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spk08: Good day and welcome to today's On24 Incorporated third quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Lori Barker. Please go ahead, ma'am.
spk01: Thank you. Hello and good afternoon, everyone. Welcome to On24's third quarter 2022 earnings conference call. On the call with me today are Shiraz Saran, co-founder and CEO of On24, and Steve Vattoni. 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 fourth quarter and full 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 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 reconciliation of these non-GAAP financial measures, please refer to today's financial press release. I will now turn the call over to Sharad.
spk04: Thank you and welcome everyone to ON24's third quarter 2022 financial results conference call. We appreciate you joining us. On today's call, I will review our Q3 results, introduce two new members of the ON24 executive team, and discuss our focus on returning to top line growth with line of sight to break even profitability by Q4 2023. First, for those of you who are new to ON24, I would like to quickly share who we are and how our platform is fueling revenue growth for industry-leading B2B organizations. ON24 is a digital engagement platform that enables B2B organizations to use our platform of six products to create live, always-on, and personalized experiences that work together to drive deep engagement, generate first-party data, and provide a unified set of customer insights that integrate with business systems so that sales and marketing organizations can take the right actions to deliver pipeline and revenue growth. Our customer base consists of thousands of the world's largest and most recognized organizations. The ON24 platform is uniquely positioned to serve as a one-stop shop for digital engagement, powering go-to-market use cases that span demand generation, partner enablement, customer and product marketing, healthcare communications, member enrollment, and live certification. By consolidating onto our platform, our customers can drive more growth at a lower cost, streamline operations, and gain actionable intelligence with an integrated set of customer insights. We have a very large TAM and expect to see long-term tailwinds as sales and marketing continues to accelerate the move to digital channels. Now, turning to Q3 results. For the third quarter, we reported total revenue of $47.6 million. Subscription and other platform revenue was $43.3 million, and professional services revenue was $4.3 million. We posted a non-GAAP operating loss of $3.6 million, meaningfully better than our guidance of $8 million to $7 million, as we drove efficiencies and tight cost containment across the organization. Engagement per attendee on the platform was at record levels, with audiences spending more time and having more interaction within our experiences, demonstrating the value our customers continue to derive from our platform. Ending ARR was $165.6 million, representing a sequential ARR decrease of $2.2 million or $1.7 million when excluding the impact of foreign currency. Our ARR performance has been adversely impacted by our virtual conference product. This product is a managed service solution for the specific use case of multi-day, large-scale, high-production digital conferences. With the return of large-scale in-person events, we are seeing less demand for our virtual conference product and have experienced a churn rate for this product that is more than two times greater than our core products over the past several quarters. This has created an approximate two to three point headwind to our ARR and revenue growth in 2022. We expect virtual conference to represent mid-single digits as a percentage of our ARR at the end of this year. And in that sense, it is not expected to be a core part of our business in 2023. When excluding the virtual conference product and impact of foreign currency, our ARR was essentially flat quarter over quarter. The core platform ARR excluding the virtual conference product has been stable and it grew low single digits year over year in spite of post-COVID normalization and current macro headwinds. The macro trend facing many companies is resulting in tighter customer budgets and greater deal scrutiny, which did become more challenging in the third quarter, particularly in Europe. Offsetting these headwinds, we continue to see strong expansions from some of our customers in Q3, which I'll go into more detail shortly. As we focus on our path to return to top-line growth and improving execution, We have deepened our bench and added two senior leaders to the ON2014. Jason Olkowski has joined as Chief Customer Success Officer and Callan Young as Chief Marketing Officer. Jason's strategic priorities include maximizing retention, driving adoption of our platform, and reimagining our customer experience. Callan is focused on evolving our platform positioning, bolstering our demand generation function, and honing our go-to-market strategy within key verticals. Now let me discuss a plan to drive top-line growth by improving gross retention, increasing net retention with customer expansion, and accelerating new business acquisition. First, we are seeing a renewal cohort stabilize and expect gross retention for our platform to improve in 2023. With new customer success leadership now in place, we are intently focused on supporting customer adoption to better onboarding and in-product education. We are also driving proactive initiatives to impact customer health with a key focus on increasing the number of our customers who have integrations with CRM and marketing automation systems, a proven lever for higher retention. As I mentioned earlier, we have a customer base comprising of some of the world's largest enterprises spanning several verticals. Our expansion motion is primarily driven by expanding the use of our new and existing products and cross-selling into new departments. Our product portfolio and industry expertise uniquely positions us to provide our customers with a single platform to power enterprise-wide digital engagement initiatives and mission-critical sales and marketing use cases. Once our customers start using our platform and have the first-party data generated from ON24 integrated with their tech stack, it's easier to adopt more for experienced products and have their first-party engagement data unified and generated from one platform. As the macro environment evolves with organizations looking to drive efficiency and consolidate to a strategic vendor, we expect the attach rate of our newest products to accelerate, which will improve our net retention rate and growth within our install base. The percentage of customers with two or more products in Q3 2022 was close to the highest ever. Let me provide a few of the Q3 expansions that further demonstrate how we are winning with our one platform strategy and multi-product portfolio. First, one of the top American investment advisor firms has been a longtime On24 customer. This customer's product marketing team was already using On24 Elite to build top leadership and awareness, but wanted to engage smaller audiences with more targeted experiences and replace in-person events that were costly and impossible to scale. In Q3, this customer added On24 forums and Target. Now they can provide their high-value clients direct access to subject matter experts through live virtual office hours, and clients can deepen their education with personalized content experiences. Over the past four years, we've expanded our business with this customer by approximately 5X. Next, we are seeing traction within the healthcare provider vertical with a six-figure expansion at one of the largest not-for-profit healthcare insurers. We expanded into the Medicaid division where they needed to transform their member retention and enrollment strategy to be digital first. With the power of On24 Elite and Engagement Hub, our platform provides an accessible, efficient way to reach and educate their senior members in a highly interactive and data-driven way. This customer has now expanded by more than six times since the initial purchase back in 2017. Turning to our new business efforts. We are most focused on enterprise and upper mid-market companies in the key verticals of technology, financial services, life sciences and healthcare, manufacturing, professional services, and information services. The macro environment backdrop is more challenging for new business with greater budget scrutiny. Despite these challenges, we landed some impressive new logos in the third quarter. One example is a six-figure win at a multinational medical device manufacturer. As part of a larger digital first go-to-market initiative, the company knew that they needed a third pillar in their tech stack to complement their content management and CRM systems power all first-party digital engagement and improve their customer experience. This led them to replace multiple collaboration tools and learning management point solutions and consolidate onto our platform, adopting On24Leak, forums, and engagement hub. Another notable six-figure win, this score, comes from a leading Asia-based healthcare distribution company where we beat out a competitor driven by our comprehensive and deeply integrated digital engagement platform. As this company expands across Asia, they selected ON24 League because of our ability to support multiple countries on one platform and provide continuous scale as they enter new markets. With the rapid expansion plan, it was critical for them to streamline the operational infrastructure between ON24 and their CRM. Using the ON24 platform, they can set up the initial integration once, keep adding more and more teams, and easily have all their engagement data flowing from one place for a single view of their health care professional clients. Moving on to our product innovation and platform strategy. Customers' need for a platform to support enterprise-wide digital engagement continues to drive our product roadmap today. This past year, we have built out a fully integrated platform of six self-service experience products. 124 Webcast Elite, 124 Breakouts, 124 Forums, 124 Engagement Hub, 124 Target, and 124 Go Live. All these products are powered by a robust set of analytics, an AI-driven content recommendation engine, and they all use a single integration to connect to third-party sales and marketing systems. We are continuing to strengthen our single-platform data advantage by adding more integrations to our ecosystem and further developing our AI-driven content recommendation engine. This enables our customers to dynamically personalize their own 24 experiences at scale, building a more intelligent and higher-performing digital journey for their audience. We expect to add additional experience products that broaden our platform and address new sales and marketing use cases. This will enable our customers to drive even more engagement, generate more first-party data, and deliver more revenue growth, all through one platform. While we continue to make targeted investments, we are tightening our focus and driving efficiencies, particularly within sales and marketing functions, where we are making additional cost reductions in Q4 and optimizing resource allocation across the organization. We are committed to improving our operating margin performance, as demonstrated in our Q3 results, with the bottom line well ahead of our previous guidance. Under a range of top-line scenarios, we believe that we have line of sight to reach breakeven profitability by Q4 2023. Steve will give you a few more details when he discusses guidance, and we'll share more on our Q4 earnings call. In conclusion, I'd like to summarize a few key points. First, we are one of the leading B2B digital engagement platforms for sales and marketing. that cost effectively powers mission critical sales, pipeline generation, and marketing use cases across the enterprise. This is increasingly important in the current macro environment as companies look to drive cost effective pipeline and revenue growth and maximize the efficiency of their spend. Second, while the economic outlook remains uncertain, we are in the early innings of a very large market opportunity and positioning ourselves for long-term industry leadership and success. Third, our focus is on driving core platform growth, and we have line of sight to deliver break-even profitability by Q4 of 2023. We continue to improve our execution and have strengthened our executive bench with two new leaders, And finally, we have a strong balance sheet with over $341 million in cash and investments, which enables us to invest in our core platform and drive customer penetration and market share. We are focused on capturing more of our TAM by adding more products and use cases to our platform while driving efficient and durable growth. Now, I'll turn it over to Steve.
spk07: Thank you, Sharad, and good afternoon, everyone. I'm going to start with our third quarter 2022 results, and we'll then discuss our outlook for the fourth quarter and full year 2022. Total revenue for the third quarter was $47.6 million, representing a decrease of 4% year-over-year. Subscription and other platform revenue was $43.3 million, a decrease of 1% year-over-year. This includes overages, which were approximately 1% of total revenue in Q3 of this year compared to over 2% of total revenue in Q3 of the prior year. Professional services revenue was $4.3 million, a decrease of 25% year-over-year and representing approximately 9% of total revenue compared to 12% in the year-ago period. We are facing headwinds with professional services as more customers elect to be self-service in the current macroeconomic backdrop. 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 $165.6 million, a decrease of 1% year-over-year, and a sequential decrease of $2.2 million from Q2. Excluding the impact of foreign currency fluctuation in Q3, it was a decrease of $1.7 million from Q2. As Sharab mentioned, we are seeing less demand than expected for our virtual conference product, and it is experiencing a higher churn rate than our core products. The virtual conference product contributed mid single digit percentage of ARR in 2019. Its contribution increased to approximately 10% of ending ARR at the end of 2020 at the height of COVID. By the end of 2022, we expect virtual conference to be in the mid single digit percentage of ARR. With the low overall contribution, we expect headwinds from this product to lessen in 2023. The virtual conference product resulted in a $1.8 million reduction to our ARR in Q3. For the full year, it has acted as a two to three point headwind to our ARR revenue growth. Excluding the impact of foreign currency and virtual conference product, ARR would have been essentially flat from Q2 to Q3. It would have grown low single digits year over year. Turning to customer metrics. The number of customers contributing more than $100,000 in ARR totaled 351, up from 349 in Q2, and our average ARR per customer was close to the highest ever. The ARR contribution from the 100K plus customer cohort continues to represent approximately two-thirds of our total ARR, which is consistent with the prior quarter. Total customer count was 2,053 customers compared to 2,054 in Q3 last year. We experienced a sequential decline compared to Q2 given the slower new business environment. 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, 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 profit in the quarter was $35.7 million, representing a gross margin of 75%, which is a two-point decrease year over year. Over the past year, we have been investing in our public cloud infrastructure capabilities and have grown our customer success teams to drive improved retention and customer experience.
spk04: Now turning to operating expenses.
spk07: Sales and marketing expense in Q3 was $22.4 million compared to $24.2 million in Q3 last year. This represents 47% of total revenue compared to 49% in the same period last year and 52% in the prior quarter, largely due to the cost-saving measures implemented in Q3. R&D expense in Q3 was $9.1 million compared to $7.9 million in Q3 last year. This represents 19% of total revenue compared to 16% in the same period last year and 18% from last quarter. We increased our R&D spend this past year as we have brought new products to the market and expanded our platform. This is consistent with past guidance for relatively moderate increases in R&D spending throughout the remainder of the year. G&A expense in Q3 was $7.9 million compared to $7.3 million in Q3 last year. This represents 17% of total revenue compared to 15% in the same period last year and consistent with 17% of revenue last quarter. While our G&A expenses have increased this past year due to the costs associated with being a publicly traded company, we have taken actions as part of our broader cost containment measures to moderate our G&A costs. Operating loss for Q3 was $3.6 million, or a negative 8% operating margin, compared to an operating loss of $1.4 million and a negative 3% operating margin in the same period last year. This was a meaningful improvement from Q2 and well ahead of our Q3 guidance as we moved to improve our cost structure. Debt loss in Q3 was $3.3 million, or $0.07 per share, based on approximately $47.6 million basic and diluted shares outstanding. This compares to a net loss of $1.6 million or $0.03 per diluted share in Q3 last year, using approximately $47.1 million in basic and diluted shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with $341.8 billion in cash, cash equivalents, and marketable securities. Our strong balance sheet affords us the ability to navigate the current market while providing us the ability to repurchase shares under the current authorization, and we expect to be active in the market this quarter. Additionally, it gives us the flexibility to pursue the most attractive organic and inorganic investments that we believe will maximize shareholder value. Turning to our use of cash on the quarter, cash use and operations in Q3 was $3.5 million compared to cash use and operations of $0.9 million in Q3 last year. Free cash flow was negative 4.2 million in Q3 compared to negative 1.6 million in Q3 last year. Free cash flow margin was negative 9% in Q3 compared to negative 3% in Q3 last year. Now, turning to guidance. As Sharab mentioned, we are optimistic about our long-term growth opportunity. However, we are operating in a period of macro uncertainty and greater budget scrutiny from customers. In addition, we continue to see increased headwinds from services as more of our customers elect to be self-serviced and reduce their use of professional services. On the platform side, as discussed, we are seeing headwinds from our virtual conference product, and our focus is on driving core platform AR growth. For Q4, we expect total revenue in the range of $45.7 million to $46.7 million. Professional services is expected to represent approximately 9% to 10% of total revenue, representing a year-over-year percentage decline in the mid-30s, which was below our previous expectations for Q4 professional services revenue. Over the next few months, we are launching new service offerings that drive higher platform and data adoption, which we believe should positively impact service revenue over time. In terms of our ARR, which impacts our Q4 platform revenue, we are incorporating headwinds from foreign currency and expect the performance of our virtual conference product to be similar to what we saw in Q3. This is incorporated into our Q4 revenue guidance. Excluding foreign currency impact in the virtual conference product, we expect ARR in Q4 to be slightly down from Q3 levels. We expect a non-GAAP operating loss in the range of $4.5 million to $3.5 million and a non-GAAP net loss per share of $0.08 per share to $0.06 per share based on 48.3 million basic and diluted shares outstanding. Our updated bottom line guidance reflects the meaningful cost reductions carried out under our cost reduction plan, which includes actions already taken in Q3, as well as additional actions we are taking in Q4 to further reduce our cost structure. Our cost reduction actions in both Q3 and Q4 span all areas of the company, but we're primarily focused on the go-to-market function to better align that with the current demand environment. In addition, as we expect lower revenue in Q4 relative to Q3, we anticipate a modest decline in our gross margins in Q4, which is reflected in our guidance. We expect a restructuring charge of $1 to $1.3 million related to our cost reduction plan. This restructuring charge is excluded from the non-GAAP amounts provided above. For the full year, we expect total revenue in the range of $190 to $191 million. Professional services revenue is expected to be approximately 10% of total revenue compared to our previous expectation of low double digits. This represents a decline of low 30s year over year. The headwinds from our virtual conference product represents approximately a three-point drag on our total revenue growth for the full year. We are meaningfully improving our previous full year 2022 bottom line guidance and now expect a non-GAAP operating loss in the range of $20.1 million to $19.1 million and a non-GAAP net loss per share of $0.41 per share to $0.39 per share using $47.7 million basic and diluted shares outstanding. On a run rate basis, we have been able to reduce our spend by approximately $4 million per quarter or $16 million annually compared to where we exited Q2 2022, which will allow us to enter 2023 with an improved cost structure. Given the current macro environment uncertainty, we would expect our return to revenue growth to be in the second half of 2023. Under a range of top-line scenarios for 2023, we believe that we have line of sight to reach break-even non-GAAP EPS by Q4 2023. We plan to provide guidance on our outlook for fiscal 2023 during our Q4 earnings call. With that, Sherrod and I will open the call for questions. Operator?
spk08: Thank you, sir. A reminder to the participants, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We pause for just a moment to allow everyone the opportunity to signal for questions. We will take the first question from Rob Oliver from Baird. Your line is open. Please go ahead.
spk05: Great. Can you guys hear me okay?
spk04: Hey, Rob.
spk05: Hey. Hey. Hi, Sherrod. Hi, Steve. Thanks for taking my questions. Appreciate it. Sherrod, I'd love to hear from you a little bit more about the puts and takes in the macro and, you know, I think particularly relative to, you know, the confidence around the back half of 23. When you're having renewal discussions right now and for those that are coming up for renewal over, you know, the next 12 months you know obviously macro headwinds right pressure on sales and marketing budgets on the other hand i mean we're starting to hear about some travel constraints which of course benefited you guys tremendously prior and some vendor consolidation which you guys as a leader might be in a position to benefit from so just wanted to understand you know what you're hearing from customers and what gives you guys that confidence of being able to return to you know the revenue growth in the back half of next year and then i had a quick follow-up uh yeah so uh
spk04: Saurabh, as we look at our business, we look at it from the point of view of gross retention, net retention, and new business. And one of the things that we have talked about is that our cohorts going into next year have normalized. All of the COVID cohorts have at least renewed once. And so we feel really good about that kind of cohort. About two-thirds of that cohort also is integrated. And that kind of a cohort, our customers are really using that as a mission-critical way to drive sales growth and pipeline growth. Better cohorts doing a better job on integration. So we believe that our gross retention into next year will improve from this year. We expect Q4 this year to be one of the best in the year. So that's the first part. Secondly, on the net retention part, I mean, in Q3, we did a good job from an expansion and upsell within our installed base point of view. And with our new product, especially as the new products get more mature, we do expect to do well with them in Q4. I believe that that will also continue to play well into next year. So better growth, stronger expansion and upsell. On the new business side, that will depend upon the macro. That being said, we have kind of aligned ourselves execution to focus a lot more on the enterprise and upper mid-market with the addition of a new CMO. We're also kind of enhancing our verticalization and go to market. So yes, there will be some headwinds there, but we are very focused on improving gross retention, net retention, and new business. That's what gives us confidence until next year. The other thing also is more and more, Our customers are looking to cost-effectively generate pipeline and revenue growth. That is going to increasingly become important as they stretch their dollars a lot more. And our products allow them to kind of consolidate in one product offering. And we are seeing more and more of that happen, too.
spk05: great okay that's helpful thank you and steve just just one quick follow-up for you um you know you you detailed i think some some of the sources of you know expense um management for you guys you know i think with the one you called out being um kind of sales on the sales side and just just just wondering I assume that's not on the enterprise side. Like, is it more lower-end and mid-market? Is that still where you guys are focused? And then could you maybe talk about some of the other sources of expense management that you guys can tap into? Thanks so much.
spk07: Yeah, Rob. So the bulk of it did actually come out of our commercial and, you know, to some extent the SMB business, but largely the commercial business. That's really where we're seeing more of the headwinds. And we work to better align our cost structure there around what we're seeing out in the macro environment. In addition to that, as I mentioned, it did span all areas of the company. So we tightened up kind of across the board in all functions. And that's reflected in the guidance that we provided. We've reduced the cost structure quite a bit, $16 million on an annual basis, and we're able to meaningfully increase our annual guide on the bottom line as a result. You know, one other thing I wanted to add on to what Charles was saying earlier about 2023 and what gives us confidence to return to growth. We are having some headwinds this year, as we mentioned in the prepare remarks, which are going to abate next year. We have about a four-point headwind on services, which we think is going to normalize next year, a point or two, about a point on overages, and two or three points on the virtual conference product, and probably about a point on FX. We've got about eight points of overages that we're fighting against this year that are largely going to dissipate next year as the year progresses.
spk05: Great. Okay. I appreciate that. Helpful caller. Thanks, guys.
spk08: We will take the next question from Arjun Bhatia from William Blair. Your line is open. Please go ahead.
spk00: Hi. It's Faith on for Arjun. Can you guys hear me okay? Okay.
spk04: Yeah, hi. Can you repeat your name?
spk00: Beautiful. It's Faith on for Arjun. Just wanted to take a step back from a macro perspective. Can you guys talk about your overall outlook on virtual events just as the macro uncertainties continue? Do you think as customers look for that more cost-effective high ROI, then that push back to more virtual events as we've seen before? How are you guys thinking about that?
spk04: When we talk about virtual events, we really focus on the virtual conference product. That, at the end of the year, is going to be close to mid-single digits of our platform. If you're thinking about virtual events, overall, we provide a digital engagement platform that has about six different self-service products for our customers. Let me talk about the virtual conference product. Our ARR this year has been impacted by that. It's a managed services solution for large-scale digital conferences. And with the return of large-scale in-person events, we are seeing less demand for that product because right now people are just itching to go back to more physical stuff. Also, we've seen the churn rate for that particular product to be about over two times more than what in the last – last several quarters compared to our other core products. I mean, this was at the end of 2019, about mid-single digits. Part of our ARR went up to 10%. And now, by the end of this year, we'll be back to mid-single digits. As Steve said, it's creating about three points of headwinds. uh this year on revenue for for us and going forward this is not part of our core mission our part of our core mission is our self-service products that's that's about six different offerings that we that we take to market now coming back to if you're asking about what happens if the macro tightens up uh we expect our what we provide our customers is a sale is a mission critical sale and pipeline generation engine. We are continuing to see our customers consolidate the various use cases with PON24, and we expect that to provide a tailwind for us into 2023.
spk00: Okay, awesome. Thank you for the color.
spk08: The next question from Noah Herman from J.P. Morgan. Your line is open. Please go ahead.
spk06: Hey, guys. Thanks for taking our questions, and congrats on the quarter. You know, maybe coming back to the elongated sales cycles you're experiencing, particularly with the new business above the $100,000 threshold, have cycles gotten longer? What has really changed, I guess, since last quarter, and how is that looking, I guess, through October or last month?
spk04: No, I mean, I think the macro of anything has gotten a little tighter than anything. And so just new logo acquisition is a little harder. We are seeing some longer sales cycles, especially with business over $100,000 thresholds. But our sales cycle still continues to be between three to six months. Enterprise is a little on the longer side. As we look at the new logos, we looked at where we are going to see even more headwinds, and that's why we also realigned on the lower end of the commercial segment. We kind of realigned some of the headcount there to be more effective in that market. So currently as we see that, we do see some elongation, especially for larger deals, and some pressure on the lower end of the commercial market. That's what we are seeing. You also have October. I think October is the first month of the quarter, so it's got that kind of a seasonality. But we are seeing some headwinds that continue from September to October.
spk06: Got it. That's really great color. And then just a quick follow-up, maybe if you can just touch upon at a high level which verticals, whether it's manufacturing, healthcare, you mentioned it was pretty strong, are seeing, you know, which areas are seeing more strain relative to maybe some other areas that are seeing some weaker growth? Thank you.
spk04: Yeah, thank you. So two things. First of all, one of the things that we have focused our execution more, like we've talked about enterprise and upper end of the mid-market, is we've also focused a lot more on our install base because we've got some of the world's best logos. I think when you look at the six core verticals that we have, technology, life sciences, technology, manufacturing, financial services, information services, and professional services. I think there are some headwinds across the verticals. Technology, of course, is the toughest. But we are seeing probably the life sciences has still got some good opportunity. especially once you're in those accounts, and some on the financial services and asset management side. Other than that, it's kind of all across the board. There are some things across the board.
spk06: Great. Thank you.
spk08: Next question from Scott Burke from Needham. Your line is open. Please go ahead.
spk02: Hi, everyone. This is Michael Rackers. I'm on for Scott Berg today. Thank you for taking my question. I really appreciate it. Just kind of wanted to ask one on the competitive dynamic. I mean, I know you've touched a lot on some of the macro headwinds and what you're seeing there, but is it generally the same players? Are your win rates kind of tracking in a similar way? And then has that changed kind of over the past three, four, five quarters?
spk04: Yeah, Michael, you know, our win rate is about the same for the last few quarters. Actually, we've seen our competitive position improve, and we've seen many of the venture-backed coin solutions that were funded in the last two, three years, they've started retreating from the marketplace. And our solution, even more now, now that we have kind of a – a platform with six core products that drive cost-effectively power mission-critical sales and pipeline generation for our customers. And this is becoming increasingly more important for these customers in recessionary times while they are maximizing the efficiency of their spend. Previously, we have talked about our competitors and two different segments. One was the video collaboration tools. That area continues to be a competitor. But those folks like the Zoom and the WebExes, they sell to IT. They have very limited data and insights. They don't provide pipeline. They don't provide a sales platform. And actually, they're a great lead generation tool for us because You know, people are going to get their first one-on-one of digital engagement there, but then they need a data-rich platform that drives pipeline, then they come to 124. And on the other side, the point solutions that we saw emerge in the last couple years, as I said, you know, we see them retreating. So we believe that as we move forward in 2023 and as our customers deploy us for multiple, even more use cases, drive more pipeline, that our competitive position is going to get a lot stronger.
spk02: Great. Thank you so much.
spk08: A final reminder to the participant, please press star 1 to ask a question. We will take the next question from DJ Heinz from Canaccord. Your line is open. Please go ahead.
spk06: Hey, Sherrod. Hey, Steve. Thanks for taking the questions. I'm curious how you're managing conversations around price. And I guess it may be different between kind of new customers and what's happening at Renewal. I mean, my sense is you guys are the premium place player in the space for good reason from a functionality perspective and what you deliver. But I'm curious how sensitive are buyers to price in this environment and how are those conversations going?
spk04: So let me talk about... Renewal first, because clearly large deals coming up for renewals. And we are cognizant of the fact, DJ, that customers are very price sensitive. So one of the clear feedback, one of the clear guidance that we have to our sales team and others is not to lose a customer. In a way, some downsell is better than short. So that's an important thing. But the other thing that we are also going with our customers is, We are getting much, much better in terms of executive business reviews, quarterly business reviews, sharing with them the new product, the more the new use cases that they can adopt. And we are seeing better adoption of products like forums and engagement hub. So that's an important thing. Generally, we also have rechargeable uplift of pricing of 7%, 8% a year. which is what we lead with, but we are being a little open if that becomes a negotiating topic. We are also continuing to give up some pricing discounts compared to multi-year deals. So those are the things on the renewal basis. Then on the new business side, we have to be a little more efficient in terms of discount levels than others. Now, again, we are not betting the farm at all because the good thing is we have multiple products. We are taking more products. So, yes, there is some higher discount compared to before on the new business side. But, again, what we are talking to these customers is the – It's not about just the cost. It's about what is the pipeline growth they're going to get. The new businesses that are coming to us in this kind of an environment are really looking to solve the problem. Are they looking to drive pipeline? Are they looking to drive partner training? So on and so forth. I'll give you one example. One of the largest software companies is standardized and on 24 for the global demand generation. They're integrated with our platform. Now their partner team came and said, hey, listen, We've been using collaboration tools. We need an enterprise-scale partner platform. And they were already integrated. So they basically spun off the partner training platform on launch 24, and their output is now 78% better. So this is going to essentially being able to take it into other use cases, other departments, allows us a little more flexibility while giving a little more discount than before.
spk06: Yeah. Yeah. Okay. That's helpful, Kala. And then look, I mean, the stock's basically trading at cash now. I appreciate, you know, what you guys have done from a cost structure perspective. I think getting the business to profitability will be important, but a lot of the fundamental stuff that we're talking about has kind of been the same for several quarters in a row now. So I guess, I guess the question is like, what else are you considering to kind of create value from here? Right. Does MNA look more attractive? Do you accelerate buybacks? Is there other stuff that you can do? Like, what, what are you thinking about when you sit around with the board?
spk04: Yeah, so let me say, I think that's a very good question. Let me answer it in a couple of ways. So first of all, DJ, in the last two, three years, we've had, you know, we were a 25% growth on an ARR basis pre-COVID at the end of 2019. And then we, you know, the last two, three years have been a little different because we had the COVID tailwinds. Then we had the normalization. Now we are adjusting to the normalization. We are dealing with the macro. And we have about eight points of Edwin that Steve talked about between the services and overages and the virtual conference and the ethics. Now a lot of that is going to abate next year. So, of course, we don't believe that our current share price reflects our long-term growth opportunity as well as actions we have taken to improve our business model. Our focus right now is on core platform growth while getting to profitability. That's what we are focused on and getting to break-even profitability by Q4 2023. Now, we do have a strong balance sheet, as you know. And our focus right now is maximizing shareholder value. We will be repurchasing shares. We've talked about that in our earnings call. We are looking at, as valuations go down, how do we continue to beef up our engagement platform organically and inorganically. So those are the things that we are doing.
spk06: Yeah, yeah. Okay. I appreciate the call. Thank you, guys.
spk08: The next question from Thomas Blakeney from KeyBank. Your line is open. Please go ahead.
spk03: Hello. Can you guys hear me?
spk04: Yeah.
spk03: Hi, Thomas. Thanks for taking the question, guys. My question is about engagement. Kind of, I guess, a little bit off of David's question there. You know, it seems like engagement is still strong here, a few million per month. I don't know if that's unique per month, but you can come up with some mathematics if it's not unique per month at about $60 a year or even five if they are unique every month. Is engagement still growing? That's the question. And secondarily, you know, they'll just talk about pricing. Where can a – Where can someone go outside of your tools and engagement tools and analytic tools to generate leads and customer service contacts for something cheaper than that? That's my first question. I have a follow-up for Steve.
spk04: So, Thomas, your question about engagement, was that audience engagement on the platform?
spk03: The metrics you provided, the $3 million per month.
spk04: Okay, listen. Yeah, let me answer the question of engagement on the platform. What we are seeing is engagement per attendee on the platform is the highest, the last one that we have seen, and the interactions that the attendees are having on the platform. This is also due to we have more products that people are using. The product is highly engaging. So we are not seeing any digital fatigue or anything like that there. And all that engagement is converting into first-party data and buying signals for people to – for our customers to convert them into sales and pipeline. The other question that you had, if you could repeat that, was on pricing. Could you repeat that, Thomas?
spk03: Well, it was just kind of a higher-level commentary about if engagement is strong, which you just alluded to, you can run arithmetic in terms of the revenues coming into your model via subscription revenue. you know, there seems to be a great value proposition. Where would the pricing pressure come from? Where could these folks go to for more lead generation if that's such a low dollar amount per touch?
spk04: I think the competition is really, I mean, generally what we are seeing is that in some cases where IT focuses people to go back to video collaboration tools, especially in an environment like this, that's where they get very limited data and insights. That is, if people want to do just the status quo in this environment without getting the data and insight, that's where they probably end up going. So we see some level of competition from that side. Now, I did talk about that there are point solutions that are retreating. And we expect them to agree because they're venture-backed, and there's not enough runway for many of these folks. But they're not completely gone. So in some cases, they are competing with us for some of those deals. But as we move into 2023 and others, we believe our opportunity is going to get much, much larger. And some of those companies may be potential acquisition targets too.
spk03: That's great. And thank you for that, Sharad. And Steve, just a follow-up question on some sort of like insight on normalized gross margins if we go here, you know, pre-pandemic in the 70% range when mid-70s here. What, you know, as you look out and provide us with that outlook of breakeven, you know, by 4Q23, what should we be thinking about in terms of gross margins there and also maybe even normalized a little longer term would be helpful? Thanks, guys.
spk07: Yeah, I mean, we were at 75% in Q3, and the commentary and the prepared remarks, you know, I suggested we feel a little bit of pressure on that in Q4, you know, based on the revenue guide. Our goal is our long-term target model is 78 to 80%. We know what that looks like. We've been there in the past, as I think you just alluded to. We're not going to get there next year, most likely. We're not providing 2023 guidance yet, but I don't expect us to be in the high 70s next year. I'd expect next year to be probably consistent with what we're seeing in the second half of this year. If that's helpful.
spk03: Very helpful. Yeah, very helpful, Steve. Thanks for answering my question.
spk08: It appears that there is no further question at this time. Mr. Sherrod, I'd like to turn the conference back to you for any additional or closing remarks.
spk04: Thank you all for joining us today. We look forward to meeting with you soon.
spk08: That concludes today's event. Thank you for your participation. You may now disconnect.
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