Data visualisation and business intelligence company Domo (NASDAQ:DOMO) reported Q4 FY2023 results beating Wall St's expectations, with revenue up 13.8% year on year to $79.6 million. The company expects that next quarter's revenue would be around $79 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Domo made a GAAP loss of $19.8 million, improving on its loss of $33.3 million, in the same quarter last year.
Domo (DOMO) Q4 FY2023 Highlights:
- Revenue: $79.6 million vs analyst estimates of $77.5 million (2.77% beat)
- EPS (non-GAAP): -$0.02 vs analyst estimates of -$0.09
- Revenue guidance for Q1 2024 is $79 million at the midpoint, below analyst estimates of $79.5 million
- Management's revenue guidance for upcoming financial year 2024 is $326.5 million at the midpoint, missing analyst estimates by 3.14% and predicting 5.78% growth (vs 19.8% in FY2023)
- Free cash flow was negative $5.75 million, compared to negative free cash flow of $8.14 million in previous quarter
- Gross Margin (GAAP): 77.2%, up from 73.5% 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 strong over the last two years, growing from quarterly revenue of $56.8 million in Q4 FY2021, to $79.6 million.
This quarter, Domo's quarterly revenue was once again up 13.8% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $598 thousand in Q4, compared to $3.5 million in Q3 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Domo is expecting revenue to grow 6.09% year on year to $79 million, slowing down from the 24% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $326.5 million at the midpoint, growing 5.78% compared to 19.6% increase in FY2023.
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 77.2% in Q4.
That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good gross margin that allows companies like Domo to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Domo burned through $5.75 million in Q4, increasing the cash burn by 0.79 thousand% year on year.
Domo has burned through $17.3 million in cash over the last twelve months, resulting in a negative 5.61% free cash flow margin. This below average FCF margin is a result of Domo's need to invest in the business to continue penetrating its market.
Key Takeaways from Domo's Q4 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Domo’s balance sheet, but we note that with a market capitalization of $547.5 million and more than $66.5 million in cash, the company has the capacity to continue to prioritise growth over profitability.
It was good to see Domo outperform Wall St’s revenue expectations this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see that Domo's revenue guidance for the full year missed analysts' expectations and the revenue guidance for next year indicates quite a significant slowdown in growth. Billings also missed expectations. Lastly, the CEO is stepping down, and founder Josh James is filling the role. Overall, it seems to us that this was a complicated quarter for Domo. The company is flat on the results and currently trades at $16.39 per share.
Is Now The Time?
When considering Domo, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Domo we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But 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 and its cash burn raises the question if it can sustainably maintain its growth.
Domo's price to sales ratio based on the next twelve months is 1.7x, 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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