Few software developers can claim they never had Slack (NYSE: WORK) notifications lighting up whenever someone in the company demands their attention. The maker of the popular communication platform has been seeing substantial growth recently and continues to be one of the most popular communication tools for millions of office and home-based professionals.
Slack is a peculiar company. It operates in an extremely overcrowded sector, where barriers of entry are low and each year new entrants attempt to dethrone the existing market leaders. So far, Slack has been successfully defending its positions. Covid-19 turbocharged company’s sales performance and as with most companies enabling remote work, benefitted from the current situation.
The company billed $417,514 million of revenue in six months ended July 31, 2020, compared to $279,794. This is an extraordinary achievement for the company. Interestingly, the costs related to sales and marketing remained below what could have been expected with this year's revenue. It is possible that the company reduced its spending on marketing, as the demand for product kept growing hence only 10% increase in costs for the category.
Slack aggressively reduced its general and administrative costs: from $160 million in 2020 to $103 million for the same period last year. Cuts in spending didn’t stop there: the company is spending 30% less on research and development.
If the current reductions in costs sustain in the upcoming quarters, the company will be on track of becoming profitable. While costs controls are understandable, substantial reduction in development spending is concerning: Slack sits in an extremely fast pace sector and rapid product innovation is one of the key factors helping the company to remain above the water. R&D spending is still one of the key factors to be watched, as continues cost reductions in this business unit often starts a slow, yet often irreversible decline.
On the positive side, even though the company operates in a crowded sector, it does have an extraordinarily strong user community and often much more deeply integrated in the daily workflow of its users. Slack is immensely popular and often the default choice amongst those working in technology sector, from developers to IT consultants. Tech savvy users don’t just use slack to communicate with each other. A wide range of available extensions and integration solutions in its app market ensures long term commitments from its users and subdued appetite for alternative solutions.
Strong user community, growing demand for remote work enabling solutions, and widening integration offerings continue to support company’s position in the market. Slack also greatly benefits from the wide adoption of its product by the users in the ever-expanding expanding technology sector. The company understands its ecosystem and develops necessary partnerships or puts resources into areas that are most likely to keep its customer base engaged and motivated to use its software. Investors, however, should remain vigilant about Slack’s efforts to become profitable: while the goal is more than welcome, the means of achieving it may not necessarily make sense.
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