Good day, everyone, and welcome to the Domo Third Quarter Fiscal Year 2024 Earnings Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Peter Lowry, Vice President, Investor Relations. Please go ahead, sir.

Good afternoon, and welcome. On the call today, we have Josh James, our Founder and CEO, and David Jolley, our Chief Financial Officer. I'll lead off with our safe harbor statement and then on to the call. 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 securities laws. These statements are subject to a variety of risks, uncertainties, and assumptions. These include, but are not limited to, statements about future and prospects or financial projections and cash position; statements regarding the potential of our consumption-based pricing; statements about our sales team and technology, our expectations for new business opportunities, transactions and initiatives; statements regarding our channel of communications and upcoming events; statements regarding the potential of artificial intelligence and its impact on our business; and statements regarding the impact of macroeconomic and other conditions on our business. For discussion of these risks and uncertainties, please refer to documents we file 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 our 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 measure, which we have posted to the Investor Relations section of our website at domoinvestors.com. With that, I'll turn it over to Josh. Josh?

Thank you, Pete, and thank you everyone for joining the call today. In Q3, we were able to exceed guidance for our key top-line metrics, including revenue, subscription revenue, and billings. A highlight in the quarter is that we had our highest operating income in history of $5 million, and our highest operating margin in history of 6%. Over the past few years, and especially the last few quarters, we have been incubating critical pivots that are finally coming together. They are clear and powerful priorities that are removing friction and strengthening our ability to deliver unmatched value to the market. Specifically, several years ago, we decided to test an idea: "What would customers do if they had unlimited access to features for an unlimited number of users and all visualization for free?" It was a simple value prop to customers. Pay for the value you are realizing. Well, after positive feedback we decided to run an even broader pilot last year, and the pilot proved to be a smash hit. We now feel like we've reached critical mass with over 20% of our ARR on the consumption model. As we continue to look at the results from this very large sample size, we feel very confident in making the decision and saying we're going all in on consumption. By the end of next year, we expect to have the vast majority of our revenue on the consumption model. Again, we now have over 400 customers on consumption contracts, representing over 15% of our customer base and over 20% of our ARR. When customers move to consumption, we are seeing user counts growing at almost 3 times the speed of seat-based customers. And we are seeing 3 times the adoption rate on premium features like data science. We've also rolled…

Thanks, Josh. I love those examples. Like you, I'm excited about our key areas of focus and believe we're really well positioned to execute on the opportunities in front of us. Now, while we aspire to higher growth rates than we're currently experiencing, I'm pleased that we were able to exceed the billings guidance that we provided at the beginning of the quarter. We delivered Q3 billings of $74.8 million, a year-over-year increase of 1%. Total revenue was $79.7 million, also a year-over-year increase of 1%. Subscription revenue represented 89% of our total revenue and grew... [Technical Difficulty]

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All right, are we back live again?

You are live. Please go ahead.

All right, very good. Sorry for the short delay. But thanks, Josh. I appreciate that and appreciate those great examples. Like you, I'm excited about our key areas of focus and believe we're well positioned to execute on the opportunities in front of us. Now, while we aspire to higher growth rates than we're currently experiencing, I'm pleased that we were able to exceed the billings guidance that we provided at the beginning of the quarter. We delivered Q3 billings of $74.8 million, a year-over-year increase of 1%. Total revenue was $79.7 million, also a year-over-year increase of 1%. Subscription revenue represented 89% of our total revenue and grew 3% year-over-year. And our ARR grew roughly in-line with subscription revenue growth. In reviewing the metrics that will impact the remainder of the year, our current RPO was $230.8 million, consistent with last year. And our total RPO grew 4% to $367.2 million as of October 31. On a dollar-weighted measure, we continue to have approximately two-thirds of our customers in our multi-year contracts. Our gross retention was above 85%, and net retention was about 95%. Last quarter, we identified potential renewal challenges with several large customers. And while we and some of our customers continue to face challenging IT spending environment, in Q3, these renewals discussions played out somewhat better than expected, which did help our results. In regards to the large renewal risks that we had identified last quarter, we have saved a few of them and have not identified any beyond those that we had identified in last quarter for the fourth quarter. Moving on to margins and profitability. Our subscription gross margin was 84.8%, up 0.2 percentage points from Q3 of last year. And non-GAAP operating margin was a record high 6.3%, up 5.4 percentage points from…

Thank you. [Operator Instructions] We'll take our first question from Eric Martinuzzi with Lake Street Capital Markets. Please go ahead.

Yeah, congrats on the good numbers for the quarter, and I appreciate the examples regarding the capacity-based pricing impacts. I wanted to understand a little bit more on the risk of non-renewals. I think last quarter, you talked about four or five enterprise accounts that were in danger and that was part of the reset to the outlook for FY '24. Can you give us a little better color? Have we reached resolution on those four or five at-risk enterprise accounts?

Yes, we've reached resolution. Good news, we were actually able to keep a couple of them just with down sales, but we still kept them as customers. So that was a little bit of a bright spot when it came to the bad news. And this quarter, we've -- given the guidance, we're obviously not -- we're not on a toward pace here, but we, at the same time, feel pretty good about looking out over the next three, four quarters in terms of the pacing of where customers are that are at risk. It feels like we hit the bottom of that, and we're recovering from that. And like we mentioned, many of the examples with the consumption pricing, we actually end up on the consolidation, being the consolidator side of the equation versus having just being impacted by others. So, the move to consumption definitely changed the relationship with a lot of our customers and has helped us save a bunch of accounts. And we think especially as that plays out over the future, like we talked about, there's so many upsells that we're getting from these accounts. If you look at the cohort of customers that have been through renewal, we haven't lost any customers that have signed up to consumption. And it's a smaller sample size, 30 to 40, but as that number gets bigger, we'll keep watching that. But it certainly is extremely encouraging looking at the 20% of our business that's purely consumption and knowing that we can get that number to a vast majority just over the next 12 months.

Okay. The other comment that you made last quarter was regarding the pipeline. And you characterized the pipeline back then as soft in all stages. I'm wondering if you could update that view on the pipeline.

Yeah, it feels -- as we look at the numbers, it seems like we've started to turn. There's seven, eight, nine numbers that all feel like they've barely started to turn, but it's barely. But all of our checks, it looks like things are -- hit the bottom last quarter and just are starting to slightly improve. So hopefully that's how things play out. But we're feeling like we have our arms wrapped around the situation much better and we feel like we're in a much better position in terms of the relationship that we have with our customers and our ability to sell consumption, our ability to get our customers over to consumption, training up the reps, training up the client services folks, focusing on adoption and helping people find these additional use cases. So, we feel like we're much better positioned and feel like we've got much better visibility into the customers and the contracts at this stage.

Understand. Good luck in Q4.

Thank you very much.

[Operator Instructions] We'll take our next question from Oliver Crookenden with JMP Securities.

Actually, it's Pat, but -- Pat Walravens with JMP Securities. Thank you. So, Josh, I do love the shift to consumption, and we've seen a lot of other people do it, but I was wondering if you could balance it out a little bit. I mean, there are some negatives to the consumption model, too, right? So, what do you give up when you make this shift?

Yeah, we -- I think if you went around the room and e-staff and tried to figure out what the negatives are, I don't -- we're not seeing any negatives. The one difference in the model is you're not going to sign up any seven-figure new logo deals, right? When you go start to use AWS, you don't walk in and be like, "Hey, give me a couple of million bucks worth." You try it out and you start spending it and if you like it, you decide that you want to commit to get lower rates, and we're seeing that same thing. So, brand new seven-figure buildings walking in the door, we're not going to have as many of those. They'll happen, but they'll happen as those customers grow. So, we're seeing those relationships. We have some really big customers that are signing up right now that on the old seat model, we'd be signing up for $3 million, $4 million, but -- annually. But in the consumption model, you sign them up for $400,000 and then another $500,000, and then you get to a couple of million bucks. And you still get to the same spot. You get there more efficiently, more effectively. There's not as many -- not as much hemming and hawing. You're not going through as many use cases and approvals internally, but at the same time, you also don't have the big billings hits until they've had time to bake. So, we'll have to wait for some of those things to bake a little bit.

Okay, great.

I think, Pat, another -- just another comment was that I think early on there was a concern, well, geez, if we're giving them whole platform, is there going to be anything to sell them later on? And there was some concern about that. But the way that's working is when we provide the whole platform and open up all the seats, it's then just about helping the customer identify how to solve more of their data issues and more use cases. And as they do that, that's the upsell. It happens very naturally.

Okay. So, there's not a near-term hit on cash flow, like you don't get less cash upfront when you go to a consumption model? I mean, maybe not...

No. I mean still AIA...

subscription.

Yeah, subscription AIA. So...

Okay. Perfect. And then, my second question is, Josh, if you could go a little deeper -- actually, I'm able to tell you my other two question, I'll put them up out front. So, for Josh, if you could go a little deeper on the architectural change and help us understand the history of that, what was it before and what is it now and how does it work? And then, maybe if you guys could address the debt in a little more detail, just sort of what's the current rate, when's the current -- when's the maturity and what's your options look like? Both of those things would be really helpful. Thank you.

Yeah. So, the problem before, when we were starting to get excited about the ecosystem and we were building relationships with some folks, especially the big data providers, we'd walk into accounts with reps, and then their customer that they introduced us to might start pulling some compute out of our partner and putting it into Domo. And of course, that's the end of those relationships, right? You're taking dollars out of the pockets of the reps of the partners. And so that was DOA as soon as that started. And so, what we've done now is we said, okay, we can take that compute component, where the data lives and how it gets queried and processed, and we can run that inside Snowflake or inside AWS or inside Microsoft. So, any partner that brings us in, we can keep all the computing charges and credits that are being used up actually with the partner. And so that changes the dynamic pretty meaningfully because now we have complete alignment except for instead of 40 users that you may have at -- even a big Fortune 500 company, from 40 users or 100 users to 5,000, 10,000, when you add the Domo front-end on top of that. And that's 5,000 and 10,000 people that are now querying and running reports that are all driving compute on the back-end of a Snowflake or a Databricks or a Microsoft or an AWS or Google. So, we feel like we're in a much, much better position. And that coupled with premium, there's been plenty of conversations where we're talking to a partner and someone that maybe we have 300 customers that have connected to their data. So, we know it's popular inside our network and we know that we provide a lot of visibility…

Great. And then, Dave, on the debt?

Yeah. So, our current debt, as you might recall, we raised that debt even prior to our IPO when we were still using a lot -- consuming a lot of cash. And so, it's very expensive debt. It carries a cash interest component and a PIK interest component, some other payments that push the effective interest rate north of 14% is where we're at today. And it's got a maturity of April '25. And so, we've gone out with a refinancing and got a bank helping us, and we're looking at cash interest component of a little over 11% right now based on where SOFR is at. We're hearing some good things about where rates might go next year, but it'll bring our rate down substantially and push our maturity date out to '29 or '30. So, it sort of puts it out well out into the future and it eliminates some of the other PIK interest and some of the other elements.

All right, terrific. Thanks to both of you.

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All right. Sounds like Pat said thanks, we heard, and there was another question. Is the question still on?

Yes. One moment. We'll take our next question from Derrick Wood with T.D. Cowen.

Hey, guys. Thanks. This is Cole on for Derek. On the RIF that you talked about, we'd just like to get a little bit more color. Is that across sales, G&A? If you can just unpack that a bit, that'd be helpful.

Yeah, we -- it was across every department. There was -- the majority of it was in sales. We're in terms of growth, not where we want to be. And so for the most part, it was based on performance. Some of it was just positions that were eliminated, as we found a more optimized way of accomplishing certain things. It wasn't a huge number, but it was still several dozen humans that were affected. So, a little bit of a rough day here at the office, but at the same time, I feel like the company is in a better position. And it's not a dramatic effect on our ability to produce. We think in many cases, actually, taking a smaller number of leads distributed -- I mean, taking the same number of leads distributed to a smaller number of reps will actually be an improvement for the reps that are here to make sure that they're being fed. So, overall, I don't think it's going to be too impactful to our company. It just, obviously, impacts the folks that were affected by it.

Sounds good. Helpful. Just building on that too, for the reps that you still have at Domo, how is productivity trending? Any new initiatives around helping them sell consumption better would be helpful to hear about things.

Yeah, we have all kinds of initiatives around helping them to consumption. We had a Board meeting just recently and walked through our consumption deck and showed the Board members all the positive things that are happening and all the negative things that we might be able to find as well. And the resounding answer was -- from the Board was, "Move as fast as you possibly can. We don't see anything that would cause us concern about you moving as fast as you possibly can." So, to that end, doing as many things as we can to drive the transition to consumption, things like we've built out a brand new adoption group that's focused on going into our -- especially our bigger customers, and helping them, it's a great phone call. We call a customer, and we're not asking for a new contract. We're not asking to go get approval from procurement. We're just walking in saying, "Hey, we'd love to come in and show you best uses for data science," or "We'd love to come in and talk to you about identifying opportunities inside your marketing spend." And they love those conversations. All we're doing is walking in and helping them, but we're helping them identify additional use cases, which, of course, ends up driving consumption. So those are the types of things that we're doing with the customer. And then, we're re-evaluating the different departments that we have and what each group does. So, reps, their job on renewal. What's what is the job on renewal? Is the job to go and procure another contract, or is the job to help identify some more use cases? And so, just identifying those different ways that we can interact with our customers to help get them excited about adding additional users and adding additional use cases. It's really fun for the customer, and it's really fun for us. They end up happier. They end up spending more. And those are the types of things that we can really do to address transitions to consumption. There are some customers that are on seat-based licenses with us, and they don't have access to all the features. We have new features rolling out all the time, and if you want to use those features, then you need to be on consumption. And so, as we go out and market the different product offerings that we have and the new product offerings that we have, those all lead to additional consumption conversation. So, we're definitely laser-focused on that. We've seen this 20% cohort of consumption that's in our business today. And it looks better than every other 20% cohort that you could find. So, we're going to do anything and everything we can to get the entire business moved over to that because just everyone ends up happier on the consumption model.

Appreciate the color. Thanks.

Yeah, you bet. Thank you.

Thank you. We'll take our next question from Sanjit Singh with Morgan Stanley.

Yeah, thank you for squeezing me in. And sorry, I've been toggling between multiple calls, so if I'm repeating a question, I apologize upfront. But David, just given the -- sort of the refinancing of the debt and sort of the higher rate environment and given the sort of actions you guys are doing today on cost, to what extent could debt pay down be part of like the capital allocation strategy, given that the budget environment is still pretty constrained right now? How do you look at debt pay down a potential lever for increasing sort of the equity value?

Yeah. I mean the good thing is even sort of as is with a very modest growth expectation for next year, I think we're free cash flow positive, which puts us in a great position. So, if we're able to accomplish some of the things that Josh talked about in accelerating our shift to consumption, and if we get any sort of help from the macro environment, then we're into producing some meaningful cash flow that then could be used to potentially retire some debt. As you know, there's usually some penalties when you pay it down in the first year. So, we'll look at that. But I think it'll be -- probably will be a lot better position as we move into some of those succeeding years to start reducing that well in advance of maturity, certainly.

Great. I appreciate the thoughts. And then, Josh, on -- I was just kind of coming out of the AWS conference, and when I hear about people's data strategies, one of the bigger themes is sort of English being the new programming language and English being the new SQL. And just want to get a sense of how you guys are sort of abstracting away kind of traditional BI type user interfaces to more of that generative AI modality where users are just sort of using natural language, English, to get the insights that they need from Domo?

Yeah, I mean it's terribly exciting because one of the most challenging things in business intelligence or in leveraging the data that you have in your company is just getting access to it. And the big part of getting access to it is connecting to it, all of the ETL that needs to go into it. And you're right, that's where these antiquated languages used to be a big part of it. And going forward, it is about English. And we have a bunch of stuff that we've already incorporated into our products, a bunch of AI that we've incorporated into our product, and a bunch of generative AI that we're going to be incorporating over the next few months into exploring the data, into building cards, into sharing data, having a data set and having AI suggest to you what you should look at, what format it should look like, being able to pick and choose from things that it suggests to you, fully formed reports. And so, it's going to dramatically alter the landscape. It's going to dramatically alter the interactions and the benefits that the customers get. So, we're really excited about that. We feel like we're extremely well positioned. When you look at the data that powers AI, it all depends on how organized that data is. And if your data is organized like a bunch of trash, then that's exactly what you're going to get back. When you use Domo, you actually not only organize your data, but you have a bunch of metadata about that data. And that's what helps AI really come up with great conclusions when it actually has an indication of what type of data is sitting there because in the data world it could be anything. It could be unstructured,…

Appreciate the thoughts, Josh. Thank you.

You bet. Thanks.

And that does conclude today's presentation. Thank you for your participation today, and you may now disconnect.