ON24, Inc.

Good afternoon, and thank you for standing by. And welcome to the On24, Inc. Second Quarter 2022 Financial Results Conference Call. Please be advised today's conference is being recorded, and a replay will be available on On24's Investor Relations website. I would now like to hand the conference over to Lori Barker, Investor Relations. Please go ahead.

Thank you. Hello, and good afternoon, everyone. Welcome to ON24's second quarter 2022 earnings conference call. On the call with me today are Surat Saran, co-founder and CEO of ON24, and Steve Vatanay, 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 third quarter and fall fiscal year 2022. These forward-looking statements are subject to known and unknown risks and uncertainties. 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 in 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 results to evaluate our ongoing operations and for internal planning and forecasting purposes. Non-GAAP financial measures include are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see the reconciliation of these non-GAAP financial measures, please refer to today's financial press release. I will now turn the call over to Shirat.

Thank you and welcome everyone to ON24's second quarter 2022 financial results conference call. We appreciate you joining us. On today's call, I will review our Q2 results, provide a progress update on our fiscal 2022 priorities, and share how we believe we are positioned to return to growth in 2023. First, for those of you who are new to ON24, I would like to spend a few minutes to reiterate who we are and how our platform is a must-have for B2B businesses to drive revenue growth. One24 is a digital engagement platform purpose-built for B2B sales and marketing. We enable thousands of businesses to convert millions of their prospects into customers and count some of the world's largest and most recognized businesses as our customers, including three of the five largest global technology companies, three of the six largest U.S. banks, three of the five largest global healthcare companies, and three of five largest global industrial and manufacturing companies. We have a very large TAN that we currently estimate to be over $44 billion worldwide and expect this market opportunity to grow as the move to digital continues to accelerate. According to Gartner, 80% of B2B sales interactions will happen through digital channels by 2025, which has the potential to provide significant tailwinds to ON24. We enable companies to digitally transform their sales and marketing by providing a single digital engagement platform for several go-to-market functions across the enterprise, from demand generation to customer marketing to partner enablement. Our platform powers a suite of seven different experience products. Our customers use these products to engage with millions of prospects at scale. We take the audience engagement from these products and convert that into first-party data and insights, which are made actionable through our deep integrations with our customer sales and marketing ecosystems to drive revenue growth. Turning to Q2 results, total revenue was $48.2 million, exceeding the high end of our guidance. Subscription and other platform revenue was $43.1 million and professional services revenue was $5.2 million. We posted a non-GAAP operating loss of $6.2 million also ahead of our guidance. We continue to remain well capitalized with approximately $345 million in cash and marketable securities. Ending ARR was $167.8 million, representing an increase of 2% year-over-year and in line with our expectation of very modest ARR growth. As we all know, the global macroeconomic environment continues to remain volatile. Like others, we also experience longer sales cycles and greater deal scrutiny, particularly with new business at and over the $100K range. threshold. We also saw some customers rationalize their spend upon renewal as they face budgetary pressure. While our total customer count declined sequentially, the number of customers contributing greater than $50,000 in ARR was roughly flat sequentially and represents the vast majority of our ARR, which is consistent with prior quarters. With a more uncertain economic market, We pivoted to focus on our existing customers, and we had a strong core on the expansion front, which included closing the largest deal in our history. A number of our top customers are making increased investments with ON24 as we deliver cost-effective, fast ROI and continue to be a critical component of their go-to-market tech stack. New products in our portfolio resonated. Our customer base is adding multiple products and making multi-year commitments to ON24. Let me share some color on these expansion wins. A longtime top ON24 customer, which is one of the world's largest technology companies, expanded with a seven-figure deal, growing their total spend with ON24 by over 100%. For the past several years, we've helped power this customer's global demand generation engine, During Q2, a significant division of this organization consolidated their global partner enablement program on the ON24 platform. They will now deliver training, enablement, and certification to thousands of worldwide partners and system integrators using ON24. In Q2, we signed the largest deal in our history, which consists of a multi-year commitment, including our newest products. This existing customer is a leading learning platform company who helps upscale the workforce of thousands of enterprises. After seeing the power of our two newest live experience products, On24Forums and GoLive, they decided to expand their use of our platform and enhance their digital engagement strategy. As a result, We increased this customer's total spend by 30% and solidified our long-term strategic partnership. Finally, one of the world's largest software companies increased their investment in our platform and commitment to our partnership because of our successful track record of delivering cost-effective ROI with a multi-year, seven-figure deal. Our first-party engagement data plays a central role in their go-to-market execution strategy, achieving meaningful results such as significantly increasing marketing pipeline and increasing their average deal size. Now taking a step back. More than 20 years ago, I co-founded ON24 and have navigated the company through several challenging economic cycles. Historically, ON24 has done well during uncertain times. Our solutions help companies drive top-line results with a cost-effective sales and marketing digital engagement solution. We believe many customers are prioritizing fast ROI solutions like ON24 and are looking to consolidate their point solutions onto a single platform for better economies of scale. While we remain optimistic on our long-term market opportunity, we have taken a hard look across our business operations and made the decision to better align our cost structure with the realities of the current environment and customer demand to secure long-term growth with an improved business model. The cost reduction plan includes reducing headcount by approximately 5% from mid Q2 levels and is expected to be substantially completed by the end of Q3. This was a difficult decision, And I want to express my sincere gratitude to those that will believe in us. Shifting gears, let me provide a progress update on our four strategic priorities for 2022. First, we have made substantial headway on our aggressive product roadmap. Last year, our customer conversations highlighted a consistent need for point solution consolidations. They wanted to expand the first-party engagement data they get from 124 to more of their experiences beyond traditional demand-gen webinars and virtual events to turning the partner training, roundtables, executive briefing centers, and so on into a data-driven strategy. Once our customers start using our platform and have ON24's first-party data integrated with their systems, it is easier to adopt more of our experienced products and keep their first-party engagement data unified and generated from one platform. So, as we look at the future of our platform, our innovation agenda will be focused on enhancing the engagement, first-party engagement data, and deep integrations we can provide to our customers. After launching this past April, On24Forums has been well received by our prospects and existing customer base. One of our new logos in Q2 was a leading American auto parts distributor that purchased forums. After struggling to scale their program with a collaboration tool, they purchased forums to educate and certify the resale of partners and technicians in the field. Most important to this customer was our first-party data and flexible API, which makes it possible for them to automatically track and certify course completion. As an aside, while you likely have seen On24 power many earnings webcasts, This is a minor part of our legacy business that we will be winding down. Moving to our other priorities. Within our enterprise go-to-market, we have seen steady growth in the number of multi-product deals and building C-level relationships for large, complex transactions. In Q2, the percentage of customers with two or more products reached another record high. One of the new Q2 multi-product deals I'll highlight was with a multinational insurance firm from EMEA. It came to us with multiple use cases to address across the go-to-market execution, including demand generation, customer market, partner enablement, and internal employee engagement. The key to our win was the ability to provide seamless integrations with their tech stack and provide a 360-degree view of all their first-party engagement data across every ON24 experience, something collaboration tools were not able to do. Now they're using us to create a full ecosystem of experiences powered by ON24 Elite, Breakouts, Target, and Engagement Hub. We are seeing similar success selling multi-product deals with our existing customer base. Another one of our long-term customers is one of the largest multinational banks. Their corporate banking group needed a way to engage the employees of their enterprise clients and provide financial wellness education as an HR benefit. While tracking the performance of the program and reporting value back to their HR clients, Through the combination of ON24 Elite, Target, and Engagement Hub, they gain a powerful digital channel to connect with corporate employees, drive them to take an action, and provide a robust set of analytics back to their employers, intelligence that we believe they would not get with any other solution. Next, on the customer success front, We have seen positive signals from the investments we have made with gross dollar retention improving quarter over quarter. We've also heard great feedback from customers on our revamped onboarding program. Lastly, we continue to see steady revenue contribution from our partner ecosystem. The percentage of partner-influenced deals in Q2 crossed double digits, and the number of partner-influenced opportunities added to our pipeline has more than doubled year over year. An example of our Q2 partner strategy execution is a win with a leading global biopharmaceutical company. They wanted to consolidate their external digital engagement onto one platform to make it easier for healthcare providers and patients to engage with a consistent, connected experience and streamline their own team's ability to execute. Our deep data integration with Viva and partnership with the regional system integrator gave us a competitive edge. In conclusion, while the economic backdrop may continue to be turbulent, I'm confident in our strategy and long-term market opportunity. We have managed through these cycles before, and a number of our top customers are increasing their investments with ON24. Even more importantly, our traction on new products is growing, and our product enhancements excite me for the future. With the organizations under mounting pressure to deliver more with less, we are well positioned to help them consolidate point solutions onto a single platform for digital engagement. Given these factors, I'm optimistic that we will return to growth in 2023 with an improved business model. With that, I'll hand it over to our CFO, Steve Battuoni, to walk you through Q2 results in more detail and provide our outlook. Thank you, Sharad, and good afternoon, everyone. I'm going to start with our second quarter 2022 results, and we'll then discuss our outlook for the third quarter and full year 2022. Total revenue for the second quarter was $48.2 million, representing a decrease of 7% year over year. Subscription and other platform revenue was $43.1 million, a decrease of 3% year over year. This includes overages, which were under 2% of revenue in Q2 of this year, compared to 3% of revenue in Q2 of the prior year. Professional services revenue was $5.2 million, a decrease of 33% year-over-year, and representing approximately 11% of total revenue compared to 15% in the year-ago period. This decrease is in line with our expectations we provided last quarter. 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 was $167.8 million, an increase of 2% year-over-year, which is in line with expectations. The macro environment remains challenging, and we experienced longer sales cycles with more approvals needed for business at and over the 100K thresholds. To cite these challenges, we had a strong quarter for expansion and closed the largest deal in our district. Customers are continuing to increase their multi-year commitments with us, with the percentage of our ARRA multi-year agreements increasing from the prior quarter to the highest ever. Also, I am pleased to see the percentage of customers with two or more products in each record level, and our new customer ASP was over 30% higher than any of the prior four quarters. Turning to customer metrics, total customer count increased by 1% from Q2 last year to 2,101 customers. We experienced a sequential decrease in total customer count, which was driven by lower commercial logo acquisition and SMB logo churn. The number of customers contributing ARR at 50K and above is roughly flat from the prior quarter and represents the vast majority of our ARR, which is consistent with prior quarters. We ended the quarter with 349 customers contributing ARR of 100K or more, representing an increase of 1% year-over-year. Although the number of 100K-plus customers decreased sequentially, the ARR contribution from the 100K-plus customer cohort was consistent with the previous quarter and represents approximately two-thirds of our total ARR. 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 as well as other certain items. Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results, can be found within our earnings release. Gross profit in the quarter was $35.9 million, representing a gross margin of 74% which is a four-point decrease in the gross margin percentage year over year. We are investing in our public cloud infrastructure capabilities and have grown our customer success teams over the past year to drive improved retention. Now turning to operating expenses. Sales and marketing expense in Q2 was $25.2 million compared to $23.9 million in Q2 last year. This represents 52% of total revenue compared to 46% in the same period last year. When we have made targeted investments in our go-to-market functions over this past year, we are tightening our sales and marketing spend given the current macroeconomic environment. R&D expense in Q2 was $8.9 million compared to $7.3 million in Q2 last year. This represents 18% of total revenue compared to 14% in the same period last year. We increased our R&D spend this past year as we have brought new products to the market and expanded our platform. And for the remainder of this year, we expect any R&D spending increases to be relatively moderate. G&A expense in Q2 was $8.1 million compared to $7 million in Q2 last year. This represents 17% of total revenue compared to 13% in the same period last year. Our G&A expenses have increased this past year due to the cost associated with being a publicly traded company. G&A expense increases have moderated sequentially this year, and as our G&A function matures, we expect G&A expense to scale and decrease as a percentage of revenue over time. Operating loss for Q2 was $6.2 million, or a negative 13% operating margin compared to operating income of 2.5 million and an operating margin of 5% in the same period last year. Net loss in Q2 was 6.4 million or 14 cents per share based on approximately 47.2 million basic and deleted shares outstanding. This compares to net income of 2.5 million or $0.04 per diluted share in Q2 last year, using approximately 55 million diluted shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with $344.9 million in cash, cash equivalents, and marketable securities. Our capital position is advantageous in a challenging macroeconomic environment of uncertain duration. We also believe it will allow us to be nimble in our decision-making with regard to organic and inorganic investments. We will be disciplined in our approach with a focus on maximizing every dollar of our shareholders' capital. Turning to our use of cash in the quarter. Cash use in operations in Q2 was $2.7 million compared to cash flow from operations of $6.9 million in Q2 last year. Free cash flow was negative 3.4 million in Q2 compared to positive 5.7 million in Q2 last year. Free cash flow margin was negative 7% in Q2 compared to positive 11% in Q2 last year. In Q2, we repurchased 566,000 shares at a weighted average price of $13.27 per share, utilizing 7.5 million. As of the end of Q2, we have utilized $29 million under the share repurchase program, with $21 million remaining out of the $50 million authorized under the share repurchase program. Before providing our outlook, I'd like to make an observation. In 2020, we experienced explosive growth, growing our ARR 100% year over year, and we continue to experience high growth in the first half of 2021. with our Q2 2021 platform revenue growing 64% year-over-year. Coming off such rapid growth, we believe we will get back to growth in 2023. Now turning to guidance. We are reiterating our 2022 annual revenue guidance. At the same time, as Shirat mentioned, we are reducing our cost structure and improving non-GAAP operating loss guidance for 2022. For the full year, we expect revenue in the range of 191 to 195 million. Professional services revenue is expected to be low double digits as a percentage of total revenue, representing a year-over-year percentage decline of low to mid 20s. I would like to provide some additional context on our revenue guidance. In 2021, professional services revenue was 14% of our total revenue. And this year, our current guidance is for that to decrease to low double digits as a percentage of our revenue, which is largely driven by more of our customers electing to be self-service. In addition, as we discussed on our call in March, overages are trending lower this year as more customers have added capacity into their contracts at the time of renewal, and that can ensure fewer overages. While neither of these items are part of our ARR, Both of these items act as an approximately 4% headwind for a full-year revenue growth rate in 2022. The global macroeconomic environment remains volatile, and we believe that we may continue to see longer sales cycles and greater deal scrutiny for larger deals. Given this backdrop, we believe it's prudent to assume that net AR additions will be roughly flat for the second half of the year. We are improving our previous 2022 annual bottom line guidance and expect a non-GAAP operating loss in the range of $27.5 million to $24.5 million and a non-GAAP net loss per share of $0.57 to $0.51 per share using $48.1 million basic and diluted shares outstanding. These estimates include the impact of our cost reduction activity, partially offset by the impact of inflation on compensation and other variable costs. Our cost reduction activity included 5% reduction in our headcount this quarter compared to where we stood in mid Q2 of this year. The headcount reduction will be substantially implemented by the end of Q3. For Q3, We expect total revenue in the range of $47 million to $48 million. Professional services is expected to represent approximately 10% to 11% of total revenue, representing a year-over-year percentage decline in the low to mid-teens. We expect a non-GAAP operating loss in the range of $8 million to $7 million and a non-GAAP net loss per share of $0.17 to $0.15 per share of based on 47.4 million basic and diluted shares outstanding. We expect a restructuring charge of 1 to 3 million related to our cost reduction plan. This restructuring charge is excluded from the non-GAAP amounts provided above. In conclusion, We are confident in our ability to navigate through this volatile macro period, and we believe we are well-positioned to return to top-line growth in 2023 with an improved cash flow profile. We will also allow for difficult comparables from services and overages starting early next year. With that, Shravai will open the call up for questions. Operator?