Domo, Inc. (DOMO) Earnings Call Transcript

The other thing just on the salesforce thing is like into the cloud, Benioff said, the reason he chose CRM was a simple, but Workday came later. And they're probably the biggest, most IT complexity was it was cloud, right? [indiscernible] wasn't. Domo's issue is we deliver a ton of IT. So naturally, if you're doing that, you're going to run into IT quicker. So Salesforce had the luxury of over time becoming incredibly IT complex. So they probably had a better -- I mean, we were early in the market in a lot of ways. There's an SKU for CRM, there's not for a platform, right? So [indiscernible]

Fair enough. That is helpful context. Can we get -- can we talk Q2? So Q2, you guys reported last week, I think there were quite a few surprises in there. And I wanted to walk through a few of those. I guess, first, your enterprise and corporate business, you alluded to this earlier, Bruce, but they performed quite differently. Can you talk about I mean again, you touched on it a little bit already, but if you can just double click as you triage it yourself and do the postmortem like what really happened underlying the disparate performance we saw in these 2 segments?

Yes. So I'll break it into 2 parts. Just Q2, which was not a terrible quarter. And then there's guidance, which people did not like. Q2...

Okay. The next question -- Yes, we'll get there.

Q2 just accentuated the trends that we're already seeing, and we had just gotten much more transparent about it. The corporate business companies $1 billion or less, are growing nicely. We've got velocity. It's a great business model. And the enterprise just continues to be too expensive for us and its growth rate. And because we've been both part of the reorg that happened with the new CRO, plus the fact that we were transferring resources over to the corporate side anyway. It just meant the enterprise business was growing less, and we even put the numbers out there, right, 40%, I mean, 30% on revenue for the corporate, 10% on the enterprise, and the ACV, even less for the enterprise with different pockets being more or less than the 30% depending on like the segment on the corporate side. So renewal rates were a little lower than we wanted them to be, although we didn't see that as a trend. So it was an okay quarter. We just highlighted the difference between the two as clearly as we thought we could, and we're saying like at this point, it's pretty clear like if we want cost-effective growth, we just have to put more resources on the corporate. And we try to be as clear as possible. We are not abandoning enterprise. We are just realizing it costs too much to have outbound efforts at enterprise. But we will get plenty of inbound just to our normal marketing efforts. And we absolutely are going to continue to service the heck out of those enterprise customers we have. We have 26 customers with ARR, more than $1 million, and that should continue to grow. And there's a lot of running room on that whole segment on how big they could be. So that's -- that was the Q2 performance. It was the rest of the year guide that really was the problem with the earnings call.

So yes, let's maybe talk about that. You've guided the billings growth of about 3% for Q3, which I think was kind of like a drop-the-mic moment. What happened there? I mean I know you've had recent turnover, you mentioned that earlier. But -- what else can you tell us in terms of what's baked in? I'm trying to remember back earlier on, I think working through another quarter with you, philosophically, I think you believe in under-promising and over-delivering. So I imagine there's some element of that baked into a 3% dramatic decel in Q3. But can you just maybe double-click on the different elements, the turnover, the ramp back to productivity, the conservatism, the environment. How do you parse through all these different factors?

Yes. So there's the mechanical answer, there's a math answer, there is the driver, and then I'll get to the other parts. The math answer as to why we guide the way we did is because our sales capacity dropped considerably between the 2 earnings calls. And when I mean considerably, I mean considerably like we had definitely growth investment that was just chugging along, and it came down to just a 10% increase in sales capacity from one earnings call to the other earnings call. So we had to absolutely take that into consideration in our guidance. The cause of that was turnover driven by total disruptive approach to the salesforce by the CRO. He's removed from the business, and we're just fixing all that. And a lot of that was directed at the enterprise business. For example, he believed, yes, to have 100 farmers. First, he didn't really understand the business, right? he didn't understand even the basic problem that I just described. 100 farmers, so they were combined before, they had quoted maybe $1.2 million. They got a decent amount of business from new logo and then they would kind of nurture their accounts and get business. Let him apart, made our best -- some of our best reps, gave them $1 million, $2 million quota and said you can't sell new logo anymore, total demoralizing. And I guess it took a quarter from because it happened more in Q2 instead of Q1, it took a quarter for that to just caused the turnover -- cause the angst would cause the turnover. And so we brought in Ian Tickle, who was a CRO before, who luckily didn't leave, and it's just getting right back to where we were. So we're just doing that. And how we gave guidance. Knowing we had 10% capacity, we gave guidance, not based on capacity. We gave guidance based on just the forecast. We got like we're going to be even more precise in guidance. We understand our capacity is 10%. We understand the call by sales, it's actually lower. We're going with the call by sales, even though capacity suggests we could do better. That's the thinking. The somewhat good news here or at least the reason why we think we're reasonably well positioned and the numbers we gave are reasonably kind of de-risk, so to speak, is that -- even amongst this turmoil, we continue to hire reps. Our rep counts at a record. The difference between our rep count and how we measure capacity is significant. If we just can limit turnover, we get right back to the capacity that we need to grow the way that we were growing. All we have to do is keep everybody in their seat and let them ramp. And furthermore, out of that capacity, now more of it is centered on the high-growth business, the efficient growth business and less on like go out and get the enterprise customers, right? So we think it's a very prudent, careful, de-risked approach given like what we just went through. And so that's why -- yes, so it's 3%, and then it goes up a little bit Q4 even -- and by the end of Q4, capacity will be like charging right toward the level that we need it to be to get right back on track. So I don't know if that adds on all the elements.

That's helpful. I want to dig maybe into what's going on with rep turnover a little bit more. Reps generally leave for 2 reasons. First and foremost, they can't make money, and they're not able to sell. And secondly, leadership/culture, that's in my experience, but you're an operator, you probably have some other perspective on it. But it leads me to another question of -- and you've touched on this already, but what gives you the confidence that the product market fit is actually there in a scalable way where reps can come on board and have a territory that's carved out, hit a quota and overachieve a quota and earn a living?

It's not there on the enterprise, quite simply. Because of that problem I just outlined. We do deliver transformative solutions to the big enterprise. That's true. The way they buy it and the way they think about technology going into the data stack, it doesn't fit. It literally doesn't fit or it fits but at a prohibitive cost for us. We just don't have the firepower and the money to overcome that. We don't have the partner network that a lot of companies have. Conversely, the complete opposite is true on the corporate side. I don't know how anybody would ever buy a tool for business intelligence, basically a tool when they can get the perfect solution, real time on your phone in the cloud and the whole tech stack where you don't have to hire all these IT people, you don't have to hire all these analysts. Every employee becomes their own analysts, right? You don't have to buy all these technologies. How can anybody compete against that? So what makes this so hard makes this side of the business so easy. I didn't need to get my MBA to know like, hey, putting your money where like all the velocity is, particularly understanding what the issue is with enterprise. If like we were kind of wrong in thinking it's just a sales execution thing. If you get the right sales leader, it all gets fixed. That's just not true. It's just not true. And we had to figure that out kind of the hard way over time. But now that we understand that, the management team, as we sit here now, by the way, Q3 that we're in is the first quarter where the management team is just clean. It's the first quarter we're free to operate without the former CEO or the guy he brought in, the first one. So we're generally pretty optimistic. We know what to do.

Awesome. You're unencumbered, so to speak.

Totally unencumbered. And as painful as it was and as hard as it is to admit, this was on us. I have to also state it wasn't the macro. It wasn't COVID. It wasn't competition. So we broke it, we can fix it and we're absolutely doing that. Now, we start to worry about what the macro is going to do, God knows. But we're so much well better positioned, I think, to have this high velocity, hundreds of thousands of customers we can go get. Like I think we're better positioned if the macro really does hit us. Then if we're all in on enterprise, and we were here talking about elongated sales cycles. Deal size is getting smaller. Everything is slipping. If I were investors here in that, I'd be like rolling my eyes like that's so painful to hear because you know it's coming and then you got to hear it. I that -- if we were more in on enterprise, we would have to be worrying about that even more. But now that we're like putting more and more resources on the high velocity business, we know how to navigate with them like, okay, that industry is not working, move here, that geo's not moving, move here. We like can react to it, and we already demonstrated that in COVID. When COVID hit and everybody was slowing down, we found those companies that were actually buying. We moved away from cruise lines, and we went to e-commerce, for example. By the way, a cruise line still bought our product. Fascinating. But generally, we moved quickly and when you have an enterprise, year lot of sales cycle, a multimillion-dollar deal, you can't move fast enough without that thing getting torpedo without your feet getting cut out from under you. So I think at least as a macro slowdown comes, this at least in a hard way to do it, but at least we position ourselves even better for when the macro really does hit us.

Understood. That makes perfect sense. You talked about the wherewithal to invest, and it's good to see that relative to enterprise, you're not throwing good money after bad, so to speak, and at least you know where to focus. But can you maybe talk about the cost reductions that you announced and how you think about balance sheet and where to from here?

Yes. I mean we said we had cash flow positive, and we were committed to saying that. And so therefore, when the top line slipped by the amount it did, we said we just have to cut the cost. And we were able to find $18 million out of the second half of the year, so I mean $36 million annualized. We were able to find it without having to make a hard strategic choice. This is just like doing things better, smarter, moving stuff to India. Anybody that's just not on board for the way we're going to run the business, out. Everybody roll up your sleeves and get prepared to work harder. We're able to like take all that out of the second half cost plan and still keep the business intact. And that was only to deliver on we've got to maintain the cash flow positive status. And we're running negative in Q3 even against all that onetime cost and a few other one timers but we're like the breakeven for Q4, and we're definitely well positioned for next year. So that was just delivering on the promise. It was not fun to do. We had to exit people we didn't not want to exit, but we just had a -- we had to honor the commitment we made. So that's what drove it.

Cool. First, we spent most of the time on Q2, the guide, I mean, it was eventful last week. So I thought it was warranted. And it's a significant pivot. A lot of other things I talked about, we're running out of time. Maybe I'll just put the microscope away as it relates to last week and bigger picture. Can you talk about the strength in embedded application analytics because you've got some interesting competition there? You've got thoughtSpot, you've got Sisense, why Domo versus competitors like those?

Yes. Embed is a commodity, and we don't really like it. So that's not our focus, although we can deliver. So -- well, I guess, we'll take those deals down. What we're really good at is allowing our customers to take their data and productize it and get it out to their customers.

Got it.

That's not Embed, Embed is like I'm just going to like publish some data and to make it available in some way or I'll let my customers like do whatever they want with it. Like I don't even know what they do with it, right? Like you just take it, do whatever they want. It's customized, some solution that's perfect for them. We're like literally giving our customers the ability to productize, which means they're allowing them to insert all kinds of data, make it interactive, allow the customers to even add data to it. And it's so differentiated, like you can only do that with a platform such as us. That part of Embed is so to speak, is a great spot to be in, and this is where we're get some serious traction. And we're going to get some -- even on the corporate side, $500,000 deals, $600,000 deals because these are revenue generators. And they're just like great. Again, productizing the data or and/or if they want, published service levels in a way that's very interesting. You name it. So this is an area of focus on the engineering side, great product area. That part of embedded, so to speak, is okay, commoditized, we aren't that interested in.

Got it. Listen, with that, we are out of time. Bruce, it's always good to see you, even better seeing you here in sunny Las Vegas at the Deutsche Bank Tech Conference. Thank you very much for participation.

Well, thanks for having us, and thank you for listening to the story today, guys. So I appreciate it and to be continued.

All right. Thanks.

Thank you.