Earnings Call Transcript - DOMO Q3 2022

Operator, Operator

Welcome to Domo's third quarter fiscal year 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. And with that, I will hand it over to Peter. Larry Domo's was vice president of investor relations. 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 Harbour statement and then onto the call, Julie?

Julie Kehoe, Chief Communications Officer

Thanks Pete. Our press release was issued after the market closed and it's posted in 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 projection, 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 conditions. These statements are subject to a variety of risks, uncertainties, and assumptions. For discussion of these risks and uncertainties please refer to documents we filed 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 a nice relation 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. Josh?

Josh James, CEO

Thank you, Julie. Hello everyone. I hope you're all doing well. Thanks for joining the call in Q3. We, once again, delivered strong results, driven by continued market demand for our core modern BI solution and increasing demand for data-enabled apps that are built on our platform and help our customers run their businesses. I'll share a few examples of how this is driving both new customer growth and expansions within existing customers. We posted 26% billings growth, which was our fifth consecutive quarter of delivering billings of 25% or better. I'm very pleased with these results. As we continue to make investments to support our goal of driving even faster long-term results, the dynamics of digital transformation and distributed work continue to work in our favor for new customer wins. We're seeing increasing interest from line of business leaders that have urgent needs not being met by their existing systems. They're not necessarily looking to rip out existing systems. Their focus is on rapidly putting apps such as externally facing ones like Domo Everywhere and internally facing ones like our retail store operations app into more hands to drive action and change business processes for expansion within our existing customers. We're seeing that success is driven by the level of engagement their employees and partners have with Domo's apps. Our focus on usability helps them deliver experiences in a way that serves the users. This is one of Domo's primary differentiators. We have a unique approach to this because of the app development framework built into our platform that puts these experiences in the place where work gets done by these users. To highlight this engagement within our customers, the number of our customers with more than 1,000 monthly active users grew 33% two years ago, and last year it grew 45%. This means that our customers are going broader with their use of Domo at an increasing rate. We think this engagement highlights a big differentiator for Domo in our usability, which is manifesting itself more frequently through apps, including Domo Everywhere. Domo enables a very broad range of use cases, but a common theme is user experience, also known as engagement, which is a high priority for both internal and external use cases. The focus is to rapidly put solutions in employees' or partners' hands to drive action and automate workflow or improve a business process. I'll emphasize the word rapidly because speed is constantly a reason that Domo wins. The app development framework built into our platform makes it easier to deliver these experiences right where the work gets done. These experiences go well beyond traditional BI and span from simple manual actions to fully automated workflows powering any level of business process across an organization. It could be on a mobile device in the hands of a store manager who is walking the store floor, or it could be embedded in a system that employees already use, like Salesforce, where work is already happening. One of our customers, for example, has an app that is used by 17,000 people across 400 locations to help them better manage store inventory. They later expanded with another app for 2,500 call center employees across five locations to better serve their customers. And now we're in a proof of concept with that same customer for a store performance app that will consolidate over 60 different data sources into a single app to help the store manager optimize store performance via a mobile device while they're walking the store floor, instead of being behind a desk. All of these apps drive increased productivity and truly dramatic business results at massive scale. We're also seeing more customers leveraging the platform for external reporting and embedded capabilities. Our Domo Everywhere solution continues to be uniquely positioned in the market, allowing our customers and partners to solve back-end integrations, a significant pain point, so they can get to business value faster. Our customers are increasingly applying AI in the form of data science and machine learning to these data sets to drive more predictive analytics. One of our customers, for example, provides IoT data around truck deliveries, such as location, miles driven, and hours driven, but their customer is the freight trucking company that wants to know if this trip is profitable. Domo Everywhere allows our customer's customer to combine data from their own internal systems, like HR, financial and accounting data, with the telemetry data to provide insight. Easily combining our customer's data with their customer's data is something our competitors in this space just can't do. Before I dive into some of our significant customer wins this quarter, let me say that I'm very pleased that Wolfgang Mossberg has joined the executive team. Prior to Domo, Wolf served as executive vice president of global sales and field operations for Fastly, where he was responsible for doubling company revenue in two years and supporting its growth to a multi-billion dollar market cap company. It's great to have Wolf on board, as I believe he can further boost what we're doing, particularly with his go-to-market motion experience. With Wolf joining the team, Ian Tickle is moving back to London and has been named President of International Revenue to work with me on our international expansion while continuing to drive Domo's global growth initiatives. I want to thank him for taking this from team growth to five consecutive quarters of growth over 25%, truly a great job done. Now let me talk about a few of our recent customer wins. What's interesting about this quarter is that we saw our customers increasingly look to adopt Domo more broadly and more quickly and are looking to us and our partners to accelerate that. As a result, many of our larger wins and upsells with some of our largest customers this quarter had a significant services or a POC component to them. While our focus is on subscription revenue, certainly customer engagement is a strong indicator of future growth and retention. These services deals with large customers give me great confidence that we're delivering compelling value and it's leading to these expanded use cases of Domo throughout their organizations. One example is the global Fortune 500 retailer that originally chose Domo for the governance that their existing vendors couldn't provide, as well as the ability to easily extend the platform with Domo apps. This customer is now using Domo to provide real-time analytics around its supply chain, inventory, store performance and predictive returns, among other use cases. In this quarter, they signed a seven-figure services deal to accelerate their adoption and a Fortune 500 technology and media conglomerate signed a $500,000 services contract to accelerate the development of a Domo Everywhere app that allows its tens of thousands of partners to more easily and securely share data with their own network of partners. We also have a big three auto manufacturer currently conducting a POC that was initiated in a marketing organization to optimize global marketing performance. This has an initial contract of more than $500,000 on the new logo front. We had a win with a property management software company representing about $500,000 of recurring new annual contract value to quickly deliver a powerful analytics solution for their customers through an app powered by our Domo Everywhere technology. This customer initially came to Domo for our free trials of a finance use case to modernize their financial reporting to business leaders and partners. But the company was also in urgent need of a solution to provide analytics to their customers and was having significant integration issues, combining data from decades of investments in legacy systems. We won this customer based on our platform's ability to quickly solve the company's integration issues and develop and deploy this app in record time. We had a strong upsell quarter as well. In addition to some of the examples I mentioned earlier, we had a significant upsell with a Fortune 500 retailer that needed to provide a uniform view into store level performance to the executive team. Domo won versus a legacy incumbent to solve this challenge. Now, before I hand this over to Bruce, I have a few more highlights that I want to touch on. First, I'm extremely pleased that our annual customer event, Domo Palooza, will be returning to Salt Lake City in March 2022 as a hybrid event. At this point, we're planning to be back together with customers to explore the future of business and data. And of course, we're monitoring the situation to ensure it's a safe event. Second, in Q3, we added Jay Brown, co-founder of Roc Nation, and Marci to our board of directors. Jay has built multi-billion dollar brands, and I'm looking forward to the value he'll bring to me and our management team as we continue to scale the company. Also, we're continuing to widen our lens on diversity and deliver on our commitment to the parity pledge. With Jay's addition, our board is now 57% diverse with 43% of outside board seats held by women. On the hiring front, 35% of all new Q3 hires were diverse. To close, I'm confident that our differentiated product and strong execution should enable our growth trajectory for a long time to come. I'm very proud of the team for producing accelerating growth this year, and given what I'm seeing in the marketplace, I'm looking forward to providing you guidance for next year when the time comes. And with that, I'll hand it over to Bruce.

Bruce Felt, CFO

Thank you, Josh. I'm pleased with our Q3 performance and more importantly, our string of 25% billings growth quarters. While at the same time building underlying growth sustainability, we continue to make good progress on the sales hiring front. We've exceeded our 20% increased sales capacity goal and are looking to add more. I'm also pleased that we have not seen a decline in our productivity as we onboard the new reps. In fact, we have seen a slight increase in productivity from our ramped-up reps in the first three quarters. While that's still early in their ramping, we're starting to see production from reps hired earlier this year, particularly in the corporate segment. We're now planning for fiscal year '23 sales hiring and at this point, based on our productivity results, we plan to add at least 20% more capacity in fiscal year '23. On execution, we had a record quarter for new logo customer ads and saw strong upsell activity. As Josh mentioned, we had a strong services quarter as several of our largest customers look to accelerate their adoption of Domo within their organizations and are engaged with our services organizations in order to deploy additional use cases. The significant proof of concepts mentioned earlier will be classified as professional services and other revenue on the P&L in the short run and are expected to be instrumental in driving future subscription revenue. With that, customer demand for strong professional services quarters are usually leading indicators of high adoption and high levels of customer satisfaction. Our North American corporate business, which focuses on companies with less than $1 billion in annual revenue, also had another strong quarter. At the same time, we're encouraged by the enterprise pipeline build, which should be further enhanced as new enterprise reps continue to ramp. We delivered Q3 billings of $70.2 million, a strong year-over-year increase of 26% driven by new customer additions, expansions into existing customers, and an over 90% gross retention rate. Net retention was above 105% on a revenue basis and over 108% on a contracted ARR basis. On a dollar-weighted measure, we now have 61% of our customers on multi-year contracts at the end of Q3, up from 59% a year ago. Our current RPO grew 24% year-over-year while our total RPO grew 19%. The growth rates in these two numbers can diverge with strong services bookings quarters, since services contracts typically have shorter lengths. Q3 total revenue was $65.1 million, a year-over-year increase of 21%. Subscription revenue grew 21% year-over-year and represented 87% of total revenue. International revenue in the quarter represented 24% of total revenue, in line with last quarter. The leading indicators of billings growth and contracted ARR growth point to higher revenue growth rates in the future, as these are going faster than our reported revenue and ultimately they become recognized revenue. Our subscription gross margin was 83% up from 81% in Q3 of last year, and it was up slightly from last quarter. We continued to be successful in managing our data center costs by innovating and making our software more efficient with scale benefits. Financial leverage, even as volumes increase. In Q3 operating expenses increased 16% from last year, primarily to invest in sales capacity. This intentionally lags our billings growth of 26% and revenue growth of 21%, as we seek to get leverage out of our cost structure. The result has been an improvement in our operating margin of over 500 basis points from the same quarter of last year. Our net loss was $10.3 million, down from $11.9 million a year ago, and a net loss per share was $0.32. This is based on $32.4 million weighted average shares outstanding, basic and diluted in Q3. We remained operating cash flow positive. Our cash balance was approximately $84 million, down slightly from last quarter due to tax-driven share repurchases related to a restricted stock unit program and CapEx. Now to discuss what we expect in Q4 and the full year fiscal '22. For Q4 we're expecting year-over-year billings growth of approximately 21%. This is the highest indicative level we have guided to since our IPO. As we have previously discussed, we have many growth drivers in play that we expect could help us achieve even a higher growth rate in the future. For the current fiscal year, we expect billings growth of about 24% year-over-year, up from our previous guidance of 21%. I expect, as we're planning for Q4, operating expenses to increase from Q3 levels as we continue to pursue our growth initiatives. Given all of our growth investments, we're planning for Q4 adjusted operating cash flow to be slightly less than breakeven, but expect positive full year operating cash flow. Not a formal guidance for the fourth quarter fiscal year '22, we expect GAAP revenue to be in the range of $65 million to $67.5 million. We expect non-GAAP net loss per share, basic and diluted, of $0.37 to $0.41. This assumes $32.8 million weighted average shares outstanding, basic and diluted. For a full year of fiscal year '22, we expect GAAP revenue in the range of $254.5 million to $255.5 million, representing year-over-year growth of 21% to 22%. We expect non-GAAP net loss per share, basic and diluted, of $26 to $30. This assumes $32 million weighted average shares outstanding, basic and diluted. In closing, we're pleased with our strong performance in Q3 and believe we continue to be well positioned to execute against our growth plans. With that, we'll open the call for questions.

Operator, Operator

Thank you for taking the questions. I guess my question starts with, looking at the growth in billings, which was 26%, really strong against a tough compare, versus the revenue growth, which decelerated a little bit. It's often easier to compare. And then when I sort of look to your Q4 guidance again, another strong billings guidance, yet you're guiding to revenue below 20%. If you can sort of help me bridge those two sets of numbers. And why would, given the sustained billings growth that you've seen in the mid-twenties, why is the revenue growth not more in line with what we're seeing in terms of the billings trajectory?

Bruce Felt, CFO

Hi, good to hear from you. Well, first let me just highlight revenue. Revenue is a lagging indicator in the task model and basically represents activity in the last four quarters, maybe even further back. And that's why I made the statement that with billings growing at 25%, ARR is right in line with that. Ultimately, that has to become the growth rate in revenue because it just naturally converts to revenue. With all these metrics pointing to that number, ultimately that's going to work its way through revenue for Q4. Not yet basically in line with what we've been saying, but you can't have ARR growing at that rate without it finally working its way through revenue, which sometimes just takes longer than we all hope for it to be. But you obviously cannot expect the revenue to track exactly what happens in billings or ARR growth in any one quarter.

Sanjit Singh, Analyst

Got it. And then maybe for Josh around the broader embedded app strategy that includes Domo Everywhere. Is this where, in terms of how customers are consuming analytics today and business intelligence solutions, is it primarily now in the form of an app versus a dashboard? I just want to get a sense of how the market is evolving and how Domo is set up for some of these shifts in how customers are consuming business intelligence solutions?

Josh James, CEO

Yeah. Thanks. Definitely. That's what we're seeing; customers are moving more and more towards apps, basically bespoke applications that allow them to not only look at data, but input data back into the app as well. It's truly something that they're using to run their business. And I think that's what's been actually really fun to see, because we're so well-positioned for that with the platform that we have and all these data-enabled apps that we're seeing our customers use. The bigger the customer is, the more apps they want to use from us. So that's actually been really fun to see.

Operator, Operator

Your next question comes from the line of Derrick Wood with Cowen and Company. Your line is now open.

Derrick Wood, Analyst

Thanks and congrats for a strong quarter. My first question is can you just talk a little bit more about these larger POC transactions that are happening? Why are they coming in this form right now? And what's the color in terms of when you expect to see it translate into more on the subscription revenue side?

Bruce Felt, CFO

Yeah, they do this periodically. Sometimes you get more in a quarter than you do in other quarters. The great things are great indicators of future opportunity, for sure, because they're meaningful commitments from our customers. We actually got a text message today. I'll take a chance to read it right now. But this is for one of the applications we built for one of our customers. They said during Black Friday weekend, there's a lot to ask for our stores to provide ongoing reporting. He noted that the app is a game changer because it allowed him to do constant reporting and saved them a huge amount of time and effort over Black Friday weekend. Another customer using the same app said, I never want to go back to using SAP again. This app's awesome. It's a total unlock for onboarding new leads. And then a third store manager said, none of the data that we see in this app could be accessed quickly any other way. Before it took an hour to an hour and a half; now it takes five minutes. It's truly transformative for these businesses, and these are big multi-billion dollar companies. We're changing the way they run their business based on these data-enabled apps that are making it down to the front lines of people that are either running stores or managing construction sites. Our modern BI platform and the apps we've built upon it are truly changing the way people can run their businesses.

Derrick Wood, Analyst

Great. That's exciting. I guess, Bruce, on the translation into subscription revenue, is it just a couple quarters or anything to show on that?

Bruce Felt, CFO

Well, based on guidance, not next quarter, but as we look to next year, it's got to start working its way through. It can build up for a while, but at some point it gets released in revenue. We should see some of that come through next year.

Derrick Wood, Analyst

Got it. And just a question on the change in leadership structure. Any tweaks expected? What new additive focus could come into the fold? And what are you going to do to make sure that there's good continuity going into Q4?

Josh James, CEO

Yeah, we're still on, good about the continuity. Like we mentioned, Ian is from London, went back to London and we're excited that he's taken over responsibilities for our international opportunity. International has been about 25% of our business overall and it's stayed fairly flat. Of course, you have to focus mostly on the U.S. But having a seasoned leader like Ian, who knows everything about this company and just reeled off several great quarters in a row, it's really exciting to have that expertise focused on international, while he's still a part of the executive team. And then layering on top of that, being able to have Wolf here, who we've had a chance to work with before and who we've watched since I worked with him last time 10 years ago, it's just, we feel like we just were able to double down, and there's a lot of upside for us here. Continuity feels great; the team feels great. Everyone's really excited.

Operator, Operator

Your next question comes from the line of Jack Andrews with Needham & Company. Your line is now open.

Jack Andrews, Analyst

Good afternoon. And thanks for taking my questions. Josh, in your prepared remarks, you talked about the trend of customers increasingly applying AI and machine learning to those data sets. I was wondering if, do you feel the need to maybe beef up your capabilities around that or does that open up potential new partnership opportunities with others in the ecosystem? How do you think about navigating that dynamic?

Josh James, CEO

Yeah, everything about navigating just similar to the way you stated your question. We have a platform here, and it's the first time that the customers, like I mentioned, have all their data accessible to them. It's because of this platform that we have. When you make it possible for business line managers to have access to that data, then they start asking questions where they want AI and machine learning applied. They want to understand how that quarter is going to turn out for them and where they need to pay attention. The more you incorporate that into the platform, the better response we get from our customers. It has been exciting to see that, and because it is a platform, we're doing everything we can to open that up to partners. I don't know if we're going to build to make the best AI on Earth, and I wouldn't want to bet my business on that, but opening up as a platform and giving AI partners access to our customer base, so we can do really interesting things together is, I think, a winning strategy.

Jack Andrews, Analyst

Well, it makes sense. Appreciate that. And just a quick follow-up question. Is there any commentary you can provide on your Sandbox product, any impact that's having in terms of customer adoption or at this point?

Josh James, CEO

Yeah, it's just another set of functionality that our biggest and smartest and most complex customers were clamoring for. We know we have these great customer advisory boards and we actually segment that out into large companies, small companies, and then also by different types of executives. It was feedback that we were getting, and the product team responded. It created a bunch of additional leads because it's a product that people are willing to pay for. So it gave our account execs an opportunity to go back to our customers and a reason to talk to them again. It's actually created quite a meaningful amount of pipeline as well. So it was a great effort on behalf of several different departments. It was a really good joint effort that we did internally, and we're really excited. Everyone's like, okay, we need to go do five more of these. We have all kinds of assets internally and we can package them up and distribute them to our customer base in a similar way. That's definitely something we're going to try to continue to do.

Operator, Operator

Your next question comes from the line of Kamil Mielczarek with William Blair. Your line is now open.

Kamil Mielczarek, Analyst

Thanks for taking my question. So Bruce, you mentioned you plan to build more capacity through the rest of the year. Given billings growth has now been above 25% for six quarters, is maybe 25% the right way to think about headcount growth for the year? And if productivity stays where it is, how sustainable is that mid-20% growth? Or if I could just put it differently, when does a need to change in the business for you to make that shift from sustainably growing headcount of 20% to maybe 25% or higher?

Josh James, CEO

Well, we've already been, we hit our 20% mark early in the year and we kept going, and we want to keep adding to that, get to 25% and maybe further even. So we're kind of already at a point where we're really comfortable with what we see in the business. We like the fact we can get good reps, hire them on board, and make them productive in a reasonable amount of time while maintaining productivity of the sales force. We're putting a stake in the ground for next year of 20%, but highly, highly likely we get to that point and continue hiring. As we sit here now as a management team, we don't see the limit as to where we ought to go at this point. We see plenty of opportunity, and we'll get more specific about what we're going to do next year on the next call, but we're leaning into it, and we think we should.

Kamil Mielczarek, Analyst

That's great color. Can you update us on the traction you're seeing with Domo Everywhere? How many customers are sharing data outside of their own company? Given we have platforms like Domo and data warehousing point solutions investing in the space. How do you expect that data-sharing market to evolve over the next three to five years?

Josh James, CEO

Yeah, it's the area of our business that's growing the fastest. Domo Everywhere is a fantastic technology, and the apps that that create are truly unmatched by anybody else in the marketplace. It's fun to work with customers on that. There are a lot of people that do embedded analytics, and we certainly do embedded analytics as well, but with Domo Everywhere, we have this feature called publish, which allows our customers to give their customers the entire Domo software package and functionality. We're seeing more and more really interesting case studies and unique experiences where our customers are taking that data they have and pushing it out to their partners and customers. An example I used in my prepared remarks is customers taking telemetry off of vehicles and sending that to the customer so they can combine that with their own data. That kind of functionality wasn't possible without tens of millions of dollars being spent on technology to create that kind of reporting. Now, we can come along and use the platform we have and the Domo Everywhere technology to enable that for a customer to distribute to hundreds or thousands of their own customers. It's a unique technology, and I was talking to one of our top 10 customers last quarter, and they expressed that every time they see an opportunity or a problem that needs solving, they can now think about how Domo could help with an app.

Operator, Operator

Your next question comes from the line of Joseph Talerico with JMP. Your line is now open.

Pat Walravens, Analyst

Oh, great. Thanks. It's actually Pat Walravens. Can you give us an update on what you're seeing competitively and then maybe as part of that?

Josh James, CEO

Yeah, we don't come across MuleSoft very often or at Snowflake. I think they're focused really on the Salesforce customer base. For us, I think competitively, we are in a brand new space. We're really in a brand new opportunity. We've consistently said since day one we're not BI in the traditional sense. Then, there started to be this definition of modern BI that is more similar to the way we were approaching data gathering, connecting, reporting, and distribution of it in a modern world; on your phone, with record speed, massively scalable, and also with usability that anybody in the business could use. The way we think about this is that we're helping you run your business, and that's where these data-enabled apps come into play. When we're in there, we just had a great conversation with one of the industry analysts. We had one of our customers get on and talk to them about how they're one of the largest contractors for cement in the country. They mentioned how they use our product to manage the number of trucks that deliver cement each day and get real-time reports to ensure they don't fall behind on their multi-billion dollar construction projects. Another customer, a top five construction company in the country, said without Domo, they would have only had maybe one Amazon warehouse; because of Domo, they attribute their ability to build over a dozen Amazon warehouses directly to us. They're able to track how many cubic feet of concrete are late every day and how many trucks of dirt come through every single day. If any one of the 20 different components of putting together the warehouse falls behind, then the whole project will fall behind. They're truly using Domo to measure things that people wouldn't normally measure. That's our narrative. This isn't just BI that generates a report where someone runs a spreadsheet and gets data in a PDF; it's real-time reporting with alerts. We have another customer who is a top construction company in the country, and we're helping them run a multi-billion dollar business with our technology. We are in a brand new space; not everyone else is trying to emulate and replicate this business from the outside looking in.

Operator, Operator

There are no further questions. This concludes today's conference call. Thank you all for attending. You may now disconnect.