Slack Technologies Inc. (WORK) Q2 2021 Earnings Call Transcript

Slack Technologies Inc  (NYSE: WORK) Q2 2021 earnings call dated Sep. 08, 2020

Corporate Participants:

Jesse Hulsing — Vice President of Finance and Investor Relations

Stewart Butterfield — Co-founder and Chief Executive Officer

Allen Shim — Chief Financial Officer

Analysts:

Alex Zukin — RBC Capital — Analyst

Raimo Lenschow — Barclays — Analyst

Brent Bracelin — Piper Sandler — Analyst

Brad Zelnick — Credit Suisse — Analyst

Michael Turrin — Wells Fargo Securities — Analyst

Arjun Bhatia — William Blair — Analyst

Joshua Baer — Morgan Stanley — Analyst

Derrick Wood — Cowen & Co. — Analyst

William Power — Robert W. Baird — Analyst

Heather Bellini — Goldman Sachs — Analyst

Walter Pritchard — Citigroup — Analyst

Mark Moerdler — Sanford C. Bernstein & Co. — Analyst

Ryan MacWilliams — Stephens — Analyst

David Hynes — Canaccord Genuity Group Inc. — Analyst

Jeff Kvaal — Wolfe Research — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Slack Technologies Second Quarter Earnings Call. [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 — Vice President of Finance and Investor Relations

Good afternoon, and thank you for joining us on today’s conference call to discuss Slack’s second quarter of 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 US 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 an 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 — Co-founder and Chief Executive Officer

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 off one for the other, we can provide both.

In June, after an extensive open beta period, we officially launched Slack Connect and released multi-org shared channels, which allow up to 20 organizations to share a single channel. This enabled a large number of new use cases and uptake 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 the graph, and as the number of endpoints has increased, growth has accelerated from a 140% year-on-year growth in Q4 to 160% in Q1 and to over 200% in Q2. Many of the 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 1,000 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 included Sony Network Communications, Shopify, Iris Ohyama, Kindai University, Peloton, LPL Financial, NTT Data Corporation and Alnylam 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 million-dollar 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 insurer 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 the 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 was 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 a permanent structural shift in the way that 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 and 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.

And with that, I’ll turn it over to Allen.

Allen Shim — Chief Financial Officer

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 billings 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 12-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 continued 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 to 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 intercompany 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.

Reaccelerating 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 3 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.

Questions and Answers:

 

Operator

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

Alex Zukin — RBC Capital — Analyst

Hey guys, thanks for taking my questions. Maybe just the first one Stewart for you. The net adds in the first half of this year are greater than the entirety of last year, and you’re commenting that you have a lot of confidence in the back half trends being higher than last year’s second half. So maybe, talk to us now that we’re two quarters of the way through the year and there is a better understanding of some of the engagement dynamics and some of the top-of-the-funnel conversion dynamics, what’s giving you that confidence? And when I realize the growth is longer term, but given the billings dynamics and the retention and dollar-based net 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 — Co-founder and Chief Executive Officer

All great questions. So there is a couple of factors that give us confidence about the second half. When it comes to new paid customer acquisition. Part of that is just 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 Sack Connect stuff is pretty easy to directly model and it’s not some flaky attribution model. It’s pretty much direct. You can see people who’ve got the invite, they’ve started the trial. The trial expired and then, they upgraded.

And I mentioned that there was 1,000 out of the 8,000 added for the quarter. That was across about half of the quarter, and all of the numbers are going up there. So we expect that to be a bigger driver. And finally, I think we’re just kind of in a good space now with the team that’s working on the new user experience and paid conversion and all that to see continued progress, but they’re just making a lot of changes. I guess, sorry, one last factor, August traditionally is a slower month, especially in the EU with holidays, but it’s — same thing is true in North America, and we’re not seeing as much slowdown as you might have thought. So I think all of those seem to be sustainable. I’ll let Allen speak to the — what it really presents.

Allen Shim — Chief Financial Officer

Yeah, Alex. Last thing on the paid customer adds, obviously, the momentum is very good right now. We like the baseline that we’re building off of from here. Q4 just keep in mind is very seasonal with the holidays. So that might distort the numbers up or down just given those — for that particular quarter. But we like the progress here. And although it’s early days, the momentum is very encouraging.

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

Alex Zukin — RBC Capital — Analyst

Understood. And then, maybe just on the other side of the equation, if you think about the dynamics around fair billings and the impact that’s having in kind of this year on dollar-based net expansion, walk us through how does that 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, if some of the cyclical dynamics around certain economies or certain sector of the economy improve, or once there is a net new kind of baseline around billing, do we have to wait until a new renewal term or contract term, I think that would be great to walk through that?

Allen Shim — Chief Financial Officer

Yeah, I think on the fair billing front, Alex, I think both are true. So, when economies are improving and you start to see normal expansion resume, you will expect to see that, but keep in mind, this impact is — you need to 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’s typically driven by the renewal timing.

Alex Zukin — RBC Capital — Analyst

Great, thank you guys.

Operator

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

Raimo Lenschow — Barclays — Analyst

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 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? Can you just discuss that a little bit more detail again?

Allen Shim — Chief Financial Officer

Yeah. Raimo, it’s Allen. So I think notably, we call out the contraction piece because that is a really big deviation from trend as the 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 Slack, they will continue to grow within and expand over time. But you are seeing more pronounced impact this particular quarter just given the workforce reductions that we believe are playing out into the numbers just given our fair billing dynamic. So I think long term, we still believe it’s in the 120%-plus range, but there is obviously some volatility that we saw in Q2. But coming out of Q2 into Q3, we do feel like the trend is stabilizing, if not improving.

Raimo Lenschow — Barclays — Analyst

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 to should probably help you and we see some of that already in some of the discussions we have with IT shops, where — with IT buyers like how do you think — in terms of time frame, how does this is going to play out, like at the moment we are 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.?

Stewart Butterfield — Co-founder and Chief Executive Officer

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 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 crisis 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 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 that capacity is starting to free up a little bit. Looking a little bit more broadly though, I think the most effective driver of new team acquisition and changing people’s minds have not been our press activity, has not been our marketing, has not been our website, but has been people who knew Slack at one company coming to a new company and advocating to other teams for it or other friends advocating for it.

So I think Slack Connect is a great replacement driver for that. And while I don’t — 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 started to happen a little bit quicker. One last just kind of more anecdotal point, we seconded our VP of Customer Experience to kind of run programs for how we should be changing the way that we work at Slack as a company given that everyone is now working from home and one of the first things she said was 500 Howard Street is no longer our headquarters, our headquarter is in Slack, and that was great.

And then, it’s funny to attribute to say, but someone pointed out a Seeking Alpha post we posted on Yahoo! Message finance board that was someone describe Slack in exactly those terms. It is like the physical — it is the digital replacement for the physical office and as we get more and more CIOs re-engaged in the process. That’s — it’s an interesting line of argument, because it’s a replacement for the conferencing where the brainstorm is happening. It’s like for the intimate nook, where the one-on-one happens, for all hands and events and for organizations that are using it. 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’re missing it yet, but we’re doing our best.

Raimo Lenschow — Barclays — Analyst

Yeah. Okay. Thank you.

Operator

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

Brent Bracelin — Piper Sandler — Analyst

Thank you. One for Stewart and a follow-up for Allen, if I could. Stewart, roughly 45 days ago, you filed a complaint against Microsoft. You — 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 — Co-founder and Chief Executive Officer

Yeah, sure. So no correlation between the timing of the filing and anything 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 works from initial conversations. We’ve been asked about this over and over again. We’ve 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 I just want to point out that those are separate.

And then, just about the complaint more broadly, we genuinely believe that like there’s almost textbook definition of what the regulations are trying to prevent. It’s illegal anti-competitive behavior.

It’s — we’re doing it for us and we’re 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 — I mean, I’m very much attention to it all right now, because this is a conversation between the lawyers and regulators. We feel very confident, as I said, that this matches the definition. We also feel confident that the commission will agree, they will initiate an investigation and ultimately that we will find in our favor.

So, okay, with that having been separated, on competition generally, the TAM is just so big that is — 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 is nothing that’s indicating increased pressure there. Win rates are the same.

We’re now in quarter 14 of competing with Microsoft. We’ve won over and over again in Office 365 using customers. So well, no doubt, that it causes some friction. It’s another thing for us to overcome. It doesn’t put any kind of ceiling or limiter [Phonetic] on our growth. And the last thing I’d point out is we have different visions. There is a different road map. The products are used in to fundamentally different ways today, and that’s becoming increasingly apparent to customers.

Brent Bracelin — Piper Sandler — Analyst

Got it. That’s helpful color. And then Allen, just as a follow-up, you mentioned headcount several times here as one of the new kind of impacts as we think about that cohort of $100,000 ARR customers, and I think 50 of them slipping 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’re seeing from a just a headcount seat drag based on some of the layoffs that have occurred here?

Allen Shim — Chief Financial Officer

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 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 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 prior and really the only difference there was the folks 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 — Piper Sandler — Analyst

Got it. Helpful color. Thank you.

Operator

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

Brad Zelnick — Credit Suisse — Analyst

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 — Co-founder and Chief Executive Officer

Those are all great questions. And I don’t have any numbers to share. I didn’t prepare any. But I also just don’t have any at my fingertips. I mean, 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 would say inside the company that this is a moat that goes to the center of the earth and it’s filled with molten lead and nickel just like the earth’s core. And I still think that’s going to be the case over 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 a really 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 connection outside of the context of the shared channels. So shared channels are already a big driver of new direct message conversations across company boundaries, but this is more like a la carte.

And the second one is what we call managed connections, which is the comprehensive reporting and policy setting at the organization 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, although you wouldn’t get the same policies. This is for us as a partner and vendor to Salesforce, 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 Slack Connect is, hey, this is a big step forward in 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 forward in security and compliance, because the competition here is largely text messages and WhatsApp and other out-of-band communication methods.

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

Brad Zelnick — Credit Suisse — Analyst

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 ELA renewals or just tangible pipeline that really drives your confidence? And what are the upside or 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 — Chief Financial Officer

Yeah. Brad, I think it’s a balancing act. We still — we pulled billing guidance last quarter because we expect more volatility. You did see that show up here in Q2. And I think we will still see a volatile environment going into the second half.

Having said that, Q3 and Q4, more of the pipeline there, particularly on the larger deals side is renewable-based and those are generally higher close rate opportunities for us. And so, we expect — again, the improving trend is something 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 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 dynamic right now.

Brad Zelnick — Credit Suisse — Analyst

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 — Wells Fargo Securities — Analyst

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 customer adds can continue to roll on at a better cadence for at least the rest of this year. I was hoping to dig into that a bit more. What is it that helps that trend persist versus this being more of a one-time product drivers. It 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 — Co-founder and Chief Executive Officer

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 I didn’t mention is the difference in user experience. If you’re a brand new user to Slack and you are coming in via shared channel versus you just went to the website and set up the team yourself. So in the latter case, it’s a real cold start. You’ve got to invite people. You’ve got to convince them to use it. You’ve got to show them how to use it. You’ve got to figure everything out, but if you are — a new user is coming in through a Slack Connect invitation, you already have people to talk to. You already have stuff to talk about. There’s already like a business use for this. So I think people will wrap their heads around Slack in a fundamentally different and much better way.

So all of those — and the features I mentioned in previous questions, all of those I think will be continued drivers for the growth of the network and continuing to see that network effect. And there’s just a lot more users behind that. There’s a lot of people bringing in vendors whenever that was. I think Q4 whenever we first started talking about Slack Connect mentioned that one little example of the star shape and that network graph that was someone who believe that the experience with their customers was so much better when they were able to support their customers on shared channels. They actually went and created Slack instances, paid for them, got them all set up, invited their customers and then let the customers run with it after. And 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 — Chief Financial Officer

Michael, I think it’s fair when we — we did intentionally call out that we think this is 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’re going to continue to optimize, and I think that’s why you’re hearing the conviction and the belief and opportunity here.

Michael Turrin — Wells Fargo Securities — Analyst

That’s helpful. I appreciate that. And then on Rimeto, you briefly mentioned it. Sure, we’ll hear more up frontiers, but 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 — Co-founder and Chief Executive Officer

Yeah, okay. So I’m going to speak a little bit more in the short term just because the long term starts to get a little involved. First of all, it’s just a great product. We’re up and running and using it now. And I’m getting utility out of it every single day, and it’s sort of maybe kind of Slack another thing 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 a Slack if there’s Salesforce on the outside.

And the same thing is true for Rimeto. So the last thing I will 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 a la carte 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 a double PIN shake.

And where Rimeto profile information is available, that’s what we will show. And as we start to build bigger and bigger directories, more use of multi-org shared channels and kind of eventually spinning that off into its own feature for letting people create networks and associations, another application for profiles there.

And then finally, just a useful repository of data not just for profile information and not just for the kind of organizational structure that 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 integrations with Slack or anywhere else.

Michael Turrin — Wells Fargo Securities — Analyst

Thank you.

Operator

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

Arjun Bhatia — William Blair — Analyst

Hi, guys. Allen, first one is for you maybe 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 whether they’d be in the SMB section of your business or elsewhere where customers are turning Slack off completely just between kind of those three buckets where you’re seeing the biggest headwinds?

Allen Shim — Chief Financial Officer

Yeah. Arjun, I would say on the expansion front, that was more or less on trend for us. The — really, the notable one was contraction which 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 the 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 conditions start to normalize from here.

Arjun Bhatia — William Blair — Analyst

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 with admin control and the rest of it? And are there barriers here that would prevent a competitor for building something similar or maybe one that’s SharePoint-based?

Stewart Butterfield — Co-founder and Chief Executive Officer

That’s a great question. I’m going to try, and I’ll 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 the Slack can be kind of tidily divided by organization. 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. That’s what — Facebook was pretty incredible in their ability to support that in the early days, which support a lot of their growth.

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

So we have pretty new technology. We literally broke ground, started development in 2013 and we’ve done a number of fundamental refactors and upgrades along the way. It took us a long time to bring Slack Connect to market just because of those the challenges that I mentioned. And from there, the challenges — a new line of challenge is introduced in addition to scalability, which is things like what do you do when they have different message retention policies, what do you do if they’re using different encryption keys and they’re both on EKM plans. So a lot of innovation that we’re doing there with our author-aware EKM. I read it as if not 10 out of 10, then maybe a nine out of 10 in tactile 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 — you 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 — William Blair — Analyst

Got it. Thank you very much.

Operator

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

Joshua Baer — Morgan Stanley — Analyst

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 in active use, has that remained elevated over the last three months compared to prior quarter commentary?

Stewart Butterfield — Co-founder and Chief Executive Officer

Yes, it has. So — we don’t report it regularly, so I haven’t looked at in the last little while, but it is so over 10 hours a day connected and 100 minutes of active usage. 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 of increased usage. I would point out that in some cases, we want to add features that help people spend five minutes less in active usage. But generally, the engagement in the sense of like people realizing the utility, the value of Slack, it being the center of gravity for their work life and kind of replacing that physical office, that’s definitely still there and that heightened engagement is something we expect to continue.

Joshua Baer — Morgan Stanley — Analyst

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 a solution to the immediate work-from-home collaboration needs at this point or have those new customers to the platform really start to fully embrace the potential of the solutions as far as building, automating workflows and integrating with other software? Thanks.

Stewart Butterfield — Co-founder and Chief Executive Officer

Yeah. It’s a great 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 that, I don’t want to call it, the amount of gumption people had to get it set up in a really sophisticated way, higher success rates at different points along the funnel, that’s still there, not as pronounced as the last week of March. Of course — but it’s still a lot of work, I think, for us or we have a lot of work to do. I guess sort of trying to say to help customers get 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 customer integration. I don’t mean third-party software. I mean, a custom integration. 90 — this is very specific, 99.8% of our $100,000-plus customers using at least one and 100% of the million-plus customers. And when I say using at least one, the average there is — I don’t have 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. The workflow stuff and the road map around that are a 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 interaction you would have or pasting a link to an object in a third-party application be the starting point for building those integrations.

Joshua Baer — Morgan Stanley — Analyst

Got it. Thank you.

Operator

Our next question comes from Derrick Wood with Cowen & Co. Your line is open.

Derrick Wood — Cowen & Co. — Analyst

Great. Thanks for taking my questions. I guess one for Stewart, one for Allen. First one, I mean you guys — on the partnership side, you guys announced kind of a strengthened partnership with AWS last quarter. Stewart, you briefly mentioned some new things you’re doing with Atlassian 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 evangelizing the market, as you look at the next six to 12 months?

Stewart Butterfield — Co-founder and Chief Executive Officer

Yeah. So I kind of divide the work into two halves there. One is more or less purely commercial. It’s how can we 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. I think that we will continue to make progress there.

On the other side, I think it’s really — I just spoke about what it — 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 more and more minutes using software every day and their companies are spending more and more dollars on their use of software over time. So I think the best thing that we can all — when I say we — us, software vendors can all do for each other and for our customers is to increase the degree of interoperability.

And I think when you look at the Atlassian tool set, obviously a huge overlap with Slack. We talk about Slack as a lightweight fabric for systems integration in the broad sense, but 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 will say, hey, seven of the 13 people in the channel don’t have access to the doc. Would you like to give it to them, and I could just press a button and all of it is automatically taken care of. And the only way you can do that, if the users are mapped across those systems and you understand who’s who and you can control all the access controls, that’s the 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 — be at the heart of the relationship with Atlassian.

When I talked 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 help in streamlining it. So it’s not just Atlassian of course, but a lot of uptake 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 — Cowen & Co. — Analyst

Well, thanks. Thanks for the color. And then Allen, 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 in Q4 or is too early?

Allen Shim — Chief Financial Officer

Yeah. So on RPO, Derrick, as a reminder, our RPO is only the value of our multi-year deals. And so, you saw that notable increase in Q1 with some larger deals, which we talked about. In Q2, we talked about some of those sales cycles lengthening and that did have an impact on fewer bigger deals being closed in the quarter. So that’s really the disconnect is really just our definition of how are using RPO. Over on the billing side of things, I think Q2 is the right baseline to build off of here. I think the second half at the same time still, there is 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 — Cowen & Co. — Analyst

Okay. Thank you.

Operator

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

William Power — Robert W. Baird — Analyst

Okay. Great. Yeah, thanks. I’ll try to fit in a couple of questions. I guess maybe, Allen, first for you, maybe just to come back to the seat count pressures you alluded to earlier, and maybe I missed this, but are you able to quantify what percent of the seat count pressure or some sort of quantification was tied to the hardest hit industries versus something broader base? And I guess, stepping back just maybe remind us again, what gives you confidence that doesn’t persist as we move through the second half of the year?

Allen Shim — Chief Financial Officer

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, what we’re seeing about going forward from here is, I think the takeaway is Q2 saw this more pronounced impact. I think as we look at expectations going forward, that’s why 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 slower going forward, but I think we’ve baked that into again, calling, Q2 the baseline. So based off of that, I think those expectations 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.

William Power — Robert W. Baird — Analyst

Okay. Great. And then Stewart, I guess one for you, as you look at Slack Connect, I mean impressive growth and overall Slack Connect end points and it sounds like overall traffic. I wonder if you could just share with us what you view as some of the more exciting use cases? What do you seeing out there now that you’ve got a much broader expansion opportunity with end points and what gets you most excited about what can be replicated there across different industry groups?

Stewart Butterfield — Co-founder and Chief Executive Officer

Yeah. So there is, 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. I talked about the example with the CEOs of other different SaaS companies. That’s 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 in any other way, but it couldn’t — wouldn’t work in WhatsApp, wouldn’t work in e-mail. 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 A) 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 reviews and the vendor approval process and commercials and all of that stuff to have the leaders and 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 duplicative work. It’s much easier to bring someone in, all the reasons that channels are better.

But the other reason why I like this use case is you can — that’s an argument for buy Slack, get revenue which is different than buy Slack, get productivity. I’m a 100% sure that the ROI on the productivity sale is massive like a 100x or something like that. We don’t actually charge that much in the grand scheme of things, but of course, that’s always a harder sale to make whereas buy our product, get revenue is a lot easier.

William Power — Robert W. Baird — Analyst

That’s great. Thank you.

Operator

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

Heather Bellini — Goldman Sachs — Analyst

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 signed 22 and I know some of those kind of drop down from over 100,000 to less than 100,000 in the quarter, how do we think about that? Is that what you’re referring to when you’re talking about the baseline and how do we think about you know kind of the pace of that number kind of growing from here given the big ELA signings that typically happen in Q3 and I guess, Q4 in particular, and then I just had a follow-up? Thank you.

Stewart Butterfield — Co-founder and Chief Executive Officer

Sure. And I think just a clarification 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 and I think we had a new baseline on and there are just in the US 2.5 million businesses that have five or more employees, not all of them are built to you Slack, but a lot of them are. So there’s a lot more room than just 5,000, 8,000, 10,000 new customers in the quarter. The representation of 100,000 — future 100,000 plus and 1 million plus customers I think naturally will diminish over time, just because there is only so many of those and a lot of them are already in the system. The maturation process can take longer and can be accelerated. I’ll let Allen add some color there. But I was talking about that the 8,000, not the hundreds.

Allen Shim — Chief Financial Officer

Yeah, Heather, just quickly on the 100,000. I think what we saw in Q2 was the folks as you mentioned dropping below that. I don’t expect that to recur nearly — definitely not that magnitude going forward here and the early visibility of the trends we’re seeing in August into September suggests that we will be — that you’ll see an improving figure there for Q3.

Heather Bellini — Goldman Sachs — Analyst

Okay. And then just another follow-up, just again — just looking at the deferred revenue trends, I know you had maybe 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 how the COVID impact concessions that you discussed impacted the sequential change in deferred revenue in the quarter? And then, the last question I had was just the true-ups on the ELAs. I mean given those typically happen in Q4, do you think the worst is behind us from a net expansion rate perspective?

Allen Shim — Chief Financial Officer

Yeah, Heather, so first on the COVID-related, $4 million in COVID-related concessions this quarter alone, $11 million for the first six months of the year. It’s something that we continue to be…

Heather Bellini — Goldman Sachs — Analyst

Is that revenue though or is that deferred?

Allen Shim — Chief Financial Officer

On the billing side, yeah, so billing service is going to impact on the deferred side, yeah.

Heather Bellini — Goldman Sachs — Analyst

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 — Chief Financial Officer

I’m sorry, so all deferred.

Heather Bellini — Goldman Sachs — Analyst

Okay. So it all — Okay. So it was all deferred. And then just the true-ups on ELAs.

Allen Shim — Chief Financial Officer

Yes, on the ELA side…

Heather Bellini — Goldman Sachs — Analyst

Impacting your own.

Allen Shim — Chief Financial Officer

Yeah, Q3, Q4, more ELAs, more renewals just given the kind of enterprise shape and seasonality of those quarters, but I think overall nothing more to report 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 is — that’s an encouraging change in trend from the Q2 — accomplishment of the Q2 pipeline.

Heather Bellini — Goldman Sachs — Analyst

Okay. Great. Thank you.

Operator

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

Walter Pritchard — Citigroup — Analyst

Hi, thanks. Just Allen, clarification here on the $100,000-type business, I mean — I guess, I’m under the assumption most of those customers will be on like annual deals and they would upsize or downsize, especially downsize at the time of a renewal or maybe even a payment period. Is it that many of those are on monthly or is it just the customers who had something up for renewal or up for payment in the quarter and renegotiated?

Allen Shim — Chief Financial Officer

Yeah. Walter, a couple of points. So not everyone is on the ELA, so it’s not all tied to renewal, but probably more importantly, it’s an ARR-based metric. So that’s why you’re seeing more movement there in a given quarter.

Walter Pritchard — Citigroup — Analyst

I mean, do they actually have a right to downgrade mid-contract? That’s what I’m just trying to understand, because our favorite SaaS company who has a three-year deal, one-year deal, only a portion of deals to be coming up at this point in time. And it actually seems like a quite a large percentage of those or a big number of those $100,000 customers were able to do this.

Allen Shim — Chief Financial Officer

Yeah, I know, it’s really a reflection of the seats. So as we’re tracking usage where as we’ve been saying real — kind of real-time tracking that and then we’re taking the — we’re reflecting on the ARR, we’re tracking for that customer.

Walter Pritchard — Citigroup — Analyst

So even if the renewal hasn’t happened yet is what is…

Allen Shim — Chief Financial Officer

Yeah, we’re on. Yeah.

Walter Pritchard — Citigroup — Analyst

Oh, I see. Okay. All right. Thanks for the clarification.

Allen Shim — Chief Financial Officer

Not a problem.

Operator

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

Mark Moerdler — Sanford C. Bernstein & Co. — Analyst

Thank you for taking my questions. 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 larger impact from the COVID-19 concessions? Are there other factors that you’re implying in here in Q3 and Q4 guidance that may have been more positive or negative than you hadn’t past and then follow up?

Allen Shim — Chief Financial Officer

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

Mark Moerdler — Sanford C. Bernstein & Co. — Analyst

Okay. Perfect. And 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 — Co-founder and Chief Executive Officer

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 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 is just like they’re probably — they’re paying more attention to everything and trying to get the most out 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 a 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 they may be relatively simple and over time, as the idea is to try to build their sophistication and help them net all these systems together in a way that really make sense for them.

Mark Moerdler — Sanford C. Bernstein & Co. — Analyst

Perfect. Very helpful. I appreciate it. Thank you.

Stewart Butterfield — Co-founder and Chief Executive Officer

No problem.

Operator

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

Ryan MacWilliams — Stephens — Analyst

Thanks for taking the questions. Solid step towards profitability this quarter on a significant reduction in sales and marketing expenses as a percentage of revenue. Can 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 — Chief Financial Officer

Yeah, Ryan. This is Allen. Just broadly speaking, sales and marketing, R&D continue to be a focus of investment for us both in accelerating our growth on the customer side, customer acquisition and expansion side of things.

I mean, on the R&D side, on the innovation side, so specific on sales and marketing, added more salespeople, continue to increase sales capacity. You did see some benefit here from obviously lower T&E given this environment, but also the timing of some one of our marketing programs hit the P&L.

Ryan MacWilliams — Stephens — Analyst

Great. And then would you mind providing more color on the paid customer cohort added during COVID the last quarter. So still early innings, but you mentioned that these customers landed larger, and we’re 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 — Chief Financial Officer

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

Ryan MacWilliams — Stephens — Analyst

Great. Thanks.

Operator

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

David Hynes — Canaccord Genuity Group Inc. — Analyst

Okay. Thanks guys. It’s actually DJ. I must have dialed in as my associate. Stewart, one for you, if 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 inquiries, that kind of stuff. It would be great to hear how you think about that.

Stewart Butterfield — Co-founder and Chief Executive Officer

Yeah, it’s — so maybe and the reason I say maybe is that 100% for sure on the business-to-business side, the B2C side is a little bit more thought because the user accounts are always tied to the customer who is the employer as opposed to the individual. And people aren’t going to want to use their workplace Slack to get their air conditioner fixed or something like that, but there are a lot of business/business opportunities, and there are a lot of communities, and we see this — Splunk and Shopify come to mind where there’s a huge amount of activity where it’s just kind of individuals inside the companies that are the champions, that are the administrators, that are the evangelists. And so, there is a lot of CX happening in those environments. And we do that too. We have a whole workspace just for shared channels with our customers and a lot of the customer advisory boards, champion networks, all kinds of stuff like that, that’s a really important use case, and I think it’s 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.

David Hynes — Canaccord Genuity Group Inc. — Analyst

Yeah, That’s helpful.

Stewart Butterfield — Co-founder and Chief Executive Officer

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

David Hynes — Canaccord Genuity Group Inc. — Analyst

Yeah, that makes sense. And then Allen, maybe a follow-up for you. Can you help us think about the yield for the Connect-free trial, so you said 1,000 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 1,000 of how many. It would be super helpful to get a sense of how powerful of a lead-gen tool Connect is?

Allen Shim — Chief Financial Officer

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

David Hynes — Canaccord Genuity Group Inc. — Analyst

Yeah. Okay. Great. Thanks for the color, guys.

Operator

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

Jeff Kvaal — Wolfe Research — Analyst

Yes. Thank you very much for taking the question. I appreciate that. It looked 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, maybe it’s new users just take a while to ramp up. And then secondly, if you could perhaps help us translate that into the correlation to — correlation between usage and revenue should be low, but if you could help us, I think that through a little bit, I would appreciate it.

Stewart Butterfield — Co-founder and Chief Executive Officer

Just to clarify, Jeff, you are talking about the engagement metrics, like number of minutes of active usage?

Jeff Kvaal — Wolfe Research — Analyst

Yes.

Stewart Butterfield — Co-founder and Chief Executive Officer

Yeah, okay. So, yeah, down a little bit, but that’s not indicative of the trend. That’s just the — it’s up compared to the baseline, the historical average. Q1 just — it’s so one of a kind that it’s hard to draw any 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, while the thing that I’m most excited about is kind of further up funnel. I think we can really do a lot to increase the yield from the people who are just interested in Slack and come to the website and all of that.

In the down funnel part, the paid conversion, seeing 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 your Slack team. So positive changes on paid conversion across the board. Engagement up compared to the historical average and no correlation that would be at all alarming in fact just generally encouraging.

Jeff Kvaal — Wolfe Research — Analyst

Yeah. Okay. Thank you. And then secondly, maybe for, Allen, it seems a lot of your commentary was talking about how encouraging the last month of the quarter or even into the current quarter had been. It seems to me and obviously, I’m a little newer to the store than the most. It seems to me that the guidance is actually reasonably seasonal. So it seems as though there might be a little — you might have been operated some conservative assumptions. Could you help us understand to the assumptions that you’ve made in the guidance versus maybe last year or into this quarter?

Allen Shim — Chief Financial Officer

I think the seasonal pattern from Q2 as a baseline, I think, is the right expectation from here notwithstanding some again exceeded volatility that we see out there. But a lot of what happened in Q2 was pretty pronounced. Just given the conditions in the nature of our model and the impact — and we’re adopting to that, I think just to be clear both kind of 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 — Wolfe Research — Analyst

Okay. Thank you all very much.

Stewart Butterfield — Co-founder and Chief Executive Officer

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 — Co-founder and Chief Executive Officer

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

Operator

[Operator Closing Remarks]