Domo (DOMO)

Data visualization and business intelligence company Domo (NASDAQ:DOMO) reported revenue ahead of Wall Street’s expectations in Q4 CY2024, but sales fell by 1.8% year on year to $78.77 million. The company expects next quarter’s revenue to be around $78 million, close to analysts’ estimates. Its non-GAAP loss of $0.05 per share was 70.9% above analysts’ consensus estimates.

Company Overview

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.

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 siloed data.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Domo’s sales grew at a weak 7.1% compounded annual growth rate over the last three years. This fell short of our benchmark for the software sector and is a rough starting point for our analysis.

This quarter, Domo’s revenue fell by 1.8% year on year to $78.77 million but beat Wall Street’s estimates by 1%. Company management is currently guiding for a 2.6% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and suggests its products and services will see some demand headwinds.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Domo’s billings came in at $102.6 million in Q4, and it averaged 3.5% year-on-year declines over the last four quarters. This alternate topline metric underperformed its total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Domo’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Domo’s products and its peers.

For software companies like Domo, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Domo’s gross margin is good for a software business and points to its solid unit economics, competitive products and services, and lack of meaningful pricing pressure. As you can see below, it averaged an impressive 74.5% gross margin over the last year. Said differently, Domo paid its providers $25.55 for every $100 in revenue.

This quarter, Domo’s gross profit margin was 74.4%, down 1.9 percentage points year on year. Domo’s full-year margin has also been trending down over the past 12 months, decreasing by 1.9 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Domo’s expensive cost structure has contributed to an average operating margin of negative 18.7% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Domo reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Analyzing the trend in its profitability, Domo’s operating margin decreased by 1.5 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Domo’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Domo generated a negative 15.6% operating margin. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

While Domo posted positive free cash flow this quarter, the broader story hasn’t been so clean. Domo’s demanding reinvestments have consumed many resources over the last year, contributing to an average free cash flow margin of negative 4.9%. This means it lit $4.93 of cash on fire for every $100 in revenue.

Domo’s free cash flow clocked in at $6.01 million in Q4, equivalent to a 7.6% margin. This result was good as its margin was 4 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts predict Domo’s cash conversion will improve to break even. Their consensus estimates imply its free cash flow margin of negative 4.9% for the last 12 months will increase by 4.1 percentage points.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Domo burned through $15.65 million of cash over the last year, and its $131.1 million of debt exceeds the $45.26 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Domo’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Domo until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly Domo blew past analysts’ billings expectations this quarter. We were also glad its EPS guidance for next quarter trumped Wall Street’s estimates. On the other hand, its revenue guidance for next year suggests a significant slowdown in demand. Zooming out, we think this was a solid quarter. The stock remained flat at $7.96 immediately after reporting.

Updated: May 16, 2025 at 10:16 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

We see the value of companies addressing major business pain points, but in the case of Domo, we’re out. First off, its revenue growth was weak over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its forecasted free cash flow margin suggests the company will have more capital to invest or return to shareholders next year, the downside is its customer acquisition is less efficient than many comparable companies. On top of that, its growth is coming at the cost of significant cash burn.

Domo’s price-to-sales ratio based on the next 12 months is 1.1x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $10.08 on the company (compared to the current share price of $8.70).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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