ON24, Inc. (NYSE:ONTF) Q4 2023 Earnings Call Transcript
ON24, Inc. (NYSE:ONTF) Q4 2023 Earnings Call Transcript February 22, 2024
ON24, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the ON24 Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce, [indiscernible], Investor Relations. Thank you. You may begin.
Unidentified Company Representative: Thank you. Hello and good afternoon, everyone. Welcome to ON24's fourth quarter and full-year 2023 earnings conference call. On the call with me today are Sharat Sharan, Co-Founder and CEO of ON24; and Steve Vattuone, Chief Financial Officer of ON24. Before we begin, I would like to remind everyone that some information provided during this call will include forward-looking statements regarding future events and financial performance, including guidance for the first quarter and full fiscal year 2024, as well as certain first quarter and full-year non-GAAP projections. These forward-looking statements are subject to known and unknown risks and uncertainties that could adversely affect ON24's future results and cause these forward-looking statements to be inaccurate, including our ability to grow our revenue, attract new customers and expand sales to existing customers, the success of our new products and capabilities, other statements regarding our ability to achieve our business strategies, growth, or other future events or conditions such as the impact of adverse economic conditions and macroeconomic deterioration, including increased inflation.
ON24 cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's periodic SEC filings and today's financial press release for factors that could cause our actual results to differ materially from any forward-looking statements. We'd also like to point out that on today's call, we will report both GAAP and non-GAAP results. We use these non-GAAP financial measures to evaluate our ongoing operations and for internal planning and forecasting purposes. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP.
To see the reconciliations of these non-GAAP financial measures, please refer to today's financial press release. I will now turn the call over to Sharat. Sharat?
Sharat Sharan: Thank you, and welcome everyone to ON24's fourth quarter and full-year 2023 financial results conference call. We appreciate you joining us. With me today is Steve Vattuone, Chief Financial Officer. Our platform allows industry-leading B2B enterprise companies to engage with their prospects and customers through a portfolio of experiences that drive engagement at scale, generate date-driven insights, and support compliance for highly regulated industries to deliver cost-effective revenue growth. We believe AI has fundamentally changed B2B sales and marketing functions, and moving forward, that change will accelerate. Over the past year, because of our first-party data, we've been able to quickly develop significant innovations, including those that are powered by generative AI, to help our customers advanced in the efficiency, ROI, and results they gain from our platform.
And to that end, just a few weeks ago, we launched the next generation of our platform, called the ON24 Intelligent Engagement Platform, which includes our AI-powered analytics and content engine, called ACE, to thousands of our customers and prospects at our global virtual launch event, ON24 Next. This announcement builds on these significant innovations. And now, our platform intelligently combines best-in-class digital experiences with AI-driven personalization and content to enable our customers to capture and act on connected insights and data at scale. We will share more about this exciting milestone later in our call. Turning to Q4 results, while we have lots of work still ahead, we are pleased to report Q4 results, which include solid top line results, and that we delivered on our profitability targets, achieving positive non-GAAP EPS and positive adjusted EBITDA.
Revenue from our Core Platform, including services, in Q4 of 2023 was $38.3 million, and total revenue including Virtual Conference was $39.3 million. Of total revenue for the quarter, subscription and other platform revenue was $35.8 million, and professional services revenue was $3.6 million. The solid revenue performance for the quarter was driven by an improvement in sequential ARR performance during the quarter despite an ongoing environment where our customers remain cautious regarding their investments in marketing and their budgets remain under pressure. Now, turning to ARR, we ended Q4 with $136.2 million in ARR related to our Core Platform, representing a sequential decrease from Q3 of $300,000, approximately flat sequentially. The sequential improvement in ARR performance was driven by an improvement in in-period gross retention, which was highest it has been in the last three years, and new business acquisition, which was the highest in the last six quarters.
Specifically, looking at our installed base, churn and downsell trends both improved in Q4. As we look at churn specifically, we saw broad-based improvement within our customer renewal cohorts, and the quarterly in-period churn was the best performance we have seen in three years. And we saw fewer reductions in contract entitlements or downsells as a percentage of the renewal base, which was the lowest in the year, and consistent with the best performance we have seen in almost two years. We are clearly starting to see stability in our installed based. We also were pleased to see a sequential increase in $100K-plus ARR customers, which increased by eight customers. And while marketing budgets are still under pressure, we also have a healthy pipeline of demand for our newly launched AI-powered ACE solution, and we even saw some initial orders placed at the end of December.
On the whole, we saw improvements in key metrics. At the end of 2023, we saw record levels for the percentage of ARR in multiyear agreements, and percentage of customers using two or more products. As 2023 proved, our business is resilient. While there is still tremendous uncertainty in the market, especially from many of our customers working with constrained marketing budgets, we are controlling what we can control, to position ourselves to capitalize on our large-market opportunity as our customers' budgets stabilize. We are excited about our Intelligent Engagement Platform, a new AI-powered ACE offering. But we also recognize that, like most new products coming to market, it will take time for our platform's AI-powered ACE solution to drive meaningful ARR growth.
As I look back at 2023, we started the year with the goal of setting the stage for long-term profitable growth, and we have delivered on that. We implemented meaningful cost reduction strategies which led to successfully achieving our profitability targets, while driving incremental improvements in our gross margins and cash flow. We executed on our product development roadmap with the launch of our next-generation AI-powered platform, and made tremendous progress in improving the stability in our customer base with improvements in customer retention. And due to the progress we made on these initiatives, we exited 2023 with a business that is stabilizing and positioned to drive an inflection in ARR growth. While we are seeing continued macro pressure on marketing budgets, I am excited about the opportunities that our platform's AI-powered ACE brings to ultimately drive growth.
Let me provide more color on the progress we have made, and how we are thinking about 2024. In 2023, I laid out three strategic business priorities. First, the launch of our next-generation Intelligent Engagement Platform, which includes our new AI-powered ACE offering. Second, continue to strengthen our enterprise go-to-market strategy, especially with mission-critical digital transformation use cases across regulated industries. Third, continuing to deliver on our profitability targets with a focus on returning to growth. First, let me discuss the launch of our next-generation Intelligent Engagement Platform. AI is at the center of our strategy to provide enterprises with a differentiated and intelligent platform for digital engagement. Backed by our foundation of first-party data that's been gathered across millions of experiences and hundreds of millions of B2B interactions, our platform intelligently combines our portfolio of best in class digital experiences with AI-driven personalization and content to enable our customers to capture, act on connected data and insights at scale.
We believe that our platform's foundation of first-party data that's gathered from analyzing the engagement of hundreds of millions of business professionals gives us a competitive edge and uniquely positions ON24 to lead the market in AI innovation. As I mentioned at the beginning of our call, last month we announced the general availability of the ON24 Intelligent Engagement Platform, which includes AI-powered ACE, our new AI-powered analytics and content engine. ACE is part of our next generation platform that brings our portfolio of digital experiences and first-party data and insights together with all the innovations we've developed this past year, including one, the ability to dynamically deliver hyper-personalized messaging, calls-to-action, content and more to unique audience segments through our platform.
Two, the use of generative AI to automate content creation, saving teams time and feeding ongoing nurture streams that keep engaging prospects and customer; three, a heat map report of key moments that identifies the most engaging segments of a live experience and automatically creating snackable video highlights to drive continuous engagement without needing more resources. And finally, ways to analyze and automatically surface intelligent analytics that enable sales and marketing teams to act on connected insights at scale, increasing impact and ROI. With our launch, we introduced streamlined pricing and packaging, which we believe will make it more straightforward for our customers to purchase and adopt our next generation offerings. We are monetizing the Intelligent Engagement Platform in two ways.
We are offering pre-configured subscription packages, which include our AI-powered ACE solution to new customers. And we are offering AI-powered ACE as an upgrade solution to our existing customers. As I shared earlier, we are already seeing positive momentum within our install base and getting very enthusiastic customer feedback from early adopters. Some of the initial benefits we are hearing from our customers is time savings in creating content and videos, being able to more efficiently personalize experiences for unique audiences and having greater visibility and insights into their prospects and customers to help their teams drive revenue growth. We are especially proud that our innovation roadmap is based on customer's feedback we've gathered over many years and a long-term vision behind our first-party data advantage.
While our current platform is already a market leader and highly differentiated, we believe this launch will further enhance our competitive position. And this is just the beginning. We expect AI to fuel an entire suite of offerings in the next generation of our platform. Moving to our second priority, our enterprise go-to-market, throughout 2023, we continued to see traction with our enterprise customers in highly regulated industries who are at the early stage of undergoing digital transformation. These use cases require an enterprise-grade solution like our platform to execute mission-critical go-to-market use cases while supporting compliance. Our solutions provide a unique ability to support their go-to-market use cases on an enterprise scale, including healthcare professional engagement in pharma and life sciences, member enrollment and broker enablement in commercial and health insurance, and continuing professional education and certification for professional services.
In aggregate, these digital transformation use cases drove sequential quarter-over-quarter and year-over-year ARR growth in the single digits this quarter despite a difficult macro environment. As these organizations look to adopt AI innovations and are earmarking AI budgets, we believe our enterprise credibility and track record combined with our next generation platform gives us a go-to-market advantage. We believe we are well-positioned for adoption from verticals that are traditionally early adopters like technology companies, as well as within the highly regulated industries I mentioned above. We also believe that our new pricing and packaging will help us land bigger deals, simplify the purchasing process, and enable customers to consolidate point solutions onto our platform.
In addition, we also expect our next generation platform packages and AI-powered ACE solutions to further strengthen our expand motion within our install base. With the initial orders for AI-powered ACE, we also saw a modest quarter-over-quarter uptick in customers with two-plus products, which was at the highest level of the year in Q4. And finally, an update on our profitability, throughout 2023, we consistently achieved our profitability targets by driving gross margin improvements and by taking a disciplined approach to our cost reduction initiatives. We maintained a healthy balance sheet while also returning $166 million of capital to our shareholders over approximately two years. The implementation of these effective cost reduction strategies allowed us to achieve positive non-GAAP EPS and positive adjusted EBITDA in Q2, Q3, and Q4.
We are committed to achieving adjusted EBITDA breakeven and positive non-GAAP EPS in 2024. The balance between growth and profitability is always a focus. And at this juncture, while we are maintaining a disciplined approach to our cost structure, we're also investing in growth as we look to capitalize on the launch of our next generation Intelligent Engagement Platform. We believe ON24 is well-positioned for long-term profitable growth. Before handing it over to Steve, I want to highlight a few new logo and expansion deals in Q4, especially those resulting from initial orders of our Intelligent Engagement Platform and AI-powered ACE premium offerings. On the new logo front, we landed one of the largest wireless carriers in the United States, a monthly billion dollar telecommunications leader with more than 70,000 employees.
As they move their focus up market and advance their B2B marketing arm, this organization needed a trusted partner to provide a platform that could scale to support each of their different teams and provide real-time first-party data and customer insights to help them deliver against their pipeline and revenue goals. This company pre-ordered our AI-powered ACE solution to provide personalized experiences to their customers and prospects. Another Q4 new business deal was with a multinational law firm with over 2,000 employees and over $2.5 billion in revenue. Their business development team was looking to move off their legacy point solution because it lacked the ability to scale and meet the needs of their continuing professional education use case.
With our purpose-built platform, this organization has the breadth and depth needed to automate their live certification process, support compliance, and provide detailed insights about their audience, saving time and improving their team's ability to retain and acquire clients. The first expansion I will highlight is with one of the world's largest asset management and financial services organizations that has trillions of assets under management and over 50,000 employees. With the goal to acquire millions in assets under management, their marketing team needed a way to acquire new institutional investors and financial advisors and quickly qualify them for sales. Our platform became a linchpin for their growth initiative and with first-party data generated and integrations we provide, it's playing a key role in a larger digital transformation initiative for their go-to-market organization, resulting in 4X growth of our footprint.
Lastly, I'll wrap up our Q4 install-based momentum by sharing a pre-order for our AI-powered ACE solution that came from a global medical device and pharmaceutical company with over $9 billion in revenue and more than 24,000 employees. With multiple types of healthcare providers to educate, we will use our platform's capabilities to personalize experiences at scale, provide content unique to different products and treatments and understand the behavior of these different types of HCPs by segment. Because our platform was already proven and trusted by their team, they felt confident adopting our new AI innovations. Ladies and gentlemen, as we look ahead, we will continue to focus on improving retention, increasing new customer acquisition, and achieving our 2024 profitability targets.
We are excited about bringing our AI-powered next-generation Intelligent Engagement Platform to market earlier this quarter, which we believe will help us better address our TAM and continue to strengthen our competitive moat. Generative AI in our business will be a monumental shift in the market and AI is at the center of our strategy to provide enterprises with a differentiated and intelligent platform for digital engagement. We believe that our platform's first-party data advantage uniquely positions ON24 to define the future of digital engagement for prospects and customers, ultimately providing a tailwind to growth. Against the macroeconomic environment that has brought uncertainty and a contraction of customer demand in 2023, we believe we enter 2024 in a much stronger position with a profitable business and a more stable customer base.
Although we are seeing stabilization in our business, we have yet to see macro uncertainty abate and we have not yet seen signs that our customers and prospects' marketing budgets are improving. In the interim, we will continue to focus on what we can control, leading the industry in innovation, especially around AI, improving our go-to-market strategy, especially in regulated industries and delivering on our profitability targets. I remain optimistic that we will see a return to sequential ARR growth in the second-half of 2024, which should continue into 2025, and we remain committed to our long-term goal of generating double-digit top-line growth with double-digit EBITDA margins. With that, I'd like to turn the call over to Steve.
Steven Vattuone: Thank you, Sharat, and good afternoon, everyone. I'm going to start with our fourth quarter 2023 results, and we'll then discuss our outlook for the first quarter of 2024 and full-year 2024. Before I get into the numbers, I wanted to remind everyone that our focus will be on the core platform business as it was in the prior quarters, as we have de-emphasized the virtual conference product. We view the metrics from our core platform, such as revenue and ARR, as the best KPIs to measure our performance. Revenue from our core platform, including services in Q4 of 2023, was $38.3 million, representing a decrease of 13% year-over-year. Total revenue for the fourth quarter, which includes revenue from our virtual conference product, was $39.3 million.
Total subscription and other platform revenue was $35.8 million. Overages represented approximately 1% of total revenue in Q4. Total professional services revenue was $3.6 million, a decrease of 21% year-over-year, representing approximately 9% of total revenue compared to 10% in the year-ago period. Moving on to ARR. ARR represents the annualized value of all subscription contracts at the end of the period, and excludes professional services and overages. Ending ARR related to our core platform totaled $136.2 million, and net new ARR was approximately flat compared to Q3. Our ARR performance was better than we had anticipated, and represents a meaningful improvement from net new ARR performance in Q3. The improvement in Q4 was primarily driven by stabilization in our install base, with gross retention improving significantly from Q3 to the highest levels we have seen in the last three years.
We also saw less pressure from customer down sells compared to prior quarters, and we saw broad-based improvements in churn across our renewal cohorts. New business activity in Q4 was the strongest in six quarters. Expansions continue to be challenging, but we did see improvements compared to earlier quarters. Total ARR, including the contribution from our virtual conference product, was $139.7 million at the end of Q4 2023, compared to $140.2 million at the end of Q3 2023. Turning to customer metrics, the ARR contribution from the $100,000 plus customer cohort continues to represent approximately two-thirds of our total ARR, which is consistent with the prior quarter, and demonstrates the continued strength of our largest enterprise customers and their commitment to our platform.
The number of customers contributing more than $100,000 in total ARR increased to 325, up from 317 last quarter. This increase was due to new logo wins in Q4, as well as certain customers increasing their spend with us above the $100,000 threshold in Q4. Throughout 2023, we have continued to see our customers make longer term commitments to our platform. Multi-year contracts increased to 49% of our ARR at the end of 2023, which was the highest level ever, and notably up versus 41% of our ARR at the end of 2022. In addition, the percentage of our customers with two or more products ended the year at 37%, up slightly from 2022 year-end levels. We were pleased to see this metric increase in 2023 during a year when many of our customers were dealing with tighter marketing budgets and spending constraints.
Total customer count was 1,784 customers. Our dollar-based net retention, or NRR, in 2023 was 84% for our core platform. As a reminder, NRR is a lagging indicator and reflects the impact of elevated down sales we experienced earlier in 2023, as many of our customers reduced their marketing budgets in a difficult macro environment. Given the stabilization and retention metrics that we are seeing in our customer base, we believe NRR will trend upwards in 2024. Before turning to expense items and profitability, I would like to point out that I will be discussing non-GAAP results going forward. Our non-GAAP results exclude stock-based compensation, restructuring charges, impairment charges for real estate, amortization of acquired intangibles, shareholder activism-related costs, as well as certain other items.
Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results can be found within our earnings release. Gross margin increased in Q4 to 77% from 76% last quarter. The sequential increase in our gross margin in Q4 reflects the cost reduction actions we took in 2023. Now turning to operating expenses, sales and marketing expense in Q4 was $16.7 million compared to $21.1 million in Q4 last year. This represents 42% of total revenue compared to 45% in the same period last year and 45% last quarter. Our sales and marketing expenses have decreased in absolute dollars both sequentially and year-over-year largely due to the cost savings measures we have implemented as we focus on driving improved sales efficiency. R&D expense in Q4 was $6.7 million compared to $9 million in Q4 last year.
This represents 17% of total revenue compared to 19% in the same period last year and 18% last quarter. While we made adjustments to our spending levels in 2023, we continue to invest in product innovation. As we have discussed, we are excited about our new AI-powered ACE solution, which we launched in early 2024 along with the next generation of our platform, the ON24 Intelligent Engagement Platform. G&A expense in Q4 was $6.6 million compared to $7.7 million in Q4, last year. This represents 17% of total revenue, which is consistent with the same period last year, and up slightly from 16% last quarter. We took actions in 2023 to reduce our G&A costs, and as a result our G&A expenses in absolute dollars have decreased as compared to the prior year.
Moving on to our bottom line performance, I am pleased to report that we exceeded the profitability targets that we provided in the prior earnings call. We achieved positive non-GAAP operating income, positive adjusted EBITDA, and EPS profitability in Q4. The continued improvements in our operational efficiency that we made throughout 2023 have paid off, and position us with a more streamlined and efficient cost structure for 2024. Operating income for Q4 was $200,000 or a 1% operating margin, compared to an operating loss of $3.5 million and a negative 7% operating margin in the same period last year. Net income in Q4 was $2.6 million, or $0.06 per share based on approximately 46 million diluted shares outstanding. This compares to a net loss of $2 million or $0.04 per share in Q4 last year, using approximately 48 million basic and diluted shares outstanding.
Turning to the balance sheet and cash flow, we ended the quarter with $198.7 million in cash, cash equivalents, and marketable securities. I want to provide an update on the progress of the $125 million capital return program that we announced in March 2023, which comprised a special dividend of approximately $50 million paid to shareholders in Q2 of 2023, and a $75 million share repurchase program. Under the share repurchase program, we utilized $54.5 million in the first nine months of 2023, and an additional $15.3 million in Q4 of 2023, for a total of approximately $70 million during 2023. In Q1 of this year, we utilize the remaining, approximately $5 million under the program, completing the entire $75 million share repurchase program. Combined with the $50 million special dividend paid in Q2 of 2023, we have returned approximately $125 million to shareholders under this capital return program.
As a reminder, under our prior share repurchase program we started in late 2021, we returned $41 million through February 2023. With the completion of these two programs, we have now returned approximately $166 million to shareholders. With almost $200 million in cash and investments at the end of 2023, our balance sheet continues to remain strong. Turning to our use of cash in the quarter, cash used in operations in Q4 was $900,000, compared to cash used in operations of $7.6 million in Q4 last year. Free cash flow was negative $2 million in Q4, compared to negative $8.9 million in Q4 last year. As a reminder, our cash flow in Q4 includes costs related to our restructuring efforts. Before turning to guidance, I want to provide an update on our cost reduction efforts.
The cost reduction plans we have initiated over the past quarters have allowed us to achieve positive adjusted EBITDA and positive non-GAAP EPS for the past three quarters. Our run rate annual total cost structure was approximately $61 million lower in Q4 than it was six quarters earlier, in Q2 of 2022. We will continue to remain disciplined on costs across the business as we focus on driving profitable growth. Moving to guidance, we are pleased to see the stabilization in our installed base, an improvement in net new business during Q4, we're also operating in a choppy environment where many customers continue to face constrained marketing budgets. As such, we are taking a prudent approach to our top line financial modeling for 2024. Turning to Q1 guidance, we expect Q1 Core Platform revenue, including services, in the range of $35.6 million to $36.6 million, and total revenue, which includes our Virtual Conference product, in the range of $36.5 million to $37.5 million.
Professional services, which is typically seasonally softer for us in Q1, is expected to represent approximately 7.5% of total revenue. We expect gross margins to be in the mid 70s in Q1. We expect a non-GAAP operating loss in the range of $2.7 million to $1.7 million. For non-GAAP earnings per share, we expect a net loss per share of $0.02 per share to net income of $0.00 per share or breakeven EPS based on 41.2 million basic and diluted shares outstanding, and 45.7 million diluted shares outstanding, respectively. Our Q1 top and bottom line guidance reflects the historical seasonality in our business, including certain costs such as employer payroll taxes and annual audit costs, which are seasonally higher in Q1. We expect a restructuring charge of $600,000 to $900,000 in Q1 related to our ongoing cost reduction efforts, which is excluded from the non-GAAP amounts provided above.
Before we move to 2024 guidance, I want to provide some color on how we're thinking about ARR. Our expectations for ARR take into account the historical seasonality in Q1 for new and expansion business coupled with our assumption for a constrained demand environment for marketing software in the first-half of the year. Given this backdrop, we expect our Core Platform ARR to decline by 2% to 2.5% sequentially in Q1, as compared to Q4 2023. In addition, ARR from our deemphasized Virtual Conference product would reduce sequentially in Q1 by approximately $500,000. Our current view is that we will return to sequential ARR growth in the second-half of 2024, assuming there is no deterioration in the macro environment. Now, let me turn to our 2024 annual guidance.
For the full-year, we expect Core Platform revenue, including services, to be in the range of $139.5 million to $143.5 million. We expect total revenue to be in the range of $143 million to $147 million. Professional services is expected to represent approximately 8% of total revenue. We expect a non-GAAP operating loss in the range of $5.5 million to $3.5 million, and non-GAAP net income per share of $0.02 per share to $0.05 per share using 47.6 million diluted shares outstanding. Our estimate of shares outstanding takes into account the impact of our capital return program. We expect gross margins to be consistent with 2023, which was 75%. Restructuring charges and amortization of acquired intangibles are excluded from the full-year non-GAAP amounts provided above.
While we are not providing specific quarterly guidance beyond Q1, our annual bottom line guidance assumes we achieve adjusted EBITDA breakeven in Q2, with sequential improvement in Q3 and Q4, resulting in breakeven adjusted EBITDA for the full-year 2024. This guidance reflects a balanced approach that recognizes the importance of fiscal discipline while also investing in growth. In summary, we are seeing encouraging signs of stabilization across our business, and are optimistic that we will return to ARR growth by the second-half of 2024. On the profitability front, we made significant cost reductions over the past six quarters, and will remain fiscally disciplined even as we invest in our key AI products to drive growth. We are excited by the strong customer feedback for our new products, and expect pipeline to build throughout the year.
With that, Sharat and I will open the call for questions.
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