Domo headed toward down-round IPO


VCJ Venture IPO Guest Column
Photo courtesy of TimArbaev/iStock/Getty Images.

By Rohit Kulkarni, SharesPost

Domo, a Utah analytics unicorn, recently filed for its IPO. Based on its financials, ongoing cash burn and slowing top-line growth, we think it could be headed to a down-round IPO.

The company’s most recent private funding valuation was $2.28 billion as of December 2017, but we’d be surprised if its public offering exceeds that level.

On the other hand, Domo boasts a proven founder/CEO, a strong track record working with enterprise-class firms, low end-market penetration, and a bullish IPO market for SaaS companies. Domo makes software that enables employees in an enterprise to access real-time data and insights, and take action from their smartphone.

Below are our 10 observations from Domo’s S-1:

  • Domo plans to raise $100 million. Underwriters include Morgan Stanley, Allen & Co and Credit Suisse. The company plans to trade under the ticker symbol DOMO on an as-yet undisclosed exchange.
  • Domo generated $108 million in annual revenue last fiscal year. This figure represents a 46 percent increase from the $74.5 million for the fiscal year ended January 31, 2017. Subscriptions accounted for 81 percent of total revenue in 2018, up from 79 percent the previous year. Domo’s subscription revenues have increased at a faster rate than professional services revenue. However, the growth rate has decelerated over the past couple of years and has dipped below 40 percent in the most recently completed fiscal quarter.
  • A large market opportunity. Domo operates in the business intelligence and analytics markets. Third-party market research estimates the total market for BI software at $24.4 billion in 2018. Additionally, Domo’s offerings can serve ancillary data and business enterprise functions, a market estimated to be $20.4 billion in 2018.
  • Negative operating margins and low gross margins. Domo incurred net losses of $183.1 million and $176.6 million for the fiscal years ending Jan. 31, 2017 and 2018, respectively. These losses contribute to an accumulated deficit of $803.3 million as of April 30, 2018. Domo’s overall gross margins have been rising over the past couple of years, from 55 percent in fiscal year ended Jan. 31, 2017 to 58 percent during most recent fiscal year. Domo’s gross margins are trending in the right direction but are clearly below SaaS peers, such as Okta, MuleSoft and DocuSign.
  • Limited operating experience. Domo first publicly announced its platform in 2015. The newness of its offerings, combined with the continued losses mentioned above, suggest it may be some time before Domo achieves profitability.
  • Significant cash burn. Domo’s cash outflow from operations was $144.1 million and $148.7 million in the fiscal years ending Jan. 31, 2017 and 2018, respectively. With $71.9 million in cash at April 30, 2018, Domo may continually require additional financing beyond the proceeds of this IPO to fund operations and growth.
  • Competition from large, established industry leaders. Competitors in the BI space include SAP, IBM, Oracle and Microsoft. Despite the large market potential, Domo will have to deal with competition from sophisticated and well-established companies, as well as many smaller private companies.
  • The IPO is for Class B, not Class A shares. Domo’s IPO will be for its Class B common stock, which is allotted one vote. Class A common stock is entitled to 40 votes. The entirety of Class A common stock will remain with Founder and CEO Joshua James.
  • Forced IPO timing. Domo most recently raised $115.1 million in venture funding in December 2017. As of April 30, 2018, it had no additional funds available from its credit facility. With $71.9 million in cash and a history of losses, the proceeds from this IPO will have a significant impact on the continued operations of the company. In fact, the company admits that the ongoing cash burn might lead to restructuring after Q3 2018: “If other equity or debt financing is not available by August 2018, management will then begin to implement plans to significantly reduce operating expenses.”
  • Top institutional holders own more than 40 percent of the company. We believe such a proportion of institutional ownership could lead to lower volatility in Domo’s post-IPO stock performance. CEO James owns about 4.5 percent of the company. Top institutional investors are IVP (12.9 percent), Benchmark (12 percent), BlackRock (10.8 percent) and GGV Capital (6.7 percent).

Rohit Kulkarni is a managing director and head of research at SharesPost Inc.

 

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