ON24, Inc.

Greetings and welcome to the On24 third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Shio Denloye. Please go ahead.

Thank you. Hello and good afternoon, everyone. Welcome to On24's third quarter 2024 earnings conference call. On the call with me today are Shirat Sharan, co-founder and CEO of On24, and Steve Vassaroni, Chief Financial Officer of On24. Before we begin, I would like to remind everyone that some information provided during this call will include forward-looking statements regarding future events and financial performance, including guidance for the fourth quarter and full fiscal year 2024, as well as certain fourth 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 cautions that these statements are not guarantees of future performance. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's periodic SEC filings and today's financial press release for factors that could cause our actual results to differ materially from any forward-looking statements. We'd also like to point out that on today's call, we will report both GAAP and non-GAAP results. We use these non-GAAP financial measures to evaluate our ongoing operations and for internal planning and forecasting purposes. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see the 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?

Hi, I am Sherat Sheran, CEO of ON24. Thank you for joining us for our third quarter 2024 financial results conference call. Our chief financial officer, Steve Battuoni, is also with me today. Let's start by discussing our financial results this quarter. Our third quarter results showed significant improvement across key metrics, AI adoption, continues to gain momentum, and our focus on mission-critical use cases in regulated industries like life sciences is yielding positive results. We have started to win back some key customers that left us for cheaper but less effective options. I will go into all of these developments in more detail later in the call, but first, I will touch on our financial results. Revenue, gross margins, adjusted EBITDA, and EPS all came in above guidance. Q3 revenue from our core platform, including services, was $35.6 million, and total revenue, including virtual conference, was $36.3 million. Of total revenue for the quarter, subscription and other platform revenue was $33.9 million, and professional services revenue was $2.5 million. we delivered our sixth consecutive quarter of adjusted EBITDA profitability and our third consecutive quarter of positive free cash flow generation. Our results in Q3 and here today underscore our improved retention profile, operating expense discipline, and cash flow improvement. I'd like to elaborate on these achievements to highlight the progress we've made this year, starting with ARR. We ended the quarter with $129.7 million of core platform ARR, a decrease of $1.37 million, or approximately 1% from Q2. Total ARR at the end of Q3, including ARR from our virtual conference product, was $132.2 million. Our core ARR performance has improved meaningfully compared to 2023, with a 5% year-over-year decrease in Q3 2024 compared to a 12% year-over-year decrease in Q3 2023. We recognize we have further work to do in this area, but we are making steady progress in stabilizing our business and executing across our growth vectors. On 24, AI-powered A's are AI-powered analytics and content engine solution is an important growth driver that continues to gain traction. In Q3, AI-powered ACE ARR performance reached a new high as a percentage of growth ARR, despite ongoing pressure on marketing budgets. New business acquisition performance in Q3 was consistent with Q2 levels in a seasonally softer Q3. Our in-peer growth retention in Q3 improved significantly from Q3 of last year, showing a high single-digit year-over-year increase in both Q3 and on a year-to-date basis compared to the first nine months of 2023. Churn and downsells both improved on a year-over-year basis. Additionally, net retention in Q3 increased by mid-single digits from 2023 year end. Next, on margin performance and operating expense discipline, gross margin improved by approximately 200 basis points year-to-date in 2024 compared to the same period in 2023. Our adjusted EBITDA margin improved on a year-to-date basis by over 300 basis points in 2024 compared to the same year-to-date period in 2023. Free cash flow year-to-date was positive $2.1 million compared to negative $12.4 million in the same period in 2023, an improvement of $14.5 million. Next, I'd like to remind you of our three strategic pillars and share with you the enhancements that we saw in each of these areas in Q3 that give us continued confidence in our strategy. One, relentless platform innovation, including our AI solutions. Two, continuing to focus our go-to-market execution on the enterprise with an emphasis on highly regulated industries. And three, returning to growth while hitting our profitability targets. Beginning with our AI platform innovation, We are excited to see sequential growth in the percentage of core platform ARR coming from our AI-powered ACE solution, which is only introduced at the beginning of the year. In Q3, our number of AI-powered ACE customers reached triple digits, and we are seeing a strong correlation between AI-powered ACE and overall customer health metrics. This customer cohort tends to invest at higher levels, for longer periods and uses multiple products in our portfolio. As a reminder, AI PowerDays includes three differentiated capabilities. One, personalization at scale to target priority audiences. Two, AI-generated content to automate and scale content creation. Three, automated campaigns and nurtures to drive continuous engagement with prospects and customers. Each of these capabilities help offset the significant resource strain faced by B2B sales and marketing teams today by leveraging the work they're already doing and delivering better conversion rates, broader global reach, and greater pipeline results. Importantly, these capabilities directly match with B2B growth initiatives and align our platform with the AI technology budget that enterprises are prioritizing for investment. Let me share how one of our AI-powered ACE customers, a public mid-market global SaaS company, is having success with AI-powered ACE. Through AI ACE's personalization at scale capabilities, they can now precisely target and engage three unique audiences with just one campaign, combining into one experience content that was previously delivered over many weeks and required totally separate campaigns. This platform innovation not only improves their team's efficiency and saves a lot of time, it also gives them more qualified leads to convert to pipeline and has accelerated buying journeys. I'd also like to share the story of an AI-powered ACE win with a new customer, a public mid-market provider of enterprise cloud-based tools. Their marketing leadership was looking to make AI a central part of their go-to-market team's growth strategy as part of a top-down initiative from their CEO. Recognizing the time savings, pipeline growth, and ROI that they could gain from our platform's AI-powered ACE solution, they decided to upgrade from a collaboration tool and will use our platform's AI capabilities to generate demand, automate content creation, and deliver personalized experiences at scale to the diverse customer base that spans a 20-plus product portfolio. As these two examples illustrate, we believe that our AI platform innovations are helping us recapture budget in the technology vertical an industry segment where we recently faced the greatest amount of pressure due to budget concessions. In fact, two of our larger Q3 new business deals came from the tech sector, where AI-powered ACE was a critical factor in their buying decision. With the overall tailwind of AI technology investment, we are continuing to invest in an aggressive AI innovation roadmap and focusing our development on advancements that will help customers get more intelligent from their prospect engagement data and improve their pipeline and revenue results. With over a billion engagement minutes per year of first-party customer data generated on our platform, we have a competitive advantage and solid foundation for ongoing AI-based innovation. For example, We've added a new AI-driven capability that surfaces key insights called Smart Tips to our customers. By delivering a continuous stream of insights, customers can apply these Smart Tips to their campaigns upfront to help them get even greater revenue results with the ON24 platform. When we look at the customers who've been using AI PowerDays between January and the end of Q3, we see those customers typically improve their conversion rates and achieve more uplift of their average reach per campaign. This is an extremely positive indication of a downstream increase in pipeline and revenue results. We are excited about the performance gains our AI-powered AS customers are experiencing, and we believe our future innovation can extend that uplift even further. Next, I'd like to turn to our second strategic priority, our enterprise go-to-market strategy. The percentage of ARR in monthly agreements and the percentage of customers using two or more products hit new record highs. We are stabilizing our ARR, and we are working to return to growth. To help improve our sales execution and return to growth, we recently up-leveled our sales leadership by hiring a new head North America sales. I'm particularly excited that we are seeing encouraging signs on customer win-backs, especially from customers who are coming back to us after failing to get results from collaboration tools and point solutions. In fact, in Q3, the percentage of new core ARR which came from Boomerang customers was in the high single digits. To provide more color, I'll share a few examples of win-back deals in Q3. One boomerang deal was with a $5 billion-plus global cybersecurity company. Facing budget pressure earlier in the year, this customer opted for a collaboration tool and within just a few months realized their mistake. They recognized that without a global purpose-built platform for engaging experiences and first-party actionable data, and insights, their pipeline was negatively impacted, and they found themselves falling short of their sales targets. In Q3, they reengaged with us to help them refuel their global demand generation engine. They're excited about our latest innovations and have reinvested in our platform with a six-figure commitment. Another boomerang deal in Q3 was with a $1 billion-plus IT services company and solutions provider. Over the past year or so, the company went through a merger and resorted to a point solution. As they started to centralize and streamline their sales and marketing operations, they quickly found that their point solution could not scale enterprise-wide or integrate with their technology stack. Leveraging the breadth and depth of our capabilities, especially the addition of our AI-powered ACE solution This customer's demand generation, customer education, and field and content marketing teams are now standardized on our platform. Using ON24 as a single platform to run digital campaigns, generate customer insights, and automate their end-to-end process. We believe that these win-backs demonstrate how differentiated our platform is when it comes to supporting mission-critical go-to-market use cases for enterprise organizations. This is especially true when it comes to highly regulated industries like life sciences, where we have a dedicated go-to-market motion and platform roadmap. We saw low single-digit sequential core ARR growth from the life sciences vertical in Q3, and we remain excited about this customer cohort. To illustrate the strength of our life sciences vertical, I'd like to highlight an expansion with one of our long-term customers, a $50 billion-plus American pharmaceutical company that is among the top 10 biopharma companies in the world. As a trusted partner, their team came to us to help advance their healthcare professional digital engagement strategy with a focus on HCPs that their sales teams are restricted from seeing in person. Through our platform, they will be able to engage these hard-to-reach HCPs, providing them with an always-on content hub full of educational resources. And with the behavioral data from our platform, the go-to-market teams will be able to gain invaluable HCP insights. Finally, turning to profitability. We continue to deliver on our targets. We achieved positive adjusted EBITDA and positive non-GAAP EPS for the sixth consecutive quarter. Free cash flow was positive for the third quarter in a row, and we achieved a gross margin in the high 70s. We expect to exit 2024 with positive adjusted EBITDA and positive EPS. In 2025, we expect to be profitable for the year as a whole across both of these metrics while we maintain our focus on returning to growth. We remain committed to our long-term profitability target of generating double-digit EBITDA margins. To conclude, we are controlling what we can control despite the macro challenges. Gartner reported that in 2019, the year preceding the pandemic, average marketing budgets were approximately 11 percent of overall revenue. And in the four years since, they've dropped to 8.2 percent. Despite the headwinds of ongoing macro uncertainty and softness in marketing budgets, our third quarter results underscored stabilization in our business performance and our ability to consistently achieve our profitability targets. We have improved year-to-date performance across our key metrics as compared to 2023 and entered Q4 with positive momentum. We have more work to do, but the strength of our AI solution, our focus on mission-critical use cases in regulated industries, and recent customer win-back momentum are very encouraging signs as we look to return to growth. We expect a sequential improvement in new business acquisitions as we exit 2024. Coupled with improving stabilization in our install base, we have confidence in our ability to return to ARR growth in 2025. With that, I'd like to hand it over to Steve Battuoni, our CFO.