DOMO, INC. — Call Transcript 2019

Good day, ladies and gentlemen, and welcome to Domo's second quarter fiscal year 2020 earnings conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. With that, I would now like to introduce Peter Lowry, Domo's Vice President of Investor Relations. Sir, you may begin. 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 harbor statement and then on to the call. Hello, everyone. Our press release was issued after market close and is posted on the investor relations section of our website, where this call is also being webcast. Statements made on this call include forward-looking statements related to our business under federal securities laws, including statements about financial projections, the plans and expectations for our go-to-market strategy, and our financial condition. These statements are subject to a variety of risks, uncertainties, and assumptions. For a discussion of these risks and uncertainties, please refer to documents we file with the SEC, in particular today's press release and 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 an isolation 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? Thank you, Julie. Hello, everyone. Thanks for joining us on our Q2 fiscal year 2020 earnings call. For today's call, I'm going to cover two things. First, our quarterly results with an update on our continued refinement of our go-to-market plans. Second, some insights into how our customers are leveraging the power of our platform and advanced data solutions to transform their businesses. Although we were looking for more growth, in Q2 we posted a 22% year-over-year increase in revenue and a 9% year-over-year increase in billings. We delivered this growth while decreasing sales and marketing expense year-over-year by 9% and also decreasing overall operating expenses by 7%. We are once again able to make meaningful progress on reducing our cash burn, coming in nearly $2 million ahead of our guidance and about half of what it was a year ago. We remain committed to achieving cash flow positive status with the cash on our balance sheet. We continue to refine our go-to-market model to accelerate our new business. We are enthusiastic about the transformational impact our product is having on some of the largest companies in the world, and we believe this will become more self-evident to the market as the number of these successes grow and become more public. That said, the kind of impact we have is so transformational and so widespread that it cuts across a significant number of functions. This requires us to cross many checkpoints along the way, which affects the length of the sales cycle. I bring this up because Q2 was definitely impacted by our pursuit of larger enterprise transactions, many of which we were not able to get to the final point of closure. Although historically, our international business has helped carry the day, this quarter was similarly impacted, particularly Asia-Pac, not including Japan. Lastly, we spoke on our Q1 earnings call about announced acquisitions offering proof of the value in our space. Those acquisitions led to many customer conversations which extended the sales process. That said, we didn't lose a single deal because of the acquisitions, and I'll talk about this more in a minute. While it's true that we're more excited than ever about our pipeline, we were over-focused in pursuing larger enterprise transactions, which had an impact on Q2 billings and new logos. However, early in Q3, we've already closed one of these customers, an almost seven-figure annual deal with a large aftermarket automotive retailer. That said, the timing of larger enterprise closings has been hard to predict. We're making significant moves in favor of landing new customers more quickly to keep a healthy pace of new opportunities and to grow new business while the larger transactions develop. Let me summarize the most important moves we're making. First, everyone knows, and you've recounted back to us that our offering and space have been difficult to explain. It's also been the number one complaint from our reps. As the recent round of acquisitions have brought more attention and structure to our space and how people describe it and think about it's created an opportunity to simplify our message. After talking to the leaders of many of the largest SaaS companies also, and testing messages on how to define our space about what we do, particularly how we fit into digital transformation and the major cloud platforms, we've come up with a better way to describe our product that seems to be resonating well. We've also very recently found that customers who've used our product while in our sales pipeline buy it at a significantly higher rate than those who haven't. We are expanding our focus on self-service proof of concepts so more users can experience our product firsthand, and we believe that will result in landing more new customers. I guess third, John Mellor is now on board as our Chief Strategy Officer and is one of the most talented people with whom I had worked at Omniture for over seven years and whom I've been recruiting to Domo every year for the last several years. In addition to strategy, John is orchestrating focused, repeatable sales plays to target prospects and land new business more quickly. With such a broad platform that can do almost anything a customer would want to do with their data, we plan to narrow the focus of how we apply it to new customers in the sales process, so they're able to understand the value and adopt our technology more quickly and more easily. Fourth, we are expanding our partnerships that focus on helping us go to market. In particular, we are finding significant interest from other technology companies that can expand their footprint, deal size, and strategic relevance by promoting Domo as part of their solution. You should expect several related partnership announcements from us in the next few months. One of the drivers of some of these partnerships is the recent acquisitions in the market, which has left a void for an independent platform that's agnostic as to what cloud or software platform customers have adopted. Domo is an independent, pure-play platform that's open to all the major players. At the same time, these acquisition announcements validated the difficulty in providing data to companies and business users. Large players have now spent over $25 billion in acquisitions in the last 18 months to enhance their data capabilities that we believe only fractionally helps them do what we do. A few companies can afford to acquire companies to make up all the product gaps, but most will need to partner as well. We don't see any new competitive threats to change our momentum. Our customer feedback on our new platform pricing model has also been very positive, and we think this will be another tailwind to landing and expanding business with new and existing customers. Another bright spot in Q2 was our gross retention rate, approaching 90%. As our customers use our products in more strategic ways and commit to more multi-year deals, we have an opportunity to achieve even higher rates. Our corporate business remains solid. Although enterprise-like in retention, technology needs, and ability to drive value, we have found that customers under $1 billion are less complex in regards to buying processes, approvals, and their competing internal legacy installations. Our easy-to-use, fully integrated platform continues to resonate with this segment, which often lacks the infrastructure or even resources to attempt to put together an alternative from scratch that would address the problems that Domo solves. During the quarter, we added new lighthouse customers, including one of the world's best-known makers of luxury timepieces. We also signed EDP, a global energy company, and Inditex, one of the world's largest fashion retailers with international brands such as Zara. We signed key expansion deals with notable customers, including CPG giant L'Oréal. With a well-known manufacturer of electronic household products and with the real estate services company, Zillow. We do well whenever there's significant amount of fast-moving, cross-departmental data that needs to get into the hands of business decision-makers across the enterprise. We recently announced how TaylorMade Golf, which uses Domo in North America and in Japan, recently expanded its use of Domo across all of its Japanese operations. Now the company is putting real-time data for key retail metrics such as traffic, sales, and inventory into the hands of every store employee, helping them understand how to better perform their jobs and have a better understanding of their customers, which they say has led to increased sales across the country. I'm proud of our team for the innovation they keep delivering and their unwavering focus on customer success. We continue to be encouraged by the validation our product receives from industry analysts. In the past quarter in Forrester Wave for Vendor-Managed BI and Analytics Platforms, Domo received the highest marks for customer satisfaction. Domo was also named an overall leader in the Dresner Advisory Services Industry Excellence Awards for the third consecutive year, based on high customer ratings for product quality, value delivered, sales, and services. Constellation Research also announced that Domo made Constellation's shortlist for both BI and analytics, as well as marketing analytics solutions. To conclude, we're working hard to improve the pace of new business. We continue to execute well on cost controls and manage our cost structure to maintain our commitment to having a fully funded business plan. We remain extremely optimistic about the opportunity in front of us. With that, I'll turn it over to Bruce. Bruce? Thank you, Josh. I'll begin with our second quarter performance, followed by our third quarter and fiscal 2020 full-year guidance. As Josh mentioned, the overweighting of our efforts on large deals with large customers resulted in decreased productivity from our enterprise reps, as there was insufficient new customer activity to compensate for those efforts. Our enterprise customer count is now over 460. In response, we're applying more resources towards acquiring new customers and at the same time, reallocating some of our large enterprise sales resources towards smaller enterprise customers. We've historically experienced good productivity from our corporate reps, and we have seen that some of the same go-to-market motion that is working for the corporate segment has also worked for the smaller enterprise customers. We expect this to help our total new business and also help our new logo count. I'd like to highlight that the new deal sizes of our corporate business have been averaging over $50,000, and the gross renewal rates have been approaching 90%, metrics many software companies equate with the enterprise category. As a reminder, we have historically defined enterprise as customers with revenue greater than $1 billion, and revenue in corporate is everything less than that. In addition, we continue to target hiring more quota-carrying reps, but have now directed those efforts in favor of the corporate business, given how productive they have continued to be, even in the face of a 29% year-over-year decrease in marketing spending. The corporate business also has a much shorter sales cycle and sales rep ramping history, which provides the ability to more immediately impact our short-term new business. Lastly, the CAC for our corporate business is lower than the enterprise business. For our enterprise business, our focus is on improving their overall productivity by closing the larger transactions and by increasing the new logo count. Our dollar-based net revenue retention rate continues to be greater than 100%. We also continue to see more customers entering into multi-year contracts, with 49% of our customers now under multi-year contracts at the end of Q2, compared to 38% at the end of Q2 last year. This drove our remaining performance obligations or RPO to grow 28% compared to the same quarter last year. Remaining performance obligations includes billed and unbilled revenue under contract that is yet to be recognized. Our Q2 revenue was $41.7 million, a year-over-year increase of 22%. Subscription revenue grew 24% and represented 84% of total revenue. Year-over-year subscription revenue growth was driven primarily by new customers. International revenue represented 26% of total revenue, consistent with Q1. Our subscription gross margin was 74.9%, up four full percentage points from 70.9% in Q2 of last year. We plan to get additional leverage out of our subscription cost of revenue over time as we continue to effectively manage our data center operations through finding efficiencies, better utilizing certain services, and continuing to optimize the Domo platform. We believe we can get subscription gross margins over 80% over the long term. Including our services business, our total gross margin was 66.2%, a 240 basis point improvement compared to 63.8% gross margin in the second quarter of last year. We were able to deliver these results once again with a further decrease in operating expenses. In Q2, we were able to decrease operating expenses by 7% from last year, even though revenue increased by 22% year-over-year. The decrease came primarily from lower marketing and R&D costs. The net effect of increased revenue effectively managing costs allowed us to improve our operating margin by 44 percentage points from the same quarter last year. Our net loss was $26.4 million, and net loss per share was $0.96. This is based on 27.4 million weighted average shares outstanding, basic and diluted. Turning now to our balance sheet. As of July 31, we had cash equivalents, and short-term investments of approximately $134 million, an amount we believe is adequate to allow us to manage the business efficiently until we reach a cash flow positive position. Our net cash used in operations was $18.7 million, an improvement of $3.4 million over the prior quarter, and a 48% reduction compared to Q2 of the prior year. Now to discuss what we expect in Q3 and fiscal 2020. We expect Q3 billings of about $36.5 million. We now expect fiscal year 2020 billings to be about $172 million. Our billings guidance assumes the same business and operating conditions we experienced in Q2 will continue in Q3 and Q4. We're not factoring in all the new initiatives we have undertaken, given it takes time to implement them, and also we provide for a low weighting factor for large deals, given the unpredictability of their closing. This approach is not to be interpreted as anything other than us being prudent in our approach to providing guidance. We're planning on our Q3 operating expenses to be up slightly from Q2. For the year, we expect our operating expenses to be down slightly from fiscal year 2019. We plan to execute on our plan to decrease cash burn sequentially each quarter of fiscal year 2020. We expect Q3 adjusted cash used in operations of about $17.5 million and $74.5 million for the year. Going forward, we'll manage our ongoing cash burn to achieve our cash flow positive position with the cash on hand. Now the formal guidance for the third quarter fiscal year 2020, we expect GAAP revenue to be in the range of $41.5 million-$42.5 million. We expect non-GAAP net loss per share, basic and diluted of $1.00-$1.04. This assumes 27.7 million weighted average shares outstanding, basic and diluted. For the full year fiscal year 2020, we expect GAAP revenue to be in the range of $168 million-$169 million, representing year-over-year growth of approximately 18%. We expect non-GAAP net loss per share, basic and diluted of $4.00-$4.10. This assumes 27.5 million weighted average shares outstanding, basic and diluted. In closing, as we exit our quiet period, we will be participating in as many investor conferences and non-deal roadshows as possible as we believe there's a substantial amount of information we'd like to convey to investors about our initiatives. With that, we'll open up the call for questions. Operator? Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Sanjit Singh with Morgan Stanley. Your line is now open. Hi. Thank you for taking the questions. I wanted to go and ask a couple questions on go-to-market strategy. Coming out of IPO, I think the message that we were all hearing is that we need to move upmarket to larger enterprise customers. Thus far, in the first half of the year, it seems like that's going below plan. Sales cycles are longer, some issues, some confusion on the competitive environment. What I'm hearing today is, well, we need to go toggle back to commercial, which is what I thought was part of the issue, coming out of the IPO. I'm just trying to understand what the right go-to-market strategy is for the product that you have, because it seems like it's going back and forth. Yeah. We certainly have been able to keep customers happy in both segments. In the enterprise, this quarter in particular, especially the bigger deals that we have in our pipeline, we've talked about our pipeline, and there's real customers there. We didn't lose any of those deals. They mostly just are taking longer than what we would hope for. We have proof points in those segments where we have very happy customers that are growing and expanding their business with us. We've been trying to figure out how to effectively and efficiently find those new logos, at a pace that makes sense and is predictable. It's a good business for us, and what we were saying is, we probably over-indexed on how fast we were trying to grow that enterprise. at the same time, with our corporate business, which Bruce and I both mentioned, is more enterprise-like. I think we've done ourselves a little bit of a disservice by drawing the definition where we've drawn it. We have customers there that, new deals are about $50,000 a year. The gross retention is very similar to our enterprise business. They don't have as much upsell potential as an enterprise business, which is partly why we're interested in enterprise. also, the more enterprise customers you have, the more complex your product gets in terms of, not complex, but the more breadth you get to your product and more you're able to solve all the needs that are out there in the marketplace. I think what we're saying right now is we're going to take a chunk of those reps and have them focus on the lower end of the enterprise space. We'll still have some out there that are out there hunting the really big logos and continuing to do what we've been doing. We're going to take the extra resources and the new heads, and really focus them on the businesses in that $1 to $5 billion revenue range, where we've seen corporate reps that are pounding the phones, that are managing their pipes and looking at numbers and looking at leads and contacts. That process has worked really well, and it's actually scaled up beyond a billion dollars in many cases. Since we've been seeing success there, and since our corporate business is really successful, more so than we thought it was going to be when we were going public, we said, "Let's make sure that we allocate these resources appropriately." The second piece that we talked about in Asia Pac, Asia Pac was growing really well last year, and we put a lot of extra heads there. It just didn't take the way that it had been performing those first three years, the incremental dollars that we put there. It takes a while to figure out if they're going to perform. They didn't perform. That's another area where we're not going to continue to invest more dollars. We'll invest those dollars, those incremental dollars, back into the lower enterprise space, into the upper corporate space. Got it. Maybe for Bruce, the gross retention rates, it sounds like they're improving if they're overall at 90%. I'm trying to put that improvement in gross retention in context with the decelerating billings growth. Billings growth was growing right around ±30% for most of your last year, and now we're down to below 10% by Q2, and yet gross retention is up. Can you sort of connect the dots for me there? Is it just new business that's declining negative? I just want to understand what the dynamics between the renewal portfolio and the new businesses. Yeah. Well, first of all, the high renewal rates across the board, including what we characterize as corporate, approaching 90% we think is a very healthy sign of the business, a very healthy sign of how much we've developed the platform, how our customers use it across the board, across every segment, across any kind of customer size. That's really, we think, a very positive sign and a great foundation to continue to grow our footprint within these businesses. Yeah, it's the new business is where we've come up short of where we wanted to be. That's why we have all these initiatives that really focus on accelerating the adoption of, really accelerating the new business and particularly getting new customers on board with the number one priority, given what we just said, actually, the number one priority, getting new enterprise customers on board. We want to make sure we aren't indicating that we're really de-emphasizing the enterprise opportunity. It's still there. We're just being a little bit more precise in how we're segmenting it and how we're going after it. Taking some of the learnings that we found at the smaller company and applying it to smaller enterprises, but they're still enterprises. I'll say what happened this quarter is we're so strong at the largest enterprises in the world. We're so unique in our ability to solve problems that frankly aren't solvable. It's very hard to not pursue those because it's so unique. The problem is, as we found out is, they're just extremely complex institutions, and we have a requirement here to grow nevertheless. We will continue to pursue those. They will be transformational as we announce them. They will help us across every segment. first things first, let's get more new customers. Let's get new business accelerating. Those customers, we're still attacking them, but we're going to be a little bit more discreet in how we're targeting these segments so that we can still achieve that but have high growth across the board at the same time.