Five takeaways from Slack's IPO filing

The enterprise chat startup has filed for a direct listing on the stock market. Here's what we learned about the company

Credit: Slack

Hot enterprise collaboration software maker Slack has filed its S-1 to go public today, giving our first real insight into its financials and market anxieties.

It is first worth noting that this is a direct listing, similar to what Spotify did last year, rather than a traditional IPO. This means existing investors and employees can cash in on their shares by selling directly to the public, without the big bank-led IPO song and dance to go with it.

Slack is a chat application for businesses and has proved incredibly popular in the market, often hailed as the most rapidly adopted enterprise app of all time, counting 10 million daily active users to date.

Here are five things we learned from the filing:

Most businesses don't pay for Slack

A large proportion of Slack's business users are on the free plan: "As of January 31, 2019, Slack had more than 600,000 organisations with three or more users, comprised of: More than 88,000 paid customers... and more than 500,000 organisations on our Free subscription plan," the filing outlines.

The company also laid out its sales strategy in the filing, focusing on a 'land-and-expand' approach at the larger organisations where it has already been embedded.

"Our increasing focus on sales to larger organisations may further increase the variability of our financial results," it reads, "to achieve acceptance of Slack by additional large organisations, we may need to engage with senior management and other personnel and not just gain acceptance of Slack from employees, who are often the initial adopters of Slack.

"As a result, sales efforts targeted at large organisations involve greater costs, longer sales cycles, greater competition, and less predictability in completing some of our sales. In the large organisation market, an organisation’s decision to use Slack, expand the use of Slack, and/or upgrade to a paid version of Slack can sometimes be an enterprise-wide decision, in which case, we typically provide designated account and customer success teams, greater levels of user and customer education to familiarise potential users and organisations with the use and benefits of Slack, as well as the design and implementation of special enterprise-specific integrations."

The company also recognises the risk of this approach later on in the filing, stating: "Our marketing strategy depends in part on users of and/or organisations on the free version of Slack convincing others within their organisations to use Slack and to drive the conversion to purchasing subscriptions to Standard, Plus, or Enterprise Grid. To the extent that some of these users and organisations do not become, or lead others to become, paid customers, we will not realise the intended benefits of this marketing strategy."

Microsoft is its number 1 competitor

Executives at rival collaboration vendors may be a tad jealous reading the filing, as Slack identified one primary competitor in its market: Microsoft.

Aside from Microsoft and its bundle of Office 365, Skype for Business and Microsoft Teams, other competitors include: "Productivity tool and email providers, such as Alphabet [with G Suite, Chat and Meet]; unified communications providers, such as Cisco; and consumer application companies who have entered the business software market, such as Facebook [Workplace]".

Read next: Why Slack is right to be scared of Microsoft Teams

"In addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing Slack, including through selling at zero or negative margins, product bundling, or closed technology platforms," it added.

The vendor also recognises its lack of product diversity, stating that: "We derive, and expect to continue to derive, substantially all of our revenue from a single product – Slack. As such, the continued growth in market demand for and market acceptance of Slack is critical to our continued success."

It isn't profitable

This isn't unusual for high-growth technology companies, and the line of "we have a history of net losses, we anticipate increasing operating expenses in the future, and we may not be able to achieve and, if achieved, maintain profitability", is pretty much boilerplate for tech unicorns at this point.

Revenue did jump from US$220.5 million to $400.6 million last year however, with losses only dropping a touch from $140.1 million to $138.9 million due to expenses of $338 million to $503 million.

That being said, video conferencing software maker Zoom proved earlier this month that profitability can be achieved and the market reacted strongly to that float.

It's scared of GDPR

One major risk factor for a company holding as much data as Slack does is regulatory fines and security breaches.

As laid out in the S-1 risk factors: "Any actual or suspected security incident, whether or not resulting in unauthorised access to, or acquisition, release, or transfer of personal or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines, and penalties, or adverse publicity and could cause organisations on Slack to lose trust in us, which could have an adverse effect on our reputation and business."

"Since many of the features of Slack involve the processing of personal data or other data of organisations on Slack and their employees, contractors, customers, partners, and others, any inability to adequately address privacy concerns, even if such concerns are unfounded, or to comply with applicable privacy or data security laws, regulations, and policies, could result in liability to us, damage to our reputation, inhibition of sales and to our business."

The filing also directly references the risk of a GDPR fine of up to €20 million or 4 percent of global turnover.

It's investing in machine learning

Like any tech company worth its salt the S-1 is peppered with references to emerging technology, specifically machine learning and its ability to "further streamline people's working lives by automating workflows".

"To remain competitive, we must continue to develop new features, integrations, capabilities, and enhancements to Slack. This is particularly true as we further expand and diversify our capabilities to address additional applications and markets," the filing states.

Slack also earmarked a large R&D budget to stay ahead of technology trends, but also recognises the financial muscle of its competitors.

"Further, many of our competitors expend a considerably greater amount of funds on their respective research and development programs, and those that do not may be acquired by larger companies that would allocate greater resources to our competitors’ research and development programs," it goes on to say.

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