ON24, Inc.

Greetings and welcome to the ON24 Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Lauren Sloan, Investor Relations for ON24. Thank you. You may begin. Thank you.

Hello and good afternoon, everyone. Welcome to ON24's Tech at Quarter 2023 Earnings Conference Call. On the call with me today are Shirat Charan, Co-Founder and CEO of ON24, and Steve Fatuoni, Chief Financial Officer of ON24. Before we begin, I would like to remind everyone that some of the information provided during this call will include forward-looking statements regarding future events in financial performance, including the execution of our capital return program and guidance for the third quarter in fiscal year 2023, as well as certain third quarter and full-year 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 our revenue, attract new customers, and expand sales to existing customers, the success of our new products and capabilities, 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 guarantees of future performance, All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's periodic SEC filings in today's financial press release for factors that could cause our actual results to differ materially from any forward-looking statement. 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 substitutes 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'll now turn the call over to Shiraz. Please go ahead.

Thank you and welcome everyone to ON24's Second Quarter 2023 Financial Results Conference Call. We appreciate you joining us. With me today is Steve Battuoni, Chief Financial Officer. Before we get into the results, a quick reminder of who we are and what we do for our customers. Through our platform, industry-leading B2B enterprise companies engage with their prospects and customers through a portfolio of experiences that drive engagement at scale, generate first-party data and insights, support compliance, training, and certification, and leverage the power of generated AI to drive cost-effective revenue growth. We focus predominantly on the following industries and use cases. In the technology manufacturing and information services verticals, global demand generation teams use our platform to drive pipeline In the highly regulated industries of life sciences, we help pharma and medical device organizations engage and educate healthcare providers and patients through digital channels. In healthcare and insurance, we enable our customers to adhere to strict compliance standards while virtually enrolling new members, delivering employee benefits and training agents and brokers. And finally, in the financial and professional services verticals, Our solutions support new business development, client engagement, and broker enablement, while also providing our customers with a digital-first approach to running compliant professional certification and credentialing programs at scale. Turning to Q2 results. Revenue for the second quarter was in line with our expectations and at the high end of guidance. and we are pleased to report that we exceeded our goal to reach breakeven non-GAAP EPS in Q2. We also achieved non-GAAP EBITDA breakeven. We believe that achieving the non-GAAP EPS target, which is a key profitability milestone, is a testament to the actions we have taken to streamline our expense structure. Profitability will remain a key priority to our long-term growth strategy, which I will elaborate on shortly. Revenue from our core platform, including services, in Q2 of 2023 was $40.5 million, and total revenue, including virtual conference, was $42.1 million. Of total revenue for the quarter, subscription and other platform revenue was $38.3 million, and professional services revenue was $3.8 million. We ended Q2 with $140.6 million in ARR related to our core platform, representing a sequential decrease from Q1 of $8.6 million. While we had a forecaster decline in net new ARR, I'd like to spend a few minutes explaining why our core platform ARR for Q2 was weaker than originally expected. As we shared in Q1, our customers' budgets for our solutions stem predominantly from their marketing departments which have continued to endure budget cuts and layoffs as a result of heightened macroeconomics uncertainty. We had expected more budget scrutiny from our customers, which is why we had forecasted a decline in net new ARR in Q2. However, this pressure persisted and increased through the second quarter and was even more pronounced than we had originally expected. Specifically in Q2, We saw pressure on downsells, which we found became even harder to balance with expansions to augment net new ARR growth. Our customers are still looking to cut costs as their budgets remain under pressure and face greater scrutiny from the CFO office. In fact, in Q2, we saw the highest level of downsells come from our enterprise customers, where this high degree of budget scrutiny is continuing to put pressure on large deal activity. We also saw the highest levels of churn come from our smallest customers. In this uncertain market environment, budget constraints are pushing these customers to resort to lower cost tools, even as they admit that those tools don't match our product's capabilities. As we have stated previously, we know how to sell in a tough recessionary environment. However, the most challenging aspect of this recent quarter came from being in limbo with customers who have taken a pause in their spend until they have more certainty on what to expect next. Based on what we are hearing in customer discussions, it seems as if customers are expecting the second half of the year to look similar to the first, and they're simply waiting to reinvest or spend more on demand generation and marketing. We believe this is not a permanent change. the economic direction becomes more certain and our customers focus on growth and as marketing budgets begin to normalize we believe that we will see our customers reinvest and grow with us in the meantime we remain laser focused on controlling what we can control and we continue to focus our execution and innovation against the three strategic priorities which we expect to further strengthen our business first continuing to deliver on our profitability targets. Second, continuing our relentless innovation with generative AI powering the next generation of our platform. Third, continuing to strengthen our enterprise go-to-market strategy where we offer differentiated solutions. First, I'll talk about our focus on profitability. Continuing to deliver on our profitability target is a top priority. and we expect that when the macro stabilizes, we will see additional operating leverage in the business. We are pleased to report positive non-GAAP EPS in the quarter. We achieved this goal by continuing to streamline our organization with our cost reduction initiatives. We plan to continue to make improvements in our operational efficiency and expect to exit 2023 with breakeven non-GAAP events. As I shared in our Q1 earnings call, we are committed to achieving long-term profitable growth, and I remain confident that this business is capable of generating double-digit top-line growth with double-digit EBITDA margins. Moving to our second priority, developing the next generation of our platform through our new generative AI capabilities and innovation roadmap. Let me start by explaining how our platform's first-party data advantage uniquely positions us to develop a differentiated set of generative AI solutions. Each year, our customers run hundreds of thousands of ON24 experiences, engaging millions of professionals for nearly an hour per experience. At the end of Q2, we saw engagement levels increase with the number of interactions per attendee at an all-time high. By capturing each of these individual interactions, more than 20 plus unique data points per attendee per experience, we believe we have been able to develop an unmatched source of human generated first party data, which gives us a strong foundation to power generative AI capabilities. This quarter, we launched a new generative AI powered optimization suite, which provides a number of innovations to our customers including the ability to turn each of their live webinar experiences into AI-generated written content like a transcript, summary, e-book, or blog. Over 200 of our customers are currently in free trial, and based on the momentum and positive feedback we are hearing, we are optimistic that we will be able to turn free trials into expansion sales. Because this solution enables rapid content creation, cost and resource intensive aspect of sales and marketing, we believe this offering could prove to be a high velocity sale as it provides our customers with a fully integrated offer. To give you a sense of what's coming on our roadmap and shaping the next generation of our platform, I'll highlight two more solutions built on our foundation of first party data. The first is personalization. Across our platform, we are enabling our customers to create highly personalized experiences that they can deliver at scale to unique audiences. With more personalized experiences, we expect that attendees will engage with even more content, generating more first-party data and enabling greater personalization, creating a flywheel effect for our customers that helps them increase revenue results with less resources. A second innovation I'll highlight is the ability to automatically turn long form content into short form content like videos based on proprietary set of analytics called Key Moments that provides a heat map of content performance based on audience engagement. This intelligence is foundational to developing future AI generated content and experiences, which we believe will give us additional levers to drive retention and expansion from our install base while enhancing our platform differentiation. Lastly, moving to our third priority, our enterprise go-to-market strategy, where we are focused on mission-critical use cases tied to digital transformation initiatives. As I shared on our Q1 call, the majority of our business, close to 80%, is with 1,000-plus employee companies. While we did see macro pressure on marketing budgets result in more downsells with our enterprise customers, tenure remains strong. And in fact, the percent of ARR and multi-year agreements was in the mid 40s and all time high. We believe that in today's environment, especially as companies look to consolidate solutions and vendors, providing our enterprise customers with a single platform that support a broad spectrum of use cases gives us a differentiated advantage. Let me give more color on each. Beginning with our most predominant use case of demand generation, we help large organizations primarily in the technology and manufacturing sectors, scale engagement and pipeline growth. As we have shared, These verticals are under the greatest amount of macro pressure, especially their demand generation budgets as companies pause on growth agendas. With that backdrop, we are currently finding more success with the highly regulated industries where an enterprise-grade solution like our platform is essential. Let me explain our platform's differentiation in supporting these digital transformation use cases. For pharma and life sciences companies specifically, our platform is critical for helping them digitally innovate healthcare provider and patient engagement, seamlessly capture that data and integrate it with their business systems, all while supporting compliance. In the healthcare and commercial insurance categories, our platform helps customers establish a digital-first, compliant approach to developing new business, facilitating member enrollment and benefits, and enabling and training agents and brokers, all of which used to happen in person and was costly and time-intensive to scale. Finally, our platform enables professional services organizations to digitize and automate professional certification and credentialing programs, thereby increasing the scale, reach, and cost efficiency of running these programs while supporting compliance. Because of the traction we are seeing with customers who have these transformation initiatives underway, we are continuing to make these use cases and verticals a strategic focus of our enterprise go-to-market execution. We believe this will help us to further expand our business and give our go-to-market greater agility and resilience. To further enhance our go-to-market execution, against these digital transformation use cases, we are making two key strategic changes. First, we are simplifying our pricing and packaging and providing solutions by use case, which will provide our customers with more value and ROI from our platform while reducing their costs and streamlining our internal efficiency. Second, we have evolved our customer success model to incorporate a digital first motion for our smaller customers, enabling us to efficiently scale our global support resources while focusing on expanding our most strategic enterprise customers undergoing digital transformation initiatives. Before I turn things over to Steve, I'd like to share a few highlights from new and expansion deals in Q2. Starting with new business, I'll highlight a few wins that further represent the traction we are seeing with digital transformation use cases. We landed a life sciences logo in a win with a worldwide leader in advanced medical devices with over 1,000 employees focused on a unique segment of healthcare provider specialists. We believe that we won this deal because of our platform's ability to help this customer deliver personalized, high-tech experiences that are unique to different providers while also capturing insights on each physician and maintaining privacy and compliance. In the vertical of professional services, a 6,000-plus employee multinational organization came to us to serve as the foundational layer in a digital transformation initiative that has a goal of turning their go-to-market execution, which is primarily happening in offline channels, into a digital-first model. Through our platform, they can attack multiple use cases and gain a comprehensive solution for generating demand and pipeline delivering professional certification programs at scale and training their partner network. Finally, we landed a multinational biotech firm that has a portfolio of products for special diseases. With the presence across different international markets, this company was challenged with maintaining compliance while building out an omnichannel strategy. Through our platform, they are able to enable a standardized scalable approach healthcare provider engagement that can be tailored to unique regional needs turning to expansion wins we expanded our footprint with an existing 10 000 plus employee multinational insurance firm out of the uk who's continuing to execute against its digital transformation initiative through our platform they are using our platform to develop a centralized content resource center for their customers agents and brokers while unifying the insight from each audience. We also continue to grow our business with another win with one of the largest biomedical companies in the country, which is over 50,000 employees. Having already proven our ability to streamline compliance approvals and meet their stringent security standards, we brought a new department of this customer onto our platform to help visually scale their training and enablement programs. Lastly, 11,000-plus employees, multinational software company, doubled down on their investment in the ON24 as a primary platform for the pipeline generation engine. After an initial pilot resulted in 12 times ROI for the company, their go-to-market teams, including demand generation and customer success, decided to make ON24 their standard platform for digital engagement growth. While marketing budgets continue to be under pressure and we are disappointed with the change in net ARR in Q2, we are focused on the things we can control. Our pace of innovation, adjusting our go-to-market, and driving more profitability. In these areas, we are optimistic about the changes we have made and remain confident in our ability to return to long-term profitable growth. We are making strategic changes to increase our win rates with new logos, especially around use cases that resonate in the current environment. We are also shifting resources to drive better growth within our install base. And we are making profound innovative changes to our platform around generated AI. We believe that these actions, coupled with improved renewal cohort dynamic, positions us to see better ARR performance in the second half I remain bullish about the long-term fundamentals and market opportunity for the business. We provide our customers with a single platform to support their demand generation and digital transformation initiatives, and we are uniquely positioned to provide an integrated solution for a set of use cases across our six key verticals. We have a strong competitive mouth, and we are confident that with our focus on our priorities, combined with our long-term commitment to profitable growth, we will deliver long-term shareholder value. With that, I'd like to turn the call over to Steve.