10-Q: Domo Inc. Reports Third Quarter Results, Navigates Shift to Consumption-Based Model

Domo Inc.'s third-quarter results show a slight revenue increase, while the company continues to transition to a consumption-based pricing model and manages ongoing economic uncertainties.

Summary

• Domo Inc. reported total revenue of $79.8 million for the third quarter of 2024, a slight increase from $79.7 million in the same period last year.
• Subscription revenue remained relatively flat at $71.1 million, while professional services and other revenue increased to $8.7 million.
• The company's net loss for the quarter was $18.8 million, compared to a net loss of $16.4 million in the third quarter of 2023.
• Domo is actively transitioning to a consumption-based pricing model, with over 55% of annual recurring revenue now on consumption-based agreements or enterprise-wide subscription agreements.
• The company's gross retention rate declined to 84% from 87% in the previous year, partly due to macroeconomic conditions and a large non-renewal.
• Domo's remaining performance obligations (RPO) totaled $368.2 million, with $220.6 million expected to be recognized as revenue in the next twelve months.
• The company has taken steps to align its sales team and control costs, which are expected to improve margins and cash flow in the long term.
• Domo has a credit facility with approximately $123 million in term loan borrowings, all of which had been drawn as of October 31, 2024.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While there are positive aspects such as the transition to a consumption-based model and cost control efforts, the increased net loss, flat subscription revenue, and declining retention rate raise concerns. The company is navigating a challenging transition period and faces significant competition and economic uncertainties.

Positives

• Professional services and other revenue saw a 3% increase year-over-year.
• Sales and marketing expenses decreased as a percentage of total revenue, indicating improved efficiency.
• The company is actively transitioning to a consumption-based pricing model, which is expected to increase customer adoption and align pricing with value delivered.
• Domo has taken steps to align its sales team and control costs, which are expected to improve margins and cash flow in the long term.

Negatives

• Net loss increased to $18.8 million in the third quarter of 2024, compared to $16.4 million in the same period last year.
• Subscription revenue remained flat year-over-year.
• The gross retention rate declined to 84% from 87% in the previous year.
• Research and development expenses increased as a percentage of total revenue.

Risks

• The company has a history of losses and may not be able to achieve or maintain profitability.
• Domo faces intense competition in the business intelligence software market.
• The transition to a consumption-based pricing model is subject to uncertainties and may negatively impact revenue in the near term.
• Macroeconomic conditions may cause customers to reduce or delay technology spending.
• The company's ability to raise capital in the future may be limited.
• Adverse events or perceptions affecting the financial services industry could negatively impact Domo's operations.
• If customers do not renew their contracts or expand their use of the platform, revenue will decline.
• Domo is subject to governmental laws and regulations, particularly those related to privacy and data protection.
• Cybersecurity breaches or unauthorized access to data could harm the company's reputation and financial condition.
• The dual-class structure of the common stock concentrates voting control with the founder and CEO.

Future Outlook

Domo expects its revenue to be negatively impacted in the near term due to the shift to a consumption-based pricing model and macroeconomic conditions. However, the company anticipates improved margins, sustained positive cash flow, and efficient growth in the long term through cost control and sales team alignment.

Management Comments

• Management is focused on increasing the efficiency of the sales force and marketing activities.
• The company plans to continue to make investments in areas of the business to expand platform functionality.
• Management believes that the company's existing cash and cash equivalents will be sufficient to meet projected operating requirements for at least the next 12 months.

Industry Context

Domo operates in the competitive business intelligence software market, facing competition from large software companies, business analytics software providers, and SaaS-based products. The company's transition to a consumption-based model reflects a broader industry trend towards more flexible and value-aligned pricing structures. The company is also navigating the impact of macroeconomic conditions, which are affecting the entire SaaS sector.

Comparison to Industry Standards

• Domo's gross retention rate of 84% is below the industry average for SaaS companies, which typically ranges from 90% to 95%.
• The company's net loss of $18.8 million indicates that it is still in a growth phase and not yet profitable, which is common for many SaaS companies in their early stages.
• Domo's transition to a consumption-based model is similar to moves made by other SaaS companies to better align pricing with customer usage and value.
• Compared to competitors like Tableau and Qlik, Domo is a smaller player in the market, but it is attempting to differentiate itself through its platform's capabilities and its focus on enterprise-wide adoption.
• The company's R&D spending at 27% of revenue is relatively high, indicating a focus on innovation and product development, which is typical for companies in the technology sector.
• The company's sales and marketing expenses at 47% of revenue are also relatively high, reflecting the need to acquire new customers and expand its market presence.

Management Changes

Legal Proceedings

• The company is involved in legal proceedings from time to time arising in the normal course of business.
• Management believes that the outcome of these proceedings will not have a material impact on the company's financial condition, results of operations, or liquidity.

Stakeholder Impact

• Shareholders may experience volatility in the stock price due to the company's transition and market conditions.
• Employees may be affected by changes in sales team structure and cost control measures.
• Customers may benefit from the consumption-based pricing model, but may also be affected by any service disruptions or security breaches.
• Suppliers and creditors may be affected by the company's financial performance and ability to meet its obligations.

Next Steps

• The company plans to continue to invest in growth opportunities, product development, and sales and marketing.
• Domo will continue to align its sales team and focus on controlling costs.
• The company will continue to monitor and adapt to the evolving macroeconomic environment.

Key Dates

Keywords

SaaS, cloud-based platform, business intelligence, data analytics, subscription revenue, consumption-based pricing, financial results, customer retention, software, enterprise