ON24, Inc.

Greetings and welcome to the ON24 Third 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce our host, Shio Denloye, Investor Relations. Thank you. You may begin.

Thank you. Hello and good afternoon, everyone. Welcome to ON24's third quarter 2023 earnings conference call. On the call with me today are Shirat Charan, co-founder and CEO of ON24, and Steve Battuoni, 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 and guidance for the fourth quarter and full 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. ON24 accosts 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'll 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 reconciliations of these non-GAAP financial measures, please refer to today's financial press release. I will now turn the call over to Sherrod. Sherrod?

Thank you and welcome everyone to ON24's third 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 how we have evolved our platform over the past year. 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 data-driven insights, and support compliance for highly regulated industries to deliver cost-effective revenue growth. Over the past year, we've developed significant innovations, including those that are powered by generative AI to help our customers advance the efficiency, time savings, insights, ROI, and results they gain from our platform. We'll be sharing later in the call how these innovations are enabling us to introduce the next generation of our platform with even greater competitive differentiation. Turning to Q3 results, I am pleased to report that Q3 was a strong quarter for ON24 as we began to see results from the strategic initiatives we first laid out at the end of last year. We achieved strong top-line results and delivered on our profitability targets. Achieving positive non-GAAP EPS, and break even adjusted EBITDA. Revenue from our core platform, including services, in Q3 of 2023 was $38.1 million, and total revenue, including virtual conference, was $39.2 million. Of total revenue for the quarter, subscription and other platform revenue was $36.4 million, and professional services revenue was $2.8 million. Turning to ARR, we ended Q3 with $136.5 million in ARR related to our core platform, representing a sequential decrease from Q2 of $4.1 million. Similar to Q2, this quarter we continue to see the enterprise install base remain under pressure, especially with respect to large deal activity as customers continue cutting costs as their budgets face greater scrutiny from the CFO office. On retention, downsells in our enterprise customers continue to be a challenge. However, on a positive note, we did see overall in-period gross retention improve quarter over quarter. And as we look at churn specifically, we saw quarter over quarter improvements within each of our renewable cohorts by ARR size that we tracked. which was particularly encouraging. As expected and consistent with last quarter, our smallest customers by ARR contributed to the greatest amount of logo churn. We are seeing signs of stabilization within our renewal base, and despite challenging macro conditions, we expect to see continued improvement in Q4. With that backdrop, Coupled with the momentum in Q3, we are increasing our revenue outlook for Q4 and 2023 and are optimistic about 2024. In the last two quarters, I laid out three strategic priorities to further strengthen our business. Let me report on those. First, continuing our relentless innovation, including AI, which is powering the next generation of our platform. Second, Continue to strengthen our enterprise go-to-market strategy and highlighting our differentiated solutions. Third, continue to deliver on our profitability targets. First, I'll talk about our relentless innovation. As we look to the future, AI is at the center of our innovation strategy. ON24 is focused on leveraging AI to drive the next generation of our platform. We believe AI complements our unique position in the market and strengthens our distinct competitive advantage. Last quarter, we launched the ability to turn live webinar experiences into AI-generated written content, like a transcript, summary, e-book, or blog. This capability joined an embedded generative AI copywriting assistant tool called Smart Text within our platform which was introduced in Q1 2023. This quarter, we will be launching ACE, our new AI-powered analytics and content engine. ACE will be available across our platform and will fuel the next generation of ON24. ACE builds on our strength as an enterprise-grade platform, which combined with hyper-personalization, segmentation, deep insights, AI-driven content creation, key moments, and nurture sequences add substantial customer value, enabling greater efficiency, ROI, and revenue growth for our clients. We believe our platform's first-party data advantage, along with our relentless focus on AI innovation, uniquely positions ON24 to redefine the future of digital engagement. Stay tuned for more information as ACE moves from data to production. Moving to our second priority, our enterprise go-to-market. As we shared on our Q2 call, we are focusing our enterprise go-to-market execution on customers in highly regulated industries that are undergoing digital transformation. Customers in these verticals require an enterprise-grade solution like our platform to execute mission-critical go-to-market use cases while supporting compliance. The use cases that our platform uniquely supports include engaging healthcare professionals in pharma and life sciences, enrolling members and enabling agents and brokers in commercial and health insurance, and delivering continuing professional education and certifications for professional services organizations. In aggregate, these digital transformation use cases drove year-over-year ARR growth in the highest single digits this quarter. Compliance is paramount for customers in these highly regulated industries, and we are differentiating our capabilities as an enterprise-grade secure platform. In Q3, we achieved ISO certifications in security and privacy, which demonstrates a continued commitment to our platform's information security and privacy protection. And finally, an update on our focus on profitability. As we near the end of 2023, I'm proud of the progress we've made towards achieving our profitability targets this year. In Q3, we achieved both positive non-GAAP EPS and break-even adjusted EBITDA for the second quarter in a row. We expect to exit the year at break-even adjusted EBITDA and with positive non-GAAP EPS. Our goal as we look to 2024 and beyond is long-term profitable growth. Before handing it over to Steve, I want to highlight a few new logo and expansion deals in regulated industries that are undergoing digital transformation. On the new logo front, we landed a new pharmaceutical client a multinational, multibillion-dollar biotechnology leader with nearly 4,000 employees who are rapidly bringing the company's portfolio of innovative products to market. With an imperative to quickly grow its healthcare professional engagement and accelerate therapy adoption in a competitive environment, this organization needed a proven, trusted platform that they could roll out across the globe and deliver high-value education to physicians, while also capturing insights. Importantly, privacy and compliance were paramount considerations in choosing ON24. A second new business win I'll highlight is with an insurance and retirement services company that has over 1,000 employees. As their sales and marketing team scaled their additional strategy, they advanced past their point solution provider and needed an enterprise-grade platform like ours that could provide their audience of index partners, agents, advisors, and professionals a frictionless and immersive experience that captured audience insights. By moving to ON24, their team saves time and gains insight into their unique audience types and allows them to deliver more personalized and better performing content while staying compliant. On the expansion front, in Q3, Our life sciences momentum continued with our install base as we added another department from a multi-billion dollar, multinational pharmaceutical and biotech company with more than 90,000 employees. After seeing the differentiated brand experience other teams at the company were delivering to healthcare professionals and the insights they were generating, the organization decided to switch from a legacy point solution to our platform. Now they are powering healthcare professional speaker programs across several of the brands in their portfolio as a centralized service center of excellence. After landing this customer in 2020, we've expanded to four times our initial footprint. Taking a step back, at the start of 2023, we set a goal to deliver sustainable profitability while positioning the company to return to growth. Looking back at the year to date, I'm proud of the progress we made on these fronts in 2023. We right-sized the business and made strategic changes to our go-to-market strategy. And we were laser-focused on improving our business model. Due to this focus, gross margins improved over the year, and we achieved positive non-GAAP EPS and break-even adjusted EBITDA. Our renewed focus on customer verticals is helping to stabilize our renewal base, and retention rates are starting to improve. On the product front, we are embracing generative AI. As we look to the future, Team ON24 is focused on continuing to improve retention, increasing new customer acquisition, and achieving our profitability targets. We are excited about bringing new products to market. to help our customers do their jobs more effectively, such as the upcoming launch of our AI-powered ACE offering. Against the choppy magic economic backdrop of the past year, we have controlled what we could control. And I am confident we have positioned the company to capture the opportunity to achieve growth in 2024 and beyond. With a longer-term goal of generating double-digit top-line growth with double-digit EBITDA margins. With that, I'd like to turn the call over to Steve.