Earnings Call Transcript - DOMO Q1 2023

Operator, Operator

Thank you for joining us, and welcome to Domo's Earnings Call for the first quarter of fiscal year 2023. Peter Lowry, Vice President of Investor Relations, will now start the conference.

Peter Lowry, Vice President of Investor Relations

Good afternoon, and welcome. On the call today, we have John Mellor, our CEO; Bruce Felt, CFO; and Julie Kehoe, our Chief Communications Officer. Julie will lead off with the safe harbor statement and then onto the call. Julie?

Julie Kehoe, Chief Communications Officer

A 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 security 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, the impact of COVID-19 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. John?

John Mellor, CEO

Thank you very much, Julie, and thanks to everyone for joining us on today's call. We started off our fiscal year well with billings growth of 25% and both total revenue growth and subscription revenue growth of 24%. The strength in the quarter was driven by a few factors, including a record gross retention rate, which Bruce will dive into, continued execution in the corporate business and further acceleration in our customer count. Today, I'll talk about the current demand drivers for the business, particularly in these times of macro uncertainty. I'll also update you on the operational priority we've been sharing with you and give some highlights from the quarter. In today's environment, agility is more important than ever. Domo is helping companies of all sizes get leverage from their existing resources to reduce cost, improve efficiencies and drive better business outcomes, all at incredible speed. This is true for our customers that are global, complex organizations, which often begin by deploying Domo in a modular fashion to fill gaps and leverage their existing systems. This is also true for our corporate customers who can deploy Domo as a complete end-to-end platform and benefit from our fully integrated data integration, storage, management, governance, analytics and distribution capabilities. We're also seeing an increasing adoption of data apps, which combine data with workflow and package them into an experience that can be put right at the point where work gets done or they can be embedded within software applications that are used inside of a company or exposed externally to customers and partners. Simply put, data apps solve the last mile of putting data to work, driving action and breaking free from the small percentage of adoption of traditional BI. A good example of the strategic value of data apps is O'Reilly Auto Parts, a leading aftermarket automotive parts retailer who we heard from at our recent user conference, Domopalooza. Among other things, O'Reilly highlighted how they were changing the game for their district managers to manage their stores with a data app that allows them to review store-level performance and add comments in real time to drive specific behavior at the store level. What used to be a largely offline, Excel driven and time-consuming process was transformed into a mobile experience, where data is automatically connected, integrated and put into the hands of the district managers in an easy-to-use data app that drives business outcomes. Turning to the current environment and what we are seeing in the market. While there are concerns around a possible economic slowdown or recession, we did not see customers pulling back in Q1. If anything, we've seen that the need for businesses to stay agile to manage through uncertainty is as important as ever. Simply stated, businesses have a need for speed and Domo gets them results. We are not sure how the economy will play out over the near term, but longer term, our view is that the modernization of business will continue as companies look to unlock data value across more areas of their business to reduce costs, improve efficiencies and drive better business outcomes. Now let me talk about some of the highlights from the quarter and how we are positioning ourselves for the remainder of the year in the context of the priorities we've been sharing with you. These priorities are: number one, keeping our growth engine intact; two, increasing our enterprise cadence; and three, our focus on data apps. The first, keeping our growth engine intact remains a strategic priority, a key driver of that is sales hiring. On that front, we have already hired enough new salespeople to meet our growth plans for the year. We are also leaning a bit more into corporate given how well that message is resonating in the market. Our planning reflects our objective to close out the year with positive annual operating cash flow regardless of the status of the economy. The second priority, getting the cadence of the enterprise new business up also remains an area of continued focus, where we are actively working on leveraging the tremendous use cases we have in our customer base. We've developed our first set of industry playbooks and enabled the team on those, and we are proactively using those in go-to-market with the objective of increasing the enterprise business to be a more predictable driver of ACV growth through our own direct selling channel and through the use of partners. And the third, our focus on industry-leading innovation with data apps. Data apps break the traditional BI model because they combine data with workflow, packaged into an experience that can be put right at the point where work gets done or embedded within software applications used inside a company or exposed externally to customer and partners. This directly supports the over 70% of people in organizations who are not served by traditional BI and analytics. Traditional BI solutions have been targeted at data analysts, who generally use a legacy tool to create reports for business leaders for decision-making, and they are usually in the form of charts and graphs. As data volumes and investments continue to increase, data apps help solve the last mile problem of getting actionable data into the hands of every person across the organization. And because data apps are built on the Domo platform, they allow organizations to modernize the data experience while capitalizing on all past investments. So whether the data resides in AWS, Azure, Snowflake or another data warehouse, Domo data apps can help unlock value from all of it. Now let me talk about a few customer highlights from the quarter. O'Reilly, who we highlighted earlier, significantly expanded their agreement with Domo to meet the growing demand for data through a 5-year company-wide enterprise license agreement. This will bring Domo from store management and loss prevention into additional functions across the organization, such as human resources, inventory control, marketing and merchandising. In addition, we also renewed what at the time was the largest upsell in our company's history with a Fortune 500 apparel retailer. This company continues to transform its business with data apps and remains a tremendous opportunity for us. Another win this quarter was with a fintech company that was looking to create a product offering that would allow its hundreds of bank and credit union customers to gain more insights and do detailed analysis on the data generated by the customers' applications. The company chose Domo because through Domo Everywhere and data apps, we were the best able to secure, quickly and at scale, provide a solution that would allow its bank and credit union customers to have a fully featured offering that looks and feels native to its existing product without the need to add new staffing or other resources. Before I hand this over to Bruce, I have a few more highlights I want to touch on. First, I'm pleased to announce that Ian Tickle has been appointed President of Global Revenue and Field Operations. Ian succeeds Wolf Maasberg, who will work closely with Ian and the team to ensure a smooth transition. Since becoming CEO earlier this year, I've spent a lot of time planning for our next phase of growth and aligning our team to best support our business objectives. I'm grateful for Wolf's collaboration in this process and thank him for everything he's done. Second, Domo continued to receive industry awards, with Dresner Advisory Services recognizing Domo as the #1 vendor in Self-Service BI for the fifth consecutive year. We believe rapidly solving the last mile engagement with timely, actionable data is where the market is heading, and this is where Domo has significant strength and differentiation; third, culture is critically important to us as we look to build a workplace where the best talent thrives. I'm pleased to announce that we received for the fifth consecutive year, a Women Tech Council Shatter List Award for our focus and progress towards building a more inclusive workplace. And we continue to honor our commitments toward a diverse, equitable and inclusive culture. In Q1, 36% of all new hires for our positions were diverse candidates. In closing, I remain incredibly proud of our entire team for focus on delivering value to our customers every day, from the innovation produced by our product team to the passion of our customer success teams, our energy is always focused on helping customers transform business by putting data to work for everyone. Now I'll hand it over to Bruce.

Bruce Felt, CFO

Thank you, John. We're off to a strong start in fiscal 2023. In the first quarter, we achieved 25% growth in billings and 24% growth in revenue, along with a record subscription gross margin. A significant factor affecting our performance was the growth in our corporate business, which is consistently generating new customers and maintaining a gross retention rate of over 90%. We will continue to leverage this strength as we focus on other growth opportunities, such as enhancing our enterprise go-to-market strategy and collaborating with our partners. Our record gross retention and subscription gross margin signal positive long-term prospects for our business and the lifetime value of our customer base. This stability reflects high customer satisfaction and demonstrates our relevance in the market. These factors provide us with strong protection against economic downturns and help explain our success during the last downturn. As previously mentioned, we are witnessing the convergence of our revenue growth with other forward-looking recurring revenue indicators like ARR and billings growth, and we anticipate this trend will persist throughout the year. In Q1, we reported billings of $72.9 million, reflecting a 25% year-over-year increase, driven by new customer acquisitions, expansions among existing customers, and our strong gross retention rate. The net retention on a contracted ARR basis was close to 110%, with a slight improvement from the previous quarter. Our current RPO reached $225 million, growing 24% year-over-year, and total RPO also increased by 24%. Additionally, 64% of our customers are now under multiyear contracts, up from 61% a year ago. Total revenue for Q1 was $74.5 million, a 24% increase from the previous year. Subscription revenue also grew 24% year-over-year, making up 87% of total revenue and significantly accelerating from 19% growth in Q4. International revenue in the quarter accounted for 21% of total revenue, similar to last quarter. We expect to finish fiscal 2023 with subscription revenue growth of around 25%. The subscription gross margin hit a record of over 84%, up from last year's Q1 by 1.2 percentage points and up 1.8 percentage points from Q4. We are very satisfied with this level of gross margin, especially considering we achieved record gross retention rates. This indicates our capacity to support our customers effectively while efficiently handling large data volumes. In Q1, operating expenses rose 21% from last year, mainly due to investments in sales capacity and related infrastructure aimed at enhancing productivity. Our non-GAAP operating expenses benefitted from executives agreeing to receive bonuses and restricted stock units instead of cash, as well as the reversal of certain tax-related accruals, which had a combined positive impact of about $5 million. Our net loss was $7.6 million, a slight decrease from $8 million a year ago, resulting in a net loss per share of $0.23 based on 33.3 million shares outstanding. In Q1, cash provided by operations was $0.8 million. When combined with $1.6 million from common shares purchased under our employee stock purchase plan, the total cash generated exceeded $2.3 million, bringing our cash balance to approximately $84 million. Now, regarding our expectations for Q2 and the full fiscal year 2023, we are guiding for Q2 billings of about $72 million, translating to year-over-year growth of around 20%. Our Q2 guidance considers a challenging comparison due to the timing of large billings last year. For the current fiscal year, we are maintaining our outlook for billings growth of about 22% year-over-year. After Q2, we expect a slightly higher billings growth rate for the second half of the year. In terms of expenses, we anticipate Q2 operating expenses will rise from Q1 levels to support our growth goals. However, if we see any slowdown in key top-line metrics associated with a macroeconomic decline, we have measures in place to adjust our expenses to maintain a positive cash flow for the year. We successfully managed the last downturn and feel better prepared for any potential future challenges. We expect net cash provided by operations for the full fiscal year 2023, including the impact of employee stock purchases under our ESPP, to be slightly positive. Q2 cash flow from operations may be slightly negative due to the upfront investment in sales hiring. For our GAAP metrics, we expect Q2 fiscal year 2023 revenue to be between $76 million and $77 million and a non-GAAP net loss per share of $0.31 to $0.35, assuming 33.9 million shares outstanding. For the entire fiscal year 2023, we are anticipating GAAP revenue between $315 million and $319 million, reflecting year-over-year growth of 22% to 24%, with a non-GAAP net loss per share of $1.26 to $1.34, based on 34.1 million shares outstanding. In conclusion, we are pleased with our Q1 performance and believe we have a distinctly strategic offering in the business intelligence analytics field, positioning us well to capitalize on market opportunities. We will now open the call for questions.

Operator, Operator

Your first question comes from the line of Sanjit Singh with Morgan Stanley.

Sanjit Singh, Analyst

Congrats on the really strong start to the year. I think, John, maybe to begin the question sort of around the priority of the category and how Domo is sort of positioned to address that ahead of what may be a slowing spend environment? We're all sort of guessing whether that materializes or not. But in terms of what Domo provides and where does that sort of stack within IT budgets, how would you frame that? That's sort of part one of the question. And then part two, could you give us a narrative on how pricing of Domo has changed. I think the company has evolved from a per-user or per-seat model to more of a platform pricing approach and how that might potentially be an advantage as you try and expand your business with customers going into this year?

John Mellor, CEO

Thank you for the question, Sanjit. The first part was about how we fit into the enterprise landscape given the current environment. I believe Domo holds a unique position as what we call the last mile. There have been numerous initiatives in the industry aimed at consolidating data, like data lakes and warehouses, but the key challenge remains in utilizing that data effectively. It needs to be accessible to individuals who can make decisions and manage their businesses. This goes beyond just charts and graphs; it's about what we refer to as data apps. Our focus is on the over 70 percent of people in an organization who don't even have access to basic business intelligence. In a context where agility and speed are essential, Domo serves as a solid solution to help businesses achieve their desired results quickly, without having to replace their existing systems. Now, regarding your second question about pricing, you are correct that Domo has traditionally operated on a per-seat or per-user licensing model. We are transitioning towards a more consumption and usage-based approach. This change aims to better align our interests with those of our customers. We want to promote adoption across organizations because the true value of Domo lies not in replacing existing tools for data analysts, but in enhancing the strategy for the larger 70 percent of the workforce that can leverage data and data apps to drive their business. This supports a model based on consumption rather than limiting our customers to a specific number of seats; our goal is to encourage broader usage.

Sanjit Singh, Analyst

It makes total sense. My question for Bruce pertains to the guidance, specifically regarding the assumptions that support it. It's reassuring to know that there is a contingency plan if the forward metrics slow down, which is crucial for sustaining that cash flow position. Regarding the full year guidance, particularly in terms of billings, was there any change in assumptions, added conservatism, or adjustments made when determining the full year bill guidance, especially since it remained unchanged from the previous forecast?

Bruce Felt, CFO

Yes, we believed it was wise to maintain the guidance we previously provided. We are optimistic about our ability to leverage the sales team we have built. However, we are also aware of the macroeconomic issues that everyone is considering. This awareness does influence us, but we believe our revenue stream is resilient, especially with a significant portion coming from renewals and upselling to our current customers. We are seeing strong momentum in acquiring new business, particularly in smaller enterprises, which tend to be more stable at the start of economic downturns compared to larger enterprises, which react more quickly. Given all these factors, we felt it was appropriate to keep our guidance as it is. It remains a solid figure, and we are optimistic about achieving it for the rest of the year, especially since we have built a significant capacity starting last year, which we are carrying into this year as we focus on our various growth drivers.

Operator, Operator

Your next question comes from the line of Derrick Wood with Cowen.

Derrick Wood, Analyst

I guess just to follow on that line of thought on the go-to-market. I forgot if it was John or Bruce, made a comment of wanting to improve the go-to-market on the enterprise side. Transactional is doing really well. But just would be curious on what levers you're looking at turning on the enterprise side, especially with Ian taking back the CRO role? And is that more of the verticalization efforts? And should we be thinking of trying to build more pipeline for larger enterprise deals in the back half of the year?

John Mellor, CEO

Thanks, Derek. This is John. I’d like to share some insights before Bruce adds his thoughts. The corporate business is demonstrating significant strength, which provides a solid foundation to drive further growth, particularly in the enterprise sector. From a growth rate, scale, and retention perspective, the corporate business is performing well. The enterprise segment presents an additional growth opportunity that we believe can be very effective, focusing on a different approach with these customers. We typically see Domo integrating into specific departments or teams, showcasing value through a land and expand strategy. We believe the best way to achieve this is by having a vertically specialized sales team, enabling us to address specific challenges in sectors like retail, high-tech, and manufacturing. This allows us to discuss the implementation speed for Domo and the rapid results we can deliver, which is where we excel. I am thrilled to have Ian in this role; I see it as a beneficial configuration for driving our growth forward. Our corporate business is increasingly resembling our enterprise segment, evidenced by over 90% gross retention rates and an annual recurring revenue that mirrors that of enterprise accounts. We’re successfully landing between 50,000 to 60,000 clients and following up with substantial upsell opportunities. I am confident in building sustainable growth within the corporate segment while we explore deeper opportunities in the enterprise space, where we are already making strides with some of the top brands globally. If we can establish solid growth in the corporate sector, when enterprise contributions begin, we could reach a growth level we all aim for. It’s an excellent model. We will keep this in mind moving forward. If there are concerns about a downturn, our short-cycle, transactional business serves as a reliable buffer for growth, even amidst potential macroeconomic challenges. And if those challenges don’t materialize, that’s beneficial for us as well. That’s how I am approaching this situation.

Derrick Wood, Analyst

Sure. I think we all recognize the importance of velocity and visibility in that business, which is encouraging to see. Referring back to the broader economic context, while it's impressive to see 25% growth, the recent momentum of beating expectations and raising forecasts has slowed somewhat, which is certainly understandable. However, are there specific segments or regions that appear to be a bit slower this year?

John Mellor, CEO

We have seen good contributions from all parts of the business. Keep in mind, we just experienced a 30% growth in Q4, so a 25% growth in Q1 is still acceptable. There is significant potential for growth through sales hiring, marketing, and partnerships. We believe there is still friction we can reduce in the enterprise sector. Overall, brand awareness is improving, organic leads are increasing, and conversion rates are higher. We are optimistic about our position and hope the economy does not hinder us. Even if it impacts other companies, we believe we remain well-positioned and can maintain our positive cash flow. We are pleased with the results of the quarter and look forward to Q2 and the rest of the year, aiming to continue our momentum.

Operator, Operator

Your next question comes from the line of Pat Walravens with JMP.

Pat Walravens, Analyst

Great, and congratulations on the renewals. That's nice to hear. So John, in the enterprise sector, it seems likely that more enterprises will standardize on something like Microsoft, right? Therefore, you have to navigate that in a way that may not be as necessary in the commercial space. Additionally, Microsoft states they have Power BI apps. How do you differentiate yourselves specifically from Microsoft when you're trying to sell to the enterprise?

John Mellor, CEO

Yes, that's a great question, Pat. It's good to hear from you. Typically, when selling to enterprises, they often have a wide variety of vendors vying for their attention. The key value for Domo is addressing specific business challenges, which is why we have structured our sales team around verticals. This approach allows us to identify consistent issues faced by sectors like retail, manufacturing, and high-tech. We engage with prospects by discussing their specific pain points, which leads to a conversation about how quickly we can provide a solution. In competitive scenarios, particularly against Power BI, we perform very well. The focus is on how swiftly we can complete the process and start generating positive business outcomes, and we excel in those competitive situations.

Pat Walravens, Analyst

All right. Great. And then, Bruce, one for you. So you've got $84 million in cash. And if I'm reading the balance sheet right, $105 million in debt. And I know you touched on some of this here, but just sort of what are the key points that you'd want to make to investors about the balance sheet?

Bruce Felt, CFO

I'm sorry, about the balance sheet? We have debt, but it's not due for a couple more years until 2025. We have potential lenders wanting to give us more cash, but we prefer not to take it on because we don't want the interest expenses. Our current cash is sufficient for our operations, and we don't have any immediate need for additional funds. So, I believe our balance sheet is in great shape. If necessary, we could improve it, but we don't feel it's required. We consider ourselves well-resourced with additional capacity if needed, but we prefer not to utilize it. That's our perspective on the balance sheet.

Pat Walravens, Analyst

All right. Great. And then last one. So Bruce, did you take your bonus in stock?

Bruce Felt, CFO

I did. And I still own it. I suppose I contributed that way as well.

Operator, Operator

There were no further questions at this time. This does conclude today's conference call. Thank you for joining. You may now disconnect.