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 our Annual Report on Form 10-K. 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, but not limited to, those set forth under the section titled "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K. Our fiscal year endsJanuary 31 . Overview Slack is a new layer of the business technology stack where people can work together more effectively, connect all their other software tools and services, and find the information they need 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 2,300 of which are listed in the Slack App Directory. Developers have collectively created more than 700,000 third-party applications or custom integrations that were used in a typical week during the three months endedJuly 31, 2020 . Further, Slack's platform capabilities extend beyond integrations with third-party applications and allow for easy integrations with an organization's internally-developed software. COVID-19 Update InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and the related public health measures, including orders to shelter-in-place, travel restrictions, and mandated business closures, have adversely affected workforces, organizations, customers, economies, and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours. We have experienced volatility in customer demand and buying habits due to the COVID-19 pandemic. At the beginning of the COVID-19 pandemic, we experienced a significant increase in demand and usage of Slack, including an increase in our number of Paid Customers. While we do not expect the significant increase in the number of net new Paid Customers associated with the initial shelter-in-place orders related to the COVID-19 pandemic to recur, we have experienced an acceleration in our Paid Customer growth during the six months endedJuly 31, 2020 . However, the rate of growth of total organizations on Slack has reverted to a level more in-line with trends we experienced prior to the COVID-19 pandemic. In addition, we have experienced an increase in paid customer churn and a decrease in expansion within existing paid customers during the six months endedJuly 31, 2020 . We expect these paid customer churn and expansion trends to continue due to the effects of the COVID-19 pandemic. We define paid customer churn as paid customers reducing the number of users within their organizations or electing not to renew their paid subscriptions. The COVID-19 pandemic and its adverse effects have been more prevalent in the locations where we, our customers, suppliers, and third-party business partners conduct business. This outbreak, as well as intensified measures undertaken to contain the spread of COVID-19, have decreased IT spending for many organizations, adversely affected demand for Slack, attrition rates, the ability of our salespeople to travel to potential customers and of our customer success team to conduct in-person trainings and consulting work, negatively impacted expected spending from new and existing customers, increased sales cycle times, negatively impacted collections of accounts receivable, caused certain of our paid customers to file for bankruptcy protection or go out of business, and harmed our business, results of operations, and financial condition. We expect these negative impacts will continue due to the effects of the COVID-19 pandemic. In addition, to prepare for potential surges in demand, we have incurred, and may continue to incur, additional costs and make additional investments in order to meet the demands of increased customer usage of Slack and additional product development efforts during this time may put additional pressure on our technical infrastructure. The broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. The COVID-19 pandemic has resulted in, and any prolonged economic slowdowns may continue to result in, paid customers on Slack requesting us to renegotiate existing contracts on less advantageous terms to us than those currently in place, defaulting on payments due on existing contracts, not renewing at the end of the contract term, or choosing to renew with 25 -------------------------------------------------------------------------------- a smaller commitment than previous contracts. For example, in an effort to assist both new and existing paid customers facing challenges due to the economic impact of the COVID-19 pandemic, we have entered into, and expect to continue to enter into, more custom contracts and billing arrangements with new and existing paid customers, which may be less advantageous to us than our standard term contracts. These arrangements have included provisions such as the ability to defer payments, to pay in installments or over longer time periods, and other collection flexibility. We have also granted, and may in the future grant, billing concessions to existing paid customers. We do not expect these billing arrangements to have a significant impact on our future revenue, but they will negatively impact our future Calculated Billings and Free Cash Flow. The COVID-19 pandemic also presents challenges as our entire workforce is currently working remotely and shifting to assisting new and existing customerswho are also generally working remotely. All of our currently planned customer, employee, and industry events have been shifted to virtual-only experiences, and we may deem it advisable to similarly alter, postpone, or cancel entirely, additional customer, partner, employee, or industry events in the future. Furthermore, inJune 2020 , we announced that we would allow many of our employees to work remotely on a permanent basis. We have a limited history of having a remote workforce and the long-term impact on, and the resulting types of continuing investments for, our employee base is uncertain. In addition, we may incur increased workforce costs, including costs associated with implementing additional personnel and workplace safety protocols, the accrual of unused paid time off, and workplace or labor claims and disputes related to COVID-19. While we have developed and continue to develop plans to help mitigate the potential negative impact of the outbreak on our business, these efforts may not be effective and a protracted economic downturn will likely limit the effectiveness of our mitigation efforts. Due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods, if at all. We are continuing to understand the long-term net effect and anticipated future magnitude of the above factors on our results for future periods and such forecasts are inherently uncertain. See Part II, Item 1A, "Risk Factors" for further discussion of the possible impact of the COVID-19 pandemic on our business, financial condition, and results of operations. 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 companieswho 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 ofJuly 31, 2020 and 2019, we had approximately 130,000 and 100,000 Paid Customers, respectively. 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. 26 -------------------------------------------------------------------------------- As ofJuly 31, 2020 , we had 985 Paid Customers >$100,000 ,who contributed approximately 49% of revenue for each of the three and six months then ended. As ofJuly 31, 2019 , we had 720 Paid Customers >$100,000 ,who contributed approximately 43% of revenue for each of the three and six months then ended. 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 ofJuly 31, 2020 and 2019, our Net Dollar Retention Rate was 125% and 136%, 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. 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. Six Months Ended Three Months Ended July 31, July 31, 2020 2019 2020 2019 (In thousands) Calculated Billings$ 218,198 $ 174,807 $ 424,207 $ 324,444 Free Cash Flow$ 10,774 $ (7,871) $ 14,457 $ (42,074) 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 27 -------------------------------------------------------------------------------- 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: Six Months Ended Three Months Ended July 31, July 31, 2020 2019 2020 2019 (In thousands) Revenue$ 215,864 $ 144,973 $ 417,514 $ 279,794 Add: Total deferred revenue, end of period 383,407 286,523 383,407 286,523 Less: Total deferred revenue, beginning of period (381,073) (256,689) (376,714) (241,873) Calculated Billings$ 218,198 $ 174,807 $ 424,207 $ 324,444 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 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: Six Months Ended Three Months Ended July 31, July 31, 2020 2019 2020 2019 (In thousands) Net cash provided by (used in) operating activities$ 14,471 $ 321 $ 23,200 $ (13,805) Purchases of property and equipment (3,697) (8,192) (8,743) (28,269) Free Cash Flow$ 10,774 $ (7,871) $ 14,457 $ (42,074) Net cash provided by investing activities$ 78,317 $ 239,131 $ 42,853 $ 344,591 Net cash provided by (used in) financing activities$ (4,618) $ 2,334 $ 751,343 $ 4,719 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 lease, utilities, and depreciation on equipment shared by all 28 -------------------------------------------------------------------------------- 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-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 expect 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 theSecurities and Exchange Commission , or theSEC , and 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. 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. Interest Expense After our issuance of 0.50% convertible senior notes due 2025, or the Notes, in an aggregate principal amount of$862.5 million inApril 2020 , interest expense consists primarily of contractual interest expense and amortization of the discount and debt issuance costs on our Notes. Interest Income and Other Income, Net Interest income and other income, 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. 29 -------------------------------------------------------------------------------- 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. 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:
Six Months Ended July
Three Months Ended July 31, 31,
2020 2019 2020 2019
(In thousands)
Revenue $ 215,864 $ 144,973 $ 417,514 $ 279,794
Cost of revenue(1) 28,387 31,106 53,989 49,680
Gross profit 187,477 113,867 363,525 230,114
Operating expenses:
Research and development(1) 94,201 217,769 185,426 268,872
Sales and marketing(1) 109,122 136,392 219,442 203,230
General and administrative(1) 52,788 123,356 103,442 160,100
Total operating expenses 256,111 477,517 508,310 632,202
Loss from operations (68,634) (363,650) (144,785) (402,088)
Interest expense (11,552) (208) (14,394) (321)
Interest income and other income, net 6,952 3,319 11,660 10,509
Loss before income taxes (73,234) (360,539) (147,519) (391,900)
Provision (benefit) for income taxes (81) (923) 61 (403)
Net loss (73,153) (359,616) (147,580) (391,497)
Net income (loss) attributable to
noncontrolling interest(2) 1,695 (54) 2,479 1,397
Net loss attributable to Slack $ (74,848) $
(359,562)
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(1)Includes stock-based compensation as follows:
Six Months Ended
Three Months Ended July 31, July 31,
2020 2019 2020 2019
(In thousands)
Cost of revenue $ 2,544
29,157 151,405 56,576 153,040
Sales and marketing 14,917 64,772 28,992 65,154
General and administrative 10,670 58,658 20,533 60,234
Total stock-based compensation $ 57,288 (2)Our condensed consolidated financial statements include our majority-owned subsidiary,Slack Fund . The ownership interest of minority investors inSlack Fund is recorded as a noncontrolling interest. 30 --------------------------------------------------------------------------------
Six Months Ended July
Three Months Ended July 31, 31,
2020 2019 2020 2019
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 13 21 13 18
Gross profit 87 79 87 82
Operating expenses:
Research and development 44 150 44 96
Sales and marketing 51 95 53 73
General and administrative 24 85 25 57
Total operating expenses 119 330 122 226
Loss from operations (32) (251) (35) (144)
Interest expense (5) - (3) -
Interest income and other income, net 3 2 3 4
Loss before income taxes (34) (249) (35) (140)
Provision (benefit) for income taxes - (1) - -
Net loss (34) (248) (35) (140)
Net income (loss) attributable to
noncontrolling interest 1 - 1 -
Net loss attributable to Slack (35) % (248) % (36) % (140) %
Comparison of the Three Months Ended
Three Months Ended July 31,
2020 2019 $ Change % Change
(In thousands)
Revenue $ 215,864 $ 144,973 $ 70,891 49 %
Cost of revenue 28,387 31,106 (2,719) (9)
Gross profit $ 187,477 $ 113,867 $ 73,610 65
Revenue increased $70.9 million , or 49%, for the three months ended July 31,
2020 compared to the three months ended July 31, 2019 . The increase in revenue
was primarily due to expansion within our existing Paid Customers, as reflected
by our Net Dollar Retention Rate of 125% as of July 31, 2020 , and the addition
of new Paid Customers, as our number of Paid Customers grew from 100,000 as of
July 31, 2019 to 130,000 as of July 31, 2020 .
Cost of revenue decreased $2.7 million , or 9%, for the three months ended
July 31, 2020 compared to the three months ended July 31, 2019 . The decrease was
primarily due to a $9.1 million decrease in stock-based compensation and related
employer payroll taxes, as compared to the three months ended July 31, 2019 when
stock-based compensation and related employer payroll taxes were higher due
primarily to the satisfaction of the performance vesting condition on
outstanding RSUs in connection with our direct listing of our Class A common
stock on the New York Stock Exchange , or the Direct Listing, in June 2019 . This
decrease was partially offset by a $4.2 million increase in third-party hosting
fees as the number of organizations on and, users of, Slack in general
increased, and a $2.3 million increase in personnel and related costs due to
additional headcount to support the growth in organizations on Slack.
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Operating Expenses
Three Months Ended July 31,
2020 2019 $ Change % Change
(In thousands)
Operating expenses:
Research and development $ 94,201 $ 217,769 $ (123,568) (57) %
Sales and marketing 109,122 136,392 (27,270) (20)
General and administrative 52,788 123,356 (70,568) (57)
Total operating expenses $ 256,111 $ 477,517 $ (221,406) (46)
Research and Development
Research and development expenses decreased $123.6 million , or 57%, for the
three months ended July 31, 2020 compared to the three months ended July 31,
2019 . The decrease was primarily due a $132.4 million decrease in stock-based
compensation and related employer payroll taxes, as compared to the three months
ended July 31, 2019 when stock-based compensation and related employer payroll
taxes were higher due primarily to the satisfaction of the performance vesting
condition on outstanding RSUs in connection with the Direct Listing in June 2019
and a $2.5 million decrease in travel costs due to COVID-19 travel restrictions.
These decreases were partially offset by an $11.8 million increase in personnel
costs related to increased headcount.
Sales and Marketing
Sales and marketing expenses decreased $27.3 million , or 20%, for the three
months ended July 31, 2020 compared to the three months ended July 31, 2019 . The
decrease was primarily due to a $53.4 million decrease in stock-based
compensation and related employer payroll taxes, as compared to the three months
ended July 31, 2019 when stock-based compensation and related employer payroll
taxes were higher due primarily to the satisfaction of the performance vesting
condition on outstanding RSUs in connection with the Direct Listing in June 2019
and a $2.6 million decrease in travel costs due to COVID-19 travel restrictions.
These decreases were partially offset by a $14.7 million increase in personnel
costs, which include customer experience and infrastructure employee costs for
users of our free version, a $10.6 million increase in marketing expenses due to
more spending on advertising, and a $3.7 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.
General and Administrative
General and administrative expenses decreased $70.6 million , or 57%, for the
three months ended July 31, 2020 compared to the three months ended July 31,
2019 . The decrease was primarily due to a $51.5 million decrease in stock-based
compensation and related employer payroll taxes, as compared to the three months
ended July 31, 2019 when stock-based compensation and related employer payroll
taxes were higher due primarily to the satisfaction of the performance vesting
condition on outstanding RSUs in connection with the Direct Listing in June 2019
and a $28.1 million decrease in fees related to financial advisory services,
audit, and legal expenses, which we incurred in the three months ended July 31,
2019 in connection with the Direct Listing. This decrease was partially offset
by an $8.8 million increase in consulting expenses related to legal fees and
acquisition-related costs, and a $3.1 million increase in personnel costs
related to increases in our administrative, finance and accounting, legal, IT,
and human resources headcount.
Interest Expense
Interest expense increased by $11.3 million for the three months ended July 31,
2020 compared to the three months ended July 31, 2019 , due to contractual
interest expense and amortization of the discount and issuance costs on the
Notes.
Interest Income and Other Income, Net
Interest income and other income, net was $7.0 million for the three months
ended July 31, 2020 , an increase of $3.6 million from the three months ended
July 31, 2019 . The increase in interest income and other income, net was
primarily driven by a net increase in realized and unrealized gains from our
strategic investments of $4.3 million and an increase of net foreign exchange
gains of $2.3 million , partially offset by a decrease of interest income of $2.6
million due primarily to a decrease in interest rates.
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Provision (Benefit) for Income Taxes
The benefit for income taxes was $0.1 million for the three months ended
July 31, 2020 , an increase of $0.8 million from the three months ended July 31,
2019 , primarily related to a decrease in tax benefit resulting from stock-based
compensation of our foreign jurisdictions. This increase was partially offset by
tax benefit from the Rimeto acquisition and a change in the United Kingdom tax
rate.
Comparison of the Six Months Ended July 31, 2020 and 2019Revenue and Cost of Revenue
Six Months Ended July 31,
2020 2019 $ Change % Change
(In thousands)
Revenue $ 417,514 $ 279,794 $ 137,720 49 %
Cost of revenue 53,989 49,680 4,309 9
Gross profit $ 363,525 $ 230,114 $ 133,411 58
Revenue increased $137.7 million , or 49%, for the six months ended July 31, 2020
compared to the six months ended July 31, 2019 . The increase in revenue was
primarily due to expansion within our existing Paid Customers, as reflected by
our Net Dollar Retention Rate of 125% as of July 31, 2020 , and the addition of
new Paid Customers, as our number of Paid Customers grew from 100,000 as of
July 31, 2019 to 130,000 as of July 31, 2020 .
Cost of revenue increased $4.3 million , or 9%, for the six months ended July 31,
2020 compared to the six months ended July 31, 2019 . The increase was primarily
due to a $6.6 million increase third-party hosting fees as the number of
organizations on and, users of, Slack increased, a $3.7 million increase in
personnel and related costs due to additional headcount to support the growth in
organizations on Slack, and a $1.1 million increase in payment processing fees
for customer credit card payments. This increase was partially offset by a $6.6
million decrease in stock-based compensation and related employer payroll taxes,
as compared to the six months ended July 31, 2019 when stock-based compensation
and related employer payroll taxes were higher due primarily to the satisfaction
of the performance vesting condition on outstanding RSUs in connection with the
Direct Listing in June 2019 and a $0.5 million decrease in travel costs due to
COVID-19 travel restrictions.
Operating Expenses
Six Months Ended July 31,
2020 2019 $ Change % Change
(In thousands)
Operating expenses:
Research and development $ 185,426 $ 268,872 $ (83,446) (31) %
Sales and marketing 219,442 203,230 16,212 8
General and administrative 103,442 160,100 (56,658) (35)
Total operating expenses $ 508,310 $ 632,202 $ (123,892) (20)
Research and Development
Research and development expenses decreased $83.4 million , or 31%, for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 . The
decrease was primarily due to a $104.4 million decrease in stock-based
compensation and related employer payroll taxes, as compared to the six months
ended July 31, 2019 when stock-based compensation and related employer payroll
taxes were higher due primarily to the satisfaction of the performance vesting
condition on outstanding RSUs in connection with the Direct Listing in June 2019
and a $1.5 million decrease in travel costs due to COVID-19 travel restriction.
This decrease was partially offset by a $23.0 million increase in personnel
costs related to increased headcount.
Sales and Marketing
Sales and marketing expenses increased $16.2 million , or 8%, for the six months
ended July 31, 2020 compared to the six months ended July 31, 2019 . The increase
was primarily due to a $27.6 million increase in personnel costs, which include
customer experience and infrastructure employee costs for users of our free
version, a $21.1 million increase in marketing
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expenses due to more spending on advertising, a $5.5 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, and a $3.4 million increase
in facility- and IT-related overhead costs to support our headcount growth. This
increase was partially offset by a $38.5 million decrease in stock-based
compensation and related employer payroll taxes, as compared to the six months
ended July 31, 2019 when stock-based compensation and related employer payroll
taxes were higher due primarily to the satisfaction of the performance vesting
condition on outstanding RSUs in connection with the Direct Listing in June 2019
and a $2.6 million decrease in travel costs due to COVID-19 travel restriction.
General and Administrative
General and administrative expenses decreased $56.7 million , or 35%, for the six
months ended July 31, 2020 compared to the six months ended July 31, 2019 . The
decrease was primarily due to a $42.2 million decrease in stock-based
compensation and related employer payroll taxes, as compared to the six months
ended July 31, 2019 when stock-based compensation and related employer payroll
taxes were higher due primarily to the satisfaction of the performance vesting
condition on outstanding RSUs in connection with the Direct Listing in June
2019 , a $30.4 million decrease in fees related to financial advisory services,
audit, and legal expenses, which we incurred in the six months ended July 31,
2019 in connection with the Direct Listing, and a $3.2 million decrease in
travel costs due to COVID-19 travel restriction. This decrease was partially
offset by an $11.3 million increase in legal fees and acquisition-related costs
and a $7.6 million increase in personnel costs related to increases in our
administrative, finance and accounting, legal, IT, and human resources
headcount.
Interest Expense
Interest expense increased by $14.1 million for the six months ended July 31,
2020 compared to the six months ended July 31, 2019 , due to contractual interest
expense and amortization of the discount and issuance costs on the Notes.
Interest Income and Other Income, Net
Interest income and other income, net was $11.7 million for the six months ended
July 31, 2020 , an increase of $1.2 million from the six months ended July 31,
2019 . The increase in interest income and other income, net was primarily driven
by a net increase in realized and unrealized gains from our strategic
investments of $2.9 million and an increase of net foreign exchange gains of
$2.8 million , partially offset by a decrease of interest income of $4.2 million
due primarily to a decrease in interest rates.
Provision (Benefit) for Income Taxes
The provision for income taxes was $0.1 million for the six months ended
July 31, 2020 , an increase of $0.5 million from the six months ended July 31,
2019 , primarily related to a decrease in tax benefit resulting from stock-based
compensation of our foreign jurisdictions. This is partially offset by tax
benefit from the Rimeto acquisition and a change in United Kingdom tax rate.
Liquidity and Capital Resources
As of July 31, 2020 , our principal sources of liquidity were cash, cash
equivalents, and restricted cash of $1.4 billion and marketable securities of
$217.0 million . Cash and cash equivalents are comprised of bank deposits, money
market funds, and certificates of deposit. Restricted cash consists of cash
deposited with financial institutions as collateral for our obligations under
the facility leases in San Francisco, California and Denver, Colorado . As of
July 31, 2020 , our restricted cash totaled $38.5 million . Marketable securities
are comprised of certificates of deposit, commercial paper, U.S. agency
securities, U.S. government securities, international government securities, and
corporate bonds. As of July 31, 2020 , 83% of all cash and cash equivalents are
held in the United States . Since our inception, we have financed our operations
primarily through proceeds from the issuance of our convertible preferred stock,
convertible senior notes, 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
$1.4 billion as of July 31, 2020 . 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.
In April 2020 , we completed our private offering of the Notes and received
aggregate proceeds of $862.5 million , before deducting issuance costs of $21.2
million . In connection with the Notes, we entered into privately negotiated
capped call transactions with certain counterparties, or the Capped Calls, with
respect to our Class A common stock. We used an aggregate amount of
$105.6 million of the net proceeds from the sale of the Notes to purchase the
Capped Calls.
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In May 2019 , we entered into a $215.0 million revolving credit and guaranty
agreement with a syndicate of financial 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. As of July 31, 2020 , 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 of July 31, 2020 .
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 and customer
acquisition efforts 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:
Six Months Ended July 31,
2020 2019
(In thousands)
Net cash provided by (used in) operating activities $ 23,200 $ (13,805)
Net cash provided by investing activities 42,853 344,591
Net cash provided by financing activities 751,343 4,719
Net increase in cash, cash equivalents and restricted cash
Cash Provided by (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 six months endedJuly 31, 2020 , operating activities provided$23.2 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$147.6 million , impacted by$155.9 million non-cash charges and$14.9 million of cash provided from changes in our operating assets and liabilities. The non-cash charges primarily consisted$111.0 million in stock-based compensation,$17.3 million of non-cash operating lease expenses,$13.6 million of depreciation and amortization,$12.6 million of amortization of debt discount and issuance cost and$6.9 million of amortization of deferred contract acquisition costs, partially offset by a$5.8 million net gain as a result of the change in fair value of our strategic investments. The cash provided from changes in our operating assets and liabilities was primarily due to a$33.5 million decrease in accounts receivable, reflecting an increase in collections and seasonal decrease in billings, a$5.7 million increase in deferred revenue due to additional billings with new and existing paid customers, and a$3.0 million increase in accrued compensation and benefits. These amounts were partially offset by$16.4 million of operating lease payments, a$4.5 million increase in prepaid expenses and other assets, a$4.0 million decrease in accounts payable due to the timing of payments, and a$2.3 million decrease in other liabilities. During the six months endedJuly 31, 2019 , operating activities used$13.8 million in cash. The primary factors affecting our operating cash flows during this period were our net loss of$391.5 million , impacted by$300.4 million non-cash charges and$77.3 million of cash provided from changes in our operating assets and liabilities. The non-cash charges primarily consisted of$289.4 million in stock-based compensation,$12.7 million of depreciation and amortization, and$3.3 million of amortization of deferred contract acquisition costs, partially offset by a$2.9 million gain as a result of the change in fair value 35 -------------------------------------------------------------------------------- of our strategic investments and a$1.7 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$44.7 million increase in deferred revenue due to additional billings with new and existing Paid Customers, a$19.8 million increase in accrued compensation and benefits mainly due to taxes withheld from vesting of RSUs for certain foreign employees, a$15.3 million decrease in accounts receivable due to timing of billings and collections, and a$9.2 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$10.2 million increase in prepaid expenses and other assets and a$1.4 million decrease in accounts payable due to the timing of payments. Cash Provided by Investing Activities Net cash provided by investing activities during the six months endedJuly 31, 2020 was$42.9 million , which was primarily driven by maturities and sales of marketable securities of$153.7 million and net cash acquired from a business combination of$6.6 million , partially offset by purchases of marketable securities of$100.3 million , strategic investments of$9.0 million , and property and equipment of$8.7 million . Net cash provided by investing activities during six months endedJuly 31, 2019 was$344.6 million , which was primarily driven by maturities of marketable securities of$435.0 million , partially offset by cash used to purchase marketable securities of$59.6 million and property and equipment of$28.3 million . Cash Provided by Financing Activities Net cash provided by financing activities for the six months endedJuly 31, 2020 was$751.3 million , primarily driven by proceeds from issuance of the Notes of$841.3 million , net of issuance costs, proceeds from employee purchases of common stock under the employee stock purchase plan of$16.6 million , and the exercise of stock options of$4.6 million , partially offset by a payment for Capped Calls related to the Notes of$105.6 million and payments of contingent consideration for acquisitions of$5.3 million . Net cash provided by financing activities for the six months endedJuly 31, 2019 was$4.7 million , primarily driven by proceeds from the exercise of stock options of$10.3 million , partially offset by a payment of contingent consideration for an acquisition of$5.0 million . Contractual Obligations and Commitments Our principal contractual commitments primarily consist of obligations under the Notes (including principal and coupon interest), operating leases for office space, and datacenter operations. For additional information of the Notes, operating lease obligations, and hosting commitments, refer to Note 6, Note 7, and Note 8 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Except for the Notes and datacenter operations, there has been no material change in our other contractual obligations 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, 2020 . See our Annual Report on Form 10-K filed with theSEC onMarch 12, 2020 for additional information regarding our contractual obligations and commitments. Off-Balance Sheet Arrangements
As of
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
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Business and Summary of Significant Accounting Policies" in our Annual Report on
Form 10-K filed with the SEC on March 12, 2020 . There have been no material
changes to our critical accounting policies and estimates during the six months
ended July 31, 2020 , except for the new accounting policy for the Notes issued
in April 2020 .
Convertible Senior Notes
The Notes are accounted for in accordance with the Financial Accounting
Standards Board , or FASB, issued Accounting Standards Codification, or ASC,
Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC
Subtopic 470-20, issuers of certain convertible debt instruments, such as the
Notes, that have a net settlement feature and may be settled wholly or partially
in cash upon conversion are required to separately account for the liability
(debt) and equity (conversion option) components of the instrument. The carrying
amount of the liability component of the instrument is computed by estimating
the fair value of a similar liability without the conversion option using a
market-based approach. The amount of the equity component is then calculated by
deducting the fair value of the liability component from the principal amount of
the instrument. The difference between the principal amount and the liability
component represents a debt discount that is amortized to interest expense over
the respective terms of the Notes using an effective interest rate method. The
equity component is not remeasured as long as it continues to meet the
conditions for equity classification. In accounting for the issuance costs
related to the Notes, the allocation of issuance costs incurred between the
liability and equity components was based on their relative values.
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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