Data visualization and business intelligence company Domo (NASDAQ:DOMO) beat analysts' expectations in Q3 FY2024, with revenue flat year on year at $79.68 million. The company expects next quarter's revenue to be around $79.5 million, in line with analysts' estimates. It made a non-GAAP loss of $0 per share, improving from its loss of $0.69 per share in the same quarter last year.
Domo (DOMO) Q3 FY2024 Highlights:
- Revenue: $79.68 million vs analyst estimates of $79.02 million (0.8% beat)
- EPS (non-GAAP): $0 vs analyst estimates of -$0.12 ($0.12 beat)
- Revenue Guidance for Q4 2024 is $79.5 million at the midpoint, roughly in line with what analysts were expecting
- Free Cash Flow was -$7.04 million compared to -$2.29 million in the previous quarter
- Gross Margin (GAAP): 76.4%, in line with the 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.
Organizations generate a lot of data that is stored in silos, often in incompatible formats, making it slow and costly to extract actionable insights, which in turn drives demand for modern cloud-based data analysis platforms that can efficiently analyze the silo-ed data.
In the business intelligence space, Domo is competing with Tableau (owned by Salesforce), Microsoft (NASDAQ:MSFT), and SAP (NYSE:SAP).
As you can see below, Domo's revenue growth has been mediocre over the last two years, growing from $65.08 million in Q3 FY2022 to $79.68 million this quarter.
Domo's quarterly revenue was only up 0.8% year on year, which might disappoint some shareholders. Additionally, its growth did slow down compared to last quarter as the company's revenue increased by just $3,000 in Q3 compared to $214,000 in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Domo is expecting revenue to grow 0.2% year on year to $79.5 million, slowing down from the 13.8% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 0.4% over the next 12 months before the earnings results announcement.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 76.4% in Q3.
That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, sales and marketing, and general administrative overhead. Domo's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Domo is controlling its costs and not under pressure from its competitors to lower prices.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Domo burned through $7.04 million of cash in Q3 , increasing its cash burn by 13.5% year on year.
Domo has burned through $17.83 million of cash over the last 12 months, resulting in a negative 5.6% free cash flow margin. This below-average FCF margin stems from Domo's poor unit economics or a continuous need to reinvest in its business to penetrate the market.
Key Takeaways from Domo's Q3 Results
With a market capitalization of $346.4 million, Domo is among smaller companies, but its more than $57.39 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
It was great to see Domo top analysts' EPS and operating cash flow estimates this quarter. Its revenue and RPO (remaining performance obligations) also slightly beat Wall Street's projections, and its EPS guidance for next quarter came in better than expected. Zooming out, we think this was a decent quarter, showing that the company is on target. The market is likely rewarding the stock for better bottom-line performance. Domo is up 7.7% after reporting and currently trades at $10.2 per share.
Is Now The Time?
When considering an investment in Domo, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in case of Domo, we'll be cheering from the sidelines. Its revenue growth has been weak over the last two years, and analysts expect growth to deteriorate from here. And while its strong gross margins suggest it can operate profitably and sustainably, the downside is that its customer acquisition is less efficient than many comparable companies. On top of that, its cash burn raises the question if it can sustainably maintain its growth.
Domo's price to sales ratio based on the next 12 months is 1.1x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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