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Domo (NASDAQ:DOMO) Q3: Stock Drops On Weak Guidance


Full Report / December 02, 2021
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Data visualisation and business intelligence company Domo (NASDAQ:DOMO) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 21.3% year on year to $65 million. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $67 million at the midpoint, or 1.05% below analyst estimates. Domo made a GAAP loss of $28.5 million, down on its loss of $22.2 million, in the same quarter last year.

Domo (DOMO) Q3 FY2022 Highlights:

  • Revenue: $65 million vs analyst estimates of $64.3 million (1.19% beat)
  • EPS (non-GAAP): -$0.32 vs analyst estimates of -$0.34
  • Revenue guidance for Q4 2022 is $67 million at the midpoint, below analyst estimates of $67.7 million
  • Free cash flow was negative $1.51 million, down from positive free cash flow of $529 thousand in previous quarter
  • Gross Margin (GAAP): 73.6%, in line with same quarter last year

Founded by Josh James after selling his former business Omniture to Adobe, Domo (NASDAQ:DOMO) provides business intelligence software that allows managers to access and visualize critical business metrics in real-time, using their smartphones.

Serial entrepreneur Josh James founded the company, after selling his prior company, Omniture, to Adobe (NASDAQ:ADBE). He had noticed that it was very difficult for the management to understand the vital signs of their company since data around various metrics such as staff numbers, retention rates, and customer acquisition costs were often held in disparate systems.

Today, Domo allows decision makers to monitor all these things and more from their phone and can draw data from thousands of sources, such as disparate points of sales across a large franchisee network.

For example, pharmaceutical companies rely on Domo's software to track the temperature of perishable products as they travel through the supply chain via real time updates. This helps them to test different refrigeration systems to know which one performs best, ensuring they save costs and deliver their products faster to users.

It's no secret that corporations everywhere are producing and monitoring more and more data sources for insights about their business. As this trend continues, the demand for business intelligence tools is expected to increase.

In the business intelligence space, Domo is competing with Tableau (owned by Salesforce), Microsoft (NASDAQ:MSFT), and SAP (NYSE:SAP).

Sales Growth

As you can see below, Domo's revenue growth has been strong over the last year, growing from quarterly revenue of $53.6 million, to $65 million.

Domo Total Revenue

This quarter, Domo's quarterly revenue was once again up a very solid 21.3% year on year. But the growth did slow down a little compared to last quarter, as Domo increased revenue by $2.25 million in Q3, compared to $2.76 million revenue add in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 18.1% over the next twelve months, although estimates are likely to change post earnings.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Domo's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 73.6% in Q3.

Domo Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.73 left to spend on developing new products, marketing & sales and the general administrative overhead. This is around the average of what we typically see in SaaS businesses, but it is good to see that the gross margin is staying stable which indicates that Domo is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Domo's Q3 Results

With a market capitalization of $2.06 billion Domo is among smaller companies, but its more than $84.2 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

Domo topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 9.16% on the results and currently trades at $59 per share.

Is Now The Time?

Domo may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although Domo is not a bad business, it probably wouldn't be one of our picks.

Domo's price to sales ratio based on the next twelve months is 7.3x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. In the end, beauty is in the eye of the beholder. While Domo wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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