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spk02: 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.
spk00: 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?
spk01: 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.
spk06: Thank you, Shirat, and good afternoon, everyone. I'm going to start with our third quarter 2023 results, and we'll then discuss our outlook for the fourth quarter of 2023 and full year 2023. Before I get into the numbers, I wanted to remind everyone that our focus will be on the core platform business as it was in the prior quarters. as we have de-emphasized the virtual conference product. We view the metrics from our core platform, such as revenue and ARR, as the best KPIs to measure our performance. Revenue from our core platform, including services in Q3 of 2023, was $38.1 million, representing a decrease of 14% year over year. Total revenue for the third quarter, which includes revenue from our virtual conference product, was $39.2 million. Total subscription and other platform revenue was $36.4 million. Overages represented approximately 1% of total revenue in Q3. Total professional services revenue was $2.8 million, a decrease of 35% year-over-year, representing approximately 7% of total revenue compared to 9% in the year-ago period. Moving on to ARR. ARR represents the annualized value of all subscription contracts at the end of the period and excludes professional services and overages. Ending ARR related to our core platform was $136.5 million, a decrease of $4.1 million from Q2 2023, which was better than we had anticipated and was a sequential improvement compared to the Q2 decrease. As Sharad noted, We saw improvement in gross retention, and we are starting to see signs of stabilization in the renewal base. While we continue to see pressure in our installed base in both expansion business and during contract renewals, we did see quarter-over-quarter improvements in Q3 within each of our renewal cohorts by ARR size that we track, and we are having more productive renewal discussions with customers when contracts are up for renewal. ARR for our virtual conference product was $3.7 million at the end of Q3 2023, down from $4.2 million at the end of Q2 2023. Total ARR was $140.2 million at the end of Q3 2023, as compared to $144.8 million at the end of Q2 2023. Turning to customer metrics. 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 and demonstrates the strength of our larger enterprise customers and our continued commitment to our platform. The number of customers contributing more than $100,000 in total ARR totaled 317, down from 323 last quarter. This decline primarily resulted from some customers reducing their spend under the $100,000 threshold due to budget pressures and their marketing departments rather than logo churn. We continue to see our customers making longer term commitments to our platform. Multi-year contracts, which comprise 41% of our ARR at the end of 2022, increased sequentially as a percentage of our ARR in Q3 to the highest ever and currently stands in the mid to high 40s as a percentage of our total ARR. Total customer count was 1,804 customers compared to 1,826 in the prior quarter. Consistent with the prior quarter, our smallest customers, those with less than 250 employees, were the largest contributor to customer churn in Q3. 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, impairment charges for real estate, amortization of acquired intangibles, shareholder activism-related costs, 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 margin in Q3 was 76%, which is an increase from 75% last quarter. The sequential increase in our gross margin in Q3 reflects the cost reduction actions we have taken this year. Now turning to operating expenses. Sales and marketing expense in Q3 was $17.6 million compared to $22.4 million in Q3 last year. This represents 45% of total revenue compared to 47% in the same period last year and 43% last quarter. Our sales and marketing expenses have decreased in absolute dollars, both sequentially and year over year, largely due to the cost savings measures we have implemented. R&D expense in Q3 was $7 million compared to $9.1 million in Q3 last year. This represents 18% of total revenue, which is down from 19% in the same period last year and consistent with 18% last quarter. We are thoughtfully investing in product innovation with a focus on the most impactful projects, including our investments in generative AI capabilities and our new AI-powered ACE product offering. G&A expense in Q3 was $6.3 million compared to $7.9 million in Q3 last year. This represents 16% of total revenue, down from 17% in the same period last year, and consistent with 16% last quarter. We have taken actions as part of our cost containment measures to reduce our G&A costs. As a result, our G&A expenses and absolute dollars have decreased as compared to the prior year and prior quarter. As I move on to our bottom line performance, I'm pleased to report that we beat the profitability targets that we provided in the prior earnings call. We achieved non-GAAP EPS profitability in Q3. as well as achieving break-even adjusted EBITDA in Q3 for the second consecutive quarter. As Sharad mentioned, the continued improvements in our operational efficiency have paid off, and we plan to exit 2023 with break-even adjusted EBITDA and positive non-GAAP EPS in Q4. We achieved these results by executing our cost reduction program, which I will cover in more detail shortly. We will share our profitability outlook for 2024 on our next earnings call. Operating loss for Q3 was $1.1 million or a negative 3% operating margin compared to an operating loss of $3.6 million and a negative 8% operating margin in the same period last year. Net income in Q3 was $1.5 million or 3 cents per share based on approximately 48.3 million deleted shares outstanding. This compares to a net loss of $3.3 million or 7 cents per share in Q3 last year, using approximately 47.6 million basic and diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $213.7 million in cash, cash equivalents, and marketable securities. I want to update everyone on the progress of the $125 million capital return program we announced in March, which consisted of a special dividend of approximately $50 million which was paid in Q2, and a $75 million share repurchase program. Under the $75 million share repurchase program, we utilized $6 million in Q1, $23.5 million in Q2, and $25 million in Q3 for a total of $54.5 million in the first nine months of this year. Thus far in Q4, we have utilized $7.8 million for a total of $62.3 million to date in 2023 under the share repurchase program. Combined with the $50 million special dividend paid in Q2, we have returned approximately $112 million to shareholders under this capital return program to date. Under our prior repurchase program, we returned $41 million through February, 2023. With these two programs, we will be returning approximately $166 million to shareholders by the end of Q1 2024. After the completion of this capital return to our shareholders, our balance sheet will remain strong and provide us with the ability to invest in our strategic priorities. Turning to our use of cash on the quarter, cash used in operations in Q3 was $2.9 million compared to cash used in operations of $3.5 million in Q3 last year. Free cash flow was negative $3.2 million in Q3 compared to negative $4.2 million in Q3 last year. As a reminder, our cash flow in Q3 includes costs related to our structuring efforts. Before turning to guidance, I want to provide an update on profitability. The cost reduction plans we have initiated over the past quarters have allowed us to reach non-GAAP EPS profitability and adjusted breakeven EBITDA. For comparison, our run rate annual total cost structure was approximately $56 million lower in Q3 than it was five quarters earlier in Q2 of 2022. We will enter 2024 with a more efficient cost structure and significant operating leverage in the business. Through these efforts, we are setting ourselves up for durable profitability in the future. We look forward to providing our detailed outlook for fiscal 2024 during our Q4 earnings call. Moving to guidance. While we are seeing signs of stabilization in our installed base, we are still operating in a period of macro headwinds and uncertainty, with many of our customers facing budget challenges for the remainder of this year. Despite those challenges, we saw significant improvement in ARR performance in Q3 relative to Q2, and we expect to again see improved sequential ARR performance in Q4. For Q4, we expect our core platform ARR to decline by 2% to 3% sequentially in Q4 as compared to Q3. For our virtual conference product, which we have de-emphasized, we expect ARR to decline by approximately half a million dollars sequentially in Q4. This would result in total ARR declining sequentially in Q4 by approximately 2.3% to 3.3%. Moving to revenue. We expect Q4 core platform revenue, including services, in the range of $35.8 million to $36.8 million, and total revenue, which includes our virtual conference product, in the range of $36.8 million to $37.8 million. Professional services is expected to represent approximately 7% of total revenue. We expect gross margins to be in the mid-70s in Q4. We expect a non-GAAP operating loss in the range of $1.4 million to $0.8 million and non-GAAP earnings per share to be one cent per share to two cents per share based on 45.8 million diluted shares outstanding. We expect a restructuring charge of $0.4 million to $0.8 million in Q4 related to our ongoing cost reduction efforts. which is excluded from the non-GAAP amounts provided above. Now let me turn to our annual guidance. For the full year, we expect core platform revenue, including services, to be in the range of $155.6 million to $156.6 million. We expect total revenue to be in the range of $161.2 million to $162.2 million. Professional services is expected to represent approximately 8% of total revenue. We expect a non-GAAP operating loss in the range of $7.5 million to $6.9 million and non-GAAP net income per share of $0.04 per share to $0.06 per share, using 49.2 million diluted shares outstanding. Restructuring charges, impairment charges on a real estate, Amortization of acquired intangibles and activism-related charges are excluded from the full-year non-GAAP amounts provided above. Our annual guidance assumes we achieve break-even adjusted EBITDA on Q4. Our estimate of shares outstanding takes into account the impact of our capital return program. In summary, while the macro environment is still challenging and impacting many purchasing and renewal discussions, We are seeing signs of stabilization evident in the improvement in sequential ARR performance in Q3, and we expect ARR performance to further improve in Q4. We have exceeded our profitability targets for Q3, achieving positive non-gap EPS and breakeven-adjusted EBITDA. We delivered a sequential increase in gross margins in Q3 and expect to be on track to achieve our profitability target for Q4 to exit the year at breakeven-adjusted EBITDA. We are encouraged by the positive momentum and progress we have made, and we remain focused on the path to return to positive ARR growth, especially as the macro improves. In closing, we are positioning ourselves to leverage a more cost-efficient business model to deliver profitable growth in the future. With that, Shrot and I will open the call up for questions.
spk02: Thank you. And ladies and gentlemen, at this time, we will now conduct our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number 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 keys. One moment please while we pull for questions. Our first question comes from Rob Oliver with Baird. Please state your question.
spk04: Great. Good afternoon. Thanks for taking my question, guys. I had two questions. The first was obviously very encouraging to hear the signs of stabilization. that you're seeing in that you guys are potentially here positioned for a return to growth in 24. I was wondering if you could just provide a little bit more color on, you know, what you're seeing there. I mean, I know macro, Steve, you just commented, you know, there's still headwinds. It's still challenging out there. So maybe if you can provide a little color on what exactly is delivering that stabilization, improved execution, customers starting to maybe add more at the margin, any color there would be helpful. And then I had one follow-up.
spk01: Rob, good to hear from you. Let me take that. I think just from an overall install-based point of view, we are seeing less frenetic behavior from our customers. Our solutions are mission critical to our customers' growth agenda, and we saw churn improve sequentially in all ARR cohorts that we track in Q3. The enterprise install-based business is still under pressure. The expansions and the downsells, those are still impacted and elevated by our customers continuing to cut costs, but overall on the churn and overall retention, we are seeing improvement. We are also seeing improved conversations related to new business, both in the enterprise and commercial segments. New business in Q3, which is seasonally softer, was better than it was in Q2, and we expect that to be better in Q4. And as we are launching our new AI-powered ACE offering, we are seeing a lot of customer excitement as we provide them a heads-up. I'm personally doing many of these meetings, and one of my meetings was one of the largest global pharmas in Europe. There was a lot of interest. in leveraging AI-powered A's, especially the segmentation and hyper-personalization capabilities.
spk04: Great. Thanks, Gerard, for that. And then my follow-up is on the focus on regulated industries. It's something, you know, an opportunity, I think, you know, you've identified here for a while and you guys have the ISO certification now, which is great. Congratulations. You just mentioned pharma. Just was wondering, you know, if you can maybe pinpoint a few industries for us where we might expect to see that impact first and you know, are you fully resourced to go after those opportunities? And, you know, could we expect that they will contribute in part to growth in 24? I realize there's three parts to that. Thanks very much, guys.
spk01: Appreciate it. Thanks, Rob. So, Rob, as you said, we are continuing to gain traction with customers in highly regulated industries that are undergoing digital transformation. Just from a vertical point of view, I mean, tech and manufacturing, which is A little less than 50% of our ARR is still challenged. Life Sciences actually, which is part of the regulated industry, stood out with year-over-year growth. Additionally, as we look at our business, we generally see two different categories of use cases. One I've talked about is the demand generation and partner enablement, which is currently under pressure. Now, the second are the highly regulated industries. We are a compliant digital transformation solution that drives revenue or growth is important. Now, these are healthcare professional engagement for life sciences, that vertical. These are professional certification. These are generally professional services, also financial services, part of those industries. And these are member enrollment and broker enablement kind of industries. These are more commercial and healthcare insurance categories. I think in these, the largest category that we are really attacking is the pharma category, and we have put together a specialized team based on that. For others, it's part of our regular execution, and we continue to, based on sales productivity, are going to continue to make decisions on the resources. Now, as we've executed in these regulated industries, these are low single digits as a percentage of our total ARR, and we expect these to continue to grow, and at some stage, when demand generation and partner enablement and we have a little more assist from the macro that will lift all the boats. So that's what we are focused on.
spk04: Great. Really helpful. Appreciate all that color. Thanks very much.
spk02: Thank you. And our next question comes from Arjun Bhatia with William Blair. Please state your question.
spk03: Great. This is Chris on for Arjun. Congrats on the quarter. Two for me. The first one I just wanted to touch on. So as we're coming up on the anniversary of kind of when your focus and attention started shifting towards being more efficient, where do you see the biggest incremental opportunities to continue to drive operating leverage going forward?
spk06: This is Steve. Let me go ahead and take that one. So, first off, we've achieved adjusted EBITDA breakeven for the past two quarters and expect to exit 2023 in the same place with Q4 having breakeven adjusted EBITDA. You know, our cost reduction efforts have spanned all areas of the company. You know, we aligned our go-to-market resources accordingly and um you know that was you know more than half of the the cost reductions that we've made we you know lowered our annual cost run rate as i mentioned in the prepared remarks 56 million dollars from q2 of 2022 which was a high water mark um you know as winter 2024 we've got a streamlined cost structure and operating leverage in the business the goal is to get to sustain the top profitability We're not giving any specific guidance on 2024 until our next earnings call, so I can't put a timeline on 2024 profitability targets at this point. But I can say the goal is to get back to profitable growth as soon as we can, and the steps we've taken have put us on the road to do that. Now, improved top-line performance would, of course, be helpful if we're moving in the right direction there, but we are committing to getting there in a variety of top-line scenarios in the future.
spk01: Just to add to what Steve just said, to drive top-line growth, I mean, the three core things that we are focused on is one is the retention profile. We expect to do better sequential improvements in gross retention, so that's important. Second is our progress on go-to-market for regulated industries, which I talked about, which in aggregate grew high single digits from an ARR point of view year-over-year in Q3. And the launch of our next generation of our AI-powered ACE platform, which includes segmentation and hyper-personalization, automated content creation, and key moments and nurture sequences. So, you know, top-line growth will also help us improve our profitability, and that's our focus.
spk03: Great. That's all really helpful feedback. And that kind of sways back pretty nicely into the other question I had. I just want to circle back on the AI suite. So last quarter you talked about 200 initial customers in the beta program for that. Has that cohort grown at all? I was curious to hear some of the feedback you might be getting from customers that are in the program and if there are any specific verticals or use cases where you've seen good traction early on. Thanks.
spk01: Yeah, let me take that. So We talked about it. In Q1, we had launched the Smart Text and AI Copywriting Assistant tool. In Q2, we launched the ability to turn live webinar experiences into AI-generated written content like transcripts, summary, and e-books. And since our last earnings call, we have doubled our customer adoption of these capabilities, and we have learned a lot. And based on the learnings from the customer adoption, Chris, we are now including these features as part of the larger AI-powered ACE platform. And just to kind of give you a little more perspective on that, AI-powered ACE is currently in beta. We are currently working on a pricing and packaging plan that we will share on our next earnings call. We are giving early access to select existing customers this quarter, and it will be available for new customers in Q1. And for now, we are confident that ACE will be a tailwind to ARR growth as it will pave the way for greater expansions. with our install base and few new business acquisitions.
spk03: That's all really helpful, and thank you very much for taking the questions.
spk02: Thank you. Our next question comes from Noah Herman with JP Morgan. Please take your question.
spk05: Hey, guys. Congrats on a solid quarter. So thanks for taking the questions. I know maybe last quarter you talked about simplifying some of the pricing and packaging, gearing that towards more specific use cases, helping to reduce go-to-market costs and streamline internal efficiency. So curious to get an update on that and what has the feedback been maybe from customers, and I just have a quick follow-up.
spk01: No, that is exactly right. I think one of the things on the regulated industries and the go-to-market, we are – in the process of finalizing our packages and streamlining those packages. And AI-powered ACE is a key part of that, so that with that, we'll be able to talk to you more about that in the next earnings call. What we have done so far is in certain categories, like especially in the pharma and life sciences, where we have pretty much created a separate unit, we have created We have created better packages that are more aligned to that particular segment, but a little more on pricing and packaging in the next earnings call, because that will also include pricing about AI-powered A's and market feedback from our customers.
spk05: Got it. And for my second question, you know, I noticed that the total customer, the delta this quarter compared to last, you know, it did downtick, but It sharply improved relative to last quarter, I think, down about 22 versus last quarter down about 90. Just curious to kind of get a sense of what maybe you're seeing now that it's almost mid-November through the quarter and just how to kind of think about some of the customer acquisition dynamics going forward. That'd be really helpful. Thanks.
spk01: Yeah, you know, yes, one, we had better new logo performance in Q3 compared to Q2, and even though Q3 is seasonally softer quarter. And as we've talked about previously, our main focus is 100K plus ARR customers, which decreased by six as some customers renewed at lower dollar thresholds. Now, this was the best performance over this year. We did experience a sequential decrease in customer count of 22. This was also the best performance over this year. And I'm not happy. uh with that and i'm focused on getting these numbers positive uh and our smallest customers as before were the largest contributor to local churn so i think as we as we look into q4 we are seeing that the team is doing a better job in terms of churn uh i think the area where we see a little larger churn has been in the lower segment the lower arr segment uh and again we are we are very much focused on reducing that in that particular segment too. But on the larger segment, it's generally more of a down sales at the time of renewal that we are dealing with. So I'm encouraged and happy that our Q3 performance was the best, but still not happy that it is negative and we're working on it.
spk02: Thank you. And a reminder, to ask a question, press star one on your touchtone phone. Our next question comes from Michael Rackers with Needham & Company. Please state your question.
spk07: Hi, everyone. This is Michael. I'm for Scott today. Thanks for taking my question. I appreciate it. I was just curious about kind of the normalized growth environment. You know, you mentioned getting back to a double-digit top-line growth number once again. Could you kind of talk about the ramp to get there? and maybe what the mix looks like in terms of new logo acquisition, AI adoption, and then cross-selling additional products to existing customers. Thanks.
spk01: Yes. Michael, while we're not providing 2024 guidance at this time, we are encouraged by the positive momentum and the progress we have made. We're optimistic about the trajectory for 24, but continue to be mindful that the macro is choppy and the marketing budgets still remain uncertain. And it's hard to sell into sales and marketing budgets still. So moving forward, we expect to deliver sequential improvement in ARR going into 2024 and expect to flatten the declines and turn positive into 24. I am confident that we'll get to positive ARR no later than second half, but I'm driving the company to get there as soon as possible. Obviously, we'll get there if the macro improves. Now, there are three core areas that we are focused on to get there. First of all is the retention base. The reason why we're saying Q4 feels better a lot is based on we are seeing improved sequential retention. On top of that is our focus on Progress on our go-to-market for regulated industries, where we are focused on mission-critical digital transformation use cases, as I mentioned earlier. Those grew in aggregate high single digits year-over-year in Q3. And on top of that, we are launching the next generation of our platform, which includes AI-powered A's, where we are adding all the capabilities that we have talked about before. So those are the three things. On top of that is new business. Again, with our go-to-market initiatives, Q3 was better in new business compared to Q2, while it generally is seasonally slower. We expect that to improve in Q4, and I think that is going to be important both on the enterprise segment and the commercial segment. So as we look at 24, those are the vectors we are currently looking at, and with a little more assist from the macro, we expect all those vectors to even grow further. Thanks so much.
spk02: Thank you. And at this point, we do not have any further questions. So we will now conclude today's conference. All parties may disconnect. Have a good evening. Thank you.
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