ON24, Inc.

Greetings and welcome to the ON24 fourth quarter and full year 2022 financial results. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lauren Sloan, Investor Relations for ON24. Thank you. You may begin.

Thank you, hello, and good afternoon, everyone. Welcome to ON24's fourth quarter and fiscal year 2022 earnings conference call. On the call with me today are Shirat Charan, co-founder and CEO of ON24, and Steve Attuoni, 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 the execution of our capital return program in guidance for the first quarter in fiscal year 2023, as well as certain second quarter 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 revenue, attract new customers, and expand sales to existing customers the success of our new products and capabilities, and 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 guaranteed a 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 measures to evaluate our ongoing operations and for internal planning and forecasting purposes. Non-GAAP financial measures are presented in addition to and not 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 Shirat. Please go ahead.

Thank you and welcome everyone to ON24's fourth quarter and full year 2022 financial results conference call. We appreciate you joining us. With me today is Steve Battuoni, Chief Financial Officer. Before we get into results, as a reminder, the ON24 platform includes 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 our customers' business systems so that sales and marketing organizations can take the right actions to deliver pipeline and revenue growth. We define this as our core platform, which excludes the managed service virtual conference product. As we stated on our last call, we are de-emphasizing the virtual conference product With the return of large-scale in-person events, we are seeing less demand for this product and have experienced a churn rate that is significantly greater than our core products over the past several quarters. By the end of this year, we expect the ARR from this product to be low single digits as a percentage of our total ARR. The focus of the core platform, we now view the metrics from this business such as revenue, ARR, and NRR as the best KPIs moving forward. Turning to Q4 results, revenue from our core platform, including services in Q4 of 2022, was $44.2 million, and total revenue, including virtual conference, was $46.6 million. Of total revenue for the quarter, subscription and other platform revenue was $42 million, and professional services revenue was $4.5 million. We posted a non-GAAP operating loss of $3.5 million in Q4, as we continue to take significant actions to align our cost structure towards achieving profitability, which I will elaborate on momentarily. We ended 2022 with $152.6 million in ARR related to our core platform, representing a sequential decrease from Q3 of $3 million, when excluding the impact of foreign currency, which is currently $400,000. Let me provide some commentary on the performance. Added to a sequential decrease in our ARR for the core platform, net of foreign currency, we saw a higher reduction than anticipated. Since our last call, the macro environment has become more challenging. Of the five verticals we which each account for 10% or more of our annual core platform ARR. We saw mid-single-digit percentage reductions in ARR between Q3 and Q4 2022 in technology and manufacturing. Technology, our largest vertical, which accounts for over a third of core platform ARR, was especially affected with over 1,000 technology companies having layoffs according to third-party data. This had the single greatest impact on our core platform ARR performance. We also saw challenges in new business logo acquisition, both in enterprise and commercial segments, due to customer hesitancy in the current macro environment. From a geographical perspective, Europe continued to be soft, and our international business revenue declined by almost two times the rate of the overall business in Q4 2022. Despite those challenges, the life sciences and professional services verticals saw positive traction with low to mid single digit percentage growth in core platform sequential ARR growth from Q3 to Q4 2022. We saw improvements during Q4 in the in-period gross dollar retention, which reflects both churn and downsells from existing customers of our core platform, with Q4 gross retention among the highest in 2022. Additionally, the in-period Q4 dollar churn rate improved to near historical levels. The contribution from new products that we launched in 2022 was the highest in Q4, and our customers are committing to longer multi-year contracts, which ended the year at the highest level ever. As we look forward, the larger digital transformation trends that have accelerated our business over the past few years are still unfolding, and we are aligned with several market trends that will provide tailwinds to the business once the macro pressure eases. These include the modernization of sales and marketing and their move to digital channels to drive pipeline and revenue growth, transition of the B2B prospect to self-educate and research online before engaging with sales, and the importance of first-party data as compliance and privacy regulations become increasingly restrictive. The time for a solution is very large, and we are in the early stages of this market opportunity. We have managed through several economic downturns before, and we are intently focused on our four main priorities to set our business for success as the macro environment recovers. These are, one, accelerating our path to profitability in 2023. Two, relentless platform and product innovation. Three, laser focus on enterprises with over 1,000 employees. for our global footprint across Europe and APAC. First, I'll talk a little bit about our path to profitability. Looking ahead, we are focused on what we can control, continuing to improve our execution and running the business in a profitable manner while driving long-term durable growth. I'm pleased to share that we've accelerated our timeline to reach breakeven non-GAAP EPS to next quarter, which is two quarters ahead of schedule from our initial target of Q4 2023. To achieve our accelerated goal, we have initiated additional cost reduction measures in the first quarter across all areas of the company. In addition to reducing non-employee related costs, we are undertaking an approximately 13% reduction in headcount in Q1 relative to December 22, both through natural attrition without backfilling positions and through headcount reductions. Once complete, these actions, in addition to those already taken in 2022, restore headcount to similar levels to the end of 2020. We have an incredibly talented team, and this was a difficult but necessary decision to best position ON24 to deliver long-term profitable growth, achieving breakeven profitability under our accelerated timeframe. Steve will share more about this shortly. Next, I'll explain our relentless focus on platform and product innovation. Engagement on the platform, as measured by engagement per attendee, was at record levels in Q4, with audiences spending more time and having more interactions with our experiences. The uplift in audience engagement levels demonstrates the maturity of our platform and payoff of developing our extensive experience product portfolio over recent years. This level of deep engagement provides our customers with unmatched first-party engagement data and buying intent to drive their pipeline and revenue results. In the near term, we are most focused on leveraging a platform's foundation of first-party engagement data and buying intent to develop new capabilities across three major product areas. The first is personalized. segmentation which enables our customers to dynamically personalize experiences for their prospects based on rule sets first and third party intent data and real-time audience behavior second we are making enhancements to analytics and insights with the first of its kind key moments report that measures the performance of live experiences based on audience behavior and launch of a new ROI attribution dashboard in Salesforce. This allows companies to measure the pipeline attribution to ON24 solutions. The third product focus is one we are very excited about, our roadmap of new AI-driven content generation capabilities. Content creation is one of the most important yet costly resource intensive and time consuming aspects of sales and marketing today. As companies reduce headcount, it is even more important to have solutions that enable them to do more with less. Starting in Q2, we will introduce several features to help our customers solve this problem. Starting with embedded AI based content generation tools. We believe that the combination of our first-party engagement data, personalization, and AI-driven content generation capabilities will further strengthen our platform's significant competitive advantage and uniquely position us for future growth. I'll now discuss a laser focus on the enterprise. Close to 80% of our business is with companies with over a thousand employees. As a one-time disclosure, I'd like to unpack our in-period gross retention performance within this segment. Gross dollar retention reflects churn and downsell. As we move through the post-COVID normalization quarters, we saw our gross dollar churn rate within the enterprise segment deteriorate by a mid-single-digit amount compared to our historical churn rate. I'm pleased to share that as a result of our initiatives in customer success, in the 1,000 employee and above customer cohort, Gross dollar churn rate improved sequentially for the past three quarters and improved to 10% in Q4, which is consistent with pre-COVID levels. This is a compelling data point as it shows that customers that comprise an overwhelming majority of our business and are our primary focus are committed to the platform. However, downsells remain elevated given customer budgetary constraints in the current macro environment, which we believe is transitory and gives us confidence in the growth of our business when the recovery comes. As previously discussed, life sciences and professional services verticals were strong performers, where we increased core platform ARR quarter over quarter and year over year. while technology and manufacturing were behind. To further bolster our enterprise go-to-market strategy across new customers and expansion of existing customers, we have refocused resources from mid-market to our enterprise segment. We also continue to build up our partner ecosystem and develop new partnerships with service providers who focus on enterprise clients in our key vertical. In Q4, we saw the overall percentage of partner influence bookings increase to low teams, and we expect to see further leverage in 2023 as this motion matures. Finally, our international business. We have already invested in expanding our footprint outside of the US with teams in place across Europe and APAC, including Japan, and have a marquee customer base across these regions. While these regions have been impacted by the macro trends over the past year, we strongly believe they will be important growth vectors during the recovery process, given that many organizations are still very early in the adoption of digital engagement. At the same time, as we are executing on these priorities, The board and the management team have taken a deep look at our balance sheet and capital position relative to our investment needs and our ability to maintain sufficient capital in the current macro environment. Combined with significant shareholder engagement around these topics, the board determined to authorize a new $100 million capital return program comprising a special dividend and a combination of an accelerated share repurchase and a share buyback program. Steve will share more specifics on this program, but I want to underscore that this new program reflects our confidence in our business. We believe it balances maintaining our focus on growth and enhancing near-term value for our shareholders while leaving ample liquidity to invest in strategic priorities and navigate uncertain macroeconomic headwinds. Furthermore, the $100 million being returned is in addition to a prior share repurchase program through which we have returned $41 million to date, bringing the total to $141 million of capital being returned to shareholders since December 2021. We are committed to this program and we intend to complete the entirety of the return in the next 12 months. The management team and board regularly evaluate the capital needs of the business and will continue to assess this dynamically as the year moves forward. Now let me highlight a few key new business wins for our company. I'll start with a new win from Japan, which comes from a multi-billion dollar IT services and consulting conglomerate with over 100,000 employees. They came to us to help centralize and scale their sales and marketing operations across multiple business units. After struggling with the current collaboration tool, they decided to overhaul their digital engagement strategy and build a single online destination for live experiences and on-demand content using a combination of On24 Elite and Engagement Hub. In addition, We brought on a global health and well-being solution provider with over 10,000 employees, which is disrupting traditional health care by providing employers with an innovative way to support and deliver employee benefits. Our ability to deeply integrate with HubSpot and Salesforce was a key differentiating factor. giving their sales and marketing teams critical insights to drive pipeline and demonstrate the value being provided to employees back to their HR leadership teams. Finally, we added the nation's largest banking association to our customer base in Q4 by providing them with a comprehensive solution for scaling their life certification programs and increasing member adoption. Our engagement data gives them a powerful set of insights to improve cross-sell, grow their membership base, and drive more sponsorship revenue. Turning to our install base, we are powering a digital transformation initiative at a multi-billion multinational pharmaceutical and biotech company with more than 90,000 employees as they innovate how their field reps and pharma brands engage healthcare professionals and set the standard for HCP engagement across all their markets. Through ON24 Elite and forums, they will be able to build and scale hundreds of HCP experiences with brand consistency from one-to-one face-to-face virtual discussions for their field reps to larger one-to-many brand-led digital summits while capturing all the engagement and data in our platform. After landing this customer in 2020, we've crippled our footprint, and they're now a seven-figure ARR customer. In addition, we had a meaningful expansion with one of the world's largest multibillion-dollar software companies with over 20,000 employees who came to us to help them take all their data-rich live experience content and use it to fuel inbound lead generation by making it available as an always-on resource center within their website. Having already Proven significant ROI by driving millions in pipeline growth from their live experiences, their demand generation center of excellence wanted to double down on their digital engagement strategy with us and consolidate all their experiences onto our platform. Since acquiring this customer five years ago, we've been able to grow our business with them by 10 times into a seven-figure ARR customer. Finally, we widened our footprint at the nation's leading association for certified public accountants. Over the last two years, we've grown our business with them by two and a half times into a seven-figure ARR customer. In Q4, they doubled down on their digital engagement strategy, expanding their use of our platform by adding our new On24Forums experience product. By integrating this new experience into their portfolio, the association will enhance its offerings to include VIP-level professional training with sponsors and members. In closing, I'd like to highlight a few important points for you to take away. In the recent past, our revenue has been impacted by two major events, post-COVID normalization and the current impact of the macroeconomic environment. So we are focused on what's in our control. One, we are continuing to retain and expand our customers with greater than 1,000 employees, which account for nearly 80% of our core platform ARR, and landing new customers that match this profile within our key verticals. Next, we are relentlessly focused on platform innovation. And lastly, we are accelerating profitability, which will in turn help us fuel sustainable and profitable growth. Additionally, we remain bullish on the long-term fundamentals and market opportunity for the business. We are confident in the long-term business trend of digital transformation as B2B sales and marketing moves to digital channels. We are in the early innings of a large market opportunity, and having managed through economic downturns before, we know that with the appropriate investments, this is an opportunity to increase market share. Lastly, while the macroeconomic environment may continue to be bumpy, we're intensely focused on and confident as ever in delivering long-term shareholder value, which is evident in our commitment to the new $100 million capital return program that we expect to execute in 2023. And with that, I will turn it over to Steve to walk through the financials.

Thank you, Sharad, and good afternoon, everyone. I'm going to start with our fourth quarter 2022 results, and we'll then discuss our outlook for the first quarter of 2023 and the full year of 2023. Before I get into the numbers, our focus going forward will be on the core platform business as we are de-emphasizing the virtual conference product. For that reason, we now view the metrics from our core platforms, such as revenue, ARR, and NRR, as the best KPIs, which I will be leading with in the following discussion. Revenue from our core platform, including services in Q4 of 2022, was $44.2 million, representing a decrease of 7% year over year. Total revenue for the fourth quarter, which includes revenue from our virtual conference product, was $46.6 million, representing a decrease of 11% year over year. Total subscription and other platform revenue was $42 million, a decrease of 7% year over year. This includes overages, which were approximately 1% of total revenue in Q4 of this year compared to 2% of total revenue in Q4 of the prior year. Total professional services revenue was $4.5 million, a decrease of 36% year-over-year, representing approximately 10% of total revenue compared to 14% in the year-ago period. As we have previously discussed on our earnings calls, our professional services revenue declined in 2022 as more customers elected to be self-service and utilize less services 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. Any ARR related to our core platform was 152.6 million a decrease of $3 million from Q3, excluding the impact of foreign currency fluctuation, which was $0.4 million. ARR from our virtual conference product was $7 million at the end of 2022, down from $13.8 million at the end of 2021. This resulted in total ARR of $159.6 million at the end of 2022, as compared to 171.4 million at the end of 2021. Given that virtual conference product now stands at only 4% of our ARR at the end of 2022, we do expect the headwinds from this product to dissipate in 2023. With that, I'd like to share some perspective on our Q4 performance and what we are seeing in the macroeconomic environment. In Q4, Our ARR was impacted by slower new business logo acquisition, lower expansion rates in the technology and manufacturing verticals, as well as a higher level of downsells in the latter part of Q4 as the macro uncertainty worsened. In addition to Sharad's commentary as a one-time disclosure, I would like to share some additional color on how our various verticals performed for the full year. There are five verticals, which each account for more than 10% of our core platform ARR. Technology, which is our largest vertical with over one third of our core ARR, life sciences, financial services, professional services, and manufacturing. Despite the macro headwinds this year, we did see core platform ARR grow in three out of the five verticals in 2022. Mid single digits for both life sciences and professional services and low single digits for financial services. Throughout 2022, we have seen softness in the technology and manufacturing verticals, particularly in the latter part of Q4 as many technology companies reduced their headcount in spending and manufacturing companies had their budgets squeezed. However, we remain optimistic that as the macro environment improves over time, these verticals will rebound. Turning to customer metrics, the number of customers contributing more than $100,000 in total ARR totaled 345, marginally down from 351 in Q3. This number was impacted by downsells in Q4 as our customers faced budgetary pressures and some customers in this cohort renewed at lower commitment levels under the $100,000 threshold. For our core platform ARR, our average ARR per customer was the highest ever at the end of 2022, and our average ARR per customer, including our virtual conference product ARR, was close to the highest ever. 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. This data point reiterates Sharad's comments on the relative strength of our larger customers and retention on our platform. Total customer count was 1,990 customers compared to 2,122 in Q4 last year. We experienced a sequential decline compared to Q3, given the slower new business acquisition environment, and churn with an SMB, which is companies with less than 200 employees, which was the largest contributor to logo churn in Q4. We continue to see our customers make longer-term commitments to our platform with multi-year contracts comprising 41% of our ARR at the end of 2022 as compared to 35% at the end of 2021. The percentage of our customers with multiple products at the end of 2022 was 36%. While we have seen some customers rationalize our entitlements as budgets tightened in the latter part of 2022, we were pleased to see these metrics increase in 2022. Our dollar-based net retention, or NRR, in 2022 for our core platform was 90%, and for the enterprise segment, it was 93%. The NRR for our total business was three points lower than our core platform. As a reminder, NRR is a lagging indicator and reflects the impact of elevated downsells that we experienced in 2022 as many companies tightened their budgets. As a one-time disclosure, I'd like to provide some additional context on our in-period gross dollar retention performance. The in-period dollar churn rate for the core platform improved in Q4 by more than 700 basis points as compared to our highest churn rate period, Q2 2021, and now stands near pre-COVID levels. However, downsells continue to remain elevated at approximately twice the percentage compared to what it was pre-COVID, driven by customer budgetary constraints from the current macroeconomic environment. We are pleased with the progress from the initiatives we have undertaken in customer success to improve return rate and expect to see further improvements. In our view, the elevated level of downsells is transitory, which gives us confidence in our ability to return to growth as the macro improves. 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, amortization of acquired intangibles, 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 $34.3 million, representing a gross margin of 74%, which is a three-point decrease year over year, consistent with the commentary we provided on the prior earnings call. While we have made meaningful cost reductions across our business, We have invested in our public cloud infrastructure this past year, and certain costs related to delivery of our products were a larger portion of our revenue this quarter as compared to prior periods, resulting in a modest decrease in our margins. Now turning to operating expenses. Sales and marketing expense in Q4 was $21.1 million compared to $24.9 million in Q4 last year. This represents 45% of total revenue compared to 48% in the same period last year and 47% in the prior quarter, largely due to the cost savings measures implemented in Q4. R&D expense in Q4 was $9 million compared to $8.1 million in Q4 last year. This represents 19% of total revenue compared to 16% in the same period last year and 19% 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 2022. G&A expense in Q4 was $7.7 million compared to $8.9 million in Q4 last year. This represents 17% of total revenue compared to 17% in the same period last year and consistent with 17% of revenue last quarter. Our G&A expenses have decreased as compared to the prior year as we have taken actions as part of our broader cost containment measures to moderate our G&A costs. Operating loss for Q4 was 3.5 million or a negative 7% operating margin compared to an operating loss of 1.8 million and a negative 3% operating margin in the same period last year. Net loss in Q4 was 2 million or 4 cents per share based on approximately 48 million basic and diluted shares outstanding. This compares to a net loss of 1.7 million, or 3 cents per diluted share, in Q4 last year, using approximately 47.8 million basic and diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with 328.1 million in cash, cash equivalents, and marketable securities. Our strong balance sheet has allowed us to return a total of $41 million under our existing share repurchase program to date, including approximately $7 million in Q4 2022 and an additional approximately $5 million in early Q1 2023. As we have previously announced, we are replacing our prior share repurchase program with a new $100 million capital return program. We believe that the capital return program strikes the appropriate balance between maintaining our focus on growth and enhancing near-term value for our shareholders. We are planning that our capital return program will consist of two components. The first component will be a special cash dividend of 50 cents per share, which we plan to pay in the second quarter of this year. The second component will be a combination of an accelerated share repurchase program and a share buyback program of approximately $75 million. We expect the accelerated share repurchase and share buyback programs to be completed within 12 months. We are pleased to be able to undertake this meaningful capital return to our shareholders while also maintaining ample liquidity to invest in strategic priorities and navigate through the current macro environment. We believe there is a significant opportunity ahead for ON24 to create additional value for our shareholders. Turning to our use of cash for the quarter. Cash used in operations in Q4 was $7.6 million compared to cash used in operations of $4.5 million in Q4 last year. Free cash flow was negative $8.9 million in Q4 compared to negative $5.6 million in Q4 last year. Free cash flow margin was negative 19% in Q4 compared to negative 11% in Q4 last year. Before turning to guidance, Let me discuss our plan to accelerate our path to profitability. Last quarter, we discussed our commitment to reach non-GAAP EPS breakeven by Q4 2023. We've now accelerated this timeline by two quarters and expect to reach non-GAAP EPS breakeven by Q2 2023. We are able to do this by meaningfully reducing our expense run rate. Our expense run rate in Q4 2022 ended at approximately $4.5 million lower per quarter or approximately $18 million lower on an annual basis than where it stood in Q2 of 2022. And we plan to continue to lower this run rate by initiating an additional cost reduction program in Q1 of 2023 that will lower headcount by approximately 13% relative to December 2022 headcount levels which involves a combination of attrition, we are not backfilling, and involuntary headcount reductions. This will result in a total headcount reduction by the end of Q1 2023 of 23% relative to where headcount stood in mid-Q2 2022, and will bring our headcount back to levels similar to what it was at the end of 2020. We expect the bulk of our additional 2023 cost reduction program to be completed by the end of Q1. By the time we exit Q2, this program will have lowered our annual expense run rate by approximately $38 million to $40 million per year relative to our annual expense run rate in Q2 2022. Our cost reduction measures have spanned all areas of the company and involved both employee and non-employee related spending. We have lowered our spending with a number of vendors tightening discretionary spending, and are also rationalizing our real estate footprint. The measures we have taken make us well-positioned to deliver long-term profitable growth. Moving to guidance. We are confident in our strong market position and are optimistic about our long-term growth opportunity. However, we are operating in a period of heightened macroeconomic uncertainty, resulting in greater budget scrutiny from customers particularly in the technology and manufacturing verticals, with technology being over one-third of our ARR and manufacturing approximately 12%. Our guidance for 2023 assumes that we continue to see softness in these verticals and that macro uncertainty continues for the year. For Q1, we expect core platform revenue, including services, in the range of $40.2 million to $41.2 million, and total revenue which includes our virtual conference product in the range of $42 million to $43 million. Professional services is expected to represent approximately 9% of total revenue. We expect a non-GAAP operating loss in the range of $5.4 million to $4.4 million, and a non-GAAP net loss per share of $0.08 to $0.06 per share, based on 47.5 million basic and diluted shares outstanding. We expect a restructuring charge of $3.8 million to $4.3 million in Q1. This includes a charge of $1.3 to $1.5 million for underutilized real estate we expect to take in Q1, although the timing on this may vary. The restructuring charge is excluded from the non-GAAP amounts provided above. In addition, we expect to incur certain expenses related to shareholder activism in Q1 and possibly future quarters. As we do not consider these costs core to our business, we are excluding them from our non-GAAP guidance provided above. For the full year, we expect core platform revenue, including services, to decline 10 to 7% and to be in the range of $160 to $165 million. We expect total revenue to be in the range of $165 to $170 million. Professional services is expected to represent approximately 9% to 10% of total revenue. Any restructuring charges incurred in Q1 or in future quarters are excluded from the full year non-GAAP amounts provided above. We expect a non-GAAP operating loss in the range of $11 million to $8 million and a non-GAAP net loss per share of $0.08 to $0.01 per share using $45.7 million basic and diluted shares outstanding. Our estimate of shares outstanding takes into account the impact of our capital return program. Our bottom line annual guidance reflects the cost reduction efforts I discussed earlier, which includes reaching breakeven non-GAAP EPS by Q2 of 2023. In terms of margins, we expect gross margins in 2023 to be in the low to mid 70s. Let me share some perspective on ARR. For core platform ARR, given the current macroeconomic backdrop and weakness in the tech and manufacturing verticals, our guidance assumes a sequential decline of approximately 2% in core platform ARR in Q1. In addition, as we have de-emphasized our virtual conference product, we expect our virtual conference product ARR to decline by at least $1 million in Q1. This would result in total ARR declining sequentially in Q1 by approximately almost 3%. We do expect to see a modest sequential increase in our core ARR starting in the second half of this year, assuming the macro environment does not worsen from here. For our virtual conference product, we expect to continue to see sequential decreases in ARR throughout 2023, with that product ending the year in the low single digits as a percentage of our ARR. In summary, we are intensely focused on executing our strategy and believe that we are now well positioned to deliver long-term profitable growth. We remain steadfast in our commitment to enhancing shareholder value as evidenced by our new capital return program. With that, Sharad and I will open the call up for questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask your question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Please limit yourself to one question and one follow-up question only. Our first question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Perfect. Thanks, guys, for taking the question. You know, Sherat, once you're through the macro headwinds, the COVID normalization, how do you think about the normal, sustainable growth rates of the business? You have the market trends that are in your favor, your new products being launched, price and power, et cetera. How should we view growth? the normalized growth rate longer term, right? Not what's going to happen Q1, Q2, but over the next few years, what is a growth rate that we can attribute to the business?

Arjun, one, we are focused on driving long-term profitable growth. Two, our focus is to get the company back to mid-teens growth and above, ideally to where we were pre-COVID. And here's how we get there as the macro eases. First of all, bringing gross retention back to pre-COVID levels. And from a churn perspective in Q4, the gross churn was already close to being there. Number two, close to 80% of our business is with customers greater than 1,000 employees. And the core platform average ARR per customer is at its highest ever. You saw that in Q4. Three, New product contribution will continue to increase as products are more mature and continue to gain traction. In Q4, new product contribution was the highest in the year. We've also shared that the headwinds from the technology and manufacturing verticals, which comprise approximately 50% of our ARR, these headwinds should ease as the macro improves. And finally, the EMEA business should rebound as that business has declined more than 2x the rate of the overall business. That's what gives me high confidence for driving long-term profitable growth for the company.

Got it. Thank you. And maybe on one of the points that you made there, just in terms of exposure to some of these verticals that are dragging down growth at a higher rate than others, how do you think about diversifying outside of tech and maybe less so outside of manufacturing, right? What can you do in go-to-market and product to drive a broader exposure to other industries that are maybe not being as impacted by some of the near-term trends, the layoff announcements, et cetera? What are the initiatives underway on that side?

Yeah, so let me tell you what we've already done. I mean, if you look at the end of 2019, urgently, Our tech exposure was about 39%, close to 40%. And now at the end of 2022, it's 34%. Manufacturing exposure is also less. Our life sciences business has grown about 30% more from an ARR point of view as a percentage of total. Similarly for our financial services business. Now, as we unpack these verticals all year long, I mean, we are taking resources in two areas. We are taking resources, mid-market resources, and putting that in companies over 1,000 employees. That's one. And we are also taking resources and putting them more in a verticalized strategy on areas like life sciences, like insurance within financial services, in the professional services category. So the verticals that are working, we are taking resources and are going almost all in in those verticals. while reducing the resources on the other side. It's about following the money.

Our next question comes from the line of Patrick Schultz with Robert W. Baird. Please proceed with your question.

Hey, guys. Yeah, thanks for taking my question. And you mentioned customers being just a little more hesitant around signing deals and just some increased deal scrutiny. Can you just talk about how sales cycles trended throughout the quarter and what you're seeing so far in Q1? Have sales cycles gotten longer for new deals, particularly on the 100,000 ARR threshold?

Patrick, let me take that. Like others, we are seeing longer sales cycles, particularly with business over the 100K plus threshold. I think that is continuing currently. I don't see... any significant change in the macro compared to what we saw in the latter half of Q4. Generally, our sales cycle still continued to be between three to six months with the enterprises being on the longer side of that. So again, still short, but that's what we are seeing.

Okay. No, that's helpful. And then just a quick follow-up question. And just around operating margins. You guys have taken a lot of costs out of the business in recent quarters, including what you talked about, the plans for Q1 with the workforce reduction and other expense efficiencies. How should we be thinking about the progression of operating margin throughout the year? Would it be fair to assume sequential margin improvement each quarter? Just any commentary here would be helpful.

Yeah, this is Steve. So one, we're committed to running the business in a profitable manner while driving long-term durable growth. And two, we've accelerated our timeline to reach break-even non-GAAP EPS by two quarters in the Q2 of 2023, which is next quarter. Now, to improve our cost structure, we are reducing headcount in Q1 of this year by 13%. Now, compared to Q2 of 2022, which was a high watermark for headcount, we would have reduced headcount by 23% by the time we exit this quarter that we're in currently. In terms of total cost, that implies a reduction of $38 to $40 million coming out of the annual total expenses exiting Q2 of 2023 compared to a year earlier. Now, this expense structure, it's going to provide us operating leverage to drive profitable growth. In terms of progression, as I mentioned, the cost reduction plan will be substantially completed by Q1 of 2023, so some of the costs, a lot of them haven't fully been baked into the quarter in 2023, so I'd expect improvement in Q2 of 2023, and that's baked into the EPS guidance we provided for next quarter.

Just to add to what Steve said, Patrick, you know, we believe that we have right-sized the business, and as growth resumes, we expect, you know, to drive profitable growth and much of that to flow through the bottom line.

Okay, thanks. I appreciate the call, and thanks for taking my questions.

Our next question comes from the line of DJ Hines with Canaccord. Please proceed with your question.

Hey guys, thanks for all the color on the call, especially some of the one-time disclosures. It's helpful to put things in context. Steve, maybe I could start with you. Do you expect that core net revenue retention should see modest improvement in 23?

Yeah, let me talk about how it's, I mean, their core platform in our net dollar retention, as we mentioned, was 90% for the company, 93% for the enterprise. And as a reminder, it's a lagging indicator. Let me unpack that a bit for you, starting with gross retention. In period, dollar churn was good. We did see higher downsells at approximately twice what it was compared to pre-COVID. Now, in our view, we believe this is transitory due to the macro. On the expansion perspective, close to 50% of our AR was in tech and manufacturing verticals, where we did see a lot of pressure during the year, particularly in the latter part. We did see strong expansions in our life sciences and professional services verticals. and we saw a number of customers increase their usage there. Now, as we move forward, we expect the headwinds on downsells and tech and manufacturing verticals to abate as the economy improves, and we'd expect NRR to improve over time as that happens.

Okay, so just in that context, and I guess relative to your guidance for minus 10 to minus 7% core revenue growth, It essentially implies very little growth from net new customers in 23. Am I thinking about that right? And is that perhaps where there's some conservatism in the guide?

Yeah, there is. And one thing to remember, I mean, revenue is a bit of a lagging indicator. You know, that's impacted by the ARR dynamics that, you know, we saw, you know, that just played out in Q4. and also in Q1. So what I'd expect to see is a core platform ARR to start to grow, you know, sequentially in the second half, and then revenue growth, you know, will follow since it's a bit of a lag indicator.

Okay.

Let me just add, DJ, to what Steve just said. You know, you're talking about second half ARR growth in the second half, And as Steve said, we are not assuming a significant uptick in new business and growth ARR. The new products will be more mature and we expect a larger contribution from them. The largest driver that we see is an improvement in gross retention, which is partially driven by cohort dynamics. Less dollars up for renewal as more are in multi-year agreements. So that's where we see it playing out this year. and also that we are shifting resources and focus in verticals like life sciences and professional services that are growing, and companies with employees greater than 1,000 employees, which is our sweet spot.

Yeah, got it. And, Chirag, maybe one for you. Just how focal has price been as a topic of renewal conversations? And I think of ON24 as a premium product, and I think it's priced as such. Like, how sensitive are buyers to price in this environment?

Yeah, let me take that. Yeah, like most companies at DJ, we have seen pricing pressure. One on new deals, our ASP for new deals actually was consistent in Q4 with the prior orders. Yes, we do have to discount more to get the deals done. And on renewals, customers are trying to renew in some cases under the 100K threshold due to budget constraints. And we also see some customers reducing entitlements as they renew due to the macro. And in spite of this, our core platform ARR per customer is at the highest ever and highest percentage of ARR is in multi-year deals at the end of Q4.

Got it. Okay. Thank you for the call.

Our next question comes from the line of Noah Herman with JP Morgan. Please proceed with your question.

Hey, guys. Thanks for taking our questions. You mentioned a little bit about customer budget scrutiny, given the macro, and this is sort of a little related to the pricing question, but are you seeing any change on the competitive front in any of these discussions with the customers? And are you seeing any change there? And what is your expectation sort of going forward?

Yeah, our focus is to be a one-stop sales and marketing digital engagement platform. that converts engagement into data and insights that drives revenue. And at enterprise scale, nobody does what we do. If anything, our competitive position has never been stronger. And let me explain. In previous calls, I've described that a competitive landscape is bifurcated between collaboration providers like Zoom, who are focused on the IT buyer, and these point solutions for virtual events. What we are seeing that the latter, these point solutions, that are small venture-backed private companies that are focused on events and others, they've started retreating. So we are seeing them become less of a competitor there. And on the collaboration providers, these guys sell to IT. They don't provide much data and insights. And what we continue to see that these collaboration providers serve as great lead gen tools for us As customers get their first taste of digital engagement there, and when they need a data-rich sales and marketing platform, then they turn to us. So, you know, we feel that our competitive position has never been stronger.

Got it. That's really helpful. And then maybe just a quick follow-up, you know, as it relates to the incremental headcount reduction. Can you just maybe parse out which areas that will take the most effect and What was sort of the impetus for it?

Yeah, it was broad-based across all areas of the company. So everyone, all the different functions contributed to it. We did take a hard look at our go-to-market resources and made alignments there, in some cases shifted resources into some of the verticals that were

doing better like professional services and life sciences, but it was across all areas of the company.

Got it. Thank you.

Our next question comes from the line of Scott Berg with Needham. Please proceed with your question.

Hi, Sherrod. Thanks for taking my questions today. Steve, I wanted to follow up with one of the other questions that was kind of asked on operating margins and operating income. Certainly understand the pull forward of non-GAAP positive EPS, or at least break-even EPS in the second quarter here, but how do we think about operating income going forward? Because the delta is really kind of driven by positive interest rates and your high cash balance today driving that positive earnings, and you're going to spend $100 million on this um capital allocation uh return to shareholder program there's some concern obviously interest rates decline next year but should we think about your return to operating income as a function of required revenue growth or can you get there by further reducing some of your costs yes scott let me let me unpack that for you so our guide for the year was an operating loss of 11 to 8 million dollars or 9.5 million at the midpoint

If you look at our Q1 midpoint of our guide, you know, more than half that loss comes in Q1. And then, you know, Q2, some of the, you know, we see further reductions as well. So you're going to see progression in terms of getting towards operating profitability as the year progresses. Now, when we get to non-GAAP, break-even EPS in Q2, there is an interest income component to that, as you pointed out. but it also takes into account the effects of the $100 million capital buyback, which was interest income. By the time we get to Q4, we're getting pretty close to EBITDA break-even, if you will, and it gives us good operating leverage going forward. Once the macro starts improving and starts seeing revenue growth, which will follow ARR growth, it gets us back to profitability on a much lower cost structure.

Got it. Quite helpful. And I apologize for the noise of the airport here in the background. Yeah, no, Shrot, you also sound pretty positive about returning to AR growth in the second half of the year, even in this current macro. I guess, where does that confidence come from, given that your largest vertical is still having some challenges? I understand that three verticals are doing well, but your largest one, I think a lot of us would agree might still be under, you know, remain at least under some pressure for a couple of quarters. Thank you.

Yeah. Scott, you know, I think I don't have a crystal ball as we talked about. I mean, unless the macro further deteriorates, I mean, the confidence is based on as we look at the renewal cohorts going into the second half of the year, we are seeing more of the business in multi-year deals. We talked about at the end of Q4, it was 41%. We are making progress on the dollar churn part of the business, even though the downsides are a little more elevated. So we are expecting to see performance improvements from a retention point of view. In addition, we are shifting resources and focus in verticals like life sciences and professional services that are growing taking some of our mid-market resources and putting them in the enterprise companies' direction. So for this year, as we have looked at the guidance, I mean, we are not planning for a significant uptake in the new business and growth AR, but predominantly seeing that from the retention profile and shifting some of the resources. I've talked about how as the macro eases, then we expect to see, of course, Gross retention, some of the other verticals that have been under pressure, some ease of pressure on the new logo acquisition, and some ease of pressure on the international business really kick in. But that's what we are factoring for this year and also for when the macro eases. But we are not factoring that in, at least for this year.

Scott? Our last question comes from the line of Brent Bracelet with Piper Sandler. Please proceed with your question.

Hi, guys. This is Hannah Rudolph on for Brent today. Thanks for taking my question. Just first one, customers with two or more products is at 36% now versus 35% a year ago. I guess how do you think about accelerating multi-product adoption across customers going forward?

I think, Hannah, some of the challenges, because this also includes the virtual conference thing, some of that is basically because of the reduction in the virtual conference product. If you took that out, it would be a little higher. I don't have the exact number right now. Because that product actually was one of the top attached products on that platform. But what we are seeing is our newer products in Q4, as a percentage of growth bookings, had the largest contribution. We are seeing forums doing quite well, even though it's starting from a lower percentage. So our focus is to continue to increase that number. But in 2022, it was mainly impacted by the reduction on the virtual conference side.

Okay, great. That's helpful. And then second question, can you elaborate on the additional efficiencies you were able to drive this past quarter off of initiatives from your new chief customer officer and your new CMO?

Yeah, so, you know, I talked about, let me talk about the chief customer success officer, then the CMO. You know, Q4 are, I mean, so some of the work that we've done, we started doing before, of course, But in Q4, as we talked about, the dollar churn on the full core ARR platform cohort was one of the best in the year, and it was comparable to pre-COVID or historical levels. I think downsells were a little elevated. We did some more work on customer health. I think the percentage of customers that are integrated integrate our platform with their sales and marketing ecosystem is at its highest ever to over 70%. So we are making some very steady and good progress there. We have focused our resources a lot more on companies with a thousand plus employees. So that's, that's on the customer success side related to the CMO. I mean, one of the things that we did as you brought Cal and young is a CMO, very strong pipeline shops. Now I'm, I'm pretty excited about the work we are doing there. Now, In Q4, we still saw some softness, especially in the latter part on the pipeline front, especially with some challenges in technology and manufacturing as customers were more deliberate. But we are pretty excited about the impact that we are seeing on the pipeline as we are moving forward because a lot of our focus going forward is larger customers, more verticalized. But I think both these executives are really making strong impact.

Great. Thank you.

That is all the time we have for questions. I'd like to hand it back to Shiraz Sharon for closing remarks.

Thank you. Thank you, everyone, for joining us today. We look forward to meeting with you soon.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.