Domo, Inc. Q2 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to Domo Second Quarter Fiscal Year 2020 Earnings Conference Call. As a reminder, this conference call is being recorded. With that, I would now like to introduce Peter Lowry, Domo's Vice President of Investor Relations. Sir, you may begin.

Okay. Good afternoon and welcome. On the call today, we have Josh James, our Founder and CEO; Bruce Felt, our CFO; and Julie Kehoe, our Chief Communications Officer. Julie will lead off with our safe harbor statement and then on to the call.

Hello, everyone. Our press release was issued after the market closed 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, including statements about financial projections, the plans and expectations for our go-to-market strategy and our financial condition. These statements are subject to a variety of risks, uncertainties, and assumptions. For a discussion of these risks and uncertainties, please refer to documents we filed with the SEC, in particular, today's press release and our most recently filed annual report on Form 10-K and our most recent 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 our 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 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. With that, let me hand it over to Josh.

Thank you, Julie. Hello, everyone. Thanks for joining us for our Q2 fiscal year 2020 earnings call. In today's discussion, I will focus on two key areas: our quarterly results alongside an update on our go-to-market strategies, and insights into how our customers are utilizing our platform and advanced data solutions to enhance their businesses. Although we anticipated more growth, we achieved a 22% year-over-year rise in revenue and a 9% year-over-year increase in billings in Q2. We managed this growth while reducing sales and marketing expenses by 9% year-over-year, as well as lowering overall operating expenses by 7%. We made significant strides in reducing our cash burn, finishing nearly $2 million better than our guidance and about half of what it was a year ago. We are committed to reaching cash flow positive status with the cash on our balance sheet. We continue to improve our go-to-market model to accelerate new business. We are excited about the transformational impact our product is having on some of the largest companies globally, and we believe this will become evident as we achieve more public successes. The impact we make is still so transformative and widespread that it intersects with many functions, which leads us to navigate multiple checkpoints and affects the length of our sales cycle. I mention this because Q2 was certainly influenced by our focus on larger enterprise transactions, many of which did not reach final closure. Historically, our international business has been a strong performer, but this quarter, it was similarly affected, particularly in the Asia Pacific region, excluding Japan. We discussed our announced acquisitions during the Q1 call, showcasing the value we bring to our sector. Those acquisitions led to numerous customer discussions that lengthened the sales process. However, we did not lose any deals because of the acquisitions, and I will elaborate on this shortly. While we are enthusiastic about our pipeline, we became overly focused on pursuing larger enterprise deals, which impacted our Q2 billings and new clients. Fortunately, early in Q3, we successfully closed one of these customers, a nearly 7-figure annual deal with a major aftermarket automotive retailer. Nevertheless, the timing of larger enterprise closings has been hard to predict. We are making substantial moves to secure new customers more swiftly to maintain a healthy flow of new opportunities and grow new business while we navigate larger transactions. Let me summarize our most significant actions. It is widely recognized that explaining our offering has been challenging, which has been the top complaint from our representatives. Recent acquisitions have attracted attention and structured the way our sector is discussed, allowing us to simplify our messaging. After engaging with leaders from many top SaaS companies and testing how to define our niche, we have developed an improved way to describe our product that resonates well. We have also discovered that customers who utilize our product during the sales process are purchasing it at significantly higher rates than those who do not. Therefore, we are enhancing our focus on self-service proof of concepts to enable more users to experience our products directly, which we believe will lead to acquiring more new customers. Our Chief Strategy Officer, John Miller, has recently joined us. He is an exceptional talent with whom I have collaborated for over 7 years at Omniture, and have attempted to recruit to Domo annually for several years. Besides strategy, John is coordinating targeted, repeatable sales strategies to engage prospects and close new business more efficiently. Given our broad platform's capability to cater to a wide range of customer data needs, we aim to narrow our focus on how we present it to new clients in sales to help them better understand the value and adopt the technology seamlessly. We are also expanding our partnerships to enhance our go-to-market efforts. We have noticed significant interest from other tech companies eager to increase their scope, deal size, and strategic importance by integrating Domo into their solutions. Expect several related partnership announcements from us in the upcoming months. A key factor behind some of these partnerships is the recent acquisitions in the market, which have created a demand for an independent platform that works across all cloud or software environments. Domo stands as an independent, pure-play platform open to all major players. Concurrently, these acquisition announcements underscore the challenges companies face in providing data to their users. Major firms have spent over $25 billion on acquisitions in the past 18 months to bolster their data capabilities, which we believe only partially addresses their needs compared to what we offer. While some companies can afford extensive acquisitions to fill product gaps, most will need to collaborate through partnerships. We do not foresee new competitive threats altering our momentum. Customer feedback regarding our new pricing model has been very positive, and we believe this will further aid in acquiring and expanding business with both new and existing clients. Another positive aspect of Q2 was our gross retention rate nearing 90%. As our customers leverage our products more strategically and commit to longer-term agreements, we foresee the potential for even higher retention rates. Our corporate business remains robust, particularly among clients under $1 billion who tend to be less complex regarding their purchasing processes, approvals, and internal legacy systems. Our fully integrated, user-friendly platform continues to connect well with this group, who often lack the infrastructure or resources to create an alternative solution from scratch to address the issues Domo resolves. During the quarter, we welcomed new Lighthouse customers, including a globally recognized luxury watchmaker. We also secured contracts with EDP, an international energy firm, and Inditex, one of the largest fashion retailers globally, known for brands like Zara. We executed significant expansion deals with prominent clients, including CPG leader L'Oreal, a renowned appliance manufacturer, and Zillow, a real estate services company. We excel in environments with substantial, fast-moving, cross-departmental data that requires timely access by business decision-makers across organizations. Recently, TaylorMade Golf, which uses Domo in North America and Japan, expanded its use of our platform throughout all its Japanese operations. The company is now providing real-time data on key retail metrics, like traffic, sales, and inventory to every store employee, enabling them to enhance their work performance and better understand their customers, which has reportedly resulted in increased sales nationwide. I am proud of our team's relentless innovation and commitment to customer success, and we are encouraged by the recognition our product has received from industry analysts. In the previous quarter, Forrester's Wave for vendor-managed BI and analytics platforms awarded Domo the highest customer satisfaction ratings. Domo was also recognized as the overall leader in the Dresner Advisory Services Industry Excellence Awards for the third consecutive year, based on high ratings for product quality, value delivered, sales, and service. Additionally, Constellation Research announced that Domo was included in the Constellation ShortLists for both BI and analytics and marketing analytics solutions. In conclusion, we are focused on accelerating new business growth. We are executing well on cost management and maintaining our cost structure to ensure our business plan is fully funded. We remain highly optimistic about the opportunities that lie ahead.

Thank you, Josh. I'll begin with our second-quarter performance, followed by our third-quarter and fiscal 2020 full-year guidance. As Josh mentioned, the overweighting of our efforts on large deals with large customers resulted in decreased productivity from our enterprise reps, and there was insufficient new customer activity to compensate for those efforts. Our enterprise customer count is now over 460. In response, we're applying more resources towards acquiring new customers and at the same time reallocating some of our large enterprise sales resources towards smaller enterprise customers. We've historically experienced good productivity from our corporate reps, and we have seen that some of the same go-to-market motion that is working for the corporate segment has also worked for the smaller enterprise customers. We expect this to help our total new business and also help our new logo account. I'd like to highlight that the new deal sizes of our corporate business have been averaging over $50,000, and the gross renewal rate has been approaching 90%, a metric many software companies equate with the enterprise category. As a reminder, we have historically defined enterprise as customers with revenues greater than $1 billion, and revenue and corporate is everything less than that. In addition, we continue to target hiring more quota-carrying reps but have now directed those efforts in favor of the corporate business given how productive they continue to be even in the phase of a 29% year-over-year decrease in marketing spending. The corporate business also has a much shorter sales cycle and sales rep ramping history, which provides the ability to more immediately impact our short-term new business. Lastly, the CAC for our corporate business is lower than the enterprise business. For our enterprise business, our focus is on improving their overall productivity by closing the largest transactions and by increasing the new logo account. Our dollar-based net revenue retention rate continues to be greater than 100%. We also continue to see more customers entering into multiyear contracts, with 49% of our customers now under multiyear contracts at the end of Q2 compared to 38% at the end of Q2 last year. This drove our remaining performance obligations, or RPO, to grow 28% compared to the same quarter last year. Remaining performance obligations include billed and unbilled revenue under contract that is yet to be recognized. Our Q2 revenue was $41.7 million, a year-over-year increase of 22%. Subscription revenue grew 24% and represented 84% of total revenue. Year-over-year subscription revenue growth is driven primarily by new customers. International revenue represented 26% of total revenue, consistent with Q1. Our subscription gross margin was 74.9%, up 4 full percentage points from 70.9% in Q2 of last year. We plan to get additional leverage out of our subscription cost of revenue over time as we continue to effectively manage our data center operations through finding efficiencies, better utilizing certain services, and continuing to optimize the Domo platform. We believe we can get subscription gross margins to over 80% over the long term. Including our services business, our total gross margin was 66.2%, a 240 basis point improvement compared to 63.8% gross margin in the second quarter of last year. We were able to deliver these results once again with a further decrease in operating expenses. In Q2, we decreased operating expenses by 7% from last year even though revenue increased by 22% year-over-year. The decrease came primarily from lower marketing and R&D costs. The net effect of increased revenue while effectively managing costs allowed us to improve our operating margin by 40 full percentage points from the same quarter last year. Our net loss was $26.4 million, and net loss per share was $0.96. This is based on 27.4 million weighted average shares outstanding, basic and diluted. Turning now to our balance sheet. As of July 31, we had cash, cash equivalents, and short-term investments of approximately $134 million, an amount we believe is adequate to allow us to manage the business efficiently until we reach a cash flow-positive position. Our net cash used in operations was $18.7 million, an improvement of $2.4 million over the prior quarter and a 48% reduction compared to Q2 of the prior year. Now to discuss what we expect in Q3 and fiscal '20. We expect Q3 billings of about $36.5 million. We now expect fiscal year '20 billings to be about $172 million. Our billings guidance assumes the same business and operating conditions we experienced in Q2 will continue in Q3 and Q4, and we are not factoring in all the new initiatives we have undertaken given it takes time to implement them and also to provide for or we provide for a low-weighting factor for large deals given the unpredictability of their closing. This approach is not to be interpreted as anything other than us being prudent in our approach to providing guidance. We're planning on our Q3 operating expenses to be up slightly from Q2. For the year, we expect our operating expenses to be down slightly from fiscal year '19. We plan to execute on our plan to decrease cash burn sequentially each quarter of fiscal year '20, and we expect Q3 adjusted cash used in operations of about $17.5 million and $74.5 million for the year. Going forward, we'll manage our ongoing cash burn to achieve our cash flow-positive position with the cash on hand. Now the formal guidance for the third quarter fiscal year '20, we expect GAAP revenue to be in the range of $41.5 million to $42.5 million. We expect non-GAAP net loss per share, basic and diluted, of $1.00 to $1.04. This assumes 27.7 million weighted average shares outstanding, basic and diluted. For the full year of fiscal '20, we expect GAAP revenue to be in the range of $168 million to $169 million, representing year-over-year growth of approximately 18%. We expect non-GAAP net loss per share, basic and diluted, of $4.00 to $4.10. This assumes 27.5 million weighted average shares outstanding, basic and diluted. In closing, as we exit our quiet period, we will be participating in as many investor conferences and non-deal roadshows as possible as we believe there's a substantial amount of information we'd like to convey to investors about our initiatives.

Our first question comes from Sanjit Singh with Morgan Stanley.

I wanted to go and ask a couple of questions on go-to-market strategy. So coming out of the IPO, I think the message that we were all hearing is that we need to move upmarket to larger enterprise customers. And thus far, in the first half of the year, it seems like that's going below plan. Sales cycles are longer. Some issues, some confusion on the competitive environment. And so what I'm hearing today is, well, we need to go toggle back to commercial, which I thought was part of the issue coming out of the IPO. So I'm just trying to understand what the right go-to-market strategy is for the product that you have because it seems like it's going back and forth.

Yes. We have managed to keep our customers satisfied in both segments. In particular, within the enterprise sector this quarter, we have substantial deals in our pipeline with real customers, and we didn't lose any of them. They are simply taking longer than we expected. We do have proof points in these segments where customers are happy and expanding their business with us. We're working on efficiently acquiring new clients at a steady, predictable pace. This is a solid business for us. We may have pushed too hard on our enterprise growth. In parallel, our corporate business, which both Bruce and I mentioned, is becoming more enterprise-like. We may have limited ourselves by defining it too narrowly. We have customers with new deals around $50,000 a year, and the gross retention rates are quite similar to our enterprise side. However, the upsell potential isn’t as high in corporate, which is one reason we’re keen on enterprise. The complexity of our product increases with more enterprise customers. Yet, having a broader product scope allows us to meet various market needs. Currently, we plan to allocate some of our sales representatives to focus on the lower range of the enterprise sector while also having others pursue major clients. We're continuing our current strategy and redirecting additional resources and new hires towards businesses earning between $1 billion and $5 billion in revenue, where our corporate representatives have been effectively managing leads and contacts. This approach has proven successful and has even scaled beyond $1 billion in many instances. Given the success we’re witnessing and the better-than-expected performance of our corporate business since going public, we feel it's essential to allocate resources wisely. Additionally, we discussed our efforts in the Asia Pacific region. While it was performing well last year, the additional investment we made didn’t yield the desired results like it had in the first three years. It will take time to assess their performance, but since they didn't meet expectations, we won't invest further there. Instead, we'll redirect those funds back into the lower enterprise and upper corporate sectors.

Got it. Bruce, the gross retention rates seem to be improving since they are overall at 90%. I'm trying to understand how this improvement in gross retention relates to the slowing billings growth. Billings growth was around 30% for most of last year, and now we are below 10% by Q2, yet gross retention is increasing. Can you help me connect the dots there? Is the decline attributed to new business? I want to understand the dynamics between the renewal portfolio and new businesses.

Yes. First of all, the high renewal rate we are seeing, especially in the corporate segment approaching 90%, is a very healthy indicator of our business and shows how well we have developed our platform. Our customers are utilizing it effectively across various segments and sizes. This is a significant positive sign and provides a strong foundation for us to expand our presence within these businesses. However, we recognize that new business is where we haven't met our expectations, which is why we have several initiatives aimed at accelerating adoption and prioritizing the onboarding of new customers, particularly enterprise customers. We want to clarify that we are not decreasing our focus on enterprise opportunities; rather, we are being more strategic in segmenting and targeting them. We are taking lessons learned from smaller companies and applying them to smaller enterprises while still acknowledging that these are enterprises. This quarter, we effectively served the largest enterprises, where our unique ability to address complex problems is invaluable. Despite the complexity of these institutions, we need to maintain our growth. We will continue pursuing these transformative opportunities as we announce them, which will benefit all segments. However, our primary goal is to attract more new customers and accelerate new business. While we are still targeting these customers, we plan to be more selective in our approach to ensure we achieve high growth across the board simultaneously.

I would like to mention that during the prepared remarks, we discussed a deal that slipped last quarter but was signed this quarter, representing nearly a seven-figure annual deal. As for enterprise deals, they haven't aligned with our timeline so far, but they are present and successful. Additionally, in our corporate business, we've managed this with a significant reduction in marketing expenses. We were uncertain about the impact of this decrease, but the numbers, especially in the corporate sector, show that our team has managed to perform well despite the lower marketing spend. Jeff Skousen and his team have done an excellent job executing this strategy. Furthermore, while we have hired a lot of new representatives this year, they are still in the early stages of their ramp-up. We see that as a potential advantage moving forward. We find the performance amid reduced marketing spending very encouraging, which is why we are considering reallocating some investments towards the lower end of the enterprise market, as we expect it to behave similarly to the corporate sector. I want to highlight something I mentioned in the prepared remarks, and I cannot emphasize enough how excited and encouraged we are by the brand-new data that came in just a week ago. Regarding the IPO, we have been focused on finding ways to lower our customer acquisition costs both before and after going public. We've been searching extensively for ways to do this more efficiently while reducing marketing expenses. Recently, we analyzed our new customer acquisitions and discovered a significant factor affecting our close rates. Customers who actively use a proof of concept (POC) have close rates that are substantially higher compared to those in our pipeline who do not engage with a POC. While we always knew that using a POC was beneficial, we didn't realize it was to the extent that we could advocate for it even to those customers initially hesitant about it. Seeing such a considerable impact, we are shifting our approach to ensure that more customers engage with our products, as this leads to higher conversion rates than industry averages for moving from leads to closed deals. This insight is incredibly exciting for us, even though it is fresh, and we believe it will have a positive impact moving forward.

And our next question comes from Bhavan Suri with William Blair & Company.

I guess I just want to touch first, Josh, maybe for you, has there been any change, especially in the larger businesses on the competitive environment, is sort of the, hey, I can use Glue and Snowflake and Red Shift and other things combination potentially slowing things down? Is it that Looker is out there with Google or Tableau? So any of just maybe impacting anything at all, do you see? And when you look at your analysis of sort of what's happening in the enterprise from the delays or the slowdown or the longer sales cycle?

It certainly had an effect on the last quarter, but it seems to be a one-time issue due to the simultaneous acquisitions. This situation raised numerous questions regarding many of our deals. There were instances where sales representatives needed to hold calls just to clarify the Google-Looker merger to clients. Some customers, who were using Google products but were also significant Salesforce users, wanted clarity on how this would affect Tableau or its integration with MuleSoft. As we mentioned previously, we are not losing deals over this, but we had to conduct some calls. Once things settled down, it appeared that we weren't losing any deals as a result. Our messaging has improved, and this isn't new information anymore. Consequently, customers are not asking the CIO or other business leaders about the recent merger. However, it certainly led to some confusion in the market. Interestingly, this situation seems to have shifted relationships; some former partners with Tableau and Looker no longer wish to collaborate in the same way, which has opened up new opportunities for us. As we explore these opportunities, we discovered that not having a partnership with certain companies might have been affecting us more negatively than we previously understood. Additionally, we anticipate some announcements in the coming months. We have partnerships that are being finalized, and we expect these to positively influence our success in the marketplace. While there was temporary confusion, it doesn't appear to have caused any significant long-term negative consequences. On the contrary, it looks like it may benefit us as our ecosystem grows stronger and more supporters join us.

Got it. That's helpful information. I want to touch on one other point. When Dean joined, the idea was not to completely overhaul the implementation at a large Fortune 500 customer right away. Instead, the plan was to demonstrate how we could quickly connect and address aspects of their architecture that they couldn't fully develop on their own. Looking at that strategy, do you think it's not working out, or is it something that will take time to unfold? On the commercial side, it seems simpler because there isn’t the same complexity from historical legacy infrastructure. How should we think about that approach? If it’s not the right way to proceed, I'm curious about your perspective on that and whether this strategy is still relevant for the enterprise market while placing less emphasis on it.

That's definitely the right question to ask. When we analyze various accounts, one of the incredible moments occurs when a customer wants to connect a specific data element, and we can seamlessly do that in the room. They can access data that would otherwise take them weeks to obtain through any other method, and this does make a difference. One challenge we've faced, which isn't a secret, is that when we look at our top 20 customers, they each have unique case studies rather than similar ones. We need to discover which stories we can tell repeatedly and what processes can be made more efficient and cost-effective. We've been working on establishing a repeatable sales approach, and we feel we're in a solid position now. We have the necessary tools and customers starting to adopt similar practices, and we can provide specific guidance based on their interests in sales analytics, marketing analytics, finance, and operations. However, we haven't led with this in the enterprises we've approached, which has been frustrating. Often, our executives or sales reps would lead sales calls without a clear direction, and if the customer's goals weren't addressed during the call, we weren't being sufficiently prescriptive. Over the past months, we've been developing focused sales strategies, and with John joining us—who has significant experience in this area—we're creating a more streamlined approach. We're bringing together teams from marketing, lead generation, and product to have regular stand-up meetings for specific sales strategies. Our goal is to enter enterprises with a clear, unified message about the journey we're offering and the solutions we know will work. Historically, we struggled with this, but we're finally confident in our ability to execute it. While it didn't help our last quarter, we feel optimistic about what lies ahead. We don't yet know the exact impact on future quarters, but we are very confident that it will be positive, and we're actively working on these initiatives as quickly as possible.

And our next question comes from Brad Zelnick with Credit Suisse.

This is Syed on behalf of Brad. Josh, after last quarter, we perceived the Looker and Tableau acquisitions as confirmation of your model and architecture, and we are optimistic that some of the short-term disruptions could present a significant opportunity for you to increase market share. Can you provide insight into the challenges you're facing with closing large enterprise deals? Is this issue localized geographically or within specific industry sectors? Additionally, how much is the overall market environment making it more difficult for you to sell?

No, the overall environment is not becoming more challenging for what we sell. Many enterprise deals did not close as anticipated. We still believe that numerous deals will eventually close, but they have been delayed. The simultaneous acquisitions during a short timeframe contributed to a less favorable environment and prompted necessary discussions. However, in the midterm and even in the short term over the next few quarters, we expect a positive impact because not everyone perceives Google the same way they might view Looker on its own. I'm confident that Google will obtain some business due to Looker, particularly from loyal Google users. Yet, there are many more elements to the ecosystem and numerous partners with Looker and Tableau who do not have strong feelings towards Google and Salesforce. This presents a genuine opportunity for us to step in, and we're already witnessing that. We've engaged in transactions with new partners we've signed over the last quarter, where we are influencing each other's deals. We believe there is much more of that to come.

And I guess one more question for Bruce. You said that more customers were signing multiyear deals. Can you give us an idea on why this is happening? And is the salesforce being incentivized for longer-duration deals right now?

I believe this aligns well with the experiences our customers are having with the platform. We now have a much more strategic range of use cases at all customer sizes compared to before. When this is clear and our customers are committed, it often means they are making a strong commitment to the platform in a more strategic manner. This contrasts with about three years ago when the platform was primarily seen as a reporting tool to replace spreadsheets. Now, it actually helps them manage their business more effectively, saves them time and money, and provides valuable insights. As an organization, we are improving significantly in how we engage with customers, and we are also enhancing our ability to deliver on the back end. Our product continues to improve, leading customers to be more willing to sign multiyear deals. Interestingly, we’re observing this trend even among smaller companies, which is notable since smaller firms typically do not pursue long-term commitments. While there is some incentive for our sales representatives, this trend seems to be driven more by the way customers are utilizing the product and our discussions with them rather than by any incentive plan. We believe this trend will persist, and we also see potential for improving retention rates as companies adopt our products more strategically, leading to longer commitments.

And our next question comes from Pat Walravens with JMP Securities.

This is Joe Goodwin on for Pat. Just a quick question from us. Given the message is tough right now, should you really be cutting back on marketing spending? And then I have a follow-up.

Should we reduce marketing spending? No. We're still optimistic about the opportunities available to us. While we're being careful in our approach, we have already made cuts to marketing expenses and are striving for maximum efficiency in our spending. We believe that upcoming sales initiatives won't necessitate an increase in marketing costs. The key focus should not be solely on attracting new leads, but rather on improving our conversion rates for those leads already in the pipeline. Our customer acquisition costs may be higher than the industry average, but among customers actively using the product, our conversion rates exceed industry standards. Therefore, our focus will be on improving this aspect significantly over the next few months.

Understood. And then what is the new way of explaining what you do? Where do you guys say you fit into this digital transformation of these companies?

We're still refining our approach and rolling it out to ensure everyone's aware of it, and it will be reflected on our website. The key message is that everyone is pursuing digital transformation and trying to enhance their digital relationships with customers and employees, seeking increases in digital productivity. They recognize that cloud technology plays a significant role in this. However, many CIOs express concerns about the multitude of cloud platforms they have, often more than a hundred. They understand the need for the cloud due to its efficiency, scalability, and manageability, but they want to simplify things to a few key platforms. Companies are standardizing on platforms like Office 365, Salesforce, Workday, and ServiceNow, but there isn't a single platform that helps monetize all their data or puts data in the hands of every employee. That's where we come in, and we do it in three ways. First, we assist in connecting and transforming data, leveraging our robust MuleSoft acquisition to provide extensive connectors. We built this capability from scratch. Once data is connected and transformed, it can be stored anywhere—public clouds, Snowflake, or privately—but the next step involves visualizing and analyzing that data. We offer a scalable solution akin to Tableau, but cloud-based and automatically linked to our data connection tools. Our customers experience significant improvements, such as an increase in data analysis capacity from 20 million to over 100 billion rows. Additionally, the number of active users using our platform can expand dramatically after switching from Tableau. After completing those initial steps, users can then tap into an application framework that includes machine learning and AI. Our demos showcase how large organizations utilize these capabilities, empowering employees to achieve tasks they couldn't otherwise without custom software solutions costing millions. They can access our services through Domo, which seamlessly connects and transforms data, visualizes it, and provides an application framework. Following this, we engage in targeted sales discussions, leveraging our knowledge of each customer's needs before meetings. Conversations can focus on sales operations or marketing analytics, leading into proof of concept (POC) engagements. If we can get customers into a POC, our conversion rates are significantly higher than industry averages. This marks a substantial difference from where we were just three months ago. I wish we had discovered this earlier, but we’re excited to see how it will benefit our business moving forward.

And our next question comes from Derrick Wood with Cowen and Company.

First question. So you guys have been through a full quarter of the change in pricing strategy. Do you think that's been disruptive? Maybe can you just talk about the puts and takes and how that rollout has gone from an internal standpoint and just an external customer reception? And do you think that's the right way pricing strategy for the corporate segment?

Yes, we believe it's the right pricing strategy. A significant part of our goal is to broaden product accessibility. Initially, we were cautious because we wanted to avoid disrupting the business or jeopardizing our pipeline. However, we've managed to implement it effectively with enough customers to confirm that it's successful, and in some instances, it's leading to larger deals than before, or at least matching previous outcomes. Additionally, we are seeing a significant increase in product usage, as our findings from the POCs indicate that higher user engagement leads to better retention, a greater likelihood of purchases, and potential for future sales. Ultimately, our main objective with this pricing is to increase adoption rates and create more opportunities for upselling additional products over time.

Okay. So that's still the plan going forward.

We strongly believe in having people on the ground, so we are continuing to hire. We are focusing more on smaller enterprises and corporate clients because we believe we can achieve results much more quickly there. We will still pursue larger enterprises as appropriate, but we plan to maintain the same pace of hiring to ensure we quickly develop productive salespeople who can start contributing to growth as soon as they join. In terms of sales cycles, our corporate transactions have been averaging around 50 to 60 days, which is quite fast. Much of the business we secure occurs within the quarter, indicating that investing resources sooner rather than later yields better short-term results. Early signs suggest that the same approach is effective with smaller enterprises, which is another reason for our focus in that area. Additionally, we’ve discovered that you don’t need a very large customer to achieve significant deals; we can secure $300,000, $400,000, or $500,000 contracts from corporate clients. While we may not land $10 million deals from them as we do with mega enterprises, this is appealing to us because we can provide unique solutions. Our goal is to build a balanced portfolio that mitigates risk across all segments, enhancing our chances for both short-term and long-term growth. That is our strategy at the moment.

And our next question comes from Jennifer Lowe with UBS.

Great. Maybe just the first question from me is looking at sort of the conservative or the down tick in spending on marketing, it seems like that was more focused around the corporate business, which also seems to be the better-performing business. But is there a chance that, that could have been in any way responsible for the challenges that you saw in the enterprise side? It seems like there are other challenges there too. But is there any sort of risk that the constraint on sales and marketing expenditures is also contributing to some of the challenges you saw in the quarter?

We don't believe that's the case. The largest deals in the enterprise were with existing customers, which gives us confidence that they will close. We have strong visibility into these deals, and we understand that the challenges are more about internal operations than competition. Our main observation is that we've been focusing on these significant opportunities with current customers because they have a considerable impact. This focus means we are allocating fewer resources to acquiring new business. The situation is less about marketing spend and more about our strategic focus. However, we're shifting our attention back to pursuing new business opportunities. By implementing simpler messaging and a concentrated effort that every representative can learn from, we plan to narrow our use cases from 1,800 to just 4 for acquiring new customers. We believe this strategy is the right one, and while some marketing investment will be necessary, we don’t expect substantial changes in our spending. The key to achieving great results will primarily come from our focused efforts rather than simply adjusting the budget.

Okay. To revisit the guidance, when we examine the billings forecast, it appears to suggest a significant decline in new deal activity. In your prepared remarks, you indicated that it assumes no changes to the conditions observed this quarter. However, when we break down what that entails, is the expectation that some of the delayed deals will close in Q3, while other deals might be postponed even further, resulting in a balance? Or is it the case that everything continues to be pushed out indefinitely? Could you clarify what you mean by current conditions persisting?

Yes, but let me start with a general comment. Unlike you guys, you give me one data point, and I extrapolate. So I'm extrapolating. I'm saying what I'm seeing right this minute, it exists forever, and that's the guidance. And that's totally probably unrealistic but I think extremely prudent. And what that means is because the big deals are going to close, they aren't going to close. That's not realistic, but that's kind of the way the guidance is. And the way we saw conversions kind of work in the pipeline, they're going to happen again, which I think is probably a little bit unrealistic, but I think it's safe for the moment. So that's what we're saying. We're just saying that the rest of our future is what we just saw from a guidance point of view. And that's why I made the comment, please don't overread that to mean anything more about the business other than I'm extrapolating one data point out a long way, and I'm just being very clear that that's what I'm doing. And we certainly don't want it to play out that way by any means, but that's what we think we should do right now.

Our next question comes from Jack Andrews with Needham & Company.

Josh, I want to kind of ask you, I guess, where do you think you are in terms of finding, call it, a killer app or a killer use case for Domo? I mean do you think it's more on the platform side? Do you think it could be vertical use cases? I mean is there enough sort of customer behavior that you're starting to coalesce around some particular themes that would drive towards this repeatable sales process?

Yes. I think we're getting close, which is why we are starting to implement these sales strategies. We are relying on customer insights rather than guessing. We're noticing similar patterns in customers’ behaviors, and we are offering solutions that address those needs. Once we recognized these commonalities in the solutions we provided, we felt confident to be more directive with our clients. For instance, if a customer wanted to work on marketing analytics, we can clearly outline what steps to take to achieve significant progress. This initial guidance is crucial because once customers get started with Domo, they tend to deepen their engagement. We are now close to pinpointing what those key applications are, and we are developing the experience and knowledge needed to support that, especially with John leading the team and all the sales leaders backing the new market strategies for both sales and specialized teams in areas such as data science and Domo Everywhere. We are conducting experiments and discovering effective solutions. Now we are in the process of formalizing and operationalizing it, and I haven’t felt this close before. It truly feels very near.

Great. Well, I appreciate your comments there. Just as a follow-up, you talked about expanding focus on self-service capabilities. I was wondering what sort of use cases do you envision falling out of that initiative.

Yes. What I mean is that we can conduct many proof of concepts (POCs). Over two years ago, we created our first premium product, and we were pleased that within the next year, anyone could visit our website, sign up for Domo, and start a free trial without needing to speak to anyone. They could connect and input billions of rows of data, link to 50 different data sources, build cards, and add users entirely by themselves. This is a self-service operation. The reason we emphasize this is that increasing the number of POCs doesn't necessarily mean involving many man-hours for each one. It's about establishing the processes around the initial customer call. If someone expresses interest, we would put them in touch with our sales executive, Julie. When they talk to her, they'll need to be ready for a POC, as that's part of the interaction. We can explain things, but true understanding comes from using the product. So, during that first call, we ensure clarity about who on the customer’s team will manage the self-service POC. We're here to guide them and will provide training support at the right time. We want to ensure everyone is focused on these POCs since we discovered we have a significantly better conversion rate when users actively engage with a POC compared to when they don’t use one or use it minimally. That insight was new to us; we initially thought it might yield a 25% increase, but it's much more substantial. Therefore, we need to prioritize this as a company.

Thank you. I'm not showing any further questions at this time. This concludes today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.