Earnings Call Transcript - DOMO Q1 2025

Operator, Operator

Greetings, and welcome to the Domo First Quarter Fiscal Year 2025 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Peter Lowry, Vice President, Investor Relations.

Peter Lowry, Vice President, Investor Relations

Good afternoon. On the call today, we have Josh James, our Founder and CEO; and David Jolley, our Chief Financial Officer. I'll lead off with our safe harbor statement and then on the call. 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. These statements are subject to a variety of risks, uncertainties and assumptions. These include, but are not limited to, statements about our future and prospects or financial projections and cash position, statements regarding the potential of our consumption model, statements about our sales team and technology, our expectations for new business opportunities, transactions and initiatives, statements regarding our channel communication and upcoming events, statements regarding the potential of artificial intelligence and its impact on our business and statements regarding the impact of macroeconomic and other conditions on our business. For a discussion of these risks and uncertainties, please refer to documents we file with the SEC, in particular, today's 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 our 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, which we have posted to the Investor Relations section of our website.

Joshua James, CEO

Thank you, Pete. Hello, everyone, and thanks for joining us on the call today. I'll start with our quarterly results. In Q1, we exceeded our revenue guidance and achieved positive adjusted free cash flow. Our billings were not on target; we would have substantially met our guidance if it weren't for one large non-renewal. With the exception of that one contract, our gross retention would have been 6 percentage points higher and coming closer to 89%. While our near-term results are not where I want them to be, I do remain confident that we're focused on and executing in the right areas, which should have us back to growth in the near future. We continue to get positive signals from our consumption customers. More and more consumption deals are coming up for renewal. And while it's still a small sample size, we think it's big enough to be directionally indicative. Gross and net retention for consumption renewals in Q1 were significantly higher than our seat-based customers. In fact, net retention for the consumption cohort was greater than 115% in Q1, which is higher than we've ever seen. And gross retention was 96%. As we look forward to Q2, we have three times the sample size and the numbers are equally encouraging. With results like these, we are very focused on converting our customer base to consumption as fast as possible. In Q1, over 90% of our new contract dollar value was on consumption. And now we have over 30% of our total ARR on consumption. We continue to believe this number will be over 50% by the end of the year. Diving into consumption, several years ago, we noticed that relationships with some of our customers were not as strong as we wanted them to be. We were having trouble getting in front of the CIO and had competitors and other departments also signing big contracts. As a result, we sometimes found ourselves stuck in a single use case. Even when customers wanted to expand to other use cases, the permissions required internally on a seat-based model made it difficult. It limited our ability to spread virally and impeded our growth. This made it clear that something needed to change, leading us to explore a consumption model. Recently, as we saw the economy churn, leading to CFOs pressuring CIOs to cut spending, particularly on software, decisions remained based on which vendor could be most aggressive on costs, and vendor consolidation became the norm. We won some of these battles and lost some. But even when we won, we often had to dramatically cut prices in situations where we were only operating in a single use case rather than with a full enterprise license agreement installation. If we were not embraced as a strategic multi-use case solution with multiple departments and the CIO's backing, we became vulnerable, which is precisely what happened with our large non-renewal this quarter. They had been our customer for eight years and renewed seven times, but we struggled to move beyond that single use case. As a result, we lost that account due to a CFO-driven cost-cutting directive focused on tech consolidation. These factors contributed to our retention dropping from our historic rates of about 90% to recent results in the low 80s. Over the last three quarters, we had 16 renewals over $1 million, of which we lost two and experienced varying degrees of down sales at seven. Of the remaining seven, we either retained or expanded our relationships. The common theme for the losses and down sales was being vulnerable to budget cuts and tech consolidation due to limited use cases or lack of widespread adoption. As we've said before, getting more customers to embrace Domo for multiple use cases with ELAs is the only way forward. Unfortunately, we didn't implement this model quickly enough to mitigate some of the churn we've experienced. But it's now in place, and we are seeing great retention numbers from our consumption customers. Looking ahead, we want to be clear that we believe we have truly turned the corner when it comes to retention. The landscape of customers renewing looks markedly different than it has been over the past four quarters. We feel confident in our Q2 retention forecast and are guiding to gross retention for the first time ever. We expect Q2 gross retention to increase and be in the range of 87% to 88%, up from 83% in Q1. We don't plan to provide this guidance every quarter, but we wanted to do this to show our confidence that the recent trend of low 80s will not be the case for Q2. What we've seen is a tale of two types of customers. On one side, there are customers with a single use case where Domo is used in only one department, lacking CIO support. On the other side, we have fiercely loyal customers who embrace Domo as a strategic solution throughout their organization. They've adopted us as their preferred solution, with limited competition in their accounts and multiple plans centered on our platform. Those customers love Domo. Nothing reinforced this more than their engagement at our Annual Customer Conference, Domopalooza, held in March. For the first time since Omniture, I am seeing truly raving fans excited to discuss their multi-year plans with Domo. It was strikingly noticeable at Domopalooza, partly because we hadn't been in-person with our customers en masse for five years. I heard dozens of companies emphatically talk about Domo being central to their data strategy and how our platform fits into their three- or five-year plans. The energy was phenomenal, and it was thrilling to hear story after story about customers transforming their businesses by fully embracing Domo. We heard from customers like Regional One Health, a Level 1 trauma center, which has used Domo to reduce its average patient stay by almost two days, freeing up hospital beds for an additional 12,000 patients annually. They’ve also improved their pharmacy program, driving $6 million in incremental profit from that alone. Thanks to Domo, they have everything they need to leverage, extend, and act on data securely and transparently, as well as automate actions leading to important outcomes. This customer has also become a valuable partner and contributed to multiple new logo deals for Domo. Another example is Allied Universal, a global security services company that transformed from a $100 million company into a $20 billion company with 800,000 employees in over 100 countries just eight years after launching with Domo. This impressive growth was made possible because they are using Domo to easily leverage, extend, and act on insights that drive tangible results. But nothing stood out more than the incredible messages our customers publicly shared with their professional networks following the event. For example, a strategy and analytics expert from Ticketmaster remarked that Domo's current tech stack and future direction are at the cutting edge and extremely user-friendly, calling Domo a hidden gem. An IT leader from Freddy's Frozen Custard and Steakburger said that if you've heard me talk about my data level, you've likely heard me mention Domo. We use Domo for so many applications, yet we may actually underutilize it. Another example of customer momentum came just last week when we spoke with a long-term customer on an ELA contract. They were thrilled to share their five-year data strategy centered around Domo and were considering a significant upsell. They were somewhat surprised by the lack of appreciation for the value we create and commented that they should invest in our stock. While we appreciate the sentiment, we believe the level of affinity from our customers reflects that our recent retention numbers do not accurately represent the incredible traction we're experiencing. We've mentioned a few times how much this space has evolved. Over the past several years, cloud data warehouses have emerged as a key center in the broader data landscape. However, as all the activity and momentum built up around this space, we found ourselves on the sidelines because we had developed capabilities that directly competed with the cloud data warehouses. As these cloud data warehouses quickly expanded their businesses and impact, it became clear we needed to modify our back end to align with them and eliminate existing friction, leading us to today. It’s only been one month since we launched Cloud Amplifier with our first cloud data warehouse partner, and we have four more lined up for the coming months. Remarkably, we already have 47 opportunities in the pipeline with 12 new relationships, with cloud data warehouses bringing us into conversations that would typically have gone to our competitors. Let me tell you about the momentum we’re seeing with partners, and this is all very recent. In the last few months, we participated in over a dozen partner events. Since April 1, we have led more than a dozen partner-enabled trainings and conducted over 90 account planning and joint customer calls. In just April, we held more than 300 sales calls where prospects mentioned a cloud data warehouse partner, a significant increase over previous months as our customers and sales teams realize the benefits of aligning with cloud data warehouses. Feedback has been overwhelmingly positive. In fact, one cloud data warehouse told us they have never been able to get data into their product as swiftly and easily as they did using Domo, granting access to data they previously thought was out of reach. Reps are starting to close deals with us and are quickly reaching out again to introduce us to their other accounts due to quicker closing times. Here are several examples of how becoming a better ecosystem partner is helping us succeed in the market. One notable win this quarter was with a manufacturing company that chose Domo and Databricks over Microsoft Fabric. This decision allowed them to leverage their existing investment in the cloud data warehouse while providing businesses with the real-time insights needed to operate effectively. Another new logo win this quarter was with a pet care company where a former Domo customer became their head of operations. She made it a condition of her employment to deploy Domo company-wide for data management, showing the affinity that customers develop when they embrace broader use cases with Domo. The deal closed within a month of a meeting with the executive team. In this case, Domo will operate on Google Cloud, distributing data throughout the organization. Another example is a well-known restaurant chain that selected Domo to replace Tableau this quarter. The company previously used Tableau on Snowflake but switched to Domo because of our ability to scale across hundreds of users, compelling mobile capabilities, and timely outcomes, all while leaving their data in Snowflake. Finally, I want to underscore the strong momentum we continue to see in upsells related to consumption conversions. One customer that switched to our consumption model this quarter was an account-based marketing firm, resulting in a 30% upsell primarily due to our ability to integrate with another prominent cloud data warehouse. Our ecosystem investments are yielding results, and we’re eagerly anticipating their impact on our top line in the coming quarters. I'm very pleased with the progress we're making as we close deals and generate increasing pipeline. And with that, I'll hand it over to Mr. Jolley.

David Jolley, CFO

Thanks, Josh. While we're still seeing a challenging market environment, we were able to slightly exceed our revenue guidance. Total revenue was $80.1 million, a year-over-year increase of 1%. Subscription revenue represented 90% of total revenue and also grew at 1% year-over-year. Q1 billings were $65.5 million. We have continued to see challenges in our traditional go-to-market channel, which further highlights that the timing is right to lean into the partner channel. Reinforcing Josh's earlier point, our billings were primarily impacted by one large contract that didn't renew. Excluding this one renewal, we would have substantially met our billings guidance. Our gross retention was 83%, and with the exception of that one large contract would have been 89%. Our net retention was 88%. That said, we expect our Q2 retention to be in the 87% to 88% range, which gives us a foundation to start to get back to growth. Now let me review some of the other Q1 metrics. Current RPO was $230.5 million, and our total RPO declined 3% year-over-year to $346.3 million as of April 30, 2024. On a dollar-weighted measure, we continue to have approximately two-thirds of our customers under multi-year contracts. Multi-year contracts benefit us in a number of ways, particularly on the retention front. We've recently taken actions to incentivize our reps and customers to enter into multi-year contracts, and expect that this will help improve our retention results in future periods. Moving on to margins and profitability. Our subscription gross margin was 83.4%, down 2.6 percentage points from Q1 of last year, due primarily to customer data usage outpacing revenue growth. Historically, our contracts haven't had data caps, so this isn't surprising. In fact, we're glad to see customers using the product more and more. Thankfully, we're already well on our way to getting our customer base moved over to consumption contracts, which will better align our revenue with customer data usage. We may see near-term fluctuations of a point or two, but over the long-term, we expect our subscription gross margin to stabilize in the mid-80s. Non-GAAP operating margin was negative 9.2%, down 7.2 percentage points from a year ago, primarily due to hosting Domopalooza as an in-person event this year and fees related to the extension of our debt facility. Non-GAAP net loss was $12.3 million compared to $6.1 million a year ago. Net loss per share was $0.33 based on 37.5 million weighted average shares outstanding. Because we're in a net loss position, all share and per share amounts are the same for basic and diluted. In Q1, cash flow from operations was $1.9 million, while adjusted free cash flow was $0.5 million, and our cash balance increased $0.2 million from last quarter to $61.2 million. Now let me talk about guidance. As Josh discussed, we've been making foundational changes to our go-to-market. Consumption better aligns our pricing with the value provided to our customers and even more importantly enables our ecosystem partnering with cloud-based data warehouse providers. In addition, research shows that deals done with partners tend to have stronger retention, shorter deal cycles, and result in much more efficient customer acquisition. While we believe we're making the right moves, the returns on our traditional go-to-market have not been where we want them to be and we think it will take a few quarters to see significant impact to billings from our initiatives with ecosystem partners. Looking forward, for Q2, we're expecting billings of about $70 million. Given our Q1 billings performance, we expect Q2 GAAP revenue to be in the range of $76 million to $77 million. We expect non-GAAP net loss per share of $0.26 to $0.30, assuming 38.4 million weighted average shares outstanding. As we stated before, we are committed to being free cash flow positive for the full year, and we'll make adjustments as necessary to achieve that goal. However, there will be variability in the interim quarters. I'll now hand it back to Josh for some concluding remarks.

Joshua James, CEO

Thanks, David. It's been fascinating to see how this space has evolved over the past 14 years. When we started, there were no complete integrated data platforms. Data was siloed offline, online, and in hundreds of disjointed disconnected systems. We put all of the offerings required together in the cloud, so customers could finally have the right experience. And that meant we had to build the entire data stack. At the time, we didn't have the distribution of the biggest tech companies, but we were solving problems that every CIO was trying to sort out. Now fast forward to today, the landscape in our space has dramatically changed. Over the past few years, a center of gravity in the broader data space has finally emerged; cloud-based data warehouses like Snowflake, Databricks, BigQuery, Redshift, Oracle, IBM and several others have taken on a central part of every CIO's data strategy. They're talking about their data strategy, and they're talking about it with one of those vendors. If we are going to be a trusted long-term vendor with our customers, we need to be involved in those conversations. But historically, we haven't been. Now with our strong partnerships, we are being brought in to provide advice and perspective because we are a frictionless and integral part of the plan. And even as you probably saw, Snowflake mentioned us in the earnings call yesterday, saying that we were one of their partners, building software on top of their platform and bringing on entirely new capabilities and unlocking new use cases for them and their customers. More excitingly, we are now also able to initiate the conversations as well with our customers by bringing our partners to the table. Our customers love it. And of course, our partners are thrilled. So when we started Domo, we built the full data stack because it didn't exist. But now we've changed our architecture to be more partner-focused and to run Domo's back end on our cloud data warehouse partners. And the conversations are going extremely well. As I described earlier, this quarter, we went from zero leads from cloud data warehouse partners to being in dozens and dozens of conversations just in the last month. And that's basically with just one partner that's really onboarded at this point. Several other partners are coming online over the next few months, as we have detailed. I'm really excited about the success and dramatic progress of these partner advancements. And the reality is, in my opinion, there's a significant chance that one of these cloud-based data warehouses is the likely acquirer in the next 12 to 24 months. It's true we get interest from strategic or private equity shops all the time. Additionally, we do have over $1 billion of income tax net operating losses (NOLs). And there is obviously substantial financial value in the NOLs alone to most operating businesses that would be strategic buyers. We are one of the lowest revenue multiple companies in the entire SaaS landscape. In my opinion, the value is clearly misunderstood and/or underestimated. In the last two quarters, multiple potential buyers have said to me, we can pay you multiples of your current stock price. And of course, we are continuing to talk to them to explore the details of how we would fit together and create value. Additionally, we are demonstrating more value to the market, I believe, and to other potential suites as we successfully transition our business more and more to the consumption model. And as we strengthen our relationships in the ecosystem, that would help us maximize the value that we ultimately receive for the stock in an acquisition scenario. We want to have strategic conversations, and the best way to do that is to successfully execute on these partnerships. We had to get through the pain, which we believe we have now and had to clean up our architecture, so we weren't at odds with many companies in our ecosystem. We have dramatically more wallet installations than we used to and have gone from just a handful of customers a year ago to over 30% of our customers on ELAs with the data consumption charge currently. And this should reach a meaningful majority by year-end. So the plan has been fixed retention and get back to growth. Looking forward, we believe we are on that trajectory finally. Our ecosystem efforts are showing great signs of life, and I believe we'll either end up with several partnerships and revenue growth north of 20% or we believe we'll sell to one of several potential strategic parties at a substantial premium that is multiples of where our stock price is today or one of many interested private equity shops. To be clear, in my heart of hearts, we'd love to get back to running this thing north of 20% growth while having a blast innovating and growing Domo in this ever-exciting space. That said, if we shoot our shot, but we still believe the best move to optimize the long-term risk-adjusted stock price for shareholders is to sell the company, then that is absolutely what we will do, just like I did last time with Omniture. With that, we will open the call for questions.

Operator, Operator

Our first question comes from Sanjit Singh with Morgan Stanley.

Sanjit Singh, Analyst

I had a couple. First on, you guys talked in the script about the importance of being sort of wall-to-wall versus single-use case. Given what the business stands today, what percentage of your ARR is tied to customers with single use cases versus non-single-use cases or wall-to-wall deployments?

Joshua James, CEO

We feel comfortable with the relationship that we have with our customers and the strategic things that they're doing internally. It really creates a market difference when you are talking about the enterprise customers. And for those enterprise customers, I think what we're excited about is, A, looking at the NRR for those consumption cohorts and seeing those be higher than we've ever seen from an NRR perspective for any cohort. So that's the first thing that we're excited about on that front. And then I think secondly, like we said in the script, we feel like we've been through a year of vendor consolidation conversations now. So the ones that were potentially problematic when we look out right now for the next four quarters, it feels very similar to what things looked like when we were trying to project our retention three years ago or four years ago; it feels like it's normalized again. So we feel a lot better about the places where we had risk, and it feels like it's a more normalized environment for us.

Sanjit Singh, Analyst

And then given what you are sort of projecting around improvement in gross retention and sort of consumption net retention being markedly higher. You guys didn't provide either a fiscal year revenue margin or billings guide. Just wanted to understand the lack of full-year guidance as well.

David Jolley, CFO

I think this is David, and I'll share some thoughts. There are many variables at play right now. We had contracts that did not renew last quarter, which is unusual for us. However, we are optimistic about improved retention moving forward. What excites me most is that we have only been live with CDW for a short time, and the level of activity has surpassed my expectations. Given the uncertain nature of these factors, we don’t feel confident enough to provide guidance at this moment. We want to gain more insights into how our partner ecosystem is functioning before offering additional information.

Sanjit Singh, Analyst

And then one last one, if I may, and I promise to see the floor. Josh, on your comments on potential exit options for the company in terms of a strategic sale or sale to PE. I'm wondering why that wasn't on the table sooner? Because in some sense, right, you guys have gone through multiple go-to-market transitions. What you're actually trying to attempt is pretty difficult on sort of the order of difficulty scale in terms of changing your go-to-market, investing in partnerships, going through a business model position. None of that's particularly easy. And if you look at your peers in this space, they've all gotten married with larger platforms, and there's no public business intelligence companies left in the market anymore. So I just want to understand why hasn't that been the answer earlier versus now when we're going through a downturn in the fundamentals that you're sort of highlighting that as the opportunity now.

Joshua James, CEO

Yes, thank you for the question. It's important to clarify this because we often receive follow-up inquiries, whether after earnings calls or at investor conferences, especially when I'm not present. Many assume that Josh would never sell, but we consistently state that we are committed to maximizing shareholder value. Since this assumption keeps arising, we wanted to be very clear about our intentions. Regarding the number of independent companies in our sector, we see this as a significant opportunity for us. We actively engage in discussions and evaluate what a potential combination scenario looks like, identifying where the value lies. We've conveyed that as one of the few independents, our technologies are in high demand among many companies. These CDW companies often seek solutions that encompass more than just a data warehouse—they require various tools to complete the solution. This often involves multiple vendors, sometimes up to five when consultants are included. However, with our backend integrated into the CDW, the dynamics change. It simplifies the process, allowing us to streamline the vendor engagement to just ourselves and a couple of others, leading to swift deal closures. This is why CDWs have formed strong partnerships with us, creating significant value for our organization. There isn't a change in our willingness to sell; rather, we aim to clarify any confusion stemming from our previous communications. Regarding the changes we've implemented, there has indeed been a lot of internal work, and I'm extremely proud of our team for their efforts. The positive news is that we’ve made substantial progress on these changes. While we can't claim complete success with consumption yet, transitioning 33% of our business last year is a commendable achievement at a quick pace, and we believe this momentum can accelerate. Additionally, we've been enhancing our ecosystem for over a year to align our backend with various CDW partners. Just three weeks ago, we executed our first integration, resulting in a significant uptick in deals and pipeline activity. We also expect four more integrations to go live in the next two months. Importantly, we're able to maintain positive free cash flow and have a substantial recurring revenue business as the only independent provider capable of adding significant value to potential acquirers. Looking ahead over the next 12 to 24 months, we anticipate that as these benefits materialize, it will create numerous opportunities for engagement.

Operator, Operator

And our next question comes from Derrick Wood with TD Cowen.

Unidentified Analyst, Analyst

It's Andrew on for Derrick. A question on the consumption traction, which has clearly been pretty good. You've been growing at like 500 basis points the past couple of quarters. If I kind of blow that out, it would be 45 by year-end, but you're saying over 50. So maybe there's something in the back half that could kind of accelerate that. And kind of can that also accelerate billings and net revenue retention?

Joshua James, CEO

I'll start and then David might have a few things to add as well. But given the success that we're seeing there, and again, highlighting what we see from that cohort of customers that are already renewing that have been on consumption for over a year, and it's a big enough sample size that we feel comfortable that is directionally accurate and indicative of the future. And then we look at it again for this quarter and seeing almost 3 times the sample size and also the same kind of high 90s gross retention north of 115% net retention, these are numbers. And so of course, we want to lean to it even more. And to your point, yes, we got some of the early wins we were able to train the sales executives and the team, and they've been great about getting on board with helping our customers understand the benefit of being on consumption as well. So we got to where 90% of our new logo deals that we closed in the quarter will be on consumption. So now the big opportunity is what do you do with all the renewals? And we have been letting that naturally happen. And since we've been seeing these great benefits that are accruing to the business, we’ve now gone and said, all right, let's be extremely declarative and deliberate about this as well. And so we've created incentives. We've created incentives, we've created a lot of training, and I think you're going to see a big portion of our renewals start to transition at a much more rapid pace than they have been the last few quarters over to the consumption model, over to the ELA with a data consumption charge model. So we think that we do have an opportunity to accelerate that. And then I'll let David talk about what that does to billings and cash flow and stability and retention.

David Jolley, CFO

Yes. To add to what Josh mentioned, this has been a process. When we began, we aimed to ensure that we had the right approach. There are many subtle details that are not immediately obvious, but it is important to provide our customers with visibility into their data usage and assist them in optimizing it as we shift them from seat licenses to a consumption model. There's more involved, and now that we have that approach established, we feel ready to move forward more quickly. As Josh pointed out, we are offering incentives for our customers and encouraging our customer service and sales teams to support this acceleration. We are in a strong position to increase our speed. We are seeing the positive outcomes we anticipated with this consumption cohort, particularly improved retention and net revenue retention. Furthermore, we consistently observe that our customers derive more value from the platform as their data usage increases. The key is to align them with the appropriate contract size, often including growth opportunities, and to assist them with their specific use cases. It’s all about speeding up the process.

Unidentified Analyst, Analyst

David, thank you for the gross retention guidance for Q2; a significant improvement there would suggest you have made progress on that front. Regarding Sanjit's question about the absence of a full-year guide, could you clarify what the main components and variables are, and help us feel more confident about the numbers for the second half?

David Jolley, CFO

Yes. I believe the most significant factor is our expansion into the partner channel, which greatly broadens our go-to-market strategy. As Josh mentioned, we launched on the first cloud data warehouse about three weeks ago, and we are now having many more conversations about data strategies with customers we weren't previously engaging with due to these ecosystem partnerships. We see a lot of potential in this area, and randomly providing a number that expands the range likely won’t be very useful for you at this time. Therefore, we prefer to wait for a bit more visibility in the coming months, and once we have that, we will offer more specific guidance.

Operator, Operator

And our next question comes from Patrick Walravens with Citizens JMP.