Q2 2024 Domo Inc Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the Domo second quarter fiscal year 2024 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I 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 thank you.
Peter Lowry Domo, Vice President of Investor Relations you May begin your conference.
Good afternoon and welcome.
On the call today, we have Josh James our founder and CEO and David Johnson, Our Chief Financial Officer.
I'll lead off their safe Harbor statement, and then onto the call.
Our press release was issued after market close and is posted on the Investor Relations section of our website.
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 in the future and prospects, our financial projections and cash position statements regarding the potential of our consumption based pricing.
Statements about our sales team and technology are expectations for new business opportunities transactions and initiatives.
Statements regarding our channel of communication and upcoming events.
Payments regarding the potential artificial intelligence and its impact on our business as.
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 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 <unk> 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.
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 the most directly comparable GAAP measures.
Which we have posted to the Investor Relations section of our website at them all as investors Dot com.
With that I'll turn it over to Josh Josh.
Thank you Pete and thank you everyone for joining the call today.
In Q2, even in a tough macroeconomic environment our year over year total revenue growth was still a 5% subscription revenue growth was 6% and billings declined 2%.
Our results for Q2 were in line or better than our guidance and I am pleased with the progress we've made in the past few quarters, particularly with our consumption based pricing, our AI strategy offerings and roadmap and our sales force retention.
That being said I expect a return to growth may take longer than we would all have hoped or due to some macro headwinds that seem to be affecting most companies we're familiar with.
Let me give you an update on some of the progress we've made and what gives me confidence in our longer term growth prospects.
I am confident that we have the people and technology to get back to the growth we've experienced in the past and to do so responsibly by managing our costs.
I continue to spend my time on the road with our current and our prospective customers and the conversations I'm, having in the market reinforce my optimism.
Time, and time again that domo can solve complex data problems that our competitors simply can't.
And we do it in record time.
Many of these promising interactions are happening through our customer connections tour.
Where we've gained some candid insight into why organizations choose domo over leading competition.
One customer from a large publicly traded advertising group expressed that domo offers superior speed and computing power and significantly reduces the effort to create reports friendly data specialists to focus on higher value business deliverables.
I believe there is potential for conversations like this to translate into significant transactions for domo in the near to midterm that could drive upside to our guidance.
Second I believe our increased focus on consumption based pricing can be a growth driver.
And create stronger relationships with our customers as we remove the limitation on number of seats in an account by granting access to all employees of our customer and only charging for data usage similar to snowflake AWS and others.
Because we can charge for usage, while offering seat licenses and visualization for free <unk>.
Consumption pricing solves many of our historic barriers to adoption and more directly aligns our pricing to the value realized by our customers.
Thanks to this consumption pricing is opening more doors for up sell opportunities.
One of the very encouraging trends, we see with our consumption customers is an increase across key metrics, including data flows and connect you runs which represent a significant source of potential growth.
Over the past year, we have seen almost a 30% increase in contract size.
For new logos doing on consumption based pricing compared to new logo customers building on seat based pricing.
Also for customers renewing who have converted to consumption pricing from seat based pricing.
We are seeing almost a 60% increase in the number of user accounts created.
And somewhat surprisingly a higher log in rates of the total users on the consumption model versus the seat based pricing model.
We're also seeing momentum in increasing the percentage of new logo customers, who choose consumption pricing.
50% of our new logos in Q2 were priced on a consumption basis.
It's up from about 30% of our logos of our new logos in Q1.
And we are targeting 75% this quarter in Q3, and even higher in Q4.
Setting us up well to have a substantial impact on the way, we go to market and even convert renewing customers to the consumption model aggressively next year.
We have over 250 customers on a consumption pricing model as of July 31.
Which represents over 10% of our customer base and over 13% of our IRR.
Another benefit to Domo is that our consumption pricing contracts are structured as subscription contracts.
This means the revenue is recognized ratably mitigating some of the lack of predictability associated with pure consumption based models.
Beyond these direct benefits for Domo and our customers are consumption pricing is also expected to improve our competitive positioning.
Some customers see our competitors visualization offerings as essentially free.
Because they're visualization tool is included as part of an enterprise license agreement.
We think including visualization with the free seats under our consumption model is a compelling selling point for enterprise and corporate customers and prospects and positions us better against some of our competitors.
Another positive in the quarter was that we once again had much lower than forecasted attrition in the sales force.
Year to date, we have stemmed the sales force attrition, we saw last year, when 30% of the sales to insurance.
Next I continue to be excited about the potential for AI to be a growth driver for domo.
I believe we are strongly positioned to be a leader in delivering AI powered data experiences in governing those data experiences and enabling businesses to achieve the data readiness required to capitalize on the broader possibilities of AI.
Domo gives you the ability to apply the power of AI to your business now.
For capacity planning, if a company needs to know the number and type and timing of employees they need to hire to achieve a business school. They can do that right now if a company wants to run simulations to dynamically price and bundle their offerings.
Can apply AI to that problem in Domo now.
If a lender wants to perform a risk assessment model on patterns of behavior and other factors.
They can use AI to apply that to the data they have in domo right now.
This month, we announced progress showcasing our commitment to this ongoing ambition, including mobilizing the full force of demos AI technology expertise and vision as Domo Dot AI.
Data and technology are important foundations, but real transformation comes from making them useful and reliable in the hands of many.
Domo that AI is championing a future where AI powered data experience has truly transformed business by amplifying a very powerful asset human curiosity.
The hurdle I think many businesses will need to overcome is building in the safety and efficiency required to effectively democratize AI.
Why <unk> approach goes beyond wiring open AI to the end user experience is.
It's about embedding AI responsibly into the very fabric of the entire business.
Let me tell you about some of the ways, we're making this possible through domo data AI.
Our suite of AI tools empowers users with chat style deed exploration and provides flexible model creation efficient model management seamless deployment and superior governance and security.
The almost AI service layer, let's businesses capitalized on the power of AI without getting bogged down bias complexities.
Users can easily manage deploy and optimize any AI model they choose right in our data experience platform to support real world use cases that matters to everyone.
AI is now easily accessible in domo bricks.
App Dev framework and in workflows.
Even low code tools, such as Magic Eto are designed to tap into AI model management, making the power of AI accessible even to those without technical expertise.
All of this and more is featured in our newly launched Domo Dot AI website.
Where we will continue to share our progress in creating a new future for data and AI.
We're also excited to be hosting our first ever innovation summit focused on AI. This month.
The free online event that will highlight just how domo that AI solutions are already helping businesses overcome real world challenges to accelerate innovation and growth.
AI is only as powerful as the data connected to it.
We have a well connected end to end data stack opening up many possibilities for domo to re imagine what data can do for business.
I encourage all of our investors to followed almost AI journey, starting with visiting the website and attending our virtual innovation summit on August 29th in North America, and EMEA and August 30, <unk> and Asia Pacific were almost 3000 people have already registered.
While we are optimistic about the significant long term growth drivers the it spending environment remains challenging.
Enterprises are carefully scrutinizing vendors and many are consolidating their spend amongst your vendors.
We're seeing sales cycles elongate and even satisfied customers are being asked by their it and finance departments to evaluate their spend upon renewal.
David will go into more detail, but we're also evaluating our renewals on a granular basis and while each one is unique we do see some risks to some of the larger renewals, which we have incorporated into our guidance for the second half of the year.
We would not expect to see some of these discussions in a more normal spending environment or in an environment, where these customers were already in a consumption model.
And then on the new business front as an indication that this is purely macro driven we saw conversion rates fall across each stage of the funnel, which is further evidence of the challenging spending environment that we're facing.
We continue to find opportunities to deliver significant value to our customers and we do have several notable wins to share from the quarter.
We closed a very significant upsell with a fortune 500 U S financial institution to provide a custom app for wealth management operations powered by our data platform.
So most of that for automating previously manual time consuming workflows and offering custom smart content that is specific to each employee across thousands of employees.
Ultimately the customer chose domo, because our platform provided a complete elegant solution to a business challenge at scale.
Another example, we work with a nonprofit subsidiary of a high profile private University and we drove a significant up sell to support their digital corporate learning solutions. This customer rolled out the entire domo data experience platform to 600, new users after successfully improving learning experiences things through real time insights into course interactions.
This win is a strong endorsement of our impact and a great example of how our consumption based pricing model is opening doors to grow existing business.
We also won a significant new logo with a global health care leader that chose domo to provide a unified view of their marketing performance. We earned this business. After a successful proof of concept trial to improve marketing performance across multiple brands and countries in.
In addition to the fantastic customer wins, we also continue to create movement within our industry. This.
This quarter Domo was ranked the number one self service business intelligence vendor by Dresner Advisory services.
Domo was also recognized as an overall leader in Dresdner's 2023, wisdom crowd study, which included our perfect recommendation score for the seventh consecutive year among.
Among our best in class categories, where integrations with third party technologies, our ease of installation and our ease of administration, all of which showcase our radios to help businesses sees the imminent opportunities for data.
In addition to this outstanding recognition Domo was also included on two constellation shortlist, which are published to help organizations search for technologies to meet their digital transformation goals.
It almost placement onto short list the list for multi cloud analytics and AI platforms and the list for embedded analytics as a strong endorsement for our reputation of driving customer success.
I'm also proud to share that Domo was once again named to the parity Dot Org lists the best companies for women to advance.
This marks our fourth consecutive year being recognized for our commitment to support women through career advancing opportunities. We believe that diversity makes organization stronger and view our continued progress in this commitment is a factor in <unk> future success.
In closing while there are certainly some near term challenges driven by the macro and currency it spending environment.
As confident as ever in our team our technology and our long term growth opportunity and with that I'll turn it over to David.
Thanks, Josh in Q2, we posted 6% subscription revenue growth and 5% total revenue growth we exceeded the billings guidance, we provided at the beginning of the quarter and delivered Q2 billings of $70 6 million a year over year decrease of 2% and reviewing the metrics that will impact the remainder of the year.
Current RPI was $232 1 million, an increase of 3% year over year and our total <unk> grew 2% to $357 6 million as of July 31 2023.
<unk> grew in line with subscription revenue growth an area, where we saw continued success with multi year contracts on a dollar weighted measure we now have 67% of our customers under multiyear contracts at the end of Q2 up from 64% a year ago.
Our gross retention improved from Q1, it was just under 90% while our net retention was just below 100% down from Q1, our net retention was driven by a challenging upsell environment, which I'll talk about in a moment.
Q2, total revenue was $79 7 million.
Our year over year increase of 5% subscription revenue represented 89% of total revenue and grew 6% year over year International revenue in the quarter represented 21% of total revenue down slightly from Q2 of last year, our subscription gross margin was 84, 9% down 4%.
<unk> points from Q2 of last year and down one one percentage points from Q1, primarily due to our move from a fully depreciated datacenter, we would expect to remain in this range in the near term.
Also pleased that in Q2, our non-GAAP operating margin was positive five 7% up 12, two percentage points from a year ago.
Our non-GAAP operating margin, primarily excludes stock based compensation as well as executive severance, which was related to the transition of C level executives, our net loss was about 800000.
An improvement from $8 2 million a year ago, and our net loss per share was <unk> <unk>.
This is based on $35 9 million weighted average shares outstanding basic and diluted in.
In Q2 cash provided by operations was approximately 600000 in total our cash balance declined $2 1 million from last quarter to $63 9 million.
We expect Q3 cash from operations to be near breakeven and we continue to expect full year fiscal 'twenty for cash from operations to be positive.
We believe we've got adequate cash in order to continue to pursue our business objectives.
In terms of guidance, but let me share some thoughts as Josh mentioned, the it spending environment has been challenging for us similar to some others in our sector. Our two factors I'd like to highlight.
First while our sales rep attrition has been less than forecast in Q1, and Q2 and we continue to build our sales capacity our conversion rates, new leads and resulting new business have also been less than forecast.
Part of what we're seeing is a sense of caution even greater than six months ago across the board with customers looking carefully at their software spend.
While we believe we have a superior technology, some customers and prospects are already paying for another solution as a part of a broader enterprise wide license agreement whereby tool can be perceived as incrementally free and they may be already using that tool for a big portion of their organization, leading some customers.
<unk> to consolidate their spend on these solutions.
As Josh mentioned I think our consumption based pricing helps our positioning against a specific challenge.
The second factor is that ongoing uncertainties about the macroeconomic environment are presenting challenges with renewals with some large customers oftentimes. This is due to the conflicting objectives of business use cases versus the overall it spending mandates.
Based on what we're seeing we believe our return to growth will take longer than originally anticipated.
And as a result, we've lowered our new business and gross retention forecast for the remainder of the year to put this in context for the entire fiscal 'twenty for a re forecast has resulted in a downward adjustment of about seven 5% in billings and two 5% in revenue.
For Q3, we're guiding to billings of $72 million to $73 million down 2% year over year.
For full year billings were providing a range of $313 5 million to $321 5 million, representing a year over year decline of 1% to 3%.
Now to guidance for our GAAP metrics for the third quarter of fiscal 'twenty four we expect GAAP revenue to be in the range of 78, 5% to $79 5 million.
We expect non-GAAP net loss per share basic and diluted of <unk> 10 to <unk> 14 for Q3.
This assumes $36 3 million weighted average shares outstanding basic and diluted.
For the full year of fiscal 'twenty, four we expect GAAP revenue to be in the range of $316 million to $320 million representing year over year growth of 2% to 4%.
We expect non-GAAP net loss per share basic and diluted of <unk> 39 to <unk> 47.
This assumes $36 1 million weighted average shares outstanding basic and diluted.
Our EPS guidance implies a positive operating margin for the full year.
In summary in spite of the challenges. We've discussed we are committed to remain operating margin positive for the year and near cash flow breakeven through the second half of the year and I'm confident we've got the right people and technology to execute against our market opportunity with that we'll open the call for questions operator.
Thank you as a reminder, if you would like to ask a question press star and the number one on your telephone keypad.
Your first question comes from the line of Derrick Wood with TD Cowen.
Your line is open.
Okay. Thank you.
Yes, it sounds like a challenging environment out there and I'm, just wanting to kind of parse out.
The macro versus potentially internal changes that you guys have made.
And really one of the big initiatives for you guys to go after this consumption based pricing model and it sounds like you've had good success.
And conversion win.
One succeeding at that but has that has that been a factor and.
Leading to longer sales cycles more investor education.
Just trying to get a sense for.
How much is external versus how much is internal because on the macro front at <unk>.
Generally it feels like things haven't changed a whole lot in the last six months, but it sounds like you guys have changed some of our chain.
Yes, we've definitely seen more change from our customers like we said the <unk>.
Our conversion rates have dropped quite a bit over those over those six months.
We've from a consumption standpoint, that's actually been a great tailwind.
So.
Our sales cycle is not longer.
Consumption they are pretty similar we factor a little bit better when we do consumption deals.
Our upsells are faster what would your consumption deals.
So the repeat business comes in a little bit quicker our deal sizes are bigger.
We do consumption deals and like we mentioned, 50% of our deals this last quarter, where we're consumption deals of the new logos.
We're shooting for we're shooting for 75% this quarter.
That's what the only still a portion of the teams trained so we think by the end of the year, we can get that up and the <unk>.
<unk>.
And.
The other thing Thats, great about consumption, so if they're bigger deals happier customers higher retention.
And quicker up sells and then I think most importantly.
There is two components number one.
We have a much bigger footprint inside those organizations.
So we instead of instead of having a customer that Scott Hudson in one room and the competitor in the next room.
It gives an ability to get more users since we don't charge based on users. So we have seen literally a 60% increase in the number of users that we get when customers convert over to.
Two our consumption model. So they had X number of users and then.
After they moved to consumption they have 6% higher so thats been thats been great and then not only that there they are actually logging in more frequently as well so they're becoming adopted by the whole organization. So that's one piece that's really exciting and then the other piece is just the.
The opportunity to wake up the first of the year and now that you've got growth in your accounts.
But you don't have to go in and upsell, it's just consumption and we're seeing good growth from a consumption standpoint.
Still it's still early to talk about exactly what kind of uptake we're going to see in those consumption deals.
And we need to go through a couple more quarters of that but we're very sure that there is an uptick from consumption.
And as we work with customers in and go through a big chunk of renewals then we will understand exactly what that number is.
Okay.
Okay.
That I guess that is the silver lining.
It sounds like on the other side.
Youre seeing some headwinds from vendor consolidation and.
I'm just wondering if you can tease that out because you guys beat your Q2 number.
But there's a pretty big guide down for second half and Youre alluding to some tougher renewals can you is that more on the enterprise side, where you potentially are seeing more contract losses or is it corporate and.
Is it concentrated is it more prevalent.
And what's informing you on that potential risk in the second half just if you could give more color that would be great.
Yes, it was some of our enterprise customers.
We've seen some pretty good stability there.
Better than with corporate in fact.
Enterprise customers are more susceptible to having multiple vendors in there. So when you look at vendor consolidation, which is definitely a theme I think across the broader it industry.
Our enterprise business is more susceptible to that for sure. So yes.
Thankfully over the last five years, we've been working on this consumption model.
And we're really excited about what that's going to do for the business.
With the enterprises.
In particular, because what we'll see is we'll go into an account the switchover to consumption.
And.
What was happening to us before is not happening to the other vendors and what I mean by that is our customers will come to us to say, yes. There's these other four projects that we have.
And now since we're not paying you foresee.
I guess, we can go eliminate this other vendor where we have this.
Data project that we're doing and we can go eliminate vendor b.
Where we have this small project in this other division and then vendors see what kind of have to see how that plays out with you guys. So.
That's been a huge boon to us in our relationships with our big enterprise customers, but there's a handful of where that happened to us or we think it may happen to us and just the idea that it might force just to say, we got to be conservative here in.
In our guidance as we get that new information I think that in conjunction with with just seeing yes, we had more sales capacity.
But the conversion rates being down.
In the in the in the process through the pipeline forces you to look and say do you want to spend that incremental marketing dollars to feed the sales team.
It doesn't seem like that's the right way to go because we want to make sure that we're staying really fiscally sound staying cash flow positive and staying net operating margin positive and we can do that which is great.
I think awesome transition, that's going to happen to our business as we move more and more to consumption. As we are able to take advantage of things like premium because we now have a consumption model and we will be seeing that over the next quarter as well.
Yes.