Why Domo (DOMO) Stock Is Trading Lower Today

Max Juang /
2024/03/08 3:52 pm EST

What Happened:

Shares of data visualization and business intelligence company Domo (NASDAQ:DOMO) fell 13.3% in the afternoon session after the company reported fourth-quarter results and provided full-year revenue guidance below expectations, suggesting a slowdown in demand. Billings' guidance for the next quarter also fell short, with management expecting the growth to stay flat quarter on quarter. Total remaining performance obligations (RPO - leading revenue growth indicator) grew only 1% during the quarter, suggesting sales remained pressured by "a challenging macro environment." While it is encouraging to learn that roughly 2/3 of customers are still on multiyear contracts, management observed weaknesses in the installed base, adding, "We had some down-sells at three enterprise customers that, combined with more normal churn, led to gross retention of 82% and net retention of 91%." 

Moving on to the bottom line, full-year non-GAAP EPS loss guidance underwhelmed, with management expecting it to come within a range of -$0.36 and -$0.46 (versus a consensus estimate of -0.02). Margins continued to feel the pressure from investments in new products, including efforts to build AI functionalities that could add more value to its customers. As a result, while Domo's free cash flow was positive during the quarter, it might be tough to maintain the trend going forward. Overall, this was a weak quarter for Domo, with the results suggesting there is more work to be done to raise investor sentiment.

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What is the market telling us:

Domo's shares are very volatile and over the last year have had 32 moves greater than 5%. But moves this big are very rare even for Domo and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was 3 months ago, when the stock gained 10.3% on the news that the company reported third quarter results that topped analysts' EPS estimates. Its revenue and RPO (remaining performance obligations) also slightly beat Wall Street's projections, and its EPS guidance for the next quarter came in better than expected. Notably, the company delivered the highest Non-GAAP operating income in history of $5 million, coupled with a historic operating margin of 6%. This suggests a potential improvement in the company's operating leverage, even though it continues to experience cash burn. 

Domo also shared positive results on the adoption of its consumption pricing model, with over 20% of its Annual Recurring Revenue (ARR) now on this model. With more than 400 customers on consumption contracts, representing over 15% of the customer base and over 20% of ARR, the company plans to transition the majority of its revenue to the consumption model by the end of next year, citing accelerated user growth and increased adoption of premium features like data science. Zooming out, we think this was a strong quarter, showing that the company is on target.

Domo is down 1.1% since the beginning of the year, and at $9.93 per share it is trading 44.5% below its 52-week high of $17.87 from July 2023. Investors who bought $1,000 worth of Domo's shares 5 years ago would now be looking at an investment worth $319.19.

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