In addition, we incurred nonrecurring fees related to financial advisory services, audit, and legal expenses in connection with the Direct Listing and recorded$0 and$30.4 million in general and administrative expense for the three and nine months endedOctober 31, 2019 , respectively. Key Business Metrics We review the following key business metrics to measure our performance, identify trends, formulate financial projections, and make strategic decisions. We are not aware of any uniform standards for calculating these key metrics, which may hinder comparability with other companies who may calculate similarly-titled metrics in a different way. We define an organization as a separate entity, such as a company, educational or government institution, or distinct business unit of a company, that is on a subscription plan, whether free or paid. Once an organization has three or more users on a paid subscription plan, we count them as a Paid Customer, and when disclosing the number of Paid Customers, we round down to the nearest thousand. Paid Customers We believe that the growth in our Paid Customer base reflects our value proposition and positions us for future growth as our Paid Customers often expand their adoption over time and Paid Customers increase awareness of Slack, which leads to organic adoption by new organizations. Our Paid Customers base has expanded through increasing awareness of Slack, further developing our go-to-market strategy and continuing to build features tuned to different industry needs. Our Paid Customer base includes organizations of all sizes across a wide range of industries. As ofOctober 31, 2019 and 2018, we had approximately 105,000 and 81,000 Paid Customers, respectively. 21 -------------------------------------------------------------------------------- Paid Customers >$100,000 We focus on growing the number of Paid Customers >$100,000 as a measure of our ability to scale with organizations on Slack and attract larger organizations to Slack. We believe that our ability to increase the number of Paid Customers >$100,000 is a key indicator for important components of the growth of our business, including our success in expanding the number of users within a Paid Customer, providing the functionality required by large organizations and developing our direct sales force. We define Paid Customers >$100,000 as those organizations on a paid subscription plan that had more than$100,000 in annual recurring revenue, or ARR, as of a period end. ARR is based on monthly recurring revenue, or MRR, for the most recent month at period end, multiplied by twelve. For Paid Customers that have a type of subscription agreement where billing is reconciled on a monthly or quarterly basis based on usage, MRR is calculated by multiplying the monthly subscription price, inclusive of discounts, by the number of active subscriptions as of the month end. For Paid Customers that have a type of subscription agreement where billing is fixed and independent of usage, MRR is calculated by multiplying the monthly subscription price, inclusive of discounts, by the number of purchased subscriptions. As ofOctober 31, 2019 , we had 821 Paid Customers >$100,000 , who contributed approximately 47% and 45% of revenue for the three and nine months then ended, respectively. As ofOctober 31, 2018 , we had 491 Paid Customers >$100,000 , who contributed approximately 39% and 38% of revenue for the three and nine months then ended, respectively. Net Dollar Retention Rate We disclose Net Dollar Retention Rate as a supplemental measure of our organic revenue growth. We believe Net Dollar Retention Rate is an important metric that provides insight into the long-term value of our subscription agreements and our ability to retain, and grow revenue from, our Paid Customers. We calculate Net Dollar Retention Rate as of a period end by starting with the MRR from all Paid Customers as of twelve months prior to such period end, or Prior Period MRR. We then calculate the MRR from these same Paid Customers as of the current period end, or Current Period MRR. Current Period MRR includes expansion within Paid Customers and is net of contraction or attrition over the trailing twelve months, but excludes revenue from new Paid Customers in the current period, including those organizations that were only on Free subscription plans in the prior period and converted to paid subscription plans during the current period. We then divide the total Current Period MRR by the total Prior Period MRR to arrive at our Net Dollar Retention Rate. As ofOctober 31, 2019 and 2018, our Net Dollar Retention Rate was 134% and 144%, respectively. Our Net Dollar Retention Rate has declined year over year as our base of revenue has grown and our penetration within existing, long-term Paid Customers has increased. Our Net Dollar Retention Rate will fluctuate in future periods due to a number of factors, including the growing level of our revenue base, the level of penetration within our Paid Customer base, expansion of products and features, and our ability to retain our Paid Customers. 22 -------------------------------------------------------------------------------- Non-GAAP Financial Measures In addition to our results determined in accordance withU.S. generally accepted accounting principles, or GAAP, we believe the below non-GAAP measures are useful in evaluating our operating performance. We use the below non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. Three Months Ended October 31, Nine Months Ended October 31, 2019 2018 2019 2018 (In thousands) Calculated Billings$ 186,126 $ 126,457 $ 510,570 $ 343,304 Free Cash Flow$ (19,106 ) $ (43,467 ) $ (61,180 ) $ (66,158 ) Calculated Billings Calculated Billings consists of our revenue plus the change in our deferred revenue in a given period. The Calculated Billings metric is intended to reflect sales to new paid customers plus renewals and additional sales to existing paid customers. Our management uses Calculated Billings to measure and monitor our sales growth because we generally bill our paid customers at the time of sale, but may recognize a portion of the related revenue ratably over time. For subscriptions, we typically invoice our paid customers at the beginning of the term, in annual or monthly installments and, from time to time, in multi-year installments. Only amounts invoiced to a paid customer in a given period are included in Calculated Billings. While we believe that Calculated Billings provides valuable insight into the cash that will be generated from sales of our subscriptions, this metric may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-over-quarter or year-over-year comparative measure. These reasons include, but are not limited to, the following: (i) a variety of contractual terms could result in some periods having a higher proportion of annual subscriptions than other periods, (ii) as we focus on sales to large organizations, the lengthening of our sales cycle, and the variability in the timing of the execution of these larger transactions, (iii) fluctuations in payment terms affecting the billings recognized in a particular period, and (iv) seasonality in our billings, with a greater proportion of our billings occurring in our fourth quarter, following typical enterprise software buying patterns. Because of these and other limitations, you should consider Calculated Billings along with revenue and our other GAAP financial results. The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to Calculated Billings, for each of the periods presented: Three Months Ended October 31, Nine Months Ended October 31, 2019 2018 2019 2018 (In thousands) Revenue$ 168,725 $ 105,648 $ 448,519 $ 278,585 Add: Total deferred revenue, end of period 303,924 190,172 303,924 190,172 Less: Total deferred revenue, beginning of period (286,523 ) (169,363 ) (241,873 ) (125,453 ) Calculated Billings$ 186,126 $ 126,457 $ 510,570 $ 343,304 Free Cash Flow Free Cash Flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less purchases of property and equipment. We believe that Free Cash Flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations that, after the purchases of property and equipment, can be used for strategic initiatives, including investing in our business, making strategic acquisitions, and strengthening our balance sheet. Free Cash Flow has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities. Some of the limitations of Free Cash Flow are that this metric does not reflect our future contractual commitments and may be calculated 23 -------------------------------------------------------------------------------- differently by other companies in our industry, limiting its usefulness as a comparative measure. We expect our Free Cash Flow to fluctuate in future periods as we invest in our business to support our plans for growth. These activities, along with certain increased operating expenses as described below, may result in a decrease in Free Cash Flow as a percentage of revenue in future periods. The following table summarizes our cash flows for the periods presented and provides a reconciliation of net cash from operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to Free Cash Flow, for each of the periods presented: Three Months Ended October 31, Nine Months Ended October 31, 2019 2018 2019 2018 (In thousands) Net cash used in operating activities$ (9,099 ) $ (28,375 ) $ (22,904 ) $ (23,454 ) Purchases of property and equipment (10,007 ) (15,092 ) (38,276 ) (42,704 ) Free Cash Flow$ (19,106 ) $ (43,467 ) $ (61,180 ) $ (66,158 ) Net cash provided by (used in) investing activities$ (23,858 ) $ (289,939 ) $ 320,733 $ (335,688 ) Net cash provided by financing activities$ 11,156 $ 427,623 $ 15,875 $ 435,554 Key Components of Results of Operations Revenue We generate substantially all of our revenue through sales of subscriptions of Slack to organizations. We recognize subscription revenue on a straight-line basis over the term of the contract subscription period beginning on the date access to Slack is granted, provided all other revenue recognition criteria have been met. Our subscriptions are generally non-cancellable and typically do not contain general rights of return. We maintain a fair billing policy, under which certain organizations on a paid subscription plan are entitled to credit if they have not used the entirety of the contracted number of users for which they have paid during the contractual term of the arrangement. These credits, accounted for as a part of deferred revenue, may be carried over to offset future billings and are not refundable for cash. On occasion, we also provide professional services to organizations on Slack. Professional services revenue has not been material to date. Overhead Allocation and Employee Compensation Costs We allocate shared costs, such as facilities (including rent, utilities, and depreciation on equipment shared by all departments) and information technology, or IT, costs to all departments based on headcount. As such, allocated shared costs are reflected in cost of revenue and each operating expense category. Employee compensation costs, or personnel costs, include salaries, bonuses, benefits, and stock-based compensation for cost of revenue and each operating expense category and also includes sales commissions for sales and marketing. Cost of Revenue Cost of revenue consists primarily of expenses related to hosting Slack and providing ongoing customer support for paid customers. These expenses include employee compensation (including stock-based compensation) and other employee-related expenses for customer experience, professional services, and technical operations staff, payments to outside service providers, third-party hosting costs, payment processing fees, and amortization expense associated with internally-developed and purchased technology. We expect our cost of revenue to continue to increase in absolute dollar amounts as we grow our business and revenue. Operating Expenses Research and Development. Research and development expenses consist primarily of personnel costs and allocated overhead. Our research and development efforts focus on maintaining and enhancing existing functionality of, and adding new functionality to, Slack. We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new features and enhancements. We expect, however, that our research and development expenses will decrease as a percentage of our revenue over time as our revenue grows, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our research and development expenses. Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, expenses associated with our marketing and business development programs, including Frontiers, our annual user conference, Spec, our annual developer conference, and other events, sponsorships, and Slack conferences. Sales and marketing expenses also include allocated third- 24 -------------------------------------------------------------------------------- party hosting costs as well as customer experience and technical operations employee overhead costs for users of our free version of Slack. Sales commissions that are directly related to acquiring sales contracts, as well as associated payroll taxes, are deferred upon execution of a non-cancellable contract with an organization, and subsequently amortized to sales and marketing expense over the estimated period of benefit, typically four years. We plan to increase the dollar amount of our investment in sales and marketing for the foreseeable future, primarily for increased headcount for our direct sales organization and investment in brand and product marketing efforts. We expect to continue to incur sales and marketing expenses to the extent that we continue to see a high-growth market opportunity to support the growth of our business. If the growth in our business lessens over time, we plan to decrease the rate of growth in our sales and marketing expenses. We expect, however, that our sales and marketing expenses will decrease as a percentage of our revenue over time as our revenue grows, although the percentage may fluctuate from period to period depending on fluctuations in the timing and extent of our sales and marketing expenses. General and Administrative. General and administrative expenses consist primarily of personnel costs for our finance and accounting, legal, human resources, and other administrative teams as well as for certain executives and professional fees, including audit, legal, and recruiting services. We expect to increase the size of our general and administrative function to support the growth of our business. We also expect to recognize certain non-recurring costs as part of our transition to a publicly-traded company, consisting of professional fees and other expenses. These fees are being expensed in the period incurred. We expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on aU.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC . In addition, as a public company, we expect to incur increased expenses in the areas of insurance, investor relations, and professional services. As a result, we expect the dollar amount of our general and administrative expenses to increase for the foreseeable future, although the dollar amount of our general and administrative expenses may decrease in certain future periods compared to the three months endedJuly 31, 2019 as a result of one-time expenses related to the Direct Listing. We expect, however, that our general and administrative expenses will decrease as a percentage of our revenues over time, although the percentage may fluctuate from period to period depending on fluctuations in our revenue and the timing and extent of our general and administrative expenses. Other Income (Expense), Net Other income (expense), net consists primarily of interest income earned on our cash, cash equivalents, and marketable securities, gains or losses on foreign currency exchange, and the change in fair value of our strategic investments. Provision (Benefit) for Income Taxes Provision (benefit) for income taxes consists primarily ofU.S. federal, state income taxes, and income taxes in certain foreign jurisdictions in which we conduct business. Since inception, we have incurred operating losses and, accordingly, have not recorded a provision for income taxes for any of the periods presented other than provisions for foreign income tax. InJuly 2015 , theU.S. Tax Court issued an opinion favorable toAltera Corporation , or Altera, with respect to the exclusion of stock-based compensation from its intercompany cost-sharing arrangement. InJune 2019 , theU.S. Court of Appeals reversed the 2015 decision of theU.S. Tax Court. OnJuly 22, 2019 , Altera petitioned the Ninth Circuit to a rehearing of a larger panel of eleven Ninth Circuit judges. Altera's petition for rehearing was denied onNovember 12, 2019 . We are currently evaluating the potential impact on our consolidated financial statements for the year endingJanuary 31, 2020 . Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
25
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Three Months Ended October 31, Nine Months Ended October 31,
2019 2018 2019 2018
(In thousands)
Revenue $ 168,725 $ 105,648 $ 448,519 $ 278,585
Cost of revenue(1) 23,140 13,540 72,820 35,002
Gross profit 145,585 92,108 375,699 243,583
Operating expenses:
Research and development(1) 94,853 40,990 363,725 111,582
Sales and marketing(1) 96,210 67,687 299,440 163,408
General and administrative(1) 49,524 34,185 209,624 79,361
Total operating expenses 240,587 142,862 872,789 354,351
Loss from operations (95,002 ) (50,754 ) (497,090 ) (110,768 )
Other income (expense), net 7,135 3,376 17,323 7,263
Loss before income taxes (87,867 ) (47,378 ) (479,767 ) (103,505 )
Provision (benefit) for income taxes (101 ) 318 (504 ) 753
Net loss (87,766 ) (47,696 ) (479,263 ) (104,258 )
Net income (loss) attributable to
noncontrolling interest(2) 1,395 (24 ) 2,792 156
Net loss attributable to Slack
_______________
(1) Includes stock-based compensation as follows:
Three Months Ended October 31 ,
Nine Months Ended
2019 2018 2019 2018
(In thousands)
Cost of revenue $ 2,673 $ 40 $ 13,671 $ 701
Research and development 40,077 3,532 193,117 7,871
Sales and marketing 17,638 227 82,792 1,679
General and administrative 13,473 6,716 73,707 8,020
Total stock-based compensation $ 73,861 $ 10,515 $
363,287
(2) Our condensed consolidated financial statements include our majority-owned
subsidiary,
Fund is recorded as a noncontrolling interest.
Three Months Ended October 31, Nine Months Ended October 31,
2019 2018 2019 2018
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 14 % 13 % 16 % 13 %
Gross profit 86 % 87 % 84 % 87 %
Operating expenses:
Research and development 56 % 40 % 81 % 40 %
Sales and marketing 57 % 64 % 67 % 60 %
General and administrative 29 % 32 % 47 % 28 %
Total operating expenses 142 % 136 % 195 % 128 %
Loss from operations (56 )% (48 )% (111 )% (40 )%
Other income (expense), net 4 % 3 % 4 % 3 %
Loss before income taxes (52 )% (45 )% (107 )% (37 )%
Provision (benefit) for income taxes - % - % - % - %
Net loss (52 )% (45 )% (107 )% (37 )%
Net income (loss) attributable to
noncontrolling interest 1 % - % - % - %
Net loss attributable to Slack (53 )% (45 )% (107 )% (37 )%
26--------------------------------------------------------------------------------
Comparison of the Three Months Ended
Three Months Ended October 31,
2019 2018 $ Change % Change
(In thousands)
Revenue $ 168,725 $ 105,648 $ 63,077 60 %
Cost of revenue 23,140 13,540 9,600 71
Gross profit $ 145,585 $ 92,108 $ 53,477 58
Revenue increased $63.1 million , or 60%, for the three months ended October 31,
2019 compared to the three months ended October 31, 2018 . The increase in
revenue was primarily due to expansion within our existing Paid Customers, as
reflected by our Net Dollar Retention Rate of 134% as of October 31, 2019 , and
the addition of new Paid Customers, as our number of Paid Customers grew from
81,000 as of October 31, 2018 to 105,000 as of October 31, 2019 .
Cost of revenue increased $9.6 million , or 71%, for the three months ended
October 31, 2019 compared to the three months ended October 31, 2018 . The
increase was primarily due to a $2.9 million increase in third-party hosting
costs as the number of organizations on and users of Slack in general increased,
a $2.7 million increase in stock-based compensation and related employer payroll
taxes, primarily driven by the satisfaction of the performance vesting condition
on outstanding RSUs in connection with our Direct Listing in June 2019 , a $2.0
million increase in personnel and related costs, and a $1.1 million increase in
facility- and IT-related overhead costs due to additional headcount to support
the growth in organizations on Slack.
Operating Expenses
Three Months Ended October 31,
2019 2018 $ Change % Change
(In thousands)
Operating expenses:
Research and development $ 94,853 $ 40,990 $ 53,863 131 %
Sales and marketing 96,210 67,687 28,523 42
General and administrative 49,524 34,185 15,339 45
Total operating expenses $ 240,587 $ 142,862 $ 97,725 68
Research and Development
Research and development expenses increased $53.9 million , or 131%, for the
three months ended October 31, 2019 compared to the three months ended
October 31, 2018 . The increase was primarily due to a $37.7 million increase in
stock-based compensation and related employer payroll taxes, primarily driven by
the satisfaction of the performance vesting condition on outstanding RSUs in
connection with our Direct Listing in June 2019 , an $11.3 million increase in
personnel costs related to increased headcount, and a $3.1 million increase in
facility- and IT-related overhead costs to support our headcount growth and the
continued development and scalability of Slack.
Sales and Marketing
Sales and marketing expenses increased $28.5 million , or 42%, for the three
months ended October 31, 2019 compared to the three months ended October 31,
2018 . The increase was primarily due to a $17.9 million increase in stock-based
compensation and related employer payroll taxes, primarily driven by the
satisfaction of the performance vesting condition on outstanding RSUs in
connection with our Direct Listing in June 2019 . Personnel costs, which include
customer experience and infrastructure employee costs for users of our free
version, increased by $10.6 million related to increased sales and marketing
headcount to support our growth. The increase was also driven by a $3.9 million
increase in facility- and IT-related overhead costs to support our headcount
growth, and a $2.2 million increase in third-party hosting costs for users on a
Free subscription plan of Slack primarily due to continuing growth in our user
base. These increases were partially offset by a decrease in marketing expenses
of $7.9 million due to less spending on advertising.
27
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General and Administrative
General and administrative expenses increased $15.3 million , or 45%, for the
three months ended October 31, 2019 compared to the three months ended
October 31, 2018 . The increase was primarily due to a $7.1 million increase in
stock-based compensation and related employer payroll taxes, primarily driven by
the satisfaction of the performance vesting condition on outstanding RSUs in
connection with our Direct Listing in June 2019 , a $5.2 million increase in
personnel costs related to increases in our administrative, finance and
accounting, legal, IT, and human resources headcount, and a $1.7 million
increase in corporate expenses mainly related to local business taxes and
increased corporate insurance costs.
Other Income (Expense), Net
Other income (expense), net was $7.1 million for the three months ended
October 31, 2019 , an increase of $3.8 million from the three months ended
October 31, 2018 . The increase in other income (expense), net was primarily due
to a net increase in realized and unrealized gains from our strategic
investments of $3.0 million and increase of net foreign exchange gains of $0.6
million .
Provision (Benefit) for Income Taxes
The benefit for income taxes was $0.1 million for the three months ended
October 31, 2019 , a decrease of $0.4 million from the three months ended
October 31, 2018 , primarily related to the tax benefit resulting from
stock-based compensation of our foreign jurisdictions.
Comparison of the Nine Months Ended
Nine Months Ended October 31,
2019 2018 $ Change % Change
(In thousands)
Revenue $ 448,519 $ 278,585 $ 169,934 61 %
Cost of revenue 72,820 35,002 37,818 108
Gross profit $ 375,699 $ 243,583 $ 132,116 54
Revenue increased $169.9 million , or 61%, for the nine months ended October 31,
2019 compared to the nine months ended October 31, 2018 . The increase in revenue
was primarily due to expansion within our existing Paid Customers, as reflected
by our Net Dollar Retention Rate of 134% as of October 31, 2019 , and the
addition of new Paid Customers, as our number of Paid Customers grew from 81,000
as of October 31, 2018 to 105,000 as of October 31, 2019 .
Cost of revenue increased $37.8 million , or 108%, for the nine months ended
October 31, 2019 compared to the nine months ended October 31, 2018 . The
increase was primarily due to a $14.0 million increase in stock-based
compensation and related employer payroll taxes, primarily driven by the
satisfaction of the performance vesting condition on outstanding RSUs in
connection with our Direct Listing in June 2019 . The increase was also driven by
a $9.8 million increase in third-party hosting costs as the number of
organizations on and users of Slack in general increased, a $7.2 million
increase in personnel and related costs, a $3.1 million increase in facility-
and IT-related overhead costs due to additional headcount to support the growth
in organizations on Slack, and a $1.3 million increase in amortization of
acquired intangible assets.
Operating Expenses
Nine Months Ended October 31,
2019 2018 $ Change % Change
(In thousands)
Operating expenses:
Research and development $ 363,725 $ 111,582 $ 252,143 226 %
Sales and marketing 299,440 163,408 136,032 83
General and administrative 209,624 79,361 130,263 164
Total operating expenses $ 872,789 $ 354,351 $ 518,438 146
28-------------------------------------------------------------------------------- Research and Development Research and development expenses increased$252.1 million , or 226%, for the nine months endedOctober 31, 2019 compared to the nine months endedOctober 31, 2018 . The increase was primarily due to a$198.0 million increase in stock-based compensation and related employer payroll taxes, primarily driven by the satisfaction of the performance vesting condition on outstanding RSUs in connection with our Direct Listing inJune 2019 . The increase was also driven by a$38.1 million increase in personnel costs related to increased headcount, and an$8.9 million increase in facility- and IT-related overhead costs to support our headcount growth and the continued development and scalability of Slack. Sales and Marketing Sales and marketing expenses increased$136.0 million , or 83%, for the nine months endedOctober 31, 2019 compared to the nine months endedOctober 31, 2018 . The increase was primarily due to an$86.1 million increase in stock-based compensation and related employer payroll taxes, primarily driven by the satisfaction of the performance vesting condition on outstanding RSUs in connection with our Direct Listing inJune 2019 . Personnel costs, which include customer experience and infrastructure employee costs for users of our free version, increased by$35.5 million related to increased sales and marketing headcount to support our growth. The increase was also driven by a$12.2 million increase in facility- and IT-related overhead costs to support our headcount growth, an$8.3 million increase in third-party hosting costs for users on a Free subscription plan of Slack due to continuing growth in our user base, and a$5.3 million increase in travel and event related costs due to increased sales activities. These increases were partially offset by a decrease in marketing expenses of$12.3 million due to less spending on advertising. General and Administrative General and administrative expenses increased$130.3 million , or 164%, for the nine months endedOctober 31, 2019 compared to the nine months endedOctober 31, 2018 . The increase was primarily due to a$70.1 million increase in stock-based compensation and related employer payroll taxes, primarily driven by the satisfaction of the performance vesting condition on outstanding RSUs in connection with our Direct Listing inJune 2019 . The increase was also driven by one-time fees of$30.4 million related to financial advisory services, audit, and legal expenses in connection with our Direct Listing, an$18.9 million increase in personnel costs related to increases in our administrative, finance and accounting, legal, IT, and human resources headcount, and a$3.7 million increase in facility- and IT-related overhead costs due to additional headcount. Other Income (Expense), Net Other income (expense), net was$17.3 million for the nine months endedOctober 31, 2019 , an increase of$10.1 million from the nine months endedOctober 31, 2018 . The increase in other income (expense), net was primarily due to a net increase in realized and unrealized gains from our strategic investments of$5.5 million and an increase in interest income of$4.3 million due to overall increase in cash, cash equivalents, and marketable securities. Provision (Benefit) for Income Taxes The benefit for income taxes was$0.5 million for the nine months endedOctober 31, 2019 , a decrease of$1.3 million from the nine months endedOctober 31, 2018 , primarily related to the tax benefit resulting from stock-based compensation in our foreign jurisdictions. Liquidity and Capital Resources As ofOctober 31, 2019 , our principal sources of liquidity were cash, cash equivalents, and restricted cash of$515.0 million and marketable securities of$297.6 million . Cash and cash equivalents are comprised of bank deposits, money market funds, and commercial paper. Restricted cash consists of cash deposited with financial institutions as collateral for our obligations under the facility leases inSan Francisco, California andDenver, Colorado . As ofOctober 31, 2019 , restricted cash was$38.5 million . Marketable securities are comprised of commercial paper,U.S. agency securities,U.S. government securities, international government securities, and corporate bonds. Substantially all cash and cash equivalents are held inthe United States . Since our inception, we have financed our operations primarily through proceeds from the issuance of our convertible preferred stock and common stock and cash generated from the sale of our subscriptions. We have generated significant losses from operations and negative cash flows from operating activities in the past as reflected in our accumulated deficit of$1.1 billion as ofOctober 31, 2019 . We expect to continue to incur operating losses for the foreseeable future due to the investments that we intend to make in our business and, as a result, we may require additional capital resources to grow our business. OnMay 30, 2019 , we entered into a$215.0 million revolving credit and guaranty agreement with a syndicate of financial 29 -------------------------------------------------------------------------------- institutions. The revolving credit facility has an accordion option, which, if exercised, would allow us to increase the aggregate commitments by up to the greater of$200.0 million and 100% of the consolidated adjusted EBITDA of us and our subsidiaries, plus an unlimited amount subject to satisfaction of certain leverage ratio based compliance tests after giving effect to the exercise, in each case subject to obtaining additional lender commitments and satisfying certain conditions. Pursuant to the terms of the revolving credit facility, we may issue letters of credit under the revolving credit facility, which reduce the total amount available for borrowing under such facility. The revolving credit facility terminates onMay 30, 2024 . Interest on borrowings under the revolving credit facility accrues at a variable rate tied to the prime rate or the LIBOR, plus the applicable margin, at our election. The margin is 0.25% in the case of prime rate loans and 1.25% in the case of LIBOR loans. Interest is payable quarterly in arrears. Pursuant to the terms of the revolving credit facility, we are required to pay an annual commitment fee that accrues at a rate of 0.10% per annum on the unused portion of the borrowing commitments under the revolving credit facility. In addition, we are required to pay a fee in connection with letters of credit issued and outstanding under the revolving credit facility that accrues at a rate of 1.25% per annum on the amount to be drawn under such letters of credit outstanding. There is an additional fronting fee of 0.125% per annum multiplied by the aggregate face amount of issued and outstanding letters of credit. The revolving credit facility contains customary conditions to borrowing, events of default, and covenants, including covenants that restrict our and our subsidiaries' ability to, among other things, incur additional indebtedness, create or incur liens, merge or consolidate with other companies, sell substantially all of our assets, liquidate or dissolve, make distributions to our equity holders or our subsidiaries' equity interests, pay dividends, make redemptions and repurchases of stock, or engage in transactions with affiliates. In addition, the revolving credit facility contains financial covenants, including a minimum liquidity balance and a minimum revenue amount. We were in compliance with all covenants under the revolving credit facility as ofOctober 31, 2019 . As ofOctober 31, 2019 , we had no amounts or letters of credit issued and outstanding under the revolving credit facility. Our total available borrowing capacity under the revolving credit facility was$215.0 million as ofOctober 31, 2019 . We believe that current cash, cash equivalents, marketable securities, and available borrowing capacity under the revolving credit facility will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements, however, will depend on many factors, including our subscription growth rate, our Net Dollar Retention Rate, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and features, particularly for large organizations and for networks between organizations and the continuing market adoption of Slack. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. In the event that additional financing is required from outside sources, we may seek to raise additional funds at any time through equity, equity-linked arrangements, and debt. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition would be adversely affected. See the section titled "Risk Factors-Risks Related to Our Business-Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our results of operations." Cash Flows The following table summarizes our cash flows for the periods indicated: Nine Months Ended October 31, 2019 2018 (In thousands) Net cash used in operating activities$ (22,904 ) $ (23,454 ) Net cash provided by (used in) investing activities 320,733 (335,688 ) Net cash provided by financing activities 15,875 435,554
Net increase in cash, cash equivalents and restricted cash
Cash Used in Operating Activities Our largest source of operating cash is cash collections from organizations on a paid subscription plan. Our primary uses of cash from operating activities are for employee-related expenditures, sales and marketing expenses, and third-party hosting costs. Historically, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the private sale of equity securities. During the nine months endedOctober 31, 2019 , operating activities used$22.9 million in cash. The primary factors affecting 30 -------------------------------------------------------------------------------- our operating cash flows during this period were our net loss of$479.3 million , impacted by$380.6 million non-cash charges and$75.7 million of cash provided from changes in our operating assets and liabilities. The non-cash charges primarily consisted of$363.3 million in stock-based compensation,$20.4 million of depreciation and amortization, and$5.5 million of amortization of deferred contract acquisition costs, partially offset by a$5.8 million gain as a result of the change in fair value of our strategic investments and a$2.1 million gain of net amortization of bond discounts on debt securities available for sale. The cash provided from changes in our operating assets and liabilities was primarily due to a$62.1 million increase in deferred revenue due to additional billings with new and existing Paid Customers and a$20.9 million increase in accrued expenses and other liabilities as a result of our increased spending and headcount associated with the growth of our business. These amounts were partially offset by a$12.0 million increase in prepaid expenses and other assets. During the nine months endedOctober 31, 2018 , operating activities used$23.5 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$104.3 million , impacted by$32.3 million non-cash charges and$48.6 million of cash provided from changes in our operating assets and liabilities. The non-cash charges primarily consisted of$18.3 million in stock-based compensation,$11.2 million of depreciation and amortization, a$2.2 million loss on disposal of property and equipment, and$2.0 million of amortization of deferred contract acquisition costs, partially offset by$1.6 million of net amortization of bond discount on debt securities available for sale. The cash provided from changes in our operating assets and liabilities was primarily due to a$64.7 million increase in deferred revenue due to increased billings and a$34.2 million increase in accounts payable, accrued expenses including compensation and benefits, and other liabilities as a result of our increased spending and headcount associated with the growth of our business. These amounts were partially offset by a$38.1 million increase in prepaid expenses and other assets mainly due to increases in prepaid hosting services and deferred commissions, and a$12.3 million increase in accounts receivable, as a result of increased billings. Cash Provided by (Used in) Investing Activities Net cash provided by investing activities during the nine months endedOctober 31, 2019 was$320.7 million , which was primarily driven by sales and maturities of marketable securities of$568.3 million , partially offset by cash used to purchase marketable securities of$202.9 million , property and equipment of$38.3 million , and strategic investments of$9.3 million . Net cash used in investing activities during nine months endedOctober 31, 2018 was$335.7 million , which was primarily used to purchase marketable securities of$734.8 million , business and intangible assets of$47.7 million , property and equipment of$42.7 million , and strategic investments of$1.6 million , partially offset by sales and maturities of marketable securities of$490.6 million . Cash Provided by Financing Activities Net cash provided by financing activities for the nine months endedOctober 31, 2019 was$15.9 million , primarily driven by the exercise of stock options to purchase common stock of$11.6 million , proceeds from employee purchases of common stock under the employee stock purchase plan, or the ESPP, of$7.4 million , and capital contributions from noncontrolling interest holders of$3.8 million , partially offset by a payment of contingent consideration for an acquisition of$5.0 million and distributions to noncontrolling interest holders of$1.4 million . Net cash provided by financing activities for the nine months endedOctober 31, 2018 was$435.6 million , reflecting proceeds from issuance of convertible preferred stock of$426.9 million , proceeds from issuance of common stock to a third party of$6.1 million , and the exercise of stock options to purchase common stock of$2.6 million . Contractual Obligations and Commitments Our principal contractual commitments primarily consist of obligations under leases for office space and datacenter operations. For additional information of operating lease obligations and hosting commitments, refer to Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There has been no material change in our contractual obligations and commitments other than non-cancelable purchase commitments primarily related to IT operations, sales and marketing activities, and acquisition related obligations in the ordinary course of business since our fiscal year endedJanuary 31, 2019 . See our Prospectus for additional information regarding the Company's contractual obligations. Off-Balance Sheet Arrangements
As of
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Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those accounting policies and
estimates that are both the most important to the portrayal of our net assets
and results of operations and require the most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. These estimates are developed based on
historical experience and various other assumptions that we believe to be
reasonable under the circumstances. Critical accounting estimates are accounting
estimates where the nature of the estimates are material due to the levels of
subjectivity and judgment necessary to account for highly uncertain matters or
the susceptibility of such matters to change and the impact of the estimates on
financial condition or operating performance is material.
Our significant accounting policies are discussed in "Notes to Consolidated
Financial Statements - Note 1. Description of Business and Summary of
Significant Accounting Policies" in the Prospectus. There have been no material
changes to our critical accounting policies and estimates as compared to the
critical accounting policies and estimates discussed in the Prospectus.
Recent Accounting PronouncementsSee Note 1 of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
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