Hello, everyone, and welcome to the Domo Q3 Fiscal Year 2023 Earnings Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. And I would now like to turn the conference over to Peter Lowry. Please go ahead.

Good afternoon and welcome. On the call today, we have John Mellor, our CEO; Bruce Felt, CFO; and Julie Kehoe, our Chief Communications Officer. Julie will lead off with the Safe Harbor statement and then onto the call. Julie?

Our press release was issued after the market close and is posted on the Investor Relations section of our website, where this call is also being webcast. Statements made on this call include forward-looking statements related to our business under federal security laws, including statements about financial projections, the plans and expectations for our go-to-market strategy, our expectations for our sales and new business initiatives, the impact of the macroeconomic and other conditions on our business and our financial condition. These statements are subject to a variety of risks, uncertainties and assumptions. For a discussion of these risks and uncertainties, please refer to the documents we filed with the SEC, in particular, today's press release, our most recently filed annual report on Form 10-K and our most recently filed quarterly report on Form 10-Q. These documents contain and identify important risk factors and other information that may cause our actual results to differ materially from those contained in our forward-looking statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Domo's performance. Other than revenue, unless otherwise stated, we will be discussing our results of operations on a non-GAAP basis. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. Please refer to the tables in our earnings press release for a reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures. With that, I'll turn it over to John.

Thank you very much, Julie, and thanks to everyone for joining us on today's call. Before I discuss our third quarter performance, I want to recognize Bruce and discuss the CFO transition we announced today. After eight years at Domo, the Bruce will be transitioning out as Domo CFO. Bruce and I have discussed his next chapter for some time now. And we're grateful that he'll continue in his role until a successor is named. Bruce is an active part of the search team to find a replacement and is committed to a seamless transition once his successor is identified. Everyone on this call is familiar with Bruce and his many successes both before and at Domo. And I want to note what a strong partner he has been to me, our board and our leadership team and the important role he has played in our success. In addition to helping advance our strategy, Bruce has elevated the entire finance function at Domo and helped us successfully navigate through the pandemic. I know I speak on behalf of everyone here and saying that we're grateful for his leadership and dedication. And I'm personally appreciative of his support during my first year as CEO. Along with the CFO succession planning, I'm working closely with our executive team during our fiscal year '24 planning cycle, to determine ways to optimize our business and leadership, so that we can better serve our customers and operate more efficiently. It's important that we run lean and stay agile. And I look forward to sharing more details as planning evolves over the coming months, and we assess our needs and plans for fiscal year '24. With that, let's dive into our third quarter results. In Q3, our total revenue growth was 21%, our subscription revenue growth…

Thanks, John, for the kind words earlier. It's been a privilege to work alongside John, our executive leadership team, and all the incredible people at Domo. I'm very proud of our finance organization and the best-in-class practices that we've put in place. We've accomplished a lot in the last eight years. And the timing is right for me personally. As John mentioned, I've committed to facilitating a smooth transition once my successor is named, and I look forward to maintaining our momentum through that process. Now let's turn to our results. I think it is appropriate to lead with the milestone of Domo reaching non-GAAP operating margin positive status in Q3. The combination of our top-line performance and expense management allowed us to sequentially increase our non-GAAP operating margin by almost 800 basis points. We have been disciplined in our expense management, as evidenced by our cost reduction efforts last quarter, and have been careful with any new spending initiatives and net new headcount. We have also begun to hire directly in low-cost geographies as a new method to continue to staff strategic initiatives but do so in a much more cost-effective manner. We are in a good position to generate positive operating margin in Q4 and for the full year fiscal '24. In Q3, we posted 5% billings growth and 22% subscription revenue growth. The results in the quarter were driven primarily by sales to our corporate customers, which experienced 31% revenue growth, consistent with Q2. Revenue from our enterprise customers experienced 13% growth up from 10% in Q2. Fluctuations in FX had a 2% negative impact on our billings growth and about a 2.5% negative impact on our revenue growth primarily due to the strengthening of the U.S. dollar against the Japanese yen. We delivered Q3 billings of…

Thank you. [Operator Instructions]. Our first question will come from Sanjit Singh with Morgan Stanley. Please go ahead.

Hi, there. Thank you so much. This is [indiscernible] on for Sanjit. Just to start-off with the billings number maybe, any detail on how much slower was doing slow this quarter due to the sales capacity versus the macro having an impact, and then I have a follow on.

I would say the major driver for the numbers this year has been sales capacity. It is down from our targets. And the quota time and that's out is, is lower than we had originally planned by a significant amount, actually. So that's the big driver. The macro is more of an overlay that we are observing certain behaviors from some of our customers, particularly the large customers that just seem to be much more reluctant to step into larger deals. We're seeing on the edge a little bit slower collections not necessarily bad debts is another one. But the smaller customers seem to be buying at a reasonably good velocity at this point. And so I'd say, yeah, there's macro. There's definitely a macro-overlay to everything we're seeing. But for this year, really the impact has been based on sales capacity.

Okay, great. That makes sense. Thank you. And then on the collections point, maybe just sort of thinking through fiscal year '21 and thanks for providing the guidance there. How do you sort of think about collections into next year and specifically asking to get a sense for free cash flow next year now that you guided to operating margins positive?

Yes. We're set up actually pretty well could be cashflow positive next year. I mean, the cost cuts we did last quarter definitely benefited this quarter, benefited Q4. And we're taking a much more cautious posture on spending, not so much that we still have building sales capacity, but kind of spending in other areas. And that really leads to having a nice Q4 in billings. That's just a seasonally high number, against modest increases in spending in some cases decreases that really sets up Q1 to be a pretty good cash flow quarter. And then, I think the whole year set up pretty well as well.

Got it. Thank you so much.

You're welcome.

Our next question will come from Derrick Wood with Cowan. Please go ahead.

Thanks. Well, Bruce, you did it again on the profitability side. Congrats. It's been a long haul on that, and you'll be missed. It's been a fun ride, good luck in your next venture. Back on the sales side, sounds like you've been a little bit under plan. Where do we stand today in kind of turnover trends? And can you just give us a sense of kind of what the level of productive sales capacity growth is today or what you're expecting, exiting Q4.

Hey, Derrick. This is John. Thanks for the question, I'll give a little bit of color and then hand it over to Bruce. I think the sales organization and he has done a great job of managing the attrition there, I think we've seen that stabilizing, get much more positive in the last couple of months. So that team is building and just the rigor around pipeline management, hygiene of prospecting activities, things like sales blitz is it's a muscle that we're kind of digesting, first half and really getting the rigor muscle back in place. And on the demand side, we continue to see strong demand, the top of funnel is working, pipeline is healthy, it's as strong as it's ever been, frankly. So we feel like the demand environment is strong and the sales execution is really getting to where we want it. I'll let Bruce comment on the rep numbers.

We are actually still building sales capacity on the one hand with the metric that we call ramped sales heads. One of the challenges we have on the numbers is, however, we've kind of had a mixed change in the business, in favor of the corporate sales reps, and they just generally have lower quotas. So from a headcount point of view, we're doing fine. We just had to work that through the system and rebalance in a way where we have the kind of the quota capacity of the street to be commensurate with the headcount. And we do have plans to get that rebalance kind of as we go into next year. And while I'm at it, we think we're in a good position to really get the enterprise being a much bigger contributed toward next year, we have great reps that are here, they know their accounts well, extremely engaged. The value proposition seems to be showing even better in this economy, even though we have to deal with the budget challenges of our customers on the one hand, but we have the right kind of architecture and approach. And the Modern BI that's just going to play well. And we think the large enterprises can actually be tailwind to us next year. So yes, we look forward to getting into next year.

Wow. I was going to ask a question about the enterprise. I didn't expect that answer. That's good to hear. But I imagine that when I'm looking at your Q4 guidance, and I mean, you have revenue down sequentially. Maybe there's some professional services volatility in there. But is it fair to say, how come we're not seeing more seasonal strengthen in revenue in Q4. Is it just because you don't have the level of enterprise business, which is typically a big Q4 seasonality as you did a year ago, and so that's a tougher comp. But once we get through that, we should start to see it better. And second half, maybe you could walk through the puts and takes on the Q4 guide for revenue.

Yes. Two main items, one is, we're being very cautious in the new business and the contribution to new business and the revenue contribution. Well, I'll even add to that reason being cautious in the renewal rate. And the revenue we get out of that we think is just that prudent. It's prudent do so given these numbers are quite large, going into Q4. And then we don't have factored in the same number of like, service delivery, hours and app delivery. It's possible -- if it is commensurate with what we've seen just recently, there's some upside there. But it's not baked into the number as we sit here right now. So that's why it's really services-driven, I would say in terms of like, what's really causing that.

Got it. Okay, thank you.

Typically a big deal quarter and we're being conservative when we look at these deals.

Thank you.

And our next question will come from Pat Walravens with JMP Securities. Please go ahead.

Oh, great. Thank you. Bruce, we're sorry to see you leave. When did you decide that it was time to leave?

That has developed over time as I just assessed, where I want to be, where Domo needs me to be. What I've accomplished? How much time I've been here. If you've counted it eight years. That's a long time, but I will also add. I mean, I just went into agreement that goes on till about March 26, seeing kind of argue I might actually be overdoing it by staying here. But yes, it's been kind of a collaborative discussion I've been having with John and the team about like, what's needed? What's the state of the business. And one of the things that we spent a lot of time was just the strength and the talent in the finance organization. And frankly, I kind of put myself out of the job that's so good. So that I'll be around for a while, I'm fully engaged here. And I have a vested interest in making sure the stock is when I sell it, it's much higher than where it is here. And to be engaged gives me a better shot at influencing that and if I wasn't.

Great, thank you. And then John, this is a tricky one, but we might as well address it. So Domo's agreement with Josh James expires on March 1, 2023. What should people expect? And what key points would you make to investors?

Yes. I would say that the team that's here is really, really solid and focused on operating the business in a prudent way. I think this is a fantastic business. If you just look at the top lines of 300 million in recurring revenue, 90% retention, 80% gross margins, operating margin positive, that was a big, big milestone. We're focused on running the business. We're not really trying to answer those questions right now as a team.

Okay. Thank you.

And our next question will come from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

I know it's still early days here. You talked about the 2024 planning process. But just curious to know if we're drafting a change in the sales compensation architecture, either kind of payouts for corporate or skewing that towards the front half of the year versus back half of the year. Any early thoughts on sales comm.

We're kind of right in the middle, I'd say of the planning process for next year, which is -- it's kind of -- it's exciting to be able to plan for next year and look at the progress we've made this year. And we want to be conservative, we want to be prudent for where we are in the macro environment. But also, we're pretty bullish on the value proposition that Domo brings to customers. When we see it every single day with these customers who are actually transforming how they do business with the Domo product, and we think that they are a real significant positive in this environment.

Yes. And I'll add, the big mistake this year was in the sales reorg, so to speak, quotas were too high, the ability to get the business just wasn't where it needed to be, for a set of reps to make their number. And that really was contributing to sales turnover. We know that. We're planning next year, one of the principles is, the sales guys have to make money, or salesmen and women have to make money. So that's a given. And we're going to make sure that we have plans that do that. And by the way, sales reps are listening to this, ignore this comment. This is for investors only. I'm only kidding. We love ourselves reps. But we do need to make sure there's a structure where they get paid in. And I'm fully supportive of that. And then working with Ian, and his sales ops team, so I'm making sure that's set up. And we're doing it early this year, too. So we hope to get off the next year with a bang.

Okay. And then I want to make sure I understand expectations for the operating expenses for Q4, and then I guess I may as well address at least early on for Q1. It's my honor to understand that there's not an expectation that OpEx would rise with potential incremental investment in sales force, or is it the variable part? We'd hope that would rise. What's your expectation for OpEx in Q4, Q1?

Yes. We're focusing on non-GAAP operating margin. And that because expenses or revenue could flex a little bit but the commitment, we have is to make sure we hit our target and definitely be positive in Q4. And all our planning models are targeting positive in fiscal year 24.

On the full year basis, but not necessarily on a quarter-by-quarter?

Well, let's say full year for now. And when we get to like formal guidance at the end of Q4, we may provide some more color about how that could be divided amongst the quarters between the quarters.

Got you. Okay, thanks for taking my questions.

You're welcome. Endof Q&A:

And with no further questions that will conclude today's conference. Thank you for your participation and you may now disconnect.