Credibility of SoftBank called into question

SoftBank has been known for being a big money player. Their investment fund, the Vision Fund, worth of $100 billion is made of mostly money from the Middle Eastern governments. They have poured money into startups around the world, including big names such as ByteDance, WeWork, Uber, Slack, Flipkart and Brandless, as well as established companies such as Sprint in the US.

By all means, being able to the tune of $100 billion is a massive undertaking. It shows the trust of investors in Son, the founder and CEO of SoftBank, and his team. However, three years after the money was raised, there have been concerning signs of SoftBank’s investment strategy and execution.

SoftBank’s most infamous flop is WeWork. After pouring $9 billion into the startup, the Japanese firm had to see WeWork’s IPO scrapped, its CEO and founder ousted and to plan another $10 billion bailout at a valuation that is significantly lower than what Son and his team expected (per WSJ). It’s mind-blowing that billions of dollars were invested with what seemed to be insufficient scrutiny and due diligence

SoftBank executives were alarmed by what they found looking deeper into the company’s financials, people familiar with the matter said.

Source: WSJ

In addition to WeWork, other high profile investments such as Uber and Slack haven’t met expectation either. Uber had to scale back its valudation upon going public and since being on the stock market, neither Uber nor Slack has been trading above its initial price

Source: Financial Times

Six years ago, SoftBank bought a controlling stake in Sprint. This paragraph below from CNBC summarized how the move is six years later

SoftBank successfully engineered a sale of Sprint for $6.62 per share to T-Mobile in 2018. (State attorneys general are in court attempting to quash the deal on grounds that it will unacceptably decrease competition.) But SoftBank acquired its majority stake in Sprint for $7.65 a share in 2013. When SoftBank bought Sprint, it was the third-largest U.S. wireless carrier by subscribers. When SoftBank sold, Sprint was a distant fourth behind VerizonAT&T and T-Mobile.

But Sprint’s annual revenue has shrunk since SoftBank took over, from $35.3 billion in 2012 to $33.6 billion in the latest fiscal year. Recently, subscriber numbers have been dropping, and the company recorded a $1.9 billion loss last year. Still, Claure made over $40 million in compensation from 2015 through 2017, primarily because of stock awards that resulted from keeping the shares above $8 per share, which was only marginally higher than the price SoftBank paid in 2013.

Sprint even acknowledged in April it didn’t have a sustainable path forward in a filing to the Federal Communications Commission, asking for the regulator to approve its sale.

“Sprint is in a very difficult situation that is only getting worse,” the company said in the letter. “Sprint is losing customers — which then reduces revenues and cash flow — further limiting its ability to invest in its network and service its debt. Simply put, Sprint is not on a sustainable competitive path.”

Source: CNBC

Furthermore, troubles have surfaced at other startups that SoftBank invested in. Fair, an online car-leasing startup, announced that it would lay off 40% of its workforce this week. Wag, an on-demand dog walking firm, laid off more than 50 employees this year already. Brandless saw declining revenue by 54% compared to the same period last year and planned to cut marketing budget.

On the other side of all the problems that hit SoftBank lately, the Japanese firm does have success in the form of its investments in Alibaba and Flipkart. Plus, its capital allowed ideas and founders to come into life. Nonetheless, the struggles at companies listed above do call into question its hype, strategy, execution and credibility. When you want to raise an unprecedented amount of money and invest in an unprecedented fashion, you are put under unprecedented scrutiny and expectations.

Take-aways from Slack IPO Filing

Yesterday, Slack filed to go public. In this post, I am laying out what I learned from reading the document

  • In the three months ending 31st January, 2019, there are more than 10 million Daily Active Users; 500,000 register developers; 450,000 third-party applications; 50 million collective usage hours; 1 billion messages sent
  • There are more than 500,000 organizations on free subscription and 88,000 paid customers, including 65 companies of the Fortune 100. Slack’s competitors include Facebook (Hangouts), Google (Workplace) and Microsoft (Teams). Even though Microsoft announced that there are 500,000 organizations using the service, including 91 of the Fortune 100, it’s tricky to form an apple-to-apple comparison. Teams can be used either free-of-charge or part of a paid Office 365 plan. There is no detail yet on what makes up the 500,000 figure.
  • Annual revenue was recorded at $105.2 million, $220.5 million, and $400.6 million in fiscal years 2017, 2018, and 2019 respectively
  • Out of the total revenue, international revenue represents 34%, 34% and 36% in 2017, 2018 and 2019 respectively
  • In fiscal years 2017, 2018, and 2019, approximately 22%, 32%, and 40%, respectively, of the annual revenue was generated from Paid Customers >$100,000.
  • In the fiscal year ended 31st January, 2019, 8% of the annual revenue came from customers who used the free plan prior, down from 10% a year before
  • “More than 90% of Paid Customers used a third-party application or custom integration in the week ended January 31, 2019”

Impressive Growth of Paid Customers >$100,000

The CAGR of Paid Customers whose ARR is bigger than $100,000 is impressive. So is the CAGR of the revenue, gross profit and calculated billings. Though Slack hasn’t made money from its operations, the loss has contracted through the quarters at the rate of 7.50%. Net Dollar Retention Rate has slowed down.

When looked at from an annual basis, the growth of the Paid Customer > $100,000 is even more impressive.

YearRevenueCost of RevenueGross ProfitR&DS&MSG&AOperating Income (Loss)
2017100%14%86%92%99%36%-141%
2018100%12%88%64%64%26%-65%
2019100%13%87%39%58%28%-38%

From the Annual CAGR chart, the scale of economies seems a bit clearer as expenses don’t grow at the same clip as revenue and gross profit. In terms of breakdown of revenue, Operating Loss as % of Revenue has been decreasing quite rapidly, along with R&D and Sales & Marketing. For the last two years, most of the improvement in Operating Loss came from R&D spending as % of Revenue. There is not much more that can be said about it definitely. Perhaps, Slack feels that there is enough investment and sufficient talent in R&D, meaning that it is not necessary to waste valuable dollars.

As % of Revenue

Reliance on AWS and Ramifications

For instance, Slack currently only utilizes AWS data centers located in the United States but certain organizations, or categories of organizations, may limit their adoption or use of Slack unless we also utilize local AWS data centers, such as data centers in Europe, Asia, and Latin America.

For example, Russia and China are among a number of countries that have recently blocked certain online services, including AWS, which hosts Slack, making it very difficult for such services to access those markets. 

From 2018 to 2023, Slack commits to spend $50 million each year on AWS

It’s going to be a direct listing

It means a less expensive process for Slack. The current stockholders are not under a contractual lock-up agreement. If enough stocks are sold when or shortly after Slack goes public, it may cause the price to contract.

They have negative free cash flow in all, but one quarter