ON24, Inc.

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.

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.

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.