Slack Technologies, Inc. (WORK) CEO Stewart Butterfield on Q2 2021 Results – Earnings Call Transcript

Slack Technologies, Inc. (NYSE:WORK) Q2 2021 Earnings Conference Call September 8, 2020 5:00 PM ET

Company Representatives

Stewart Butterfield – Co-Founder, Chief Executive Officer



Allen Shim – Chief Financial Officer

Jesse Hulsing – Vice President of Finance, Investor Relations

Conference Call Participants

Alex Zukin – RBC

Raimo Lenschow – Barclays

Brent Bracelin – Piper Sandler

Brad Zelnick – Credit Suisse

Michael Turrin – Wells Fargo Securities

Arjun Bhatia – William Blair

Josh Baer – Morgan Stanley

Derrick Wood – Cowen and Company

Will Power – Baird

Heather Bellini – Goldman Sachs

Walter Pritchard – Citi

Mark Moerdler – Bernstein Research

Ryan MacWilliams – Stephens

D.J. Hynes – Canaccord Genuity

Jeff Kvaal – Wolfe Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to Slack Technologies Second Quarter Earnings Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Jesse Hulsing, Vice President of Finance and Investor Relations. Thank you. Please go ahead.

Jesse Hulsing

Good afternoon, and thank you for joining us on today’s conference call to discuss Slack’s second quarter fiscal 2021 financial results. On the call we have Stewart Butterfield, Co-Founder and Chief Executive Officer; and Allen Shim, Chief Financial Officer.

During the course of today’s call, we may make forward-looking statements, including but not limited to statements regarding our guidance and future financial performance, market demand, product development, growth prospects, business strategies and plans, ability to attract and retain customers and ability to compete effectively.

We will also make forward-looking statements regarding the potential impact of the global COVID-19 pandemic on U.S. and global economies and our business. These forward-looking statements are based on management’s current views and assumptions and should not be relied upon as of any subsequent date and we disclaim any obligation to update any forward-looking statements.

Actual results may vary materially from today’s statements. Information concerning our risks, uncertainties and other factors that could cause results to differ from these forward-looking statements are contained in the company’s SEC filings, earnings press release and supplemental information posted on the Investors section of the company’s website.

Our discussion today will include certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Our non-GAAP measures exclude the effect of our GAAP results of stock-based compensation and certain other items. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in our earnings release and on our Investor Relations website at investor.slackhq.com.

I would now like to turn the conference call over to Slack’s Co-Founder and Chief Executive Officer, Stewart Butterfield. Stewart?

Stewart Butterfield

Thank you everyone for joining. I want to highlight three key areas of continued execution against our highest priorities; those which you heard me talk about on the last two calls, along with comments on macro-related headwinds we are seeing in the installed base and what we are doing about it.

I’ll discuss Slack Connect, where we’re seeing the emergence of a genuine network effect which is already impacting new customer acquisition, along with the continued success of our enterprise business as highlighted through recent customer wins.

But let me start with what I’m most excited about and that’s accelerating growth in new paid customers. This is the fundamental driver of the entire business, from compounding expansion on the self-serve side to the most valuable source of enterprise pipeline.

Net new paid customer adds grew at a faster rate in June and July compared to April and May. That trend continued in August, even after the typical vacation-related slowdown for the month, indicating that paid customer additions are potentially finding a new baseline rate.

We attribute part of the uptick to the “work from home” driven increase in the importance of the category, but we believe an even bigger portion of the impact comes from incremental product drivers. Those are first, continued improvements to the self-serve experience for new team creators and joiners, leading to more successful teams; second, improvements to paid conversion driven primarily by new trial offers; and third, the emergence of inter-company collaboration as a new path into the product via Slack Connect.

The core product experience improves every quarter, with a particular emphasis on simplifying and removing friction from the process of creating or joining a new team. Our focus in this area has delivered results. Small changes create minor compounding tailwinds. We continue to invest here and expect Slack to get better and more obvious for new teams each quarter, driving increased yield from our self-service funnel.

It’s worth noting that the full impact of this growth will show up over time. Historically, it has taken new cohorts of paid teams several years to hit their peak revenue contribution. We expect the strength you saw in Q2 to materialize in a more pronounced way at the end of this year and into the next.

Moving on, a quick update on Slack Connect. I mentioned it earlier, as a driver of new paid customer acquisition, but we also believe it serves as a key product differentiator and an important factor in retention. Connect provides a very rare combination in Enterprise software; A giant leap forward in both end user experience and security and compliance. Whereas so often customers are asked to trade one off for the other, we can provide both.

In June, after an extensive open [data] period, we officially launched Slack Connect and released “multi-org shared channels,” which allows up to 20 organizations to share a single channel. This enabled a large number of new use cases and uptick was rapid. Marketing support and ongoing product improvements have added even more fuel to the fire.

We measure network adoption by the number of Connected Endpoints in a graph and as the number of endpoints has increased, growth has accelerated, from 140% year-over-year growth in Q4 to 160% in Q1, and to over 200% in Q2.

Many of these endpoints are on teams that had not previously upgraded to a paid plan or even teams that are brand new to Slack. To encourage adoption and virality, in late March we introduced 90-day trials for teams that are invited by a paid customer, making the connection experience seamless. Those trials started to expire in late June and in just six weeks contributed over a thousand new paid customers out of the 8,000 total paid customers added in the quarter.

Trial starts are increasing as the network grows, so we expect Slack Connect’s contribution to paid customer growth to increase substantially in the second half. We further expect that trend to continue, especially as we drive increased utilization inside enterprises with the launch of compliance and security features, such as author-aware encryption key management in shared channels.

This product-driven growth is very encouraging, providing us with a scalable way to sustain customer growth. Our pace of execution on the product side is accelerating; the new user experience is going to improve further and in the second half we’ll announce a number of new features for Slack Connect. Stay tuned for more updates at Slack Frontiers, our user conference, on October 7 and 8.

Our continuing product leadership with features like Connect, our extensible platform and workflow integrations, and our significant architectural and scalability advantages, are all propelling growth in the enterprise segment. We added 17 new million dollar customers in the first half, ending Q2 with 87, up 78% year-on-year.

New and expansion deals this quarter include Sony Network Communications, Shopify, IRIS Ohiyama, Kindai University, Peloton, LPL Financial, NTT Data Corporation and Al-nye-lum Pharmaceuticals.

Across industries, our value proposition is resonating with market leaders and companies at the forefront of digital transformation. For example, four of the six largest North American telecommunication providers are now $1 million customers on Slack. This echoes the pattern we see across many other industries where the market leader chooses Slack.

We are also achieving significant depth of adoption within verticals such as financial services. For example, HSBC doubled its investment. HSBC is one of the largest banking and financial services institutions in the world, serving millions of customers. The shift to remote work has accelerated HSBC’s Slack adoption, providing them with a secure platform to drive internal alignment and deliver innovative solutions for their customers.

Northwestern Mutual ranks Number 111 on the Fortune 500 and offers life insurance, disability insurance, long-term care insurance, and financial advising services across the United States. After an extensive evaluation of Slack against competing products, Northwestern Mutual chose Slack as its preferred collaboration tool. With Slack as an enterprise-wide tool, Northwestern Mutual plans to streamline their processes for innovation and meeting clients’ financial needs.

Leading life, accident and health insurance throughout the Americas, Pan-American Life Insurance Group chose Slack and accelerated its adoption when employees were transitioned to remote work. Slack was able to meet Pan American’s high standards of security and compliance, streamline communications with vendors and partners and maximize their technology investments. Pan American found Slack to be the best tool to bring its 2,000 plus employees together. Also of note this quarter, the successful completion of the largest initial deployment of Slack ever to over 450,000 users.

We continue to deliver on our company priorities outlined at the beginning of the year. Accelerate paid customer growth, grow in network and win in the enterprise. I’m proud of our ability to execute, especially against the backdrop of a complex set of changes in the environment.

As I mentioned earlier, in Q2 we felt some macro-related headwinds in the installed base. We price on a per-seat basis and when our customers downsize, freeze hiring or hire more slowly, net dollar retention is negatively impacted. That impact is direct and because of our fair billing policies and the substantial number of smaller customers on monthly plans, it shows up much more quickly than it would for others in our industry.

On the Enterprise side, there is also more budget scrutiny, especially for new categories with longer adoption curves. Even when leaders understand the deep impact that Slack can have for them, the urgency of the moment favors short term solutions that solve immediate problems. CIOs have a lot on their plates right now.

The pandemic has obviously had both positive and negative effects on our business. We believe the positive changes will have greater impact and will persist as part of this permanent structural shift in the way we work. On the other hand the negative effects will dissipate as we emerge from the pandemic and related economic uncertainty.

In the meantime, we have rapidly adapted our go-to-market tactics to the current environment, leaning into our product leadership as well as ROI-based, use-case specific selling and marketing oriented around distributed/remote work. We are also investing in CIO-outreach and using Slack Connect as a lever to drive broader deployment discussions. As IT departments begin their return to longer term strategic priorities, we see these messages resonating.

These sales efforts are complemented with new trial programs and new distribution partnerships, including the recently announced deepening of our partnership with Atlassian. Historically, where we focus we see results and this is certainly an area of focus.

To wrap up, I want to reiterate that the core driver of long-term growth, paid customer additions, accelerated meaningfully in the first half. We believe there are drivers in place that will sustain this momentum, including our rapidly growing network for intercompany collaboration, Slack Connect, which is accelerating as it scales.

Finally, I’d like to welcome the Rimeto team to the Slack family. The completion of the acquisition this quarter sets us up for some exciting future opportunities, especially for Slack Connect and the platform. We see huge potential in reimagining the enterprise directory and look forward to sharing updates on future calls.

With that, I’ll turn it over to Allen.

Allen Shim

Thank you Stewart, and thanks again to everyone for joining us.

I will go through our fiscal second quarter results, then discuss in more detail the impact from the COVID-19 pandemic on new customer and existing customer business and close with guidance for the third quarter and full year fiscal ‘21.

Total revenues in the second quarter were $216 million, growing 49% year-over-year. Calculated billings were $218 million, growing 25% year-over-year. As discussed last quarter, to support distressed customers, we have continued to offer credits, installment billing and billing durations of less than one year.

In Q2, calculated billings were impacted by approximately $4 million of COVID-related concessions and contract duration related headwinds. This brings the total concessions-related billings headwind in the first half to approximately $11 million.

Although we’ve seen a slowdown in concession requests over the past couple of months, it’s still not possible to forecast the effects of the pandemic on our customer base over the next few quarters. We plan to continue to help customers manage through this unique time and expect calculated billings to be negatively impacted and less useful as a measure of underlying growth during the COVID-19 crisis.

Trailing twelve month calculated billings were $865 million and grew 38% year-over-year. Remaining performance obligations were $388 million, up 80% year-over-year. Net dollar retention was 125% versus 132% in Q1.

We ended the quarter with 985 customers with more than $100,000 in annual recurring revenue, up 37% year-over-year. We also ended the quarter with 87 customers with more than $1 million in annual recurring revenue, up 78% year-over-year. We continue to show improved operating leverage in the quarter, with non-GAAP operating margins at negative 3% and free cash flow of $11 million.

I’ll now provide more detail on the business with a focus on what we are seeing from new customer growth and what we are seeing in our existing customer base.

We continue to see healthy growth in Paid Customers. As of the end of Q2 we surpassed 130,000 Paid Customers, up 30% year-over-year and representing an addition of over 8,000 Paid Customers quarter-over-quarter, up substantially from the 5,000 Paid Customers added in the second quarter of fiscal ‘20. The shape of Paid Customer additions in the quarter was encouraging, with June and July accelerating versus April and May. This acceleration continued in August.

While some of the acceleration in Paid Customer growth this quarter is likely due to work-from-home, growth is also due to some emerging product-related drivers that we believe will be more sustainable as the work-from-home tailwind normalizes.

First, in late June we started to see the results of the 90-day Slack Connect trials we launched in Q1. These trial conversions contributed significantly into paid customer growth in the last month of the quarter. Connect provides us with another driver of adoption, as our existing customers are starting to pull their vendors, partners, and customers into Slack for inter-company collaboration.

We have historically had two funnels for our business: the self-service funnel and the direct sales funnel. With Slack Connect, a third funnel is emerging and as Connect grows, we expect its contribution to paid customers to also grow.

Second, as we have discussed on the last two calls, we have been very focused on the self-service funnel and the new user experience. We are making significant progress here and that is driving better conversion rates.

Re-accelerating paid customer growth has been our biggest focus this year, as customer growth feeds the business over the longer-term. We are very encouraged by the progress observed in the first half notwithstanding the COVID impact. Due to this progress, we expect paid customer additions in the second half of this year to exceed additions in the second half of fiscal ‘20.

I’ll now provide some additional color on what we are seeing in the base of existing customers. As discussed last quarter, our customer base looks a lot like the broader economy, with representation from businesses of all sizes, in nearly all geographies, and all verticals.

We estimate less than 20% of our business is from industries most directly impacted by the COVID-19 pandemic. While these represent a minority of our business, these higher risk industries grew significantly slower in the first half versus non-impacted industries.

We also price on a per seat basis and many of our customers are on a pricing model tied to usage with Fair Billing, so recessionary dynamics such as reductions in force, hiring freezes, and slower hiring are direct and immediate headwinds to growth within our installed base.

In the midst of those headwinds, customer retention remains very healthy, with retention for customers spending greater than $100,000 annually remaining flat in the mid-to-high 90s. Retention for customers spending between $1,000 and $100,000 was in the low 90s and moved downward slightly. Engagement also remains very high. Customer churn has also largely stabilized over the last couple of months.

On the other hand, $100,000 customer contraction provides a good example of how headwinds like headcount reductions in our customer base impact metrics. In Q2, we had 50 customers move from the $100,000 to $150,000 bucket to the $50,000 to $100,000 bucket. This compares to only 10 in the second quarter of fiscal ‘20.

Net dollar retention was similarly impacted. Contraction was approximately three percentage points above normal in Q2. Some of the contraction in Q2 was due to what might be described as a hangover effect from the Q1 surge. In Q2, growth in many of our customers contracted or flattened versus normal seasonal trends. In August, growth began to trend at more typical seasonal levels.

In general there is more budget scrutiny, particularly for incremental investments, and we have seen sales cycles lengthen with some customers accordingly. This is particularly true in the Americas region. Close rates in geographies less impacted by COVID are similar to pre-COVID levels.

I’ll now provide some direction on modeling Q3 calculated billings. As discussed, many of the headwinds we have observed in Q2 have stabilized and some parts of our business are beginning to accelerate. At the same time, the macroeconomic environment has created more uncertainty for our customers. Given this backdrop, we expect similar quarter-over-quarter percentage growth from Q2 to Q3 as we observed in fiscal ‘20.

Now, onto guidance. For the third quarter we expect revenue in a range of $222 million to $225 million, representing year-over-year growth of 32% at the midpoint. We expect non-GAAP operating loss in a range of negative $27 million to negative $23 million driven by higher investments in our R&D and sales organizations. We expect non-GAAP EPS in a range of negative $0.06 to negative $0.05. We are modeling Q3 basic shares outstanding of approximately 571 million.

For the full year we are raising our revenue guidance to a range of $870 million to $876 million, representing growth of 38% at the midpoint. We expect full year non-GAAP operating loss guidance in a range of negative $75 million to negative $70 million. We expect full year non-GAAP EPS in a range of negative $0.14 to negative $0.13. We are modeling full year weighted average basic shares outstanding of approximately 567 million.

Finally, we continue to make substantial progress on our growth phase leverage targets and now expect to be free cash flow breakeven for the year.

With that, I’ll turn it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Alex Zukin with RBC. Your line is open.

Alex Zukin

Hey guys, thanks for taking my questions. Maybe just the first one Stewart for you. You know with the net adds in the first half of this year are greater than the entirety of last year and your commenting that you have a lot of confidence in the back out trends being higher than last year’s second half. So maybe, you know talk to us – you know now that we’re two quarters of the way through the year and there’s a better understanding of some the engagement dynamics and some of the top of the funnel conversion dynamics, what’s giving you that confidence and when – I realized the growth is longer term, but given the Billings dynamics and the retention, and it elevates the expansion dynamics, when do you expect that growth to present and what’s the best way to think about your durable growth trajectory?

Stewart Butterfield

All great questions. So there’s a couple of factors that give us confidence about the second half when it comes to new paid customer acquisitions. Part of it is just like a higher baseline rate. And obviously this is something that we model really carefully and do a lot of analysis on. So that’s kind of a background trend and presumably that’s just the increased relevance importance of the category in work-from-home world.

But the Slack Connect stuff is pretty easy to directly model and it’s not some flaky attribution model, it’s pretty much direct. As you can see people who got the invite, they stated the trial, the trial expired and then they upgraded, and I mentioned that there was 1,000 net out of the 8,000 added for the quarter. That was about half of the quarter and all of the numbers are going up there, so expect that to be a bigger driver.

And finally, I think we are just kind of you know in a good space now with the team that’s working on a new user experience and paid conversion and all that, to see continued progress. They are just making a lot of changes, and I guess sorry, one last factor. August traditionally is a slower month, especially in the EU with the holidays, but the same thing is true in North America and we’re not seeing as much slowdown as you might have thought. So I think all those seem to be sustainable.

I’ll let Allen speak to the – you know what it really presents.

Allen Shim

Yeah Alex, last thing on the paid customer adds, you know obviously the momentum is very good right now. We like to base on that we are building off from here. Q4, just keep in mind is very seasonal with the holiday, so that might distort the numbers up or down just given those for that particular quarter, but we like the progress here and all those early days, the momentum is very encouraging.

In terms of what to expect for the impact, you know these cohorts, you know take time to expand over many quarters, if not more like two to three years on a cumulative basis. So I expect to see some contribution, probably you know starting as early as the end of this year if not more into the beginning of next year, but that will be an ongoing tailwind for us just given the land to expand dynamic that we have.

Alex Zukin

Understood! And then maybe just on the other side of the equation. If you think about the dynamics around fair billings and the impact it’s having in kind of this year on dollar based net expansion, walk us through, how does that you know present on the other side? What is the – when will you start to see – is it fair that it troughs and then starts to kind of go up, as some of the cyclical dynamics around certain economies or certain sector of the economy improve or once there’s a net new kind of baseline around billings, we have to wait until a new renewal term or contract term. I think that would be great to walk through that.

Allen Shim

Yeah, I think on the fair billing front Alex, you know I think both are true. So when economies start improving and you start to see normal expansion resume, you will expect to see that. But keep in mind, this impact is, you need that kind of anniversary it to really see the full benefit of it. So I would expect that to take multiple quarters to play out, but you’re right, for our larger customers that are more ELA based, that is typically driven by the renewal timing.

Alex Zukin

Great, thank you guys.

Operator

Our next question comes from Raimo Lenschow with Barclays. Your line is open.

Raimo Lenschow

Hey, thank you. Could we kind of talk one more time in the dollar net retention, the 125? If you think about it like – you know you mentioned some of the components already, but like how much of this is like a sustainable kind of new level versus something that could come back and can we just discuss that in a little bit more detail again?

Allen Shim

Yeah Raimo, its Allen. So I think notably we call out the contraction piece, because that is a really big deviation from trend. Obviously churn was higher in the period as well. So I think, we have a land and expand model here. We know that expansion will continue – as customers adopt slightly, they will continue to grow with and expand over time. But you are seeing, you know a more pronounced impact this particular quarter just given the workforce reductions that we believe are playing out into the into the numbers just given our fair billing dynamic.

So I think long term, we still believe it’s 120% plus range, but there’s obviously some volatility that we felt in Q2 here. By coming out Q2 into Q3 we do feel like the trend is stabilizing, if not improving.

Raimo Lenschow

Okay, and then one follow up for Stewart. So the – if you think about it like, people have to rethink or reimagine how they work, and that’s kind of like going through – you know it should probably help you and we would see some of that already in some of the discussions that have with IT shops, where with IT buyers. Like how do you think in terms of time frame, how this is going to play out. Like at the moment we’re still in – it seems like very much we’re still in crisis mode, like what sort of kind of early stage discussions do you see about people reimagining how they are operating, etc.

A – Stewart Butterfield

So, it’s a great question, and I think there’s probably like two different things going on. One more in the enterprise world and one just like with the broader group of companies that might use Slack.

In enterprise land, it’s a period of digestion. So a lot of IT leaders are going through almost like a series of crises with managing the network, the VPN, security, how to deliver laptops to new employees, how to fix stuff that’s broken. Just like kind of the whole transition to work-from-home in the operational side for them. And with that there is only enough capacity to fix things that seem like real fires and emergencies, and you know whether it’s correct or not, I think Slack is viewed more as an elective in that sense. Good news is, I mentioned this on the call, is that traffic is starting to free up a little bit.

Looking a little bit more broadly though, we think the most effective driver of new team acquisition and changing people’s minds has not been our press activity, it’s not been our marketing, has not been our website, but has been people who use Slack at one company coming to a new company and advocating teams or other friends advocating for it.

So, but I think Slack Connect is a great replacement driver for that, and while I don’t – you know we’ve always said Slack is something that people don’t know that they want, but once they have it, they can’t live without it. That dynamic, I think can start to happen a little bit quicker.

One last just kind of more of anecdotal point, we seconded our VP of Customer Experience, to kind of run programs of how we should be changing the way that we work at Slack as a company given that everyone’s now working from home. And one of the first things she said was, 500 Howard Street is no longer our headquarters, our headquarters is in Slack. And that was great, and it’s funny to attribute it this way, but someone pointed out a Seeking Alpha post, reposted at Yahoo message finance board that was – someone described Slack in exactly those terms.

It is like the physical – it is the digital version of the physical office, and as we get more and more CIOs reengage in the process, it an interesting line of argument, because it’s the replacement for the conference room where the brainstorms happen, it’s like for the internet, where the one-on-one happens, for all handed events and for organizations that are using like a they really experienced that as a true center of gravity for the operations of the organization. I don’t think the people who don’t have that, know that they are missing it yet, but we are doing our best.

Raimo Lenschow

Yeah, okay. Okay, thank you.

Operator

Our next question comes from Brent Bracelin with Piper Sandler. Your line is open.

Brent Bracelin

Thank you. One for Stewart and a follow up for Allan if I could. Steward roughly 45 days ago you filed a complaint against Microsoft. Could you walk through the logic of the why now regarding the timing of the filing and then maybe what you saw competitively this quarter?

Stewart Butterfield

Yes, sure. So no correlation between the timing of the filing and anything that’s else that’s going on. I don’t know if it’s apparent from the outside or not, but this is something that is literally years in the, some initial conversations. We’ve been asked about this over and over again and we had to be a little bit circumspect in our answers. We decided to pull the trigger a little while ago, but even that process has some spin-up to actually submit the complaint.

So as I pointed out that those are separate and then just about the complaint more broadly, we genuinely believe that the – like there is so much textbook definition of what the regulations are trying to prevent. Its illegal anti-competitive behavior, it’s – we are doing it for us and we are doing it for the innovation, for competition and for the broader ecosystem and ultimately for customers.

But, this is a tactic, this is not a strategy. This is not something that I’m paying very much attention to at all right now, because this conversation is between lawyers and regulators, we feel very confident as I said that this matches the definition. We should also feel confident that the commission will agree, they will initiate investigation, and ultimately optimally that we’ll find in our favor.

So, okay with that haven’t been separated, on competition generally, the term is just so big that I don’t think anything, even if it was worrisome is going to show up for us in a significant way for a while. But there’s nothing that’s indicating increased pressure there. Win rates are the same. We are now in quarter 14 of competing with Microsoft. We’ve won over and over again in Office 365 using customers.

So well, you know no doubt that it causes some friction, it’s another thing for us to overcome. It doesn’t put any kind of ceiling or limit on our growth the last thing I’d point out is, we have different visions, there’s a different road map, the products are used in fundamentally different ways today and that’s becoming increasingly apparent to customers.

Brent Bracelin

Got it. That’s helpful color, and then Allen just as a follow up, you mentioned head count you know several times here as one of the new kind of impacts as we think about that cohort of $100 to $1000 ARR customers and I think 50 of them, something below. As you look through the installed base and as you look through the reset, right, of headcount, is that largely now behind us as an impact? Do you still think there could be more of an impact across your existing customer base as a drag next quarter? Just kind of walk us through what you – what you’re seeing from a just a headcount seat drag based on some of the layoffs that have occurred here?

Allen Shim

Yeah, I think that’s right Brent. What we saw was pretty pronounced impact in Q2 and just given what’s happening in the world, I think you know the timing is not coincidental. But we don’t expect to see that kind of sequential change again going forward here. As I look here, in kind of the second week of September, the early trends coming out of August and into September are more encouraging and even in Q2 just as a reminder, we added the same amount of gross $100,000 customers as the year prior and really the only difference that was, the folks are kind of falling below the line which we highlighted. In Q3 we’re seeing, the ongoing momentum there on $100,000 adds without the same kind of drag on the contraction side.

Brent Bracelin

Got it! Helpful color, thank you.

Operator

Our next question comes from Brad Zelnick with Credit Suisse. Your line is open.

Brad Zelnick

Excellent! Thank you so much for taking my questions. Maybe one for Stewart and one for Allen. For Stewart, it’s great to see the number of Slack Connect customers and endpoints continue to grow. But are there any additional metrics you can share about penetration within customers, average number of other organizations they connect with, and ultimately any observations that you have around renewal and expansion trends or even daily usage of this cohort?

Stewart Butterfield

Those are all great questions, and I don’t have any numbers to share, didn’t prepare any, but also just don’t have any at my fingertips.

Intuitively this is going to be a great driver of retention over the long run. Back when we first proposed this, and put it on the road map, we could say inside the company that this is a mode that goes to the center of the earth and its filled with molten lead and nickel just like the earth’s core and I still think that’s going to be the case in the long run. While we have seen great adoption counting the companies at the enterprise level, we still have a long way to go in kind of building the right tools for administrators to allow for more rapid spread inside of those companies. All of those are trending in encouraging ways and I think there’s also a lot of stuff on the road map which is going to make it a big difference.

The two that I would point out: one is, kind of DM Connect or the ability for any two Slack users to create a DM connect outside of the context of the shared channel, so the share channels are already a big driver of new direct message conversations across company vendors, but this is more like à-la-carte.

And the second one is what we call Managed Connections, which is the comprehensive reporting and policy setting at the organizational level for their relationship with other companies and this is something that I would actually love to have. I guess theoretically you could do with email, but you would do the same policies. This is for us as a partner and vendor to sales force, all the shared channels that we have with them, all the direct message conversation, just kind of reporting on the activity and usage seeing that trend over time with professional services firms that we use with our customers and the ability to set policies there.

Because what we’re selling on the enterprise side of the Slack Connect is “Hey, this is a big step toward improvement. You’re going to support your customers better, you’re going to get more value to your vendors” but it’s also a big step so forward in security compliance, because the competition here is largely tech messages and WhatsApp and other out of band communication methods.

So I think that’s beginning to resonate. You know we have customer advisory board that’s kind of early preview of a lot of the features to champions within, Slack using organizations and people get it, and I think that’s a message that’s really going to resonate. So big drivers there and we’ll look at what broader set of metrics beyond connected points we want to start sharing.

Brad Zelnick

Awesome! Thank you Stewart and maybe just for Allen. Allen, it’s encouraging to hear your comments suggesting a return to more normal billing seasonality next quarter. How would you characterize the visibility you have perhaps in terms of VLA renewals or just tangible pipeline that really drive your confidence and what are the upside and downside risks to that, especially just given some of the uncertainty in the world and for example some of the things that you said about what you’re seeing in the Americas? Thanks.

Allen Shim

Yeah, Brad I think it’s a balancing act. You know we pulled billings guidance last quarter because we expected more volatility. You did see that you know show up here in Q2 and I think we will still see a volatile environment going to the second half.

Having said that, Q3 and Q4, more of the pipeline there, particularity on the larger deal side is renewal based and those are generally higher closed rate opportunities for us. And so we expect, you know again that improving trend is somebody that I think is working in our favor. The quality of the pipeline if you will, the composition of the pipeline is working in our favor, but you know I think the volatility which we saw in Q2, we don’t expect that to recur again here, but at the same time the world is pretty dynamic right now, the environment is pretty dynamic right now.

Brad Zelnick

Totally get it. Thank you so much guys for taking the questions.

Operator

Our next question comes from Michael Turrin with Wells Fargo Securities. Your line is open.

Michael Turrin

Hey thanks, and good afternoon. You touched on the influence of Slack Connect on new customer adds a couple of times. It sounded like from the prepared remarks you’re suggesting custom adds can continue to roll on at a better cadence for at least the rest of this year. So can you dig into that a bit more? What is it that helps that trend persists versus this being more of a one time the product drivers? It is just continued rolling adoption trends? Maybe just help us in calibrating around where Slack Connect is today versus where it can ultimately end up?

Stewart Butterfield

Got you. So the confidence in that kind of trend continuing is just looking at the number of invites being sent out, the number of new trials being started. And those are all encouraging and point to continued growth.

On top of that, one of the things we didn’t mention is the difference in user experience if you’re brand new user to Slack and you’re coming in via a shared channel, versus you just went to the website and setup a team yourself. So in the latter case it’s a real cool start, you go to invite people, you got to convince them to use it, you got to show them how to use it, you got to figure everything out.

But if you are a new user coming in through a Slack Connect invitation, you already have people to talk to, you already have stuff to talk about. There is already like a business use for this. So I think people will wrap their heads around Slack and in a fundamentally different and much better way.

So all of those and the feature as I mentioned in previous questions, all those I think will be continued drivers for the growth of the network and continue to see that network effect and there’s just a lot more users behind that. There is a lot of people bringing in vendors, you know whenever that was.

I think Q4, whenever, we first started talking about Slack Connect, I mentioned that one little example of the star shape and that network [inaudible]. That was someone who believed that the experience with their customers was so much better than they were able to support their customers on shared channels. It actually went and created Slack instances, paid for them, got them all set up, invited their customers and then let the customers run thereafter.

Well, that’s not going to happen thousands of time a day. That kind of dynamic and that impulse is definitely something that we can capture, harness and start to direct that energy.

Allen Shim

Michael, I think it’s fair when we did intestinally call out, that we think this a third funnel for us, and this is very early days in terms of how we have leveraged trials in particular in Slack Connect as a growth driver. So we are going to continue to optimize it and I think that’s what you’re hear, the conviction and the belief and opportunity here.

Michael Turrin

That’s helpful. I appreciate that. And then on Rimeto, you briefly mentioned that sure will give you more frontiers. Can you expand a bit more here as well around what that brings in terms of richness of profile data and how that helps expand on what you’re building out with those connections across your user base? Thanks.

Stewart Butterfield

Yeah, okay so I’m going to speak a little bit more on the short term, just because the long term starts to get little involved. First of all, its just a great product. We are up and running and using it now and I am getting utilities out of it every single day, and it’s sort of – maybe it’s kind of a Slack and everything that, if you don’t have it you don’t know you need it, but once you get it you can’t live without it.

So we’re excited to start delivering it to more and more customers. No real expectations on our side that it’s going to make any kind of material difference to the business in the short term, because that’s not the goal in the short term. We want to improve the profile features inside of Slack itself. But generally if you have a better user interface for browsing profiles, it’s fine to link out just like we have all kinds of integrations with all kinds of services, we don’t need to build a CRM inside Slack if there is sales source on the outside.

And the same thing is true for Rimeto. So last thing I’ll mention, and I think what you were getting at is its ability to kind of share profile details in the context of other applications, where either profile details or organizational structure details would be important or relevant. So for us the obvious simple one is Slack Connect.

When I mentioned before this à-la-cart DM connection between two individuals, it’s a little bit like Blackberry Messaging if you remember that from the good old days, where I share my pin, you can send me a message. I still have to accept it. It’s kind of like a double handshake and where Rimeto profile information is available, that’s what we’ll show, and as we start to build bigger and bigger directories, more use of these multi-org share channels and kind of eventually span it off into its own feature for letting people create networks and associations, another application for profiles there.

And then finally just a useful repository data, not just for profile information, and not just for the kind of organizational structure you typically see in these tools, which is based on reporting lines, but for the fuller sense of what teams people belong to, what groups and how they relate to one another, which can be used in all kinds of applications to increase the power of the integrations with Slack or anywhere else.

Michael Turrin

Thank you.

Operator

Our next question comes from Arjun Bhatia with William Blair. Your line is open.

Arjun Bhatia

Hey guys! Allen, first one is for you. I mean you know not to beat a dead horse, but on the net dollar retention headwinds, can you just maybe give us a sense for how much of that is from customers that are just facing headcount reductions versus gross expansions being at a slower rate or true churn that you’re seeing over the SMB section of your business or else where customers are turning Slack off completely. Just between kind of those three buckets where you’re seeing the biggest headwinds?

Allen Shim

Yeah Arjun, I’d say you know on the expansion front, you know that was more or less on trend for us. Really the normal contractions we called out, but also churn was elevated in the quarter, although that we did see that start to stabilize coming out of the quarter and into Q3.

So I think Q2 was a pretty unique quarter. We saw these impacts in a very pronounced way, but we don’t expect them to recur, definitely not in this magnitude, notwithstanding kind of the economic environment and volatility that we believe is still present there. But the trends are encouraging from here and we think we’re at a better baseline as the conditions start to normalize from here.

Arjun Bhatia

Got it, that’s helpful. And Stewart one for you, it’s great to hear that Slack Connect is launched and you’re seeing a lot of interest and it’s driving paid customer adds. Just when we think about this at a higher level, can you just help us understand the technical sophistication maybe that’s required in building an offering like this that can support multiple organizations of admin control and the rest of it. And are there barriers here that would prevent a competitor for building something so similar, maybe one that’s SharePoint based.

Stewart Butterfield

It’s a great question. I’m going to try and be a little light on the technical details, but I think the easiest way to think about it is if there are no interactions across organizational boundaries, then all of the data inside of Slack can be kind of tightly divided by organizations. So we only need to support the scale of the largest organization as opposed to all of the users in the network. All of users in the network is a much bigger problem, you know that’s what Facebook was pretty incredible in their ability to support that in the early days, which support a lot of the growth.

So you know if you have 10,000 people in your company, did your software client used to only have to know at most about 9,999 other people. If you could have a connection to literally any other Slack user, then it potentially has to know about millions and millions of people and that’s a bit of a commentary explosion there.

So we have pretty new technology. I mean we literally broke ground started development in 2013 and we’ve done a number of fundamental refactors had upgrades along the way. It took us a long time to bring Slack Connect to market just because of those challenges that I mentioned and from there the challenges are – a new line of challenge is introduced in addition the scalability, which is things like what do you do when they have different message retention policies? What do you do if they are using different inscription keys and they are both on EKM plans, so a lot of innovation that we are doing there with most popular ware of EKM.

I read it as you know if not a 10 out of 10, but maybe a nine out of 10 ion technical difficulty and I think the challenge will be incorporating legacy technologies or kind of getting a bunch of legacy technologies to operate in this way. It’s hardly never-say-never. It’s kind of hard to predict, but we don’t see anyone being able to replicate what we’re doing any faster than we did it.

Arjun Bhatia

Got it, thank you very much.

Operator

Our next question comes from Keith Weiss with Morgan Stanley. Your line is open.

Josh Baer

Hi! This is Josh Baer on for Keith. Thanks for the question. A couple on engagement. Just wondering if engagement per day as far as time connected to Slack and active use, has that remained elevated over the last three months compared to prior quarter commentary?

Stewart Butterfield

Yes, it has. So you know we don’t report it regularly, so I haven’t looked in that in a while, but it’ still over 10 hours a day connected and 100 minutes of activity. So I’m not sure how it’s trending, but I think it’s fair to say that we’re – we kind of set a new baseline and new features may drive increased usage.

I would point out that in some cases we want to add features that help people spend 5 minutes less given the connected usage, but generally with the engagement sensitive, like people realizing the utility and the value of Slack, you know it being the center of gravity for their work life and kind of replacing that physical office, that definitely is still there and that heightened engagement is something we expect to continue.

Josh Baer

Got it. And then thinking about the 12,000 new paid customers last quarter and then all the momentum this quarter, thinking about engagement, are they still using – are they using Slack as kind of the solution to the immediate work-from-home collaboration needs at this point or have those new customers to the platform really started to fully embrace the potential of the solutions as far as building automating work flows and integrating with other software? Thanks.

Stewart Butterfield

Yeah, it’s a big question and what we saw in the early stages was I think because the incremental demand was driven by the increased importance in this time, there was kind of a correlated increase in the – I don’t know what to call it, but the amount of gumption people had to get it set up in a really sophisticated way, you know higher success rates at different points along the funnel, that’s still there, not as pronounced as in the last week of March of course, but its still a lot of work I think for us.

We have a lot of work to do I guess is what I’m trying to say, to help customers get to realize the full value there. The workflows are very popular and we see usage increasing, but it takes a while to get to where we end up and where we end up by the way is 94% of paid customers using at least one custom integration, but only third party’s offering, I mean a custom integration. 90 – this is very specific. 99.8% of our $100,000 plus customers using at least 1, and 100% of the $1 million plus customers and we’re seeing using at least one. The average there is – I don’t have it in front of me, but it’s in the hundreds.

So that kind of usage takes a while for people to kind of wrap their heads around and undertake. We have a big commitment to making that easier and simpler, to look for stuff and the roadmap around that big driver there, and I think beyond that we’re also looking at kind of a broader platform 2.0 refactor of the approach to applications, really trying to make it as simple as possible, really trying to make any interactions you have a testing link to an object in a third party application deemed the starting point for building those integrations.

Josh Baer

Got it. Thank you.

Operator

Our next question comes from Derrick Wood with Cowen and Company. Your line is open.

Derrick Wood

Great! Thanks for taking my questions. I guess one for Stewart, one for Allen. First one, you guys – on the partnership side you guys announced kind of strength the partnership with AWS last quarter. Stewart, you briefly mentioned some new things you’re doing that will last you in this quarter. I was just hoping you could double click on what’s new, what new efforts were coming out of these partnerships and how you’re thinking about helping drive market coverage or market advantage, [inaudible] the market as you look at the next six to 12 months.

A – Stewart Butterfield

Yes, so I’ve kind of divided the work into two halves there and one is just you know more or less purely commercial. Its helping me help each other out. Those are obviously important. I don’t have a lot to announce right now or numbers to share, but we are seeing – we’re doing more and more experiments around distribution and offers and things like that and I think that we will continue to make progress there.

On the other side I think it’s really – I just spoke about what we need to do to bridge more usage from kind of normal people to this world of integrations, because the normal people are using hundreds of different software tools of their company and they are spending many and more minutes using software every day and the company is just spending more and more dollars on their use of software over time. So you know I think the best thing we can – and I think us software vendors can all do for each other and for our customers, is to increase the degree of inter-operability and I think when you look at the Atlassian toolset, obviously a huge overlap with Slack.

We talk about Slack as a lightweight fabric for systems integration in the broad sense, but you know companies like Atlassian can look at Slack as a lightweight fabric for integration of their own product suites for their customers, and that’s something that’s really attractive.

I use this example a lot, but it is still my favorite. I paste a link to a Google doc into a channel in Slack, and it’ll say ‘Hey! 7 of the 13 people in the shared folder have access to the doc. Would you like to give it to them?’ and I can just press the button at all of it is automatically taken care of. And the only way you could do that is if the users are mapped across their systems and you understand who’s who and you can control all the access controls. That’s a level of convenience that I think we all can collaborate to bring to customers, to remove friction, to get more value out of software, and that’s really the thing at the heart of that relationship with Atlassian.

When I talk to Mike Cannon-Brookes, that is the number one thing that we talk about. How can we make that easier? How can we make it simpler? How can we streamline it? So it’s not just Atlassian of course, but a lot of up take and a lot of interest among the independent software vendors that we talk to more or less every week and expect more progress there.

Derrick Wood

Well, thanks for the color. Allen, so 80% growth in RPO is a big delta versus the 34% growth in deferred revenue. Can you remind us why there’s such a big delta and kind of when we should expect that to converge a little bit more? And then thanks for the color on billing, directional thoughts on billings in Q3. Are you at a point where you could share directional thoughts and Q4 [inaudible].

Allen Shim

Yes, so on RPO Derek, you know as a reminder you know our RPO is only the value of our multiyear deals and so you saw you know that notably increase in Q1 with some larger deals that which we talked about. In Q2 we talked about some of those sales cycles lengthening and that to have an impact on fewer bigger deals being closed in the quarter. So that’s really the disconnect; it’s really just our definition of how we’re using RPO.

Overall on the billing side of things, I think you know Q2 is the right baseline to build off of here. I think you know the second half at the same time, so there’s a pretty limited visibility beyond this quarter, so I think that’s why you’re hearing us provide more color on Q3, but I think it’s too early to call Q4 at this point.

Derrick Wood

Okay, thank you.

Operator

Our next question comes from Will Power with Baird. Your line is open.

Will Power

Okay, great, yeah thanks. You know I’ll try to fit in a couple of questions. I guess maybe Allen first, maybe just to come back to the seek out pressures you alluded to earlier and maybe I missed this, but are you able to quantify what percentage of the C-Cap pressure or some sort of quantification was tied to the hardest hit industries versus something broader based, and I guess you know stepping back, just remind us again, what gives you confidence that that doesn’t persist as you move to the second half of the year?

Allen Shim

Yeah, well I think what we see is that those impacted industries are growing slower. I don’t have a more specific attribution of that for you right now; we can follow up on that. But specifically in what we’re seeing about going forward from here is, I think the takeaway is that Q2 saw this more pronounced impact. I think as we look at expectations going forward, that’s where we talk about Q2 as the baseline, because I think we’ve absorbed a lot of what we think will happen at least on a sequential basis here.

It’s not to say that they won’t continue to grow for – gross dollar going forward, but I think we’ve baked that into again calling Q2 the baseline. So you know based off of that I think those expectation have been built into how we’re looking at the remainder of the year. But broadly speaking, I think the trends are improving aside from those affected industries.

Will Power

Okay, great. And then a Stewart, I guess one for you. As you look at you know Slack Connect, I mean impressive growth in the overall you know Slack Connect end points and it sounds like no overall traffic. I was wondering if you can just share with us you know, what you view as some of the more exciting use cases? What are you see out there, you know now that you’ve got a much broader expansion opportunity, you know what are the end points and you know what gets you most excited about what can be replicated there across your financial groups.

A – Stewart Butterfield

Yeah, so there’s I guess two different answers here and the one for me personally has been the kind of magical power of multi-org shared channels to create private networks. You know I talked about that example of CEOs of other different SaaS companies, but still a vibrant source of activity and still a great way to kind of to have an avenue for conversation that literally couldn’t have been done any other way. Could have been working and that’s what we’ll be working in now, so that’s me as a user.

Me as a business person, the use cases that I’m most excited about are sales related, and just [inaudible], it’s actually just really good. I mean it’s great to have – for a complex sales process which can involve legal negotiations and security of use and the vendor approval process and commercials and all of that stuff to have the leaders, the managers on the sell side and the buy side, both kind of have oversight of the conversations that are happening. It’s a lot less to tuck into work. It’s much easier to bring someone in, you know all the reasons that that channels are better, but the other reason why I like this use case is you can – and that’s an argument for by Slack get revenue, which is different than by Slack getting productivity.

I’m 100% sure that the ROI, the productivity sale is massive, you know like 100x or something. We don’t actually charge that much in the grand scheme of things, but of course you know that’s always a harder sale to make, whereas buying our product to get revenue is a lot easier.

Will Power

That’s great, thank you.

Operator

Our next question comes from Heather Bellini of Goldman Sachs. Your line is open.

Heather Bellini

Great! Thank you so much gentlemen. Most of mine have been answered, but I just wanted to go back to Stewart. In the beginning you mentioned that customer additions you think are finding a new baseline. When you think about the customer count of over 100,000 and I think you’d find 22, and I know some of those kind of dropped down from over 100 to less than 100 in the quarter. How do we think about this? Is that what you’re referring to when you’re talking about the baseline and how do we think about kind of the pace of that number kind of growing from here given the you know big EOA findings that typically happen in Q3 and I guess Q4 in particular. And then I just have a follow-up. Thank you.

A – Stewart Butterfield

Sure, and just a classification there. I’m talking about just the total number of net new customer adds, all shapes and sizes all around the world, so that’s the number that I think we hit a new baseline on and there are – you know just in the U.S. 2.5 million businesses that have five or more employees. All of them are bound to use Slack, but all of them are – sort of there’s a lot more room than just 5,000, 8,000, 10,000 new customers in a quarter.

The representation of hundred – future 100,000 plus, a 1 million plus customers I think naturally will diminish over time just because they have so many of those. A lot of them are already in the system. That maturation process can take longer and can be accelerated. I’ll let Allen add some color there, but I was talking about you know the 8,000’s, not the hundreds.

Allen Shim

Yeah, I would just quickly on the 100K, you know I think what we saw in Q2 was the focus as you mentioned dropping below that. I don’t expect that to recur in nearly – and definitely not that magnitude going forward here, and the early visibility of the trends we’re seeing in August into September suggests that you know we will be – you know that you’ll see an improving figure there for Q3.

Heather Bellini

Okay, and then just another follow-up – just again just looking at the deferred revenue trends. I know you had a slight benefit from the acquisition, but it looks like on the cash flow statement it was roughly flat sequentially. I’m just wondering, and I know you gave a little bit of color on billings for Q3, but is there anything you can share with us of how the COVID impact confessions that you discussed impacted you know the sequential change in deferred revenue in the quarter.

And then the last question I had was just, the true-ups on the ELA – I mean given those typically happen in Q4, do you think the worst is behind us from a net expansion rate perspective?

Allen Shim

Okay Heather, so first on the COVID related, you know $4 million in COVID related concessions this quarter alone; $11 million from the first six months of the year. You know it’s something that we’ll…

Heather Bellini

Is that revenue though or is that deferred?

A – Allen Shim

On the billing side, so you’ll – yeah, so billings it’s going to impact on the deferred side, yeah.

Heather Bellini

I get that, but what’s the specific revenue, what’s the balance, what’s the split between deferred and revenue, I guess that’s what I’m trying to figure out.

Allen Shim

Yeah, oh sorry! So all deferred.

Heather Bellini

Okay, so it’s all deferred and then just the true-ups on ELAs.

Allen Shim

Yeah, on the ELA side. [Cross Talk] Yeah Q3 and Q4, more ELA’s, more renewals, just given the kind of enterprise shape and seasonality of those quarters. But I think overall, nothing more to reporter there. I think the current thinking is those renewals are going to be higher quality opportunities for us, and we believe that we continue to add a lot of value for these larger customers in particular. So I think there’s – that’s an encouraging change in trend from the Q2, accomplishment of the Q2 pipeline.

Heather Bellini

Okay, great. Thank you.

Operator

Our next question comes from Walter Pritchard with Citi. Your line is open.

Walter Pritchard

Hi thanks. Just a clarification here on the 100k type business. I mean I guess I’m under the assumption most of the customers will be on annual deal and they would upsize or downsize, especially downsize at the time of a renewal or maybe even a payment to revisit. Is that many of those are on monthly or is it just the customers who have something you know up for renewal or up for payments in the quarter and renegotiated.

Allen Shim

Yeah Walter, a couple of points there. So not everyone is under ELA, so its not all types of renewal, but probably more importantly it’s an ARR base metric, so that’s why you are seeing more movement there in any given quarter.

Walter Pritchard

I mean do they actually have the right to downgrade any of the contracts, that’s what I’m just trying to understand, because our favorite SaaS company who has a three year deal, one year deal, you know only a portion of those deals will coming op at this point in time and it actually seems like quite a large percent of those, or a bigger number of those kind of paid customers [inaudible].

Allen Shim

Yeah, I know it’s really a reflection of the seed. So as we are tracking usage, as we have been saying, you know kind of real timing tracking that and then we are taking the – we are reflecting on ARR, we are tracking for that customer.

Walter Pritchard

So even if the renewal hasn’t happened yet, is what you’re saying.

Allen Shim

Yeah, on yeah.

Walter Pritchard

Okay, I see. Okay alright, thanks for the clarification.

Allen Shim

No problem.

Operator

Our next question comes from Mark Moerdler with Bernstein Research. Your line is open.

Mark Moerdler

Thank you for taking my question. Obviously a lot of them have been asked already and answered and I appreciate that. If you don’t mind I’m going to ask two reasonably short ones. On the Q3 and Q4 or implied Q4 guidance, just wanted to confirm, are you modeling similar or a larger impact from the COVID-19 concessions. Are there other factors that you’re at implying here in Q3 and Q4 guidance that may have been more positive or negative than you’ve had in the past and then I have a follow-up.

Allen Shim

Yeah, just on the shape of the guidance here, I think a similar impact right now based on what we saw here in Q2. So no real change on expectations.

Mark Moerdler

Then Stewart on the integrations, how long do you see customers taking until they start picking up and adding integrations, creating integrations of their own and is it any different from the people, the companies that have joined since work-from-home started versus those historically?

Stewart Butterfield

Yeah, I don’t have any hard numbers for you on the use of integration specifically, but as I mentioned before, a lot of people coming in, in this environment of heightened interest and importance relevance of the category are coming in with slightly more sophisticated ideas or maybe another way of saying this is, they are paying more attention to everything and trying to get the most of it.

Unfortunately I don’t have any specific figures on adoption. I mentioned earlier that 94% of all paid customers are using custom integrations.

I don’t know what the comparable figure would be for all integrations, including third party, but I assume that it’s going to be very, very close to 100%.

So everyone gets there at some point and that might be popular tools like Google Docs or Dropbox or Outlook calendar, things like that and it may be relatively simple, and over time once the ideas are trying to build their sophistication and that it helps them net all these systems together in a way to really make sense for them.

Mark Moerdler

Perfect, very helpful. I appreciate it. Thank you.

Stewart Butterfield

No problem.

Operator

Our next question comes from Ryan MacWilliams with Stephens. Your line is open.

Ryan MacWilliams

Thanks for taking my questions. Solid step towards profitability this quarter and a significant reduction in sales and marketing expenses as a percent of revenue. Could you just add a little more color on this line item for the quarter and then how you think about sales investments going forward in this uncertain macro environment?

Allen Shim

Yeah Ryan, this is Allan. Just you know broadly speaking, sales and marketing, R&D continue to be a focus of investment for us, both in kind of accelerating our growth on the customer side, customer acquisition and expansion side of things, and on the R&D side, on the innovation side. So specific on sales and marketing, added more sales people, continued to increase sales capacity, you did see some benefit here from obviously lower T&E given this environment, but also the time of some our marketing programs at the P&L.

Ryan MacWilliams

Great! And then would you mind providing more color on the paid customer cohort added during COVID last quarter. So still early innings, but you mentioned that these customers landed larger and we are engaging more. So any additional detail on how these customers have matured so far? And are these customers more likely to be monthly paying users than prior cohorts?

Allen Shim

Yeah, overall the COVID cohort if you want to call it that, has performed pretty much in line with prior trend, especially as more time has passed here. So nothing more to report there in terms of deviations in that particular cohort.

Ryan MacWilliams

Great! Thanks.

Operator

Our next question comes from Daniel Reagan with Canaccord Genuity. Your line is open.

D.J. Hynes

Hey thanks guys, its actually D.J., I must have dialed in as my associate. Stewart, one for you. As we think about how Connect could evolve, I’m curious how you think about CX. Like are there ways – do you envision ways for brands to open up Slack Channels to the consumer to solicit feedback and manage common service enquiries that kind of stuff. It would be great to hear how you think about that.

Stewart Butterfield

Yeah, it’s so maybe and the reason I say maybe because you know 100% for sure on the business to business side. The B2C side is a little bit more flat, because their user accounts are always tied to the customer who’s the employer as opposed to the individual. And if he’s not going to want to use their workplace Slack to get their air conditioner fixed or something like that. But there are a lot of businesses and opportunities and there are a lot of communities that issue this.

Spunk and Shopify come to mind where there’s a huge amount of activity, and it’s kind of individuals inside the companies that are the champions, that are the administrators, that are the evangelists. There is a lot of CX happening in those environments and we do that too. We have whole work space, just for shared channels with our customers and a lot of the customer advisory boards, champion networks, you know all kinds of stuff like that. That’s a really important use case and I think it’s an also longer term, kind of important opportunity to combine the power of Slack Connect with the power of the platform for sending service tickets and giving reports on activity, purchase orders, invoices, like all of that kind of transactional stuff being conducted there as well. So yeah…

D.J. Hynes

Yeah, that’s helpful.

Stewart Butterfield

Longer term, maybe on the B2C stuff, it’s just that’s a distant future.

D.J. Hynes

Yep, no that makes sense. And then Allan maybe a follow up for you. Can you help us think about the yield for the Connect’s free trial. So you said 1000 paid conversions in half a quarter, which is awesome. Can you give us a sense for what the denominator is in that equation, right? Like a 1,000 of how many? It would be super helpful to get a sense of how powerful the lead gens will connect us?

Allen Shim

Yeah, we are not sharing specifics on the right now you D.J., but I think sufficed to say it’s a much higher yield than the average trial. I think given the pole effect that you are getting from you know obviously an existing customer that has a value partner or vendor that they’re fully into the network there, you know that’s clearly a much more compelling offer than you know kind of a cold start, open pay trial invitation.

D.J. Hynes

Yeah, yeah. Okay great, thanks for color guys.

Operator

Our next question comes from Jeff Kvaal with Wolfe Research. Your line is open.

Jeff Kvaal

Yeah, thank you very much for taking the question. I appreciate that. It looks as though some of your usage metrics were down a little bit from an exceptionally high quarter last quarter. I’m wondering if you could parse that for us and tell us why that might be might be? Maybe its new users, it’s taking a little while to ramp up.

And then secondly if you could perhaps help us translate that in correlation of usage and revenue should be little, but if you could help us think that through a little bit, I would appreciate it.

Stewart Butterfield

Just to clarify Jeff, you are taking about the engagement metrics, the number of minutes of active usage.

Jeff Kvaal

Yes.

Stewart Butterfield

Yeah, okay. So yeah, down a little bit, but that’s not indicative of a trend, that’s just – it’s up compared to the baseline historical average. Q1, just you know, it’s still one of a kind, but it’s hard to drive a useful comparison there and it could be the large number of new users who are starting to get it figured out or actually, I’m just speculating here.

But definitely nothing concerning there and certainly nothing that would point to any kind of difference in conversion. Conversion remains really strong and in fact you know, while the things that I’m most excited about is kind of further up funnel, because I think we could really do a lot to increase the yield from the peoples who are just interested Slack, and come to the website and all of that.

The down funnel part, the pay conversion, we’ve seen a lot of progress and a lot of success there, and that’s to be clear, outside of the context of Slack Connect as well. That’s just trial programs that are around the time that you create a Slack. So you know positive changes on paid conversion across the board, engagement up, compared to the historical average and no correlation that would be alarming, in fact just generally encouraging.

Jeff Kvaal

Yeah, okay. Thank you. And then secondly maybe for Allan, it seems a lot of your commentary was talking about how encouraging the last month and the quarter or you went into the current quarter have been. It seems to me obviously [inaudible] it seems to me the guidance is actually is recently seasonal. So it seems as though there might be a little, you might have been operated through some conservative assumptions. Could you help us understand sort of the assumptions that you’ve made in the guidance versus maybe last year or into this quarter.

Allen Shim

I think you know the seasonal pattern from Q2 as a base line I think is the right expectation from here. You know not withstanding some, again excited volatility that we see out there. But you know a lot of what happened in Q2 was pretty pronounced, just given the conditions and the nature of our model and the impact, and we are adapting to that. I think just to be clear, both on kind of a tactical level, but I think also over time our model benefits from the fact that we’re adding more and more of these customers over the first half of this year and that will also play out over the coming quarters and years even.

Jeff Kvaal

Okay, thank you all very much.

Stewart Butterfield

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for the question-and-answer session. I will turn back the call over to the company for closing remarks.

Stewart Butterfield

Thank you all for joining. Nothing more to add. I appreciate the time and see you next quarter.

Operator

This concludes today’s conference call. You may now disconnect.


Originally published on Seeking Alpha

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