DOMO - Diving Into Domo

2023-05-10 16:19:51 ET

Summary

• Shares of data visualization software provider Domo, Inc. have plummeted 85% in the past 19 months as unprofitable single-digit forecasted sales growth remains unappealing.
• However, with the return of the founder as CEO and improving Adj. gross and operating margins, the recent purchases by the returning Domo, Inc. CEO warranted a deeper dive.
• A full investment analysis on Domo, Inc. follows in the paragraphs below.

The visionary lies to himself, the liar only to others. " - Friedrich Nietzsche.

Today, we look at a small cap tech concern has brought back its founder to help right the ship. Can the shares rebound off their huge recent decline? An analysis follows below.

Company Overview:

Domo, Inc. ( DOMO ) is an American Fork, Utah-based business intelligence software platform that collects data across a business and enables processes dependent on said data to be executed in an extremely swift manner at scale. Located on the cloud, the company's offering combines business intelligence, data warehousing, data discovery, analytics, collaboration, dashboarding, visualization, and reporting under one platform and is sold to over 2,500 customers worldwide. Domo was founded in 2010, launched its platform in 2015, and went public in 2018, raising net proceeds of $202.5 million at $21 per share. After reaching an all-time high of $98.35 in August 2021, shares of DOMO now trade around $14.00, equating to a market cap of just north of approximately $480 million.

The company is capitalized by two classes of stock. The privately held 3.3 million shares of Class A stock confers economic interest and 40 votes per share. The publicly traded 31.6 million shares of Class B stock bestow economic interest and one vote per share. Owing to this arrangement, Founder and CEO Joshua James controls 81% of the voting power.

Domo operates on a fiscal year ((FY)) ending January 31st. For the avoidance of doubt, FY23 will refer to the 12 months ending January 31, 2023.

The company is a provider of data visualization software by integrating information siloed in multiple databases and spreadsheets throughout an organization, be it on the cloud, or at on-premise data stores or at a third-party provider. These data (say from marketing, sales, product, logistics, etc.) are then compiled, cleansed, and transformed into formats that can be easily viewed and analyzed, digitally connecting a CEO to a frontline employee. Through its more than 1,000 connectors available at its Domo Appstore, the company provides easy access to data with (in most cases) no coding action.

Domo is primarily known as a mid-sized applications software provider, although 27 customers paid over $1 million for its offerings in FY23. Those services are primarily subscription agreements with typically multi-year terms - 65% of its customers were under multi-year contracts at YEFY23. This subscription revenue provides ~86%-88% of the company's total. The balance is provided by professional services consisting of implementation assistance sold with new subscriptions, as well as training and education.

It competes with business intelligence offerings from large software companies such as Microsoft Corporation ( MSFT ), Oracle Corporation ( ORCL ) , and IBM ( IBM ) ; business analytics software offerings from Alphabet Inc./Google's ([[GOOG]], [[GOOGL]]) Looker Data Science, Salesforce, Inc. ( CRM ) Tableau, private-equity held Qlik, Sisense, and Tibco; and SaaS-based products from salesforce.com and Infor.

Share Price Performance

With a high-margin subscription service in tow, Domo somewhat bumbled through its first two years as a public company, trading around its IPO pricing at calendar YE19 ($21.72). Shares of DOMO cratered at the onset of the pandemic to $7.62 in mid-March 2020, setting the stage for a robust rally.

With the ability to integrate multiple pinpoint solutions (such as data integration, business intelligence analytics, and intelligent apps) under an easily scalable cloud platform, Domo began winning enterprise clients, including Cisco Systems, Inc. ( CSCO ) , Zillow Group, Inc. ( Z ) , Unilever PLC ( UL ) , DHL, and the NBA. Despite being largely unprofitable, the market viewed these wins as validation of its platform and bid shares of DOMO to $98.35 in August 2021, when the company was forecasting an FY22 loss of $1.35 a share (non-GAAP) on revenue of $254 million - the latter representing a 21% improvement over FY21. In other words, with a 21% top-line growth outlook, Domo was trading at 12.5 times FY22E sales. Bulls ignored this "expensive" valuation as they were looking for the company to pivot towards profitability with the onboarding of enterprise clients.

However, by the time the company reported 3QFY22 results in early December 2021, its stock was already down $25 a share in the prior month due to inflation fears triggering the risk-off trade. Even though Domo slightly beat Street forecasts and slightly raised its FY22 outlook, it reminded the market that it was nowhere near profitability. As such, shares of DOMO plunged 26% in the subsequent trading session to $48.26, initiating a death march - aided by underperformance versus expectations due to a challenging macroeconomic backdrop and a significant sales force exodus during FY23 - to under $12 in calendar 2023.

4QFY23 Results & FY24 Outlook

Unfortunately, there was nothing particularly uplifting about the company's outlook when it reported financial results from its final stanza of FY23. Domo posted a loss of $0.02 a share (non-GAAP) on revenue of $79.6 million versus a loss of $0.41 a share (non-GAAP) on revenue of $70.0 million in 4QFY22, representing a 14% increase at the top line. These results were $0.07 and $2.5 million better than expectations modified in August 2022.

The company's annual recurring net revenue retention rate fell sequentially from 107% in 3QFY23 to 101% in 4QFY23 - and down from 110% in 4QFY22. Also, owing to high sales force turnover, the thought-to-be-arriving enterprise customer contributed less to Domo's revenue line in FY23 (49%) than in FY22 (53%).

As for the year, Domo lost $0.63 a share (non-GAAP) on revenue of $308.6 million versus a loss of $1.30 a share (non-GAAP) on revenue of $258.0 million in FY22, representing a 20% increase at the top line.

This performance led to a changing of the guard in the C-suite, with founder James reassuming the role of CEO he vacated in March 2022. Additionally, there were new appointments at CFO and CRO, as well as the announcement of two new board members.

Despite these moves that occurred concurrent to the release of Domo's quarterly results, new management could not improve upon Domo's FY24 outlook, which was anything but growthy, projecting an FY24 loss of $0.33 a share (non-GAAP) on revenue of $327 million - based on range midpoints - representing only a 6% increase at the top line as customer spend is likely to be truncated throughout the fiscal year.

Balance Sheet & Analyst Commentary:

Although free cash flow for the fiscal year was negative $18.9 million, Domo's balance sheet is in decent shape with non-restricted cash and equivalents of $62.8 million and debt of $108.6 million.

Four analysts have rendered commentary on Domo over the past twelve months, the most significant being Morgan Stanley analyst Sanjit Singh's downgrade from an outperform to a hold in January 2023, citing a lack of sales execution and a wave (at that time) of executive departures as his impetus. Otherwise, the other three analysts are still bullish on the company's outlook, although all have lowered price targets several times over the past twelve months. Their median price target currently resides at $22. On average, they expect Domo to lose $0.34 a share (non-GAAP) on revenue of $326.0 million in FY24, followed by a turn to profitability on a non-GAAP basis in FY25, earning $0.05 a share on revenue of $359 million.

Making a statement with his return as CEO, the owner of all the Class A shares (James) purchased 429,810 Class B shares at an average price of $14.11 in late March and early April, raising his total economic ownership interest to 13%. The CFO added $70,000 worth of stock to his stake on April 12th. The next day, a company director purchased nearly $700,000 worth of shares.

Verdict:

Irrespective of who is at the helm, the challenging macroeconomic backdrop that is elongating sales cycles will continue to weigh on Domo's performance. Backing out the absurd amount of stock-based compensation ((SBC)) - 27% of total revenue in FY23 after 23% of total revenue in FY22 - that has increased total share count (Class A and B shares) by 12% in the past two years, FY23 Adj. EBITDA was negative $4.9 million, rendering any EV/EBITDA calculation useless.

However, there is one item that points to a positive longer-term outlook: Adj. operating margin. Backing out the stock based expenses, the company's Adj. operating margin improved from negative 10.8% in FY22 to negative 1.6% in FY23. Additionally, it achieved positive 3.7% in 4QFY23. Furthermore, Adj. gross margins improved from 83.7% in FY22 to 85.7% in FY23.

That said, with expected top-line growth of 6% in FY24, Domo, Inc. stock is not a bargain at 1.33 times FY24E revenue. Furthermore, if a would-be investor were to generously apply the same linear improvement in FY26 forecasted to be achieved in FY25 (vs FY24), FY26E non-GAAP EPS would rise to $0.44. That algebra results in a very forward P/E ratio on FY26 EPS of 32.

Currently, Domo, Inc. is damaged goods with more downside risk than upside. As such, the recommendation is to avoid the shares until additional signs of a turnaround are apparent.

If you only ever look at what is obvious, you'll always see the wrong things. " - Jonathan Heimberg

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