Domo, Inc. Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Domo Fourth Quarter Fiscal Year 2020 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Peter Lowry, Domo Vice President, Investor Relations. Please go ahead.

Good morning, 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 onto the call. Julie?

Thanks, Pete. Our press release was issued before market open 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, our expectations for our sales and new business initiatives, 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 file with the SEC, in particular, today's press release and our most recently filed annual report on Form 10-K and our most recently filed quarterly report on Form 10-Q. In addition, our business faces risks associated with the COVID-19 outbreak. 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 their most directly comparable GAAP measure. With that, let me hand it over to Josh. Josh?

Thank you, Julie, and hello, everyone. Thanks for joining the call. We know it's short notice, but we think it's important to share our strong Q4 performance with you as soon as possible, particularly given this crazy time that we're in. We know, as it relates to COVID-19, this is a trying time. And in times like these, our most important focus is on our people and their families. In regard to everyone's health and well-being, weeks ago, we implemented common sense protocols, including putting restrictions on nonessential travel, supporting work-from-home initiatives, and changing the format of our annual user conference to online only. Our thoughts are certainly with everyone who's affected at this time. I'm going to keep my section short and sweet. I want to make a more reflective view and highlight the progress we have made since we became a public company, and then Bruce will cover this quarter's details. So this is our seventh reported quarter as a public company. In the last 7 quarters alone, we have made significant progress on a number of metrics. Number one, our year-over-year subscription revenue growth has averaged 28% and has never been below 24% for any quarter. Number two, our subscription gross margins have improved from 71% when we went public to 77% today. Number three, our gross retention rate has improved from 82% to 91% this quarter. Number four, our contracted annualized recurring revenue is now over $160 million, a size and scale that gives us the ability to get to cash flow positive quickly if we need to. Number five, our customers under multiyear contracts have increased from 38% of our customer base when we went public to 55% today. Number six, over that same time period, our operating expenses have decreased from $55 million per quarter to $53 million per quarter, despite our growth in recurring revenue. Number seven, we have decreased our quarterly cash burn from $36 million a quarter to now $15 million. And lastly, number eight, we've been able to accomplish all of this with the same headcount level we had about 4 years ago, and we still have sufficient capacity to continue to deliver significant value to our customers, also with an ample amount of cash to run our business however we need to, in whatever environment we are in. I'm very pleased with these accomplishments in this past quarter, including signing one of the world's largest companies, Amazon, as a customer, and I look forward to continuing to execute well against this large market opportunity before us. The path to achieving a cash flow positive position with the cash on our balance sheet has become clear every quarter. And with that, I'll turn it over to Bruce.

Thank you, Josh. We're pleased to deliver a solid Q4 against all guided metrics. I'll now review the details behind this performance followed by providing first quarter and fiscal 2021 full year guidance. Our better-than-expected Q4 was driven by higher renewal rates, strong upselling into our installed base and the entirety of our business delivering above expectations. Our enterprise team capped off a record-breaking second half of the year, and our corporate team produced the largest amount of new ACV business for the company and was well above our beginning of the quarter expectation. It is noteworthy that we achieved our results with minimal contribution from large deals, with our top 5 new business deals comprising only 5% of our billings this quarter. Our focus has been on increasing our recurring revenue base, and I'm pleased that our subscription revenue grew 24% year-over-year, driven by an improved mix of new subscription versus services revenue and by improving retention rates. I also want to highlight how encouraged I am by the continued improvement in our existing customer lifetime value, or LTV, profile, as both retention and recurring gross margin continue to show incremental improvement. A significant benefit of the SaaS model is that strong improving LTV fundamentals provide a core financial visibility in periods of external market uncertainty. Our recurring revenue base is broadly spread across a wide range of industries. We do not have significant concentration in any one industry with no industry representing more than 15% of ARR and most representing significantly less than that. As Josh also mentioned, our gross retention rate was 91%. In addition to better-than-expected retention, Q4 billings benefited from about $2 million of renewals in connection with upsells. We had expected these renewals to come in the first quarter of fiscal year 2021. This did not affect our reported retention rate, but it does influence our Q1 billings guidance. We achieved a net revenue retention rate of 120% in our North America enterprise business. We now have 55% of our customers under multiyear contracts at the end of Q4 compared to 42% at the end of Q4 last year. Our remaining performance obligations, or RPO, grew 17% compared to the same quarter last year. Our Q4 revenue was $46.2 million, a year-over-year increase of 17%. Subscription revenue represented 86% of total revenue. International revenue in the quarter represented 25% of total revenue compared to 24% in Q3. Our subscription gross margin was 77%, up more than 2 percentage points from 74% in Q4 of last year. We plan to obtain 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 utilization of certain services and continuing to optimize our software that runs the Domo platform. We believe we can achieve subscription gross margins of over 80% in the long term. In Q4, operating expenses increased by just under 7% from last year, even though revenue increased by 17% year-over-year. We did take a cost reduction action in Q4 in our non-Japan APAC region due to underperformance relative to the investments we have been making in that region. We will redeploy those savings in North America, where we're finding great success. The net effect of increased revenue, while effectively managing costs, allowed us to improve our operating margin by 12 full percentage points from the same quarter last year. Our net loss was $23.7 million, and net loss per share was $0.85. This is based on 28 million weighted average shares outstanding, basic and diluted. Turning now to our balance sheet. As of January 31, we had cash, cash equivalents and short-term investments of approximately $99 million, an amount we believe is more than sufficient to allow us to become cash flow positive. Our adjusted net cash used in operations was $15.3 million, an improvement of $0.9 million over the prior quarter and a 45% reduction compared to Q4 of the prior year. Now to discuss what we expect in Q1 and fiscal year '21. We are very aware of the uncertain environment and are planning for different scenarios. Our guidance does not factor in a downturn or slowdown because at this point, we have not felt any material effects on our business. In fact, in Japan, where there is more societal upheaval, we continue to close business. We believe this is in part because our product set helps drive revenue, find efficiencies and help businesses operate remotely. I would say that relative to companies that rely on large amounts of new business from new customers, we are in a better position because our current top line is driven by a large sticky renewal base, the majority of which is under multiyear contracts, our new business comes mostly from current customers that are easier to sell to than obtaining new customers, and most of our quota-carrying reps primarily sell over the phone, which is an asset when traveling is restricted. Also, we've been able to grow our business without increasing costs and have demonstrated an ability to control and even cut costs if needed. We're entering fiscal year '21 with 20% more pipeline than we had at the same time last year, as a result of all the work we've been doing to improve marketing operations, run the sales plays, form relationships with partners, and automate the proof of concept process. With that as background, we expect Q1 billings of between $40 million and $44 million. Had the $2 million in renewals not been billed in Q4, our billings guidance would have been $42 million to $46 million. We're planning for fiscal '21 billings to be between $205 million and $210 million. We are planning on our Q1 operating expenses to be up from Q4. Although we're excited about having Domopalooza online and have over 5,000 registrants already, our operating expenses are driven in part by our annual user conference costs that cannot be recovered and higher payroll-related expenses in Q1. For the year, we expect our operating expenses to be up slightly from fiscal year '20. We expect Q1 adjusted net cash used in operations of approximately $14 million, and expect full year adjusted net cash used in operations of approximately $50 million. We believe we will be able to exit this year with a quarterly cash burn rate that gives investors the confidence they're looking for that we can achieve our cash flow positive status with the cash we have on the balance sheet. Now the formal guidance. For the first quarter of fiscal year '21, we expect GAAP revenue to be in the range of $46 million to $47 million. We expect non-GAAP net loss per share, basic and diluted, of $1.04 to $1.08. This assumes 28.4 million weighted average shares outstanding, basic and diluted. For the full year fiscal '21, we expect GAAP revenue to be in the range of $192 million to $198 million, representing year-over-year growth of 11% to 14%. We expect non-GAAP net loss per share basic and diluted of $3.22 to $3.32. This assumes 29.2 million weighted average shares outstanding, basic and diluted. In closing, we're pleased with our results for Q4, and I look forward to our fiscal '21 year. Please join us on March 18 for Domopalooza online and our analysts and investor program. You can register for those at domopalooza.com.

We'll open up the call for questions. Operator, please do so.

Congrats on the beat on billings this quarter. Bruce, I wanted to talk a little bit about guidance, and thank you for walking through some of the assumptions on Q1 and for the full year. Specifically, as it relates to the enterprise sales team, how are you thinking about the potential travel disruptions? I understand you have quite a lot of quota-carry capacity on doing inside sales. But in terms of just the enterprise sales force, how much contribution sort of assumed in full year guidance? And what sort of disruptions are you anticipating in terms of the ability to close deals because of people not in the office or just not getting enough face time in front of customers?

We have a strong pipeline that has been steadily building. We believe our ongoing activities will continue to enhance this pipeline, even as some of our sales team has historically preferred in-person meetings. Given the current challenges faced by corporate America and globally, we are doing our best to maintain business as usual. I hope and believe that we will be more open to conducting business over the phone, which could establish a new normal that is even healthier than our previous ways of working. It's reassuring that much of our business, particularly with enterprise clients, comes from existing customers, making phone interactions more manageable since we already have established relationships. We are conscious of the enterprise pipeline and activity levels, and we are incorporating normal caution into our forecasts. While no one can predict how the current situation will unfold, we believe we are in a solid position with many advantages. We will continue to strive to keep business activity high despite this slowdown in travel, though it is important to note that it's a slowdown, not a complete halt.

Understood. For my follow-up, could you elaborate on the strategies you have available to help manage cash flow and control cash burn in a more challenging scenario?

Yes. We plan to significantly enhance our telesales activities and become more proactive in our efforts to strengthen our top line. Our current cost structure allows us plenty of flexibility, meaning we can reduce expenses if necessary. Josh and I have encountered similar situations in the past, and we recognize when a genuine slowdown is approaching. During the 2008 crisis, we acted decisively, and we would do so again if faced with a similar scenario. Ideally, we prefer not to confront such circumstances, but we must be prepared to respond if the economy slows down. Therefore, we are closely examining our cost structure. As mentioned in my notes, we have already adjusted our strategy when the return on our investment was unsatisfactory. If we need to reallocate resources, we will do so with a new perspective, especially if we detect signs of a slowdown.

Let me echo my congrats, especially on the LTV CAC metrics. That was really good to see. I guess I wanted to just push a little bit on Sanjit's question, just on guidance. Josh, you touched on no quarter has seen growth of less than 24%. The guide to both revenue and billings seems conservative. Just any more color on what else you baked in there. Sort of I know, Bruce, you said sort of normal conservatism but if you think about the pipeline is 20% higher than what it's been, you've seen net dollar retention rates go to 120% for enterprise. Just trying to understand sort of the conservatism, or the level of conservatism that's baked in here, given you're not expecting sort of a global slowdown? Just trying to understand that part.

Yes, this is Josh. First of all, the metrics you've mentioned are quite positive. We're observing significant enthusiasm from the sales efforts we're implementing, and the new messaging is resonating well with our team and how they engage with customers. Customers are discussing their future plans, and when we review the major deals in a quarter, most are with clients who have been with us for a few years, and they are standardizing their processes with us. There are many encouraging developments. However, we also recognize that the world has changed compared to two months ago. Although we haven't observed a substantial impact on our business, we haven't seen the opposite either. For instance, Bruce noted the situation in Japan, where there is a more significant lockdown compared to the U.S., and our 50 employees there are working from home due to childcare issues. We were concerned about our business performance in that region, yet we're still securing new deals and contracts. I can't say for certain how the U.S. would respond under similar circumstances, but transactions continue to occur. As Bruce highlighted, people seem willing to conduct business over the phone. This situation is different from the market crash in 2000 or the financial crisis in 2008. It feels more like a collective challenge that humanity must address together, which I believe will lead to a different set of experiences compared to previous downturns, even if we may still face some negativity.

Yes. I think I just have to take this moment just to say, we set guidance the way we normally do. But it would be very imprudent for us sitting here today, seeing what's going on in the environment to expect a big beat. So I'm just kind of stating the obvious, given the market, it's really just based on the macro environment.

Got it. Got it. That's super helpful. And then I just want to touch a little bit on bake offs, specifically. You talked over the last couple of quarters of doing more bake offs, seeing really good win rates on those opportunities where you can demonstrate the nature of the platform. Just love to understand how that was in Q4. And how much of a focus area you guys are sort of thinking about that in 2021? As you think about your sales plays, the idea of bake offs, bringing data in, how are you thinking sort of about investing in that area given the win rate? So I'd love just to know how the quarter was and sort of the plan around sort of those POCs bake offs for 2021?

Yes, those proof of concepts are definitely beneficial for us, and the investment required is not significant compared to our other initiatives, aside from the costs involved. We fully recognize their importance. The main challenge is encouraging our sales representatives to incorporate this into their standard process, ensuring they feel confident about it, and understanding that utilizing POCs improves our close rates. I believe both our sales and management teams recognize how beneficial this approach is for us, and we will continue to implement it more frequently. If you consider the large contracts we secured last quarter, as well as those currently in our pipeline, nearly all of them involved a POC that helped persuade those customers to commit to standardization in a significant way.

Great job on Q4, everyone. Josh, my first question is, are you noticing any of your customers or potential customers cutting budgets or delaying projects due to the current environment?

We haven't seen any projects being cut or delayed. What we have observed is a decrease in travel and conferences, and everyone is trying to adapt to this situation. When you examine your marketing plans and budget allocations, you notice many events lined up, which means you need to find alternative ways to generate leads. Business continues to progress with individual meetings happening, although people are refraining from large gatherings and conferences. Particularly in the enterprise sector, significant meetings are still occurring, so our business is not currently impacted. It would be unwise to ignore the changes happening, but we hope to quickly adjust to a new normal. If that adjustment takes longer, we are prepared for that scenario as well. A notable example is Japan, which surprised me when I received notifications about deals being closed there, especially since one was a new logo. We find comfort in the fact, as Bruce noted, that a significant portion of our new revenue each quarter comes from upselling our existing customer base, which we have invested a lot in developing. This reduces our risk since we can rely on familiar clients and conduct business effectively via phone and video conferencing. Our ecosystem continues to evolve and develop, and we are very excited about it. We are continuing to invest in it. The recent acquisitions took place in a short timeframe, creating opportunities for many people seeking new partnerships. We have received feedback from numerous customers who appreciate our work over the past few years and are asking for help in extending this to all their customers. The ecosystem is becoming a significant part of our business, and we are confident about its future, with Microsoft and Amazon as part of it. The mention of Amazon as a customer refers to them as a traditional client outside of the ecosystem.

Congrats as well on a nice close to the year. I was hoping to get an update on your go to market, and it was surprising actually to hear that your top 5 deals in the quarter represented no more than 5% of bookings just because for most software companies that are selling valuable solutions into enterprises, you would think Q4 is actually when the magic happens, that's when you're seeing the large deals. So just as you think about the target market and how you're going after it and we think about the stratification from large enterprise down to SMB, where are you making the investments and focusing the reps? And where are you incentivizing them to go this year?

We have divided our sales representatives into several teams. There's a strategic accounts team that focuses on the Fortune 500 and the Private 100. This team targets these specific segments for sales. In our last quarter, we demonstrated our ability to meet our targets without significant contributions from any single deal, and it's possible our results could have been even better if we had secured some large contracts. Our top 10 customers by annual recurring revenue grew significantly, and all of these customers generate more than $1 million in ARR. This indicates that we have a robust and healthy strategic enterprise business. Additionally, we have a focus on businesses with revenue between $1 billion and $5 billion, supported by dedicated representatives. There is also a corporate team that manages the sub-$1 billion segment entirely through phone interactions, followed by our international operations. This structure allows us to target different segments effectively and, through the right placement of our teams, we can achieve sales in those markets. Our strategy emphasizes the importance of assigning the right people to these roles rather than merely using incentives.

That makes sense, Josh. And maybe if I can follow-up with 1 for Bruce. It's great to hear all of the evidence that's driving strong net expansion and retention that you talked about. Can you maybe give us a sense of the different levers, whether it's price increases, number of seats for existing use cases, new use cases and company divisions that you're breaking into? How should we think about the dimensions there?

Yes, the two main factors are related to specific use cases and the growth in the number of users. We are improving our ability to make this growth more significant than in the past. Additionally, there are nearly limitless use cases we are discovering. Once we establish our presence within an account and customers experience what I refer to as the magic of Domo, they realize they can access information on their phones that they previously thought was unavailable in real time. This realization tends to influence the executives who support those users. We have become quite skilled at making the internal case and assisting our champions in promoting usage within their teams. Consequently, we are also proficient at structuring these efforts into reasonably sized deals, which has resulted in an increase in our average deal sizes. These are two major areas of focus for us, and we plan to pursue them aggressively, especially in the current environment where it's much easier to collaborate with existing customers. We have numerous use cases that clearly demonstrate high value, with backing from the business leaders in our customer base. Therefore, these are two key areas we will leverage moving forward.

Congratulations on the quarter. First one, Josh, obviously, you had some consolidation in the space in 2019. I mean, how are you feeling about the competitive landscape? And I'm wondering, obviously, you guys are seeing strength on the corporate side. Do you think that has anything to do with kind of the change in the competitive landscape, some of the independent vendors getting acquired and that opening up more opportunity for you?

Yes, the consolidation has definitely strengthened our position as an independent provider. It allows us to remain agnostic regarding where customers choose to store their data. Customers prefer to partner with a company that collaborates with all major vendors since many of them use multiple vendors. While some of our competitors have aligned with those big vendors, we've become a very appealing partner within the ecosystem. It's also been gratifying to see our business recognized. Our customers and partners acknowledge the metrics I mentioned earlier, such as our subscription revenue growth, which has never dipped below 24%, a gross margin of 77%, and a gross retention rate of 91%. We're achieving significant scale with over 55% of our contracts being multiyear. Additionally, we've managed to reduce our cash burn to $15 million, which is a key focus for us. Overall, I believe we're well-positioned to support our customers and partners for the long term.

Yes, we don't view it as a separate business. Services exist to ensure we deliver the expected value to customers as quickly as possible. You're right that it faced a tough comparison to last year due to some one-time items we reported. Generally, we expect it to remain steady at about the same percentage since customer requests tend to be quite standard. Our primary focus is on increasing recurring revenue, which is our margin-rich, cash-generating engine, while services just support that. The percentage of revenue from new business may fluctuate, but we don't want to see much variability. In fact, if we can provide value with fewer services, that's beneficial for us. This reflects our philosophy regarding that line item.

I wanted to follow up on the question that Brad asked earlier regarding the different roles within the sales organization. You mentioned cost savings in Asia Pacific that are being reinvested into the U.S. To be more specific, as you invest in the U.S. sales organization, how are you allocating those investments among the various levels of sales personnel? Is this influenced by any uncertainty in the macro environment, where telesales might be more stable? How are you determining the best areas to allocate those investments?

The key metric we're concentrating on is CAC. We understand the difference between high return items and low return items, and we're going to adjust our CAC strategy to maximize our results in both sales and marketing. In the APAC region, although there was growth, we needed to align CAC with certain benchmarks, which unfortunately did not occur. As a result, we decided to be strict with our budget and reallocate funds to areas of the business that provide higher returns. This approach might involve a variety of initiatives, and we will keep refining it to ensure CAC is positioned to support the growth our business deserves. We will continue to iterate on this process. I'm very pleased with the progress we're making in our sales strategies and marketing operations, which are becoming much more rigorous. Additionally, our new Chief Revenue Officer brings a strong focus on data, metrics, and consistency. Together, they provide valuable insights on where to allocate funds, and we plan to be very proactive about it this year.

The fact that we're on a great pace, we feel confident entering fiscal 2021. Our progress over the last several quarters has us positioned well in this liquid market. And if new opportunities arise, with that in mind, I’ll hand it off for any further analysis.

Thank you. We have no further questions in the queue at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.