Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
This morning we’re taking a look at Slack’s customer growth in the current moment compared to what we know about it historically. What we’d like to know is whether Slack’s current boom in customer growth is unprecedented for its business or if the company is merely returning to prior levels of logo growth.
As with any modern software (SaaS) business, Slack’s revenue growth doesn’t only come from net-new customer adds; Slack also grows its top line by selling more of its service to folks who already have a paid account. Think of it like this: Slack can add revenue by selling new customer Alex And Friends Ltd. a ten seat license or it can add revenue by selling Alex Actually Has No Friends Inc. another 5,000 seats to its existing account. We’re looking at the first case today.
Recently Slack CEO Stewart Butterfield updated the world on its his company’s reported growth. Slack told the world via an SEC filing that it had added 7,000 net new customers in its current quarter, ahead of the preceding few quarters in which it had added around 5,000. Last night, in a thread worth reading if you want to better understand what it’s like to run a company in chaotic times, Butterfield noted that the figure had risen to 9,000.
Of course, we’re only seeing part of Slack’s accelerated growth in light of the remote work push being made in the face of rising COVID-19 infections; Slack is also selling more of its service to existing customers, per the CEO. But let’s go find what we can about these net customer adds and see if Slack is setting new records or just getting its groove back. At the end, we’ll tie this all back to the growth in demand that remote work startups have seen in recent weeks.
History
Let’s start with what we know: Slack added about 5,000 net new customers in its last two quarters and 9,000 in its current period. In simpler nomenclature, here’s what that looks like (Slack’s Q4 F2020 was the three-month period ending January 31, 2020, for reference):
- Q3 F2020: 5,000 net customer adds
- Q4 F2020: 5,000 net customer adds
- Q1 F2021: 9,000 net customer adds and counting
Obviously the company’s current growth pace is impressive and welcome. Investors have bid Slack’s shares higher in response to the gains and as I write to you the company’s equity is up over 6% in pre-market trading on a day in which the broader market is down.
Looking back through Slack’s investor relations website, we can quickly see that Slack added about 5,000 customers in Q2 F2020 as well, going from “over 95,000 Paid Customers” in Q1 F2020 to “over 100,000 Paid Customers” in the second quarter of its Fiscal 2020. What we can see now is that Slack added about 5,000 net new customers not for three quarters. From this we can see that Slack’s current growth pace is at a local maximum.
What about Q1 F2020? We have to go back to Slack’s pre-IPO SEC filings to learn more. So let’s do that. As it turns out, Slack had “more than 95,000 Paid Customers” as of April 30, 2019, or the end of its Q1 F2020, and “more than 88,000 Paid Customers” at the end of its FQ4 2019. So, Slack added 7,000 net new customers in the first quarter of its F2020. That’s still far less than the firm will post in its current quarter one year later.
We can see from this that there have been periods of time in which Slack has grown more quickly per-quarter in terms of net new customers than it did in most of the quarters making up its F2020. However, the current quarter still stands atop its predecessors.
Finally, let’s go way back in time. In the year ending January 31, 2019, Slack added 29,000 net new customers for an average of 7,250 per quarter. That’s faster than what the firm put up in its F2020. In the year ending January 31, 2018, Slack added 22,000 customers for an average of 5,500, a figure much closer to what it managed in its most recent fiscal year.
So Slack’s growth expanded as it scaled, slowed last year, and has now accelerated to what appear to be new records in the face of a huge remote work demand boom. These are truly historic times for the enterprise darling.
Caveats, warnings
One thing we are not clear on is the relative size of Slack’s net new customers. Are they larger than preceding cohorts from prior quarters? Smaller? We don’t know. But we do know that there are a hell of a lot more of them, and as Slack tends to see rising spend from existing customers as they add seats over time, the firm has given itself a nice forward growth tailwind.
We’ve also seen Microsoft Teams grow quickly; could it be eating larger contracts off Slack’s plate, leaving Slack with an average new-customer size that is smaller than we should anticipate?
And, finally, we don’t know what sort of free usage Slack is undergoing to help generate these new paid accounts. Could the firm’s gross margins erode from the cost of supporting what must be rising free usage? Again, we’ll know more when we get the numbers. But Slack is certainly having one hell of a moment.
Bringing this back to startups, what’s our lesson? That the demand for remote friendly services is probably bigger than we thought; we’ve heard from startups of all sorts that changing work patterns has boosted demand for their services. But Slack’s gains make it clear that the world is really changing.
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