Domo, Inc. Q4 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Domo Q4 Fiscal Year 2023 Earnings Conference Call. Please be advised that this call is being recorded. And now at this time, I'd like to turn the call over to Mr. Peter Lowry, Vice President of Investor Relations. Please go ahead, Mr. Lowry.

Good afternoon, and welcome. On the call today, we have John Mellor, Josh James, our Founder and CEO; and Julie Kehoe, Chief Communications Officer; and David Jolley, our Chief Financial Officer. Julie will lead off with our safe harbor statement and then onto the call. Julie?

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, 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 the impact of macroeconomic and other conditions on our business 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, 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 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, I'll turn it over to John.

Thanks, Julie, and thanks to everyone for joining us on today's call. Before we delve into our 2023 or ship succession notes. As you saw today, I have decided to step down as CEO, and Josh James has been reappointed CEO. Let me say at the outset, it has been an honor and a privilege to be part of the Domo team for almost four years and to lead as CEO over the last year. I'm proud of the highly engaged, talented team we have here, which operates with incredible commitment and integrity. When I became CEO, my focus was to drive ongoing innovation for customers and further hone a disciplined go-to-market strategy. One year later, we have optimized our business for tighter internal alignment and advanced our strategy for growth, all while striving to build and promote a culture of inclusivity at the highest level. Most importantly, our team has demonstrated an unwavering commitment to our customers. One of the many reasons I am confident Domo will continue to be a key player and market disruptor for years to come. After being a steward of the company for the last year and helping to put the company in a better place, I feel like it's a good time for Josh to run this. I'm excited he's happy to come back. As Domo's founder, Josh spent more than eleven years building this company. He is passionate about Domo's business, mission and customers. Given that he has served in this role for so many years, I know he will hit the ground running. Also joining Josh on today's call is David Jolley, newly appointed CFO, who succeeds Bruce Felt. Bruce and I look forward to following the company's continued success under Josh and David's leadership. I will now turn things over to Josh to discuss Domo's fourth quarter and fiscal year 2023.

Thank you, John. This is an exciting time at Domo, and I sincerely appreciate all your contributions over the last year. I love Domo. I know this business, and I'm excited to hit the ground running. I look forward to more in-depth conversations with all of you in the coming days and weeks. Before I begin, as I'm sitting here reflecting on the quarter, I'm looking forward to getting Domo back to being a high-growth company. I am very pleased with the internal alignment that has been created as well as our sales capacity outlook in support of those goals. I am also very much looking forward to locking arms with the sales team and getting on the road to meet face-to-face with customers to attract and grow new business. As you have read today, we have a few other updates to the management team. I'd like to welcome David Jolley to the company as CFO and also thank Bruce Felt for his many contributions over the years. David Jolley is a highly accomplished financial executive with more than 30 years of experience working with and advising innovative market-leading companies. For many years, David was the office Managing Partner of Ernst & Young's Salt Lake City office, during which time he was involved with many significant IPOs. He then went on to have several national leadership roles at EY, most recently serving as the Americas growth markets leader, where he worked with go-to-market teams in North, Central and South America to engage with high-growth companies and world-class entrepreneurs. In addition, Jeff Skousen has been named our Chief Revenue Officer, succeeding Ian Tickle. As before, it's important to me to have the CRO role in the U.S. We are grateful for the many contributions Ian brought to the company, including his operational rigor and the mentorship he provided to many sales leaders. That said, Jeff is more than ready to assume this position and has been one of the most consistent leaders in delivering targets and has delivered well over half the company's ARR. He's energetic, well-liked, and a fighter who does what it takes to meet our numbers. We have also added two new Board members. I'd like to welcome both Dan Strong and Rene Soto, who complement the strength of our leadership team. Dan brings more than 30 years of CFO experience for both public and private companies, and Rene, as Co-Founder of Reevemark, adds close to 20 years of strategic communications advising CEOs, founders, and Boards. These changes, coupled with the very recent promotions of Darren Thane to lead all of tech and product, and Marc Maun to lead all of our client services, put us in a fantastic leadership position for our go-forward plans. Before David goes into more detail on the quarter, I'll touch on a few topics, including a review of the quarter regarding the macro environment, an update on our sales force, why we think we are positioned as we enter fiscal year '24 despite a challenging macro environment, and lastly, our market opportunity and why we believe we are well positioned to execute on a larger opportunity. So let me touch briefly on the quarter. In Q4, our total revenue growth was 14%. Our subscription revenue growth was 18%, and billings declined 3%. It's no secret that the macro situation has added complexity to the software sales process for tech companies in general, increasing deal scrutiny and elongating deal cycles. Like others, we saw these effects in Q4. Despite the challenging environment, Domo continued to concentrate on areas where we had the most control, including costs. As a result, I'm happy to report that Domo's operating margin continued to expand. In Q4, Domo posted a sequential increase of 280 basis points, reaching an operating margin of 3.5%. I believe a continued focus on controlling costs will strengthen our position as we move through fiscal year '24 and will better position us longer-term for accelerating our growth as conditions improve. Let me now talk about why we feel well positioned as we enter fiscal year '24. To begin, Domo remains a highly differentiated business with over 80% gross margins. There have been no material changes to the competitive environment for the business, and we remain optimistic about Domo's long-term prospects. Overall, the size and quality of our pipeline is healthy. We believe that responsibly managing our growth will continue to lead to expanding margins and higher profitability long-term. Next, I want to focus on our market opportunity and why Domo remains well positioned. As companies have become more conservative with spending, they must achieve more with what they have, and in many cases, do more with less. Our sales teams are hearing this from many customers and prospects. As we move into fiscal year 2024 and beyond, I believe businesses will want to continue to demonstrate rapid ROI as they make decisions, and this is where digital transformation comes in. The industry has been discussing digital transformation for more than 20 years. However, digital transformation won't fulfill its promise until people are using data in ways that they don't even have to think of as business intelligence. Since Domo's founding over 10 years ago, our vision has been to put data to work for people across entire organizations to transform the way businesses are managed. In the early days, that looked like business intelligence, analytics, and dashboards. But traditional business intelligence will not solve the adoption challenge that exists inside organizations. If we have to teach store managers or truck drivers how to be data analysts, then we have failed. The future is to deliver new data experiences that work the way people do. You'll hear many examples of this at Domopalooza, our annual customer event happening on March 29. These will be human-first experiences that deliver personalized insights and put those insights in the context of the job that person is doing, then connect those insights to other internal systems, so it's not just passive consumption of data. It's an actionable process that leverages their time more efficiently and effectively so they can multiply their impact faster. It's like the story of a scrap manager at an aluminum products company who is saving his company tens of millions of dollars a year by using Domo to reduce the time it takes each truck to move through the production process. Or the restaurant store manager using Domo to deliver better and more profitable customer experiences, and operations people using Domo to improve employee satisfaction by significantly reducing the time necessary to process tips from thousands of daily transactions into the bank accounts of more than 4,000 individual employees. Beyond the value that customers receive today, leading IT analyst firms are touting the value of fully integrated stacks like Domo because they eliminate the need for many resources typically required to implement and manage all the underlying technologies necessary to govern data from the source into the hands of people everywhere. It's more efficient to work with a fully integrated stack like Domo. But what I believe points to the future is when industry analyst firms mention the rise of the composable enterprise, where modern systems can be quickly configured to support a more agile data experience down to team and individual levels. Simultaneously, companies have millions of processes that are not modernized yet, meaning they are slow and inefficient, costing organizations money. As an example, our team had a recent conversation with a major enterprise that's still using LOTUS Notes. Today, the solution we set out over ten years ago has become a primary ingredient in business performance, which means there is opportunity everywhere for what we do. The barriers to digital transformation and growth are less about technology and more about a human's ability to use that technology in the context of their job. It's about being able to run your business from your phone. This is where Domo shines. We believe the steps we are taking across the business will prepare us to accelerate growth, especially when the external environment improves. As I mentioned, later this month, we will host our Annual Customer Conference, Domopalooza, and you are welcome to attend. And we, of course, invite you to our Analyst Day, which we are planning for April. Before I hand it over to David, I want to thank the entire Domo team from executive leadership to each Domo employee for their ongoing commitment to delivering outstanding care and value to every one of our customers around the globe and, of course, to our own business. I'm excited to lead us back to being a high-growth company in the upcoming year. Over to you, David.

Thanks, Josh. It's great to be here as a part of the Domo team, and I'm excited to support you in this next chapter of Domo's growth. In Q4, we posted 18% subscription revenue growth and 14% total revenue growth. The results in this quarter were primarily driven by sales to our corporate customers, which experienced 19% revenue growth. Revenue growth from our enterprise customers experienced 9% growth. We delivered Q4 billings of $104.5 million, a year-over-year decrease of 3%. This decrease was driven by a tough compare on the one hand, and a challenging macro environment that affected our new business growth and our renewal rates. Several other key metrics were above our billings growth. Current Remaining Performance Obligations (RPO) of $243.8 million grew 10% year-over-year, and our total RPO grew 12% to $378.2 million. Our Annual Recurring Revenue (ARR) grew at a higher rate than our total RPO growth; an area where we saw success was multiyear contracts. On a dollar-weighted measure, we now have 65% of our customers under multiyear contracts at the end of Q4, up from 62% a year ago. On gross retention, we faced some of our larger customers reducing their footprint in response to their business challenges, causing dollar gross retention to be less than 90%, bringing our full-year gross retention to 89%, down from 90% a year ago. The net retention rate dropped but remained above 100%. Q4 total revenue was $79.6 million, a year-over-year increase of 14%. Subscription revenue represented 88% of total revenue and grew 18% year-over-year, down from 22% growth in Q3. International revenue in the quarter represented 21% of total revenue, down from 22% in Q3. Our subscription gross margin was 85.7%, up 2.9 percentage points from Q4 of last year and up 1.1 percentage points from Q3. We are pleased with the results as they reflect successful proactive management and optimization of our third-party hosting services. In Q4, our operating costs decreased compared to Q3, mostly due to lower personnel expenses. Our non-GAAP operating margin was up 18.4 percentage points from a year ago and up 2.8 percentage points sequentially. Our net loss was $0.8 million, down from $13.6 million a year ago, and our net loss per share was $0.02. This is based on 34.7 million weighted average shares outstanding, both basic and diluted. In Q4, cash used in operations was $2.8 million, partly due to lower cash collections as customers stretched payments, which we attribute to the macro environment. Our cash balance declined by $4.6 million from last quarter to $66.5 million. We expect Q1 cash flow from operations to be positive, and our cash balances to increase from Q4. We expect full-year fiscal 2024 cash from operations to also be positive. We believe we have adequate cash to continue pursuing our business objectives. Our fiscal year 2024 planning and guidance incorporate what we are seeing in the macro environment, including elongated sales cycles and more challenging renewal discussions. That said, we entered Q1 with more pipeline than we had a year ago. For Q1, we are guiding to billings of about $69 million, which is down 5% year-over-year. For the full year billings, we are providing a range of approximately $335 million to $353 million, representing 4% to 9% growth. These are not the growth numbers we aim for, but we feel comfortable with this range. We do see a path to higher growth rates, potentially into double-digit growth, and we look forward to updating you on our growth plans as the year progresses. Looking ahead to the second half of the year, we believe we are in a good position to accelerate our billings relative to the first half outlook. Now to guidance for our GAAP metrics. For the first 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, both basic and diluted, of $0.15 to $0.19. This assumes 35.3 million weighted average shares outstanding, both basic and diluted. For the full year of fiscal '24, we expect GAAP revenue to be in the range of $323 million to $330 million, representing year-over-year growth of 5% to 7%. We expect non-GAAP net loss per share, both basic and diluted, of $0.27 to $0.39. This assumes 36.2 million weighted average shares outstanding, both basic and diluted. Our EPS guidance assumes we will have a negative operating margin in Q1, but a slightly positive operating margin for the full year. In closing, while we are in a somewhat challenging macroeconomic environment, we believe we are entering fiscal year '24 with a better aligned and positioned sales force, and I am really looking forward to working with Josh to help drive our long-term growth. With that, we'll open the call for questions.

And we'll take our first question this afternoon from Derrick Wood of Cowen.

Josh, welcome back. Nice to be reconnected, and John, good luck in your next chapter. Josh, could you just walk us through what your top initiatives may be to drive growth acceleration? And I think there's particular interest on the enterprise side of things since that part of the business has faced more adversity over the last year. So as you're getting back into the field and you look across investments from corporate to enterprise, what are some of the top initiatives you'd like to push forward?

Yes, thanks, Derrick. Great to reconnect as well. Yes, I'd say a couple of things. Number one, I think it's just going to be a strong focus on growth. That's what I like, that's what I do. I know John said he was excited to have me back, and the management team in sales is going to talk to a bunch of customers and close some deals. I think it's a lot of blocking and tackling. Then there's the macro headwinds. But if you look at a couple of the metrics inside the quarter and inside the year, a few things actually point to enterprise being a real strength. We've seen our customers who are on multiyear contracts increase significantly this year, demonstrating a real strength of relationship with them. Another metric that really stood out to me as I've reviewed the numbers is we had almost a 30% increase in the number of companies with ARR over $500,000 last year. We also saw a near 30% increase in the number of companies paying us over $1 million a year in ARR. So despite some of the macro challenges, our relationships continue to strengthen, indicating real opportunities as some of these headwinds dissipate in the near term.

Okay, great to hear some of those stats. I guess, just on the other side, you mentioned being bullish based on your sales capacity and pipeline outlook. Can you touch on those, particularly on the sales side? There was some elevated churn midyear that subsided in Q3. How did that track in Q4? And do you have a sense of what the level of growth in productive sales capacity is as we enter the new year and what you're thinking about in terms of hiring?

Yes, last year saw varied reasons for our elevated churn, which impacted our capacity negatively. We woke up and noticed the quarter and realized there wasn't enough capacity due to that retention issue. Thankfully, that retention issue seems to be improving, especially in the first six weeks of the new year. We're definitely in a better position compared to last year, and with more alignment, we found that we perhaps were over-indexing on enterprise last year. I believe the corporate business aligns well, and throughout this year, we have an opportunity to accelerate growth. Our enterprise business will always remain a key aspect, with our largest customers renewing and upgrading. Despite anemic growth for many software companies, we achieved a 30% increase in the number of customers paying us over $1 million and those between $500 million and $1 million, which is a promising sign of customer commitment. This, along with the longer contracts, signals a great opportunity in the future.

If I could squeeze one more in. It was great to hear that kind of vision around the technology, Josh, and how you aim to transform the market. Anything to highlight on pricing or packaging changes with regards to the platform? Or is it too early to discuss that?

Yes. I think it's an important topic, and you'll hear us talk a lot about it moving forward. There is a significant opportunity to adjust our packaging and pricing in a way that resonates with customers’ purchasing habits. When we started, it was too complex to charge anything other than per seat. However, over the last four to five years, we have been working on normalizing the various components we're selling to customers so that we can compute a metric for consumption. By transitioning to a more usage-based model, similar to Snowflake or AWS, we reduce friction since companies often face blockades when it comes to user-based pricing. The progress made over recent years includes switching some customers to a compute model, resulting in increased engagements, renewals, and smoother adoption processes within organizations. When we eliminate those roadblocks around charges based on usage, the potential for growth can be significant. We achieved 30% growth in the quarter before I left, and though we faced several macro challenges since, we believe we can return there and even achieve better results with a compute-based model in place.

And we'll take our next question now from Sanjit Singh at Morgan Stanley.

I wanted to discuss some of the retention patterns you saw in Q4. While I understand it's a tough environment, I was surprised to see the degradation in the gross retention rates, particularly since analytics and real-time intelligence have been high priorities given current supply chain issues. Any patterns in market segments or industries that you can share to provide context on the churn in Q4?

Yes, great question. I'm glad you brought it up. There were significant declines in some of the COVID-related contracts that we had saved in year two. The team has done a remarkable job at preserving many of those relationships, but we saw a substantial decline in payments associated with those contracts. If you account for that factor, our renewal rates would be right where we want them. It was a one-time situation with COVID contracts. Going forward, we hope to maintain those numbers closer to the 89%, 90% renewal rate. With Mark now responsible for customer service, aligning the group to focus on adoption can help improve these metrics, but we will need to navigate the macro environment carefully. Q4 showed a direct impact on our renewals.

That's helpful context. As my follow-up question, I apologize if this was addressed earlier; I joined a bit late. But the focus on efficiency and profitability appears significantly more pronounced now compared to your last term as CEO. I’ve seen some peers with similar market caps expanding their margins aggressively over the upcoming year. While I understand growth is a top priority, how do you think about profitability and margin expansion throughout this year and next?

That depends on the specific company and its size, market position, and growth profile. We reached a point where growth was anemic in the last few quarters. It’s essential to improve that situation. With the current market, fiscal prudence is critical, and we've achieved efficiencies which we might not have pursued if growth were different. Our guidance demonstrates the goal of achieving operational margin positivity this year while managing our cash flow effectively. You can expect to see that from us, aiming to position ourselves favorably to accelerate growth once the market stabilizes.

We'll go next to Kamil Mielczarek at William Blair.

There's a lot of excitement surrounding generative AI this year. Can you discuss Domo's exposure as a data platform to these trends? Specifically, how significant are your data science products like auto ML today, and how can Domo lean into this tailwind?

Yes. There's an excellent opportunity here, and I know our team has delivered several webinars on this topic and engaged with numerous customers. Considering we provide a platform where all data is digitally connected, rather than just dumped in a data warehouse, we can identify correlations that may not have been previously apparent. Furthermore, we can leverage these correlations to apply efficiencies or capitalize on what's working effectively. The challenge has always been digitally connecting this data, which is precisely what Domo achieves. I believe our position with AI and technologies like AutoML will significantly benefit us over time, and we plan to partner with various technologies as they emerge. As our customers find success, we'll ensure they are connected with the right parties providing the necessary technology.

That's helpful. Can you provide an update on how demand varied across geographies in the quarter? Given the changes in sales leadership, how do you plan to prioritize international investments?

We have maintained a healthy international business for quite some time, although growth as a percentage has remained flat. We have performed well in Japan and have established great customers across EMEA. We have clients in both regions that significantly influence and shape our products. Asia Pacific also continues to perform strongly. Overall, we haven't observed any dramatic changes recently, but we plan to build out internationally at the same pace as our overall organization while possibly investing more aggressively in Japan considering its potential.

And it appears we have no further questions this afternoon. That will bring us to the conclusion of our call. Ladies and gentlemen, I'd like to thank you all for joining Domo's Q4 fiscal year 2023 earnings call. Thank you again, and we wish you all a great evening. Good night.