Release Date: May 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ON24 Inc (ONTF, Financial) achieved positive adjusted EBITDA and non-GAAP EPS for the fourth consecutive quarter.
- The launch of the next-generation intelligent engagement platform and AI-powered analytics (A-Power days) shows early signs of positive traction and customer engagement.
- ON24 Inc (ONTF) reported a mid-single-digit improvement in gross retention year-over-year and compared to the average gross retention in 2023.
- The company's focus on enterprise customers and mission-critical digital transformation use cases in regulated industries is driving strong business performance and diversification.
- ON24 Inc (ONTF) has a strong balance sheet with $196.1 million in cash, cash equivalents, and marketable securities, providing financial stability.
Negative Points
- ON24 Inc (ONTF) experienced a sequential decrease in ARR from Q4 2023 by $2.9 million, indicating challenges in maintaining growth momentum.
- Total revenue and professional services revenue both saw a year-over-year decrease, reflecting ongoing market and operational challenges.
- The company faces uncertainty in marketing budgets, affecting new logo acquisitions and overall market expansion.
- Despite improvements, there is still a cautious approach to new purchasing commitments from customers due to budget constraints.
- ON24 Inc (ONTF) anticipates a decline in core platform ARR by 2% to 3% sequentially in Q2, showing potential ongoing challenges in achieving growth targets.
Q & A Highlights
Q: Hi, everyone. Thanks for taking my questions. I have a couple here. Let's start with the churn cycle. Sharat, you can be a little bit more comfortable with the statement of returning to ARR growth in second half this year this quarter, you mentioned that last quarter you see it as convinced of that and I get the conservatism in the second quarter guide with a couple of large deals. But when you look at that ARR in the second half, how high is your, I guess, confidence or visibility into the ability to actually grow ARR in relative to, I think a year ago, you were hoping to grow ARR in '23 as well, and that didn't quite happen. So just trying to understand what that what might be different this time versus your prior expectation?
A: Scott, on ARR first on Q1, here are we delivered ARR performance in line with our expectations, I think we are seeing improved stability in our install base and gross retention improved year over year by mid-single digits and down sales improved for a second quarter in a row. I mean, you know, we've had some challenges with down sales in the last couple of years, but we are seeing steady improvement in that. And our gross bookings as a percent as a percentage of growth here are in Q1 included an incremental uplift from A-Power days that will double digit mark as a percentage of new growth ARR. So so we delivered what we said in Q1 and in Q2. When we think about it, we are making progress on retention. We believe as a business is continuing to stabilize. We are seeing traction on A-Power days and also our use case focus from a go to market on mission critical digital transformation use cases that includes pharma and life sciences, but we are still operating in an uncertain environment where marketing budgets are constrained. So we are and we are being incrementally prudent with our expectations for ARR in Q2 due to these larger customer renewals coming due in Q2 and it is early in the quarter. I know you talked about the second half. First of all, we were almost there in Q4 last year. So we are very close to positive IBNR up. We are seeing stabilization in the installed base. And for second half of 2024, we expect to make continued progress in gross retention, both in churn and down-sell. Two, we believe our focus on mission critical digital transformation use cases will be a driver of new business. And three, we expect to continue to make progress on A-Power days. Based on that, we still expect that we will return to sequential ARR growth in the second half of 2024.
Q: Got it. Helpful. And then Steve, wanted to maybe think about how you're thinking about the model kind of going forward here. You've clearly taken out a lot of costs in the model. I know we're still not quite profitable given what's going on with the overall business. But have you set up the model too and require revenue growth to get to those long-term adjusted EBITDA targets? In the mid 10s or better? Or is there a scenario where you can reach that end up in a market where budgets are still tight and constrained and ARR growth as it may be positive but minimal at the same time. It's a question I've had a lot from investors lately is just trying to understand what the profitability of the model could come in at? Or are you still in a challenged Medicare for the next year or two for marketing logistics?
A: I thought there were I think, two questions in there. So let me go ahead and take the first which is about Tom profitability. So first, we did achieve adjusted even EBITDA profitability and EPS profitability for four quarters in a row. So we've now moved the company to a more profitable operating model this past year. We have improved our gross margins over the past year from 73% in Q1 of 2023 to 77% this quarter. And in addition, in Q1, we also delivered positive operating and free cash flow. So we now have a more streamlined organization and we're committed to maintaining that. We are guiding to EBITDA breakeven or better for the year and 2024. Now in 2024, we are taking a balanced approach. We're continuing to invest in the business, especially around AI. while remaining disciplined on cost and delivering EBITDA break-even. Our goal for the Company is that long term gross margins, long term is to get to gross margins of 78% to 80% and 20% for operating margin and working with a we're working to get there over time. Now your other question, do we need to invest more to grow? So currently, the expense structure is about where we want it, but we'll, of course, adjust it as needed as we've done in the past, we will be making investments going forward, but those are really going to be based on the top line and we'll continue to evaluate that for always optimizing to return to top line growth that we're also balancing profitability. Some of the investments we're looking at making are making are on a high-powered ACE for bringing it to market and are continuing to develop it regulated use case in pharma and financial services. Data chart discussed that we're making some investments there. We are focused on making some other selective investments in certain categories while also being disciplined on our cost and sales and investments are going to be driven by productivity that we're seeing there.
Q: Great. Thanks for taking my questions, guys. And Sharat. I had a question on a high-powered ACE. I know it's still early. It's obviously really impressive when you guys did the demo events from the early adopters that you mentioned. What sort of uplift are you seeing there? And I guess maybe echoing Scott's question, is that a component of the pipeline comfort that gives you comfort in being able to grow ARR in the second half and as well?
A: So let me let me take the second first. The answer is absolutely. We expect that the contribution for air power days to ramp during the course of the year and provide tailwinds into 2025. So let me go back to the first question on utilization and just to remind people, A-Power day centers, three modules forces personalization at scale using audience segmentation. Second is ability to deliver derivative content like blogs, e-books takeaways from long-form webinar content, and third, enhanced audience nurture using key moment videos from long-form video content. So you know, the airport is bookings reached double-digit market. The percentage of growth here are in its first quarter after launch. We launched at the end of January. And while it is early, the pipeline generated and the early wins received thus far from A-Power days makes me optimistic about the future of this offering up from a utilization point of view since the beginning of the year, over 15% of our customers. I've used or tested our AI capabilities. I'll give you the example of one of the largest technology companies in the identity and security space, their marketing
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
