Slack Technologies (WORK) stock opened 3% higher today after its fiscal 2020 third-quarter earnings and revenue beat analysts’ expectations. The workplace collaboration software maker reported its earnings results late yesterday evening.
Slack reported non-GAAP (generally accepted accounting principles) EPS of -$0.02, significantly better than analysts’ estimate of -$0.08. Its quarterly loss also narrowed from -$0.30 in the previous year’s quarter.
What drove Slack’s third-quarter earnings?
The company’s bottom line result mainly benefited from robust YoY (year-over-year) revenue growth. In the quarter, Slack reported revenue of $168.7 million, 60% higher than the previous year’s quarter. Moreover, its quarterly revenue topped Wall Street’s expectation of $156 million. Billings, a key sales growth metric, grew 47% YoY to $186.1 million.
The addition of new paid customers of higher subscription value mainly drove Slack’s top line results higher. Slack revealed that the number of paid customers with over $100,000 in recurring annual revenue had grown 67% YoY to 821. The number of paid customers with yearly subscription values of over $1 million exceeded 50 for the first time. Moreover, the company ended the third quarter with 105,000 total paid customers, 30% higher than the previous year’s figure.
Due to its higher revenue, the company registered YoY improvements in its gross and operating margins. Its non-GAAP gross margin expanded 80 basis points YoY to 88.3%. Its operating loss as a percentage of revenue narrowed to 11% from 37% in the third quarter fiscal 2019.
Slack ended the quarter with cash and cash equivalents and marketable securities of $774.1 million. Moreover, the company used net cash of $9.1 million, or 5% of total revenue, for operating activities during the third quarter. It burned a free cash flow of $19.1 million, or 11% of total revenue, during the quarter.
Slack provided an optimistic outlook for fiscal 2020, which exceeded analysts’ expectations. The company expects its total revenue to grow in the range of 55%–56% to $621 million–$623 million. Wall Street analysts estimate for the fiscal year stands at $607.7 million. The company expects its billings to grow 44%–47% to $745 million–$760 million.
Slack expects to report non-GAAP EPS of -$0.31 to -$0.32 in fiscal 2020. Wall Street analysts expect EPS of -$0.34. Slack anticipates burning net free cash flow of $85 million–$80 million.
The company’s fiscal 2020 outlook reflects the software maker’s potential for growth despite intensifying competition from Microsoft (MSFT). Microsoft’s Teams tools directly compete with Slack’s chat software.
During an interview with Bloomberg, Slack CEO Stewart Butterfield said competition with Microsoft had a small impact on the company’s business. He said, “There’s still a lot of market confusion and we’re going to have to work harder to dispel that. If you think about those concentric circles, there’s a lot where we don’t compete at all.”
For the fourth quarter, Slack expects its revenue to rise 41%–43% to $172 million–$174 million. It anticipates non-GAAP EPS of between -$0.06 and -$0.07 for the quarter. Wall Street analysts project EPS of -$0.05 on revenue of $174 million.