ON24, Inc. Q3 FY2024 earnings call

Financial Results Improvement

• Q3 revenue from core platform including services was $35.6M, total revenue $36.3M. Delivered sixth consecutive quarter of adjusted EBITDA profitability and third consecutive quarter of positive free cash flow generation.

ARR and Customer Metrics

• Ended Q3 with $129.7M core platform ARR, down $1.37M from Q2. In-period gross retention improved by high single digits year-over-year in Q3 and YTD. Total ARR including Virtual Conference product was $132.2M. ARR from $100,000-plus customer cohort was ~2/3 of total ARR. Over 50% of ARR in multiyear contracts, and number of customers with 2 or more products was record high.

AI-powered ACE Progress

• AI-powered ACE ARR performance reached new high as percentage of growth ARR. Number of AI-powered ACE customers reached triple digits. Examples of customers using AI-powered ACE showed improved efficiency, pipeline growth, and ROI. Added new AI-driven capability 'Smart Tips' to surface key insights.

Customer Win Backs

• Started to win back key customers that left for cheaper but less effective options. High single-digit percentage of new core ARR came from boomerang customers. Examples of win back deals with global cybersecurity and IT services companies.

Profitability

• Achieved positive adjusted EBITDA and non-GAAP EPS for sixth consecutive quarter. Gross margin in high 70s. Expect to exit 2024 with positive adjusted EBITDA and EPS, and be profitable in 2025 while focusing on returning to growth.

In the third quarter of 2024, revenue from ON24's core platform including services was $35.6 million, and total revenue including Virtual Conference was $36.3 million. Subscription and other platform revenue was $33.9 million, and professional services revenue was $2.5 million. Ending core platform ARR was $129.7 million, a decrease of approximately $1.37 million from Q2 2024. Total ARR including Virtual Conference product was $132.2 million at the end of Q3 2024. Core ARR performance improved compared to 2023, with a 5% year-over-year decrease in Q3 2024 vs. 12% in Q3 2023. AI-powered ACE ARR performance reached a new high as a percentage of growth ARR. The ARR contribution from the $100,000-plus customer cohort represented approximately 2/3 of total ARR, with 311 customers contributing over $100,000 in total ARR. The percentage of ARR in multiyear contracts was the highest ever at over 50%, and the number of customers with 2 or more products was at an all-time record.

Q4 Guidance

• Expected sequential reduction of core ARR by 1% to 2%. ARR from Virtual Conference product expected to reduce by ~$0.4M in Q4 vs. Q3, to be $2.1M at end of Q4.

2024 Full Year Guidance

• Core platform revenue expected to be in range of $143.6M - $144.6M, total revenue $146.8M - $147.8M. Gross margins expected to be mid- to high 70s, 200 basis points higher than 2023's 75%. Expect positive adjusted EBITDA for 2024.

2025 Outlook

• Goal is to maintain adjusted EBITDA and EPS profitability in 2025 while focusing on returning to ARR growth. Q1 typically seasonally softer for revenue due to fewer days and softer services business.

Risks

• Factors that could adversely affect future results include ability to grow revenue, attract new customers and expand sales to existing customers, success of new products and capabilities, impact of adverse economic conditions and macroeconomic deterioration, and other statements regarding ability to achieve business strategies, growth or other future events or conditions.

Q: Encouraging to hear about some of the win backs from customers who maybe went to other competitors or less functional or not as strong as you guys. And would love to hear a little bit more color on that, Sharat? You guys have obviously done a ton to enhance the platform during this tougher period for marketing spend with AI ACE. And would love to hear what those conversations are like? And then any commentary you can give us relative to what you're seeing in the kind of general spending macro relative to marketing spend and trends would be great.

A: Rob, let me take the win-back question first. I'm particularly excited that we are seeing encouraging signs on these customer win backs, especially customers who are coming back to us after failing to get results from collaboration tools and point solutions. We talked about this in Q3, the percentage of new core ARR, which came from what we are calling boomerang customers was in the high single digits. And let me share a win back deal from Q3. One was with a large global cybersecurity company. They were facing budget pressures earlier in the year, and this customer opted for a collaboration tool and within just a few months, realized their mistake. They recognize that without a purpose-built platform for engaging experiences and first-party actionable data, and insights, their pipeline was negatively impacted. And in Q3, almost with after a quarter, they reengaged with us to help them refuel their global demand generation engine and have reinvested in our platform with a 6-figure commitment. Other examples are where companies have found they may have gone to point solutions that they are not scaling enterprise-wide. They don't have the first-party data capabilities or the AI capabilities, those that match ON24. Now, the next thing that you talked about, any change about the marketing budgets and how I'm seeing that. So, yes, Rob, the last 2, 3 years have been tough. That being said, if you ask Gartner, they would say, "Hey, the marketing spend in 2024 was about 280 basis points compared to 2019. So, that's a significant reduction. So, there have been some headwinds. But at the same time, I'm very encouraged because we are seeing increased stabilization. And based on our customer conversation, especially the win backs we are seeing, there are some green shoots. Our customers are still committed to our platform. They're seeing value in our platform. Our ARR per customer is over $78,000. The number of customers in multiyear contract is significantly the largest we've had. So look, companies have focused on reducing their martech and tech stacks for two to three years now. They have cut real deep. Now, if the win backs are any guide, we see that as a sign of stabilization, and we expect these companies to start investing in the revenue-generating products in 2025. We are cautiously optimistic.

Q: This is Linda Lee on for Arjun. Sharan, what does the win-back pool look like right now? And what percentage of that pool expected to win back from here on forward?

A: So, overall, we do expect as the market stabilizes that the percentage of companies or the number of companies that are going to come back to ON24 and really focus on driving revenue and demand generation and other various things will continue to accelerate. At this stage, it's hard for me to give you a number on that particular thing. But we are also seeing the stability and seeing that as we go into next year, our customers are probably going to be more focused on revenue-generating activities as an execution team from a sales and marketing point of view. We are also aggressively focused on that. So, if you were to ask me, as we go into 2025, we do expect continued momentum on winbacks. Another thing I will point out is we've talked about how life sciences and financial services has become 1/3 of our ARR in the last 4 years compared to 20% in 2019. So, that's great. The other thing that we are seeing is, we are seeing these win backs, a lot of them coming from the technology sector. So, we are also seeing green shoots in the technology vertical there with increased win backs, and momentum with AI-powered days. So, that's a good thing. We feel that our business is now more diversified and well positioned to drive broad-based growth once investments in front-end software return next year.

Q: Maybe if you could just double-click on some of the go-to-market changes that you're implementing. I know you're bringing in some new leadership, especially in the Americas region. Just curious if there's anything changing fundamentally on the go-to-market side?

A: Yes. I think if you look at our ARR performance, Noah, there are 5 things. There are 4 things we've talked about stabilizing our business. We've talked about the win backs. AI-powered ACE has become a strong growth vector for us. The regulated industries, financial services and life sciences is 1/3 of our business and becoming an important growth vector. The one area for improvement that we are focused on is our new business execution. And we have hired a new sales leader for our North America business. We must make our execution here to be more business outcome oriented. And we need to do a better job in orienting our solutions to solving business challenges and creating these measurable outcomes by the various verticals and use cases. I mean, especially at a time when we believe that the marketplace is stabilizing and there's going to be more appetite for revenue-generating things. So, one, our focus has been is bringing in the right talent from a leadership point of view and a sales and other part. But the other thing is to really optimize our execution to be even more benefit solution oriented by the various verticals and use cases that we focus on. And I believe that this will allow us to drive growth, better profitability and cash flow for our shareholders. So, that's a very important thing that we are doing. And we've learned to operate in this tough environment with some headwinds. Like I said before, this cannot continue. We are seeing increased stability with the win backs, with the enhancements in the go-to-market. After 2 years of deep cuts, companies will have to start investing in these revenue growth opportunities, revenue growth solutions, which will help us, and we are beginning to see that.