Domo (DOMO) Jumps On Cost Cutting
Shares of Domo are bucking the downtrend early on Monday after management announced late last week that it would take steps to cut an additional $30 million in costs by reducing the workforce by roughly 90 employees across sales, marketing, general/administrative and R&D departments. This comes after $5 million in cuts announced in March, and management opened the door for another $30 million should the economic situation deteriorate.
The stock’s strength after this news reflects some relief that the company won’t face both a deteriorating sales environment and deteriorating balance sheet, which would require a capital raise at a terrible price, at least in the near-term.
On the topic of what the company is doing now to try to generate growth, management has said it is focusing resources in more resilient markets. With a good deal of business typically closed in the end of the quarter, which is on April 30 (just two weeks away), this is a pivotal time.
Stepping back, roughly 80% of revenue comes from existing customers, 50% comes from telesales and 55% of new deals comes from multi-year contracts. With gross renewals historically north of 90%, the takeaway, for now, is that Domo’s current revenue base should weather this storm OK and the cost cutting maintains a path to positive cash flow without having to raise capital.
That said, we don’t know details on the current quarter and won’t until it closes and management can update us. For now, it seems a worst case scenario has been taken off the table and Domo has a logical plan for the next year or so.
Is it a buy? Meh. I think this is a relief rally but it’s not a reflection of excitement about the future. We’re not value investors so buying now would only make sense if you’re looking to average down in your existing position or gamble on a recovery. Personally, I like other stocks out there to buy right this minute and in this environment. That said, I don’t disagree that there is money to be made by buying here, should the puzzle pieces begin to fit together.
It’s really a matter of what else you could do with the money (i.e. the opportunity cost) and I’d be inclined to go with stocks that might have less upside if everything works out, but also carry less risk if they don’t. I reserve the right to update my thinking if/as risk continues to decrease for Domo.
Taking it all in I’m keeping Domo at hold. HOLD