Domo, Inc. (DOMO) Earnings Call Transcript & Summary

Okay. Hi. I am Sanjit Singh. I cover infrastructure and analytics for the Morgan Stanley software team. We're really pleased to have Bruce Felt, CFO from Domo, joining us at the conference once again. Thank you for coming back, Bruce.

Thank you for risking your life to be here.

Yes. No. Well, we're all here.

This event.

And Pete Lowry, VP of Avaya -- of Domo, thank for joining as well. Before we get started, let's just quickly go through some important disclosures. Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk.

So maybe just to kick off the conversation, Bruce. A lot of conversation around like the macro environment, COVID-19. In a scenario where like the economy starts slowing down, how would you sort of characterize the defensibility of the business and what you guys -- how would you guys react to a more adverse spending environment?

Yes. I mean I think interestingly, our top line is probably in a better position than the average software company or maybe even way beyond. And the reason for that is a substantial portion of our billings today, which we kind of don't want in the future but it exists today, is -- comes from a renewal stream which is very sticky. So if there's a really bad downturn or slowdown or stopping, those -- most of those or a large majority will probably -- who are using the product, they'll probably renew. The other thing -- and then on our new business, a big portion of that actually comes from current customers so we don't have the risk of being overly reliant on getting a bunch of new brands, which a lot of companies are. We want that problem. It's what we're working on but if -- in a downside scenario, we're in a good -- pretty good position. And then if nobody wants to travel and nobody wants to have meetings, then we are extremely well positioned from the standpoint that our corporate business has always been very telephone-oriented. And these aren't $5,000 deals or $50,000 deals. And we've been kind of leaning into that anyway just because the unit economics work pretty well. So oddly, our top line is actually in a pretty good position and we have enough recurring revenue that on the cost side, we could cut our ways to wherever we need to be to make sure we're self-sufficient with the cash we have on the balance sheet. And then on the product side, we have a product that's kind of easy to deploy. So you could maybe sell and deploy it over the phone. We have free trials, proof-of-concepts, and you could argue it's a kind of product you might really need when everybody is trying to figure out what the hell is going on with their business. So I think just generally speaking, we're in -- the top line is pretty protected. And if we had to make -- take action on the cost side, we aren't afraid to do that.

And maybe just a follow-up there. And we spent quite some time on the sales strategy as we go through the conversation. But just driven -- like sort of contextualize the sales cycles and the -- in the commercial business versus the enterprise business, what does this look like?

Sales cycles are -- they're pretty fast in the commercial business, 60 days or less. A substantial portion of the business we get on the corporate business, that's everything under $1 billion. We don't even know -- it's not even in the pipeline at the beginning of the quarter, so pretty quickly. And enterprise is 6 months on average, sometimes more, sometimes less. The upsell part of the business, that's where we lean into our current customer base. That can come in, pipe and become a deal within 30 days, 45 days. So that's really fast. And we're just trying to speed everything up. Big deals are new to us. Even selling to our current customers, those are hard to predict. So we're spending a lot of time lining more and more of those up. We have a product set that once we get into a customer account, they really, really like it and they really start using it. We just need to systematize the ability to kind of package it up to be a $1 million deal. They usually start at about $100,000. So -- but yes, $100,000, maybe 120 days on average, maybe 6 months, when you bring in the big stuff. And the corporate is much more predictable and quicker.

Got it. It seems like you have a couple of levers to react appropriately if things turn. So maybe to bring -- up-level the conversation a little bit. It's been a couple of years since the IPO. And so one of the things I wanted to get a better understanding of is how have you guys thought about the value proposition. And sort of simply stated, I think the best way to think about Domo is a data platform company but in terms of like how you guys think about the value proposition of the product internally and then how you are messaging that value proposition to go out and win customers have been evolved like since the IPO until today.

The main evolution has been -- well, we're still true to the original vision, which is as a CEO or a management team, can we just get the information we need to run the business today basically on our phone, real time. We have literally delivered on that proposition. And it's extremely hard to do and we found out very expensive to do. Just offering -- so trying to run your business on your phone isn't enough, however. We've had to evolve more towards, "Let's get very precise in who we're going after on the business side." So this is where we talked -- the conversation about sales plays came up. Let's go after CFOs, they're perfect, and their FP&A team and their accounting team. Let's go after CMOs. Let's go after Chief Revenue Officers. So let's get more precise because the ability to run your business on your phone actually was so universally true but broad. We could go down 20 different paths. And we're successful at it but it just costs too much. It takes too much time. The other -- the big move that we've been making is trying to be as friendly as possible to the IT department. That's new, and that's evolved and we're still evolving it. Because at the beginning, we promoted the fact that you really could rip out your infrastructure and use Domo instead. That's true but very unhelpful because there are a lot -- there's a lot of money spent by CIOs into their infrastructure that kind of works in the way they thought they could deliver data. It's not what we do. We'd really unleash it, but they're extremely protective of it. And to say, "Go rip it out," is just a bad idea, as true as it might be. So we've evolved it to be -- and we're getting a lot of traction, "Just use us to unleash and lever all the BI investment you made." That's just as true also. We can sit on top of it and get it out to people, and we can do it fast and we can do it at scale. And so we're being extremely friendly to the IT department without really making them our target customer because we're so -- and we kind of diverted. Are they a target customer? Are they not a target customer? Back and forth, and we're saying -- we just want to make them our friend. They are starting to buy it. Well, one of our bigger deals in Q3 actually was CIO-sponsored, but we just want them to be our friends while we go really hard at CFOs, CMOs and CROs right now.

Understood. And I've got -- one of the other elements that's changed and if I go back to around the time of the IPO, I think the message there in terms of the sales strategy is like, "Look, our platform can do really well in these really large companies where if the unit economics are better, you don't want to give up on the commercial market but you directed more -- pushed more resources to the enterprise field sales." And I think what the first half of last year is about is that you do have the ability to land really large customers. At the same time, they're lumpy. There's -- they're harder to predict. So can you talk about how -- like what's the strategy to get the business on a more predictable sales cycle going forward as you, on one hand, continue to try and lay on these marquee Fortune 500 as accounts while at the same time building a blocking-and-tackling business that can get you from quarter-to-quarter and we started seeing that consistency?

The #1 focus is to get new enterprise customers. That's the #1 focus on what really unleashes this thing because we figured out how to get the business in the corporate, which is one way to deal with the lumpy units on the enterprise, is don't be afraid to invest in the less than $1 billion revenue companies because they -- we have the ability to sell to them, and we were not so sure about that a year ago when we kind of defunded the massive marketing spend that we were doing, just massive. And we thought that's got to just -- I can't imagine it not decimating the small business. That seems to be very lead-gen-oriented and it needs the volume and you cut that off, it's gone. Well, it didn't go away. It didn't go away. And how could that be? And the answer is it's actually more enterprise-y than we thought. The salespeople were very good at value proposition, really describing the value proposition of smaller businesses. They were already selling $50,000 deal sizes. So they're good at it. And when we recognized that, we said, "Let's just lean more into that," preserve what we're doing on it but just lean more into that just to kind of -- to your point, de-risk the business, have predictability. The big ticket guys -- this is Jim Kowalski, the North America team, they love going after big deals but that just naturally made them go after current customers. So they're getting better at that. And if you get a big enough pipeline of that, then that becomes predictable. You can't have 10 and have 10 closed, but you're going to have 100 and have 10 closed, just a percentage of them that would work. But the last key thing is how do we get new big brands to sign up to us much easier than what we've done before when you have an enterprise sales force that's going after just the big stuff and kind of at the expense of that. And once we crack that code, that's when I think we'll start seeing a super outsized growth. And it's one of the things we're working on, we think the sales play is focusing on. I mean I'm involved in going after just explaining what we do to CFOs, and I've yet to have one say, "I could use this." But working through the apparatus of these big companies is still hard. We have one of the biggest financial services companies I met, I don't know, 2 months ago, becoming a POC, probably going to become a big deal, maybe the biggest deal ever. But it takes time and it's just tons and dozens of people involved in things like that. But these are really going after these real personas and being -- putting the whole marketing sales apparatus behind that with cost scripts and lead gen and the whole kind of value delivery chain to that function. That's where we're spending a lot of time on and iterating as we speak. And I think that's going to pay off in the end and help us deal with all this and get more predictability and a higher level of growth.

Back on the Q2 call, Josh sort of highlighted potentials of proof-of-concepts, free trials to sort of improve that conversion in a self-service fashion. What's been the early -- I guess you guys have been doing that, I think, for a couple of quarters now. What are sort of the early results there? And how much of a driver can this be? How much of...

It's definitely additive. It's helpful. I don't think -- it's not a game changer at the moment. But to have big data infrastructure, that's what we do and let customers even more easily to proof-of-concepts on their own is just definitely helpful. So we're making progress there. The other thing that we're spending a lot of time on that we brought up on Q2, Q3 call has been -- we just got to build out this partner network. We really -- we're pretty aggressive. I think we could go at it alone because technically -- just technically, we should be able to. But if you really want to be a big software company in this world, you really have to have partner help. And that, we work on, too. And that's making nice progress also, the cloud providers, independent software companies, system integrators all just making progress. So proof-of-concept sales play is this, I think, just all working to add to better business momentum as time goes on. And then we have John Mellor who came over, who's running the sales play and now with -- our Chief Strategy Officer. He's now taken over marketing and he's just grinding out marketing operations just to do everything better and better. And he said, "Look, there's nothing we're doing terribly wrong, but we aren't doing anything across the board really where it ought to be. And if I can just make the progress there on lead gen and processing and moving things through the pipeline, if I can just make all that incremental progress, it's going to end up with some nice pipeline build at the end that's absolutely going to turn into deals." So it's just so many things. That's why we're -- that's why I'm so cautious on the numbers all the time. I mean everything is going to help, but there's just too many things moving. So I got to just be cautious and maybe as overly -- in the end, overly conscious on Q3. We set up expectations for low growth in Q4, but it's all a function of -- there are so many things going on. That's what I'm worried about, not that they all have to work and they all have to contribute, but that's where the kind of caution in the numbers comes from.

I certainly don't mind you being cautious.

You don't mind?

No. That works. I guess a few of those conversations have sort of been how is Domo evolving. And I think in the last 6 months, probably one of the bigger themes has been sort of -- you mentioned is the partners, particularly working hand in hand with guys like AWS and Snowflake. I guess the first thing is what sort of changed in terms of your sales method that allowed you to partner more effectively with the cloud providers and guys like Snowflake because you guys did have a data warehousing, data integration, right?

We do and we were competitive to Snowflake. And technically, you could argue, yes, that makes sense. It's a data warehouse in the cloud. It's more a -- what's so much a messaging thing. It's a realization that we just have to change our posture and then the messaging followed. We had to build an ecosystem. We have to have partners. Independent software companies can be just as big a partners as anybody. Snowflake is a great example. They've absolutely thought we're competitive and won't even take our call. And we knew we could actually help them get more data into their data warehouse in the cloud and they get paid on volume. So when we finally convinced them, "We add data, don't take it away," they totally changed their posture. And now we're still working through -- well, let's -- so now we got a relationship and it definitely helped us get deals in Q3. But now it's more about, "Okay. Well, let's help you more and let's get higher on your list, Snowflake," so that they can help us more. Same thing is going on with Microsoft and Google and Amazon. Let's help them get business. Let's help Microsoft sell Azure because we bring so much data from the business side at work that they absolutely bring in the infrastructure. So they're -- right now, we're doing joint sales calls together. And we just need to get them super excited about it and have the right talent on our team who can really just make sure that stays on the tracks so that they get enough momentum so they put a lot of resources behind it.

And you mentioned like working on joint sales calls. Was that on the Azure side or the AWS side?

It's actually on the small business side who cares the most about Azure sales. So -- and that will flip over to the enterprise sales if we get traction with. It's a $10 billion business so it's not a small business.

Right. So I think you've had some specific partnerships with AWS around -- on IoT. You went to Snowflake but there can be -- may be a potential further announcement with Azure. Anything on the Google side? Or does that matter...

No, it's just as important to them to fight the other 2. So we're kind of the independent guys that can help all of them and they don't mind because they're at war with each other. We're just a tool they can use to help them against their kind of their competitive threat. So great relationships with them, too. We just got to -- again, they're all going to be supporters of us. We just have to get them more resources from them behind us so we can make it a meaningful part of our business.

In terms of -- if we just take AWS, are we at the stage yet where an AWS salesperson can knock down some of this quota by selling Domo?

They can because we are one of the vendors where if they buy us, it becomes credit against the contractual commitment that their customers have with AWS, which is a problem everywhere. Everybody overbought, for a lack of a better word, or overcommitted the minimums. And so they buy Domo. It burns down minimums. And in some cases, we had a deal on play that they would have cut a check to AWS but for -- but they didn't have to because they're done or they weren't going to. It's not a done deal. So I can't say it's done. But that's very attractive to -- that's something that they pitch that any corporation in the world that has an AWS contract can say, "Sure, I buy it, and it takes down my minimum, and I'm short," and a lot of them are short. We were even short. So we had to redo our deal. We know exactly what that's like, but we can't be a credit against that commitment.

Got it. Importantly, Chief Revenue Officer, Ian Tickle, who was running EMEA sales. I remember like EMEA being one of the higher performers who are sort of running that enterprise sales growth better than some of the other regions. What did he specifically do in EMEA that sort of made you guys comfortable in putting him the head of sales? And what are sort of the initiatives that he's laying out going into the next fiscal year?

Well, we -- the first thing is we watched his success over 4 years. That's one thing. And two, it was 4 years, so we saw him in action, extremely well respected. What he -- the point of view that he brought was he was a General Manager of the European operation. And I think that made a big difference because he took such a holistic view of things. It wasn't just, "Go get the deal or land an account." It was, "I need to build a business. So therefore, the original transaction is just the beginning. I need to support it. I need to make sure of professional services." So he just understands the whole picture really, really well. And I think that helped us get some nice accounts in Europe like L'Oreal and British Petroleum and things like that. So he's a known quantity, very well respected. And we thought he'd be a very good choice, very operationally oriented also, very detailed-oriented, very data-driven. So he's looking at numbers all the time, "Look, could you believe this?" or "Look at this opportunity that we could really take advantage of." And I just think he's the right kind -- and that operational rigor. I mean he's doing things like weekly pipeline build by rep, which we just weren't that rigorous on. That just wasn't the granularity that the prior sales management did. I think that's just -- that discipline is really, really going to be good for us. And so yes, it was the general manager, that kind of rigor, his point of view. And him married with now John Mellor, who's running marketing, this is a way different talent than we've ever had before, very mature, extremely seasoned. They know what the right thing is. They know what the wrong thing is. It's just not, "Go do it all." I think that, in combination, is going to really, really help us develop the business the way we want it.

Got it. There's a lot of consolidation in the market, particularly Salesforce bought Tableau, Google bought Looker. And I wanted to get your take on what the implications for Domo sort of being one of the few stand-alone players in the market. But maybe first -- I guess the first question is what do you see as the forces. What are the forces driving consolidation in the industry? And what does the landscape look like in the 6 months -- 6 or 7 months after? If you have things gotten harder, more difficult. What's -- what do you see sort of the fallout from the...

Yes, I think the Salesforce-Tableau -- and I'll throw MuleSoft in there too, demonstrates just what this space really needs. I mean the space is just a mess, 1,000 vendors all doing their own thing. It's the way the large companies want to buy it. They didn't have a choice. So that's what they're used to doing. They just have to patch it all together and do their best to get data out. And basically, it's not very good. And it's emails and spreadsheets and PowerPoints, and it just doesn't work in the modern world really, right? So Benioff has understood this for a long, long time. He announced Wave a long time ago, right, 4 years ago or so?

Right.

That was Domo because he saw the need in the market. But what happened to it? Went nowhere, right? Why? Because you have to have a complete platform built from scratch on the cloud to truly do this. So he can't do that. He's already got a footprint, a big footprint. So the next best thing he can do is buy Tableau and MuleSoft and other things and put together a unified story but not a unified architecture or technology offering. And that's what Domo does. So I think the biggest signal that this is -- it's a big problem. They're willing to spend $22 billion plus-plus to go after it, spend money to go after it. So obviously, it's a big market. And I can tell you that doesn't solve the problem and Domo does. So it's on us to -- like we have to articulate the value proposition better. We have to capture the imagination of the C-suite of the big companies. We have to get it -- do it much more cost-effectively. But we're really -- that was just such a bullet sign for them to do what they did and Google to go by Looker. The problem is not solved. It's still not solved. We think we have the solution. It's on us to really articulate in a way where people did buy it. And at some point, we're going to have so many customers speaking on our behalf. It's got to spread, right? It's just got to. There always is a tipping point. You never know when it is, where the word-of-mouth really kicks in, and we become the thing you ought to own. And if we get better operational in the meantime without that tipping point, we could still have fine growth. But man, if that ever does tip over...

That will be...

That's when we get the 30% and the 40% growth and there's just no insight because we do the whole thing. So we probably have the biggest market opportunity out of anybody. I would say Benioff support -- would support that notion. They just want to do it themselves, and I don't blame them, but we actually have the answer.

Got it. I had a couple more questions. I want to see if anyone in the audience had any questions before we wrap up. Got one in the front right here.

Maybe you can just maybe frame it in terms of net expansion rates. But if you don't kind of land any of these sort of new logos, sort of sales team stays kind of at its current potential, I guess -- or not potential but its current abilities, what is that growth rate kind of ex sort of the super sort of landing new logos? What are maybe -- and I don't know if you guys have given a kind of expansion rate. Just help me think about what's the natural growth rate of the current existing base.

Yes. So new logo comment was really about enterprise, the big enterprise that we got to get. We're actually pretty good at things less than $1 billion. And then we have a group called the $1 billion to $5 billion, where we brought that motion over. So -- but we've always had 100% -- over 100%. So we've always had growth anyway just by our -- we call it the dollar renewal rate or the net expansion rate greater than 100%. It's been jumping around. It can be 105%. It can be 115%. It's kind of in these ranges. So we kind of have some built-in growth from that. We'll definitely speak to this on our Q4 call. The enterprise expansion rate was good, as you might expect, because our sales force is expanding in the big accounts more than getting the new ones and the renewal rates have been going up. But yes, if we just kept that -- and the other thing that is somewhat new is we started this last year as we had the corporate business again under $1 billion split in the farmers and hunters, and we historically had very little upsell out of that business. And the upsell grew. The farmer group did really well, surprisingly well, nice -- had big quota numbers hit them. So that will also help that expansion rate for the whole company if the corporate business, which used to be less than 100%, starts really kicking in. So that's not comforting, right? You don't have to get -- we don't have to get new customers any more than where we are now. We still have growth. We just don't like this growth. We should have much higher growth given what we've built and what the market needs. That's what we're solving for at the end of the day, but we do have somewhat of an insurance policy. Once we get into account, people do want to buy it and it expands.

One last question if you can. The -- getting to cash flow breakeven, what gives you the confidence? I mean you guys have been emphatic that you guys have a self-funded business plan. Can you just sort of walk us through the underlying assumptions? Or just anything that gives us -- gives you that confidence to get there.

Yes. Well, we made the statement when we're on the road show and nobody believed us. And the reason is understandable. There was no model that show we didn't need more money. I don't think there was one. Even the investors, they came in and said, "I had you to have 2 fundraising," even though we said we're doing none. Part of that is when you go public, you have to keep -- you've got to keep your top line expectations down. I mean we had a crazy business, right? It's still crazy. So we got to keep it down. So we overperformed there. And when I told -- what I've told every investor -- I'll tell it again today, is if you can grow your top line and recurring revenue business just almost any growth, you can keep costs flat, you can grow your way out of it. And people -- the models just didn't sync to that point because the growth was so low and expenses were going up, but we know we can control expenses. We know it. And we are growing so we have a path that absolutely gets us there. We have to knock on wood and nothing crazy goes on with the market right now, I mean the macro market. Even there, I said top line is somewhat protected. And we will get there and we're committed to do it. And we will cut if we have to, but we don't think we have to because it's just working. And we'll definitely speak to this in Q4. You'll see more progress. And we'll talk about next year and give you more guidance and people will get more comfortable that what we said 2 years ago is, in fact, true.

Got it. Well, thank you, Bruce.

Thanks for showing up today and being here late in the day, and thanks for nobody coughing.

I was holding it in.