Domo, Inc. (NASDAQ:DOMO) Q2 2024 Earnings Call Transcript

Domo, Inc. (NASDAQ:DOMO) Q2 2024 Earnings Call Transcript August 25, 2023

Operator: Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Domo Second Quarter Fiscal Year 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Peter Lowry, Domo Vice President of Investor Relations, you may begin your conference.

Peter Lowry: Good afternoon, and welcome. On the call today, we have Josh James, our Founder and CEO; and David Jolley, our Chief Financial Officer. I’ll lead off with our safe harbor statement and then onto the call. Our press release was issued after the market close and is posted on the Investor Relations section of our website, where this call is also being webcast. Statements made on this call include forward-looking statements related to our business under federal securities laws. These statements are subject to a variety of risks, uncertainties and assumptions. These include, but are not limited to, statements about future and prospects or financial projections and cash position; statements regarding the potential of our consumption-based pricing; statements about our sales team and technology; our expectations for new business opportunities, transactions and initiatives; statements regarding our channel of communication and upcoming events; statements regarding the potential of artificial intelligence and its impact on our business; and statements regarding the impact of macroeconomic and other conditions on our business.

For a discussion of these risks and uncertainties, please refer to documents we file with the SEC, in particular, today’s press release, our most recently filed annual report on Form 10-K and our most recently filed quarterly report on Form 10-Q. These documents contain and identify important risk factors and other information that may cause our actual results to differ materially from those contained in our forward-looking statements. In addition, during today’s call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Domo’s performance. Other than revenue, unless otherwise stated, we will be discussing the results of operations on a non-GAAP basis. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results.

Please refer to the tables in our earnings press release for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measure, which we have posted to the Investor Relations section of our website at domoinvestors.com. With that, I’ll turn it over to Josh. Josh?

Josh James: Thank you, Pete, and thank you, everyone, for joining the call today. In Q2, even in the tough macroeconomic environment, our year-over-year total revenue growth was still at 5%. Our subscription revenue growth was 6%, and billings declined 2%. Our results for Q2 were in line or better than our guidance, and I’m pleased with the progress we’ve made in the past few quarters, particularly with our consumption-based pricing, our AI strategy offerings and road map and our sales force retention. That being said, I expect our return to growth may take longer than we would all have hoped for due to some macro headwinds that seem to be affecting most companies we’re familiar with. Let me give you an update on some of the progress we’ve made and what gives me confidence in our longer-term growth prospects.

First, I’m confident that we have the people and technology to get back to the growth we’ve experienced in the past and to do so responsibly by managing our costs. I continue to spend my time on the road with our current and our prospective customers, and the conversations I’m having in the market are reinforced by optimism. We hear time and time again that Domo can solve complex data problems that our competitors simply can’t, and we do it in record time. Many of these promising interactions are happening through our customer Connections Tour, where we’ve gained some candid insight into why organizations choose Domo over leading competition. One customer from a large publicly traded advertising group expressed that Domo offers superior speed and computing power and significantly reduces the effort to create reports, train their data specialists to focus on higher-value business deliverables.

I believe there is potential for conversations like this to translate into significant transactions for Domo in the near to midterm that could drive upside to our guidance. Second, I believe our increased focus on consumption-based pricing can be a growth driver and create stronger relationships with our customers as we’ve removed the limitation on number of seats in an account by granting access to all employees of a customer and only charging for data usage similar to Snowflake, AWS and others. Because we can charge for usage while offering seat licenses and visualization for free, consumption pricing solves many of our historic barriers to adoption and more directly aligns our pricing to the value realized by our customers. Thanks to this, consumption pricing is opening more doors for upsell opportunities.

One of the very encouraging trends we see with our consumption customers is an increase across key metrics, including data flows and connector runs, which represent a significant source of potential growth. Over the past year, we have seen almost a 30% increase in contract size for new logos going on consumption-based pricing compared to new logo customers going on seat-based pricing. Also, for customers renewing who have converted to consumption pricing from seat-based pricing, we are seeing almost a 60% increase in the number of user accounts created and somewhat surprisingly, a higher log-in rate of the total users on the consumption model versus the seat-based pricing model. We’re also seeing momentum in increasing the percentage of new logo customers who choose consumption pricing.

50% of our new logos in Q2 were priced on a consumption basis. That’s up from about 30% of our logos — of our new logos in Q1, and we are targeting 75% this quarter in Q3 and even higher in Q4, setting us up well to have a substantial impact on the way we go to market and even convert renewing customers to the consumption model aggressively next year. We have over 250 customers on our consumption pricing model as of July 31, which represents over 10% of our customer base and over 13% of our ARR. Another benefit to Domo is that our consumption pricing contracts are structured as subscription contracts. This means the revenue is recognized ratably, mitigating some of the lack of predictability associated with pure consumption-based models. Beyond these direct benefits for Domo and our customers, our consumption pricing is also expected to improve our competitive positioning.

Some customers see our competitors’ visualization offerings as essentially free because their visualization tool is included as part of an enterprise license agreement. We think including visualization with the free seats under our consumption model is a compelling selling point for enterprise and corporate customers and prospects and positions us better against some of our competitors. Another positive in the quarter was that we once again had much lower-than-forecasted attrition in the sales force. Year-to-date, we have stemmed the sales force attrition we saw last year when 30% of the sales team churned. Next, I continue to be excited about the potential for AI to be a growth driver for Domo. I believe we are strongly positioned to be a leader in delivering AI-powered data experiences, in governing those data experiences and in enabling businesses to achieve the data readiness required to capitalize on the broader possibilities of AI.

Domo gives you the ability to apply the power of AI to your business now. For capacity planning, if a company needs to know the number and type and timing of employees they need to hire to achieve a business goal, they can do that right now. If a company wants to run simulations to dynamically price and bundle their offerings, they can apply AI to that problem in Domo now. If a lender wants to perform a risk assessment model on patterns of behavior and other factors, they can use AI to apply that to the data they have in Domo right now. This month, we announced progress showcasing our commitment to this ongoing ambition, including mobilizing the full force of Domo’s AI technology, expertise and vision as Domo.AI. Data and technology are important foundations, but real transformation comes from making them useful and reliable in the hands of many.

Domo.AI is championing a future where AI-powered data experiences truly transform business by amplifying a very powerful asset, human curiosity. The hurdle I think many businesses will need to overcome is building in the safety and efficiency required to effectively democratize AI. That’s why Domo’s approach goes beyond wiring OpenAI to the end user experience. It’s about embedding AI responsibly into the very fabric of the entire business. Let me tell you about some of the ways we’re making this possible through Domo.AI. Our suite of AI tools empowers users with chat-style data exploration and provides flexible model creation, efficient model management, seamless deployment and superior governance and security. Domo’s AI service layer lets businesses capitalize on the power of AI without getting bogged down by its complexities.

Users can easily manage, deploy and optimize any AI model they choose right in our data experience platform to support real-world use cases that matter to everyone. AI is now easily accessible in Domo Bricks, Domo’s app dev framework, and in Workflows. Even low-code tools such as Magic ETL are designed to tap into AI model management, making the power of AI accessible even to those without technical expertise. All of this and more is featured in our newly launched Domo.AI website, where we’ll continue to share our progress in creating a new future for data and AI. We’re also excited to be hosting our first ever innovation summit focused on AI this month, a free online event that will highlight just how Domo.AI solutions are already helping businesses overcome real-world challenges to accelerate innovation and growth.

AI is only as powerful as the data connected to it. We have a well-connected end-to-end data stack, opening up many possibilities for Domo to reimagine what data can do for business. I encourage all of our investors to follow Domo’s AI journey, starting with visiting the website and attending our virtual innovation summit on August 29 in North America and EMEA and August 31 in Asia Pacific, where almost 3,000 people have already registered. While we’re optimistic about these significant long-term growth drivers, the IT spending environment remains challenging. Enterprises are carefully scrutinizing vendors, and many are consolidating their spend among fewer vendors. We’re seeing sales cycles elongate, and even satisfied customers are being asked by their IT and finance departments to evaluate their spend upon renewal.

David will go into more detail, but we’re also evaluating our renewals on a granular basis. And while each one is unique, we do see some risk to some of the larger renewals, which we have incorporated into our guidance for the second half of the year. We would not expect to see some of these discussions in a more normal spending environment or in an environment where these customers were already in a consumption model. And then on the new business front, as an indication that this is purely macro driven, we saw conversion rates fall across each stage of the funnel, which is further evidence of the challenging IT spend environment that we’re facing. However, we continue to find opportunities to deliver significant value to our customers, and we do have several notable wins to share from the quarter.

We closed a very significant upsell with a Fortune 500 U.S. financial institution to provide a custom app for wealth management operations powered by our data platform. Domo stood out for automating previously manual, time-consuming workflows and offering custom smart content that is specific to each employee across thousands of employees. Ultimately, the customer chose Domo because our platform provided a complete elegant solution to a business challenge at scale. Another example, we worked with a nonprofit subsidiary of a high-profile private university and we drove a significant upsell to support their digital corporate learning solutions. This customer rolled out the entire Domo data experience platform to 600 new users after successfully improving learning experiences, thanks to real-time insights into course interactions.

This win is a strong endorsement of our impact and a great example of how our consumption-based pricing model is opening doors to grow existing business. We also won a significant new logo with a global health care leader that chose Domo to provide a unified view of their marketing performance. We are in this business after a successful proof-of-concept trial to improve marketing performance across multiple brands and countries. In addition to the fantastic customer wins, we also continued to create movement within our industry. This quarter, Domo was ranked the number one self-service business intelligence vendor by Dresner Advisory Services. Domo was also recognized as an overall leader in Dresner’s 2023 Wisdom of Crowds study, which included our perfect recommendation score for the seventh consecutive year.

Among our best-in-class categories were integrations with third-party technologies, our ease of installation and our ease of administration, all of which showcase our readiness to help businesses seize the imminent opportunities for data. In addition to this outstanding recognition, Domo was also included on two Constellation ShortLists, which are published to help organizations search for technologies to meet their digital transformation goals. Domo’s placement on two ShortLists, the list for multi-cloud analytics and BI platforms and the list for embedded analytics, is a strong endorsement for our reputation of driving customer success. I’m also proud to share that Domo was once again named to the Parity.Org list of Best Companies for Women to Advance.

This marks our fourth consecutive year of being recognized for our commitment to support women through career advancing opportunities. We believe that diversity makes organizations stronger and view our continued progress in this commitment as a factor in Domo’s future success. In closing, while there are certainly some near-term challenges driven by the macro and current IT spending environment, I’m as confident as ever in our team, our technology and our long-term growth opportunity. And with that, I’ll turn it over to David.

David Jolley: Thanks, Josh. In Q2, we posted 6% subscription revenue growth and 5% total revenue growth. We exceeded the billings guidance we provided at the beginning of the quarter and delivered Q2 billings of $70.6 million, a year-over-year decrease of 2%. In reviewing the metrics that will impact the remainder of the year, current RPO was $232.1 million, an increase of 3% year-over-year, and our total RPO grew 2% to $357.6 million as of July 31, 2023. Our ARR grew in line with subscription revenue growth. An area where we saw continued success was multiyear contracts. On a dollar-weighted measure, we now have 67% of our customers under multiyear contracts at the end of Q2, up from 64% a year ago. Our gross retention improved from Q1, was just under 90%, while our net retention was just below 100%, down from Q1.

Our net retention was driven by a challenging upsell environment, which I’ll talk about in a moment. Q2 total revenue was $79.7 million, a year-over-year increase of 5%. Subscription revenue represented 89% of total revenue and grew 6% year-over-year. International revenue in the quarter represented 21% of total revenue, down slightly from Q2 of last year. Our subscription gross margin was 84.9%, down 0.4 percentage points from Q2 of last year and down 1.1 percentage points from Q1, primarily due to our move from a fully depreciated data center. We would expect to remain in this range in the near-term. I’m also pleased that in Q2, our non-GAAP operating margin was positive 5.7%, up 12.2 percentage points from a year ago. Our non-GAAP operating margin primarily excludes stock-based compensation as well as executive severance, which was related to the transition of C-level executives.

Our net loss was about $800,000, an improvement from $8.2 million a year ago, and our net loss per share was $0.02. This is based on 35.9 million weighted average shares outstanding, basic and diluted. In Q2, cash provided by operations was approximately $600,000. In total, our cash balance declined $2.1 million from last quarter to $63.9 million. We expect Q3 cash from operations to be near breakeven, and we continue to expect full-year fiscal ’24 cash from operations to be positive. We believe we’ve got adequate cash in order to continue to pursue our business objectives. In terms of guidance, let me share some thoughts. As Josh mentioned, the IT spending environment has been challenging for us, similar to some others in our sector. There are two factors I’d like to highlight.

First, while our sales rep attrition has been less than forecast in Q1 and Q2 and we continue to build our sales capacity, our conversion rates, new leads and resulting new business have also been less than forecast. Part of what we’re seeing is a sense of caution even greater than six months ago across the board with customers looking carefully at their software spend. While we believe we have a superior technology, some customers and prospects are already paying for another solution as a part of a broader enterprise-wide license agreement where their BI tool can be perceived as incrementally free, and they may be already using that BI tool for a big portion of their organization, leading some customers and prospects to consolidate their spend on these solutions.

As Josh mentioned, I think our consumption-based pricing helps our positioning against this specific challenge. The second factor is that ongoing uncertainties about the macroeconomic environment are presenting challenges with renewals with some large customers. Oftentimes, this is due to the conflicting objectives of business use cases versus the overall IT spending mandates. Based on what we’re seeing, we believe our return to growth will take longer than originally anticipated. And as a result, we’ve lowered our new business and gross retention forecast for the remainder of the year. To put this in context, for the entire fiscal ’24, our reforecast has resulted in a downward adjustment of about 7.5% in billings and 2.5% in revenue. For Q3, we’re guiding to billings of $72 million to $73 million, down 2% year-over-year.

For full-year billings, we’re providing a range of $313.5 million to $321.5 million, representing a year-over-year decline of 1% to 3%. Now to guidance for our GAAP metrics. For the third quarter of fiscal ’24, we expect GAAP revenue to be in the range of $78.5 million to $79.5 million. We expect non-GAAP net loss per share, basic and diluted, of $0.10 to $0.14 for Q3. This assumes 36.3 million weighted average shares outstanding, basic and diluted. For the full-year of fiscal ’24, we expect GAAP revenue to be in the range of $316 million to $320 million, representing year-over-year growth of 2% to 4%. We expect non-GAAP net loss per share, basic and diluted of $0.39 to $0.47. This assumes 36.1 million weighted average shares outstanding, basic and diluted.

Our EPS guidance implies a positive operating margin for the full-year. In summary, in spite of the challenges we’ve discussed, we are committed to remain operating margin positive for the year and near cash flow breakeven through the second half of the year. And I’m confident we’ve got the right people and technology to execute against our market opportunity. With that, we’ll open the call for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Derrick Wood with TD Cowen. Your line is open.

Derrick Wood: Okay, thank you. Yes, it sounds like a challenging environment out there. And I’m just wanting to kind of parse out the macro versus potentially internal changes that you guys have made. And really, one of the big initiatives for you guys was to go after this consumption-based pricing model. And it sounds like you’ve had good success and conversion when, I guess, succeeding at that. But has that been a factor in leading to longer sales cycles, more investor education? Just trying to get a sense for how much is external versus how much is internal because on the macro front, it generally feels like things haven’t changed a whole lot in the last six months, but it sounds like you guys have seen some more change.

Josh James: Yes. We’ve definitely seen more change from our customers. Like we said, our conversion rates have dropped quite a bit over those six months. And we’ve — from a consumption standpoint, that’s actually been a great tailwind. So our sales cycle is not-longer from consumption. They’re pretty similar. In fact, they’re a little bit better when we do consumption deals. Our upsells are faster when we do consumption deals. So the repeat business comes in a little bit quicker. Our deal sizes are bigger when we do consumption deals. And like we mentioned, 50% of our deals this last quarter were consumption deals of the new logos, and we’re shooting for 75% this quarter, and that’s with only still a portion of the teams trained.

So we think by the end of the year, we can get that up in the 90s. And the other thing that’s great about consumption, so it’s — they’re bigger deals, happier customers, higher retention and quicker upsells. And then I think most importantly, there’s two components. Number one, we have a much bigger footprint inside those organizations. So instead of having a customer that’s got us in one room and the competitor in the next room, it gives an ability to get more users since we don’t charge based on users. So we have seen literally a 60% increase in the number of users that we get when customers convert over to our consumption model. So they had x number of users. And then after they move to consumption, they have 60% higher. So that’s been great.

And then not only that, they’re actually logging in more frequently as well. So they’re becoming — they get adopted by the whole organization. So that’s one piece that’s really exciting. And then the other piece is just the opportunity to wake up the first of the year and know that you’ve got growth in your accounts, that you don’t have to go in and upsell. It’s just consumption. And we’re seeing good growth from a consumption standpoint. It’s still early to talk about exactly what kind of uptick we’re going to see in those consumption deals, and we need to go through a couple more quarters of that, but we’re very sure that there is an uptick from consumption. And as we work with customers and go through a big chunk of renewals, then we’ll understand exactly what that number is.

Derrick Wood: Okay. I guess that is the silver lining. It sounds like on the other side, there’s — you’re seeing some headwinds from vendor consolidation. And I’m just wondering if you can piece that out because you guys beat your Q2 number, but there’s a pretty big guide down for second half, and you’re alluding to some tougher renewals. Can you — is that more in the enterprise side where you potentially are seeing more contract losses? Or is it corporate? And is it concentrated? Is it more prevalent? And what’s informing you on that potential risk in the second half? Just if you could give more color, that would be great.

Josh James: Yes. It’s with some of our enterprise customers that — we’re really seeing some pretty good stability there better than with corporate, in fact. But enterprise customers are more susceptible to having multiple vendors in there. So when you look at vendor consolidation, which is definitely a theme, I think, across the broader IT industry, our enterprise business is more susceptible to that for sure. So thankfully, over the last five years, we’ve been working on this consumption model, and we’re really excited about what that’s going to do for the business. With the enterprises in particular — because what we’ll see is we’ll go into an account, they’ll switch over to consumption, and what was happening to us before is now happening to the other vendors.

And what I mean by that is our customers will come to us and say, yes, there’s these other four projects that we have. And now since we’re not paying you for seats, I guess, we could go eliminate this other vendor where we have this data project that we’re doing, and we can go eliminate vendor B where we have this small project in this other division. And then vendor C, we’ll kind of have to see how that plays out with you guys. So that’s been a huge boon to us and our relationships with our big enterprise customers. But there’s a handful where that happened to us or we think it may happen to us and just the idea that it might force us to say we got to be conservative here in our guidance as we get that new information. I think that, in conjunction with just seeing, yes, we have more sales capacity, but the conversion rates being down in the process through the pipeline forces you to look and say, do you want to spend that incremental marketing dollars to feed the sales team.

And it doesn’t seem like that’s the right way to go because we want to make sure that we’re staying really fiscally sound, staying cash flow positive and staying net operating margin positive. And we can do that with this great, I think, awesome transition that’s going to happen in our business as we move more and more to consumption. And as we’re able to take advantage of things like freemium because we now have a consumption model, and we’ll be seeing that over the next quarter as well.

Derrick Wood: Okay. And just one for David. I mean, how low can that revenue retention rate go in the second-half? And I guess to Josh’s point about staying breakeven, do you need to make any kind of OpEx cuts or head count cuts? Or how are you feeling about the initiatives for second-half around OpEx spend?

David Jolley: Yes. I think to that point, specifically, we’ve sat down, take a look — taken a look at the business for the second half to say, okay, if we don’t produce the same number of billings that we originally forecast and we don’t have that cash as a result, how do we manage that? And we’re confident that we can bring down costs in areas that aren’t going to affect our ability to go out and compete effectively in the market and win in the market.