ON24, Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Good afternoon and welcome. Please note that the live interactive webcast of today's call may be accessed via the Investor Relations section of the company's website at www.investors.on24.com. Upon completion of the prepared remarks, we will open the call for questions, which may be submitted via the webcast portal or the dial-in line. Please note that this call is being recorded. At this time, I'd like to turn the conference over to Maili Bergman with The Blueshirt Group. Please go ahead.

[Maili Bergman:]

Thank you. Hello and good afternoon everyone. Welcome to ON24's first quarter 2021 earnings conference call. On the call with me today are Sharat Sharan, the Founder and CEO of ON24; and Chief Financial Officer, Steve Vattuone.

[Sharat Sharan:]

Thank you, Maili. And welcome everyone to ON24's first quarter 2021 financial results conference call. Thank you for joining us. For our call today, I'll share a quick information of our financial results for Q1, 2021 and then provide an update on our business momentum. I'll finish with a recap of our annual conference and product announcements before turning it over to Steve to review our first quarter financials. I'm pleased to report strong financial results for the first quarter of 2021, exceeding the high end of our guidance.

[Steve Vattuone:]

Thank you Sharat and good afternoon everyone. As Sharat mentioned, we are very pleased with our first quarter results. I'm going to start the discussion of our results with revenue. The majority of our revenue is generated from subscriptions that we sell to our Digital Experience Platform which is delivered through cloud-based software. We also generate revenue from professional services which primarily consist of implementation and support services. Digital Experience Platform revenue excludes revenue from our legacy product offering, which we stopped selling to new customers in 2018 and is 0.2% of our revenue in Q1, 2021. Our revenue for the first quarter was $50.1 million an increase of 102% compared to Q1 of 2020. Our Digital Experience Platform revenue was $50 million, an increase of 111% year-over-year. Subscription and other platform revenue for the first quarter 2021 was $42.9 million, an increase of 115% compared to the first quarter of 2020. As a reminder, this includes overages which are generally around 3% to 4% of our revenue, but can fluctuate depending on customer usage of our platform and seasonality. Professional Services revenue in the first quarter was $7.2 million, an increase of 49% year-over-year representing 14% of total revenue. As we mentioned last quarter, the first quarter is typically a seasonally low quarter for professional services for us. We expect this revenue as a percentage of total revenue to be up in the mid-teens during Q2. 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. ARR growth reflects our ability to both land new customers and expand our footprint within existing customers as they add additional users, capacity and products and our platform becomes more strategic across their businesses. Total ARR at the end of Q1, 2021 is $163.1 million, an increase of 90% year-over-year. The growth of our ARR is underpinned by both new customer acquisition, which continued at a strong pace in Q1, as well as existing customers continuing to expand usage of our products. A key driver of our ARR is new customer acquisition. We ended the first quarter of 2021 with 2062 customers representing growth of 37% year-over-year. In addition, at the end of the first quarter, we had 325 customers with ARR of $100,000 or more representing growth of 102% year-over-year. This demonstrates our ongoing traction with larger enterprise customers. We are confident we will continue to leverage our existing customer base to upsell our speed of experiences providing a long runway for ongoing growth. 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, as well as certain other items. Our GAAP financial results along with a reconciliation between GAAP and non-GAAP results can be found in our earnings release. Gross profit in the quarter was $39.7 million, representing a gross margin of 79% compared to 73% in the year ago period. We intend to continue to invest in scaling the business throughout fiscal 2021 and as a result, we expect this to reduce gross margins in the near term. Turning now to operating expenses. Sales and marketing expense in Q1 was $22.2 million compared to $11.9 million in Q1 last year. This represents 44% of total revenue, an improvement compared to 48% in the first quarter last year. We intend to continue investing in sales and marketing to support increased demand for our digital experience. R&D expense in Q1 was $7.2 million compared to $4 million in Q1 last year. This represents 14% of total revenue versus 16% in the same period last year. We have increased our R&D spending in absolute dollars over the past year and as we move through 2021, we intend to continue to invest in R&D. G&A expense was $7.5 million for the quarter compared to $3.3 million in the first quarter last year. G&A was 15% of revenue versus 13% of revenue last year. Our G&A expenses have increased as a percentage of our revenue during the costs associated with being a publicly traded company. Over time, we expect G&A expense to decrease as a percentage of our revenue. Operating income for Q1 was $2.8 million or a 5.5% operating margin compared to an operating loss of $1.1 million or negative 4.5% during the same period last year. Net income in Q1 was $2.2 million or $0.05 per diluted share based on approximately 42.2 million weighted average diluted shares outstanding. This compares to a net loss of $1.7 million or $0.18 per share in Q1 last year using 9.1 million basic and diluted shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with $392 million in cash, cash equivalents and short-term investments. Cash flow from operations in the first quarter was $3.7 million compared to $1.3 million in Q1 last year. Free cash flow was $3.2 million in Q1 compared to $1.2 million in Q1 last year. Free cash flow margin was 6% in the first quarter compared to 5% in Q1 last year. In terms of head count as of March 31, 2021, we had 652 full-time employees which reflects growth of 19% compared to the 547 full-time employees we had at the end of 2020. This demonstrates the continued investments we're making in head count as we scale the business. And finally turning now to guidance. We are very pleased with the positive momentum in our business, especially our continued new customer growth in Q1 and high engagement from existing customers. At the same time, it is early in the year and we are coming off a year of explosive expansion for our business with the peak of COVID-related renewals in Q2. Balancing these factors in the second quarter of 2021, we expect revenue in the range of $50.5 million to $51.5 million which represents year-over-year growth of approximately 39% to 42%, non-GAAP operating income in the range of 0 to $1 million or a margin of 0% to 2% and non-GAAP net loss per share of $0.01 per share using 47 million basic and diluted shares outstanding to non-GAAP earnings per share of $0.01 per share using 57 million diluted shares outstanding. And for the full year 2021, we expect revenue in the range of $207.5 million to $210.5 million which represents year-over-year growth of approximately 32% to 34%. Non-GAAP operating income and loss range a $2 million operating loss to operating income of $1 million or a margin of negative 1% to positive 0.5%. A non-GAAP loss per share of $0.02 per share to $0.08 per share using 44.4 million basic and diluted shares outstanding. In summary, we are pleased with our Q1 results and are well positioned to benefit from the investments we have made in all functional areas of the company. We expect to continue to benefit from the trends driving the need for our data rich digital engagement platform. With that, Sharat and I will open the call for questions. Operator?

[Operator:]

And we'll take our first question today from Sterling Auty with JPMorgan.

[Sterling Auty:]

Yes, thanks hi guys. I wanted to drill in on the new customers that you added during the quarter, can you give us a sense what industries do they represent and what sized companies. Because I think one of the questions we get is right, who is that already selling digitally, who are the late comers and who's left to come to the ON24 platform?

[Steve Vattuone:]

Yes, Sterling this is Steve, I'll go ahead and start that one. We had a really good quarter in Q1 in terms of customer growth. We added 68 net new customers and ended with 2,062 customers and our customers with ARR are greater than $100,000 or more that increased by 23 to 325 at the end of Q1. So we're very pleased with the progress we continue to make and adding new customers. In terms of forward-looking guidance, we don't really disclose that on customer count. We'll obviously report that at the end of Q2, but we're seeing very good momentum. We added a lot of large customers and we're seeing it in multiple verticals.

[Sharat Sharan:]

Just to add to what Steve just said Sterling, our ICP we really focus on technology. We focus on manufacturing, life sciences, financial services, professional services, media and entertainment and we are seeing traction across the board. Of course, you would expect the technology guys to be leading it, but things like pharmaceutical, manufacturing I mean we are seeing very, very good traction. I'll give you an example of a company in the financial services space that we closed last year in May and they increased their spend, they spend significantly. This is one of the top five largest banks in North America, they were 100K ARR customer last year, they came and worked with us on the capital market side, they used Elite, Engagement Hub and Virtual Conferences. They've doubled their run rate and they've increased their spend with us in Q1. So, we are seeing momentum across that, I gave the example of integration with Veeva in the pharmaceutical space that's a very important category also that we are seeing on a global basis.

[Sterling Auty:]

Great. And then you mentioned your own virtual conference that you help, what is this end up being a big lead generation and customer expansion event for you each year, just maybe some of the - give us a little bit more color around the experience that you typically get coming out of your conference and what did you experience this year?

[Sharat Sharan:]

So generally Sterling in the past, we have done these experiences physically and this is the first year we really did this digitally. We will probably do another one of them - another one of this later this year. Typically, there were 2, 2.5 year, 2.5 days and we did this in North America, we would do it in EMEA and APAC and so mark three or four of these events at one time. We had over 6,000 people who attended this. It was one-day event. It was done 24/7 started in APAC, EMEA and then North America. About over 3,000 people attended and we had about 14, 15 customer stories. Because it was virtual, we kept it to one day and I think there are two key things that we are going to see. One is of course from new customers, acquisition of new customers, as people get more educated about the platform, they can see it in action. They can see a lot of the demos. And the other thing is almost - this always been almost like a bear hug, right, for our existing customers to be able to see what their peers are doing and learn from that, that's always been a very important part about the conference we've been able to do. Now that we are going to move to more of a hybrid situation going forward, we'll probably do this conference a little more frequently than we did previously.

[Operator:]

Next, we'll hear from Chris Merwin with Goldman Sachs.

[Chris Merwin:]

Thanks for taking my question. You talked about some new product additions I think Breakouts and some others as well. I know, these are probably still very early not contributing yet, but can you just talk in general about how the cross-sell motion is going and - I don't think I heard you speak to net dollar retention or multi-product customers and I admit missed it? But I don't think I heard that in the script. So can you just please update us on those metrics if you can or maybe just comment in general and how the cross-sell motion is going? Thanks.

[Sharat Sharan:]

So let me take the first part. And Steve, you can take the second part of the question. So we are really excited Chris in terms of the expansion and upsell that we saw in Q1. We are excited by how it has continued in Q2, specifically about Breakouts, there's a lot of excitement from our customer base for this product. Now you can not only reach 200 to thousands of people who are interacting and engaging with buying signals and engagement data in a live experience. But now you can move into one-on-one interactions, peer-to-peer networking and group meeting. So it takes you further down the funnel from marketing driven sales to close that deal. So there is a lot of excitement and yes, we expect this to provide and uplift, but it is early. I mean we just launched it, Chris. So it is early, but this is a major part of our expansion and another part of our expansion and upsell cadence. Steve?

[Steve Vattuone:]

Yes, so Chris, you'd also asked about NRR and I think the multiproduct metric we talked about last time. So let me start with NRR, we don't really report on NRR on a quarterly basis, but as expected we had a very strong quarter for NRR. Our average ARR per customer continued to go up in Q1 that are highest it's ever been. We do expect our NRR to return to something closer to pre-COVID levels over time. And our NRR was about 110% pre-COVID with our enterprise business typically being five to seven points higher than that enterprises, 70% of our business. In terms of the customers with multiple products and cross-sells, we are really pleased with the increase in 17% to 30% we saw in 2020 for the customers with two-plus products. Now, we don't expect it to increase at that rate this year, it's not really a metric we're going to disclose quarterly, but I can say that the number of customers we have with two or more products did increase during Q1, and we're really pleased with our continued progress in that area.

[Chris Merwin:]

Okay, great. Thank you. And maybe one other question, it seems like another theme in the remarks is around integrations. I think you mentioned a couple with Drift, an outreach into companies within the CRM suite more broadly. And can you talk a bit about I guess maybe, I know, that's again probably early, but the impact that is having with your customers about increasing platform stickiness for you all? And then just secondly in terms of the data that's being captured, does that often go into like a database that the customer maintains separately or is this - with the integrations is the data going directly from ON24 to these other platforms? Just trying to understand the kind of the pain points that are being solved here for customers and how we think about improved platform stickiness over time? Thanks.

[Sharat Sharan:]

So Chris, this is Sharat, just overall integrations within a customer sales and marketing ecosystem is extremely, extremely important for us and we spent millions of ours, kind of building one of the most robust third-party ecosystem of deep integrations of our engagement data and buying signals within these systems, some of those - Marketo from Adobe or whether it's Eloqua, whether it's Salesforce, SAP, so that is a very important part. 60% of our ARR is integrated and we generally see much better, much more stickiness and others - when that happens. So, we announced the integration of Veeva in the life sciences space that is very important to us, but it's not only just basic integration, we take all the 20, 30 different engagement data points and we've created this almost near real-time engagement. So when a salesperson - when a prospect is ready to buy and they are saying. I'm ready to buy 90 days, we want that information to go almost in close to real-time through the marketing and sales ecosystem that our customer uses. So we are not trying to be - make our data a silo, we integrate our data within our customer sales and marketing ecosystem. If they've got Salesforce, if they've got Marketo, it's integrated in that, so it's available to the sales and marketing people. So clearly it helps stickiness very significantly. Now the example about Outreach, Outreach is a sales enablement tool. They enable SDRs and others and what we're trying to do in this, we provide something called prospect engagement profile. It's a 360-degree view of a prospect and they are first, and their engagement on our platform everything that they have done, what we are doing is we are integrating that within the profile of that particular prospect within Outreach. So when the SDRs are following up, they know a lot more about that customer again adding value. Things about Drift, Drift comes more in the direction of the engagement platform. If people come into the engagement platform and they want to go and converse one-on-one with sales and we are integrating that in that perspective, so that people can move the funnel deeper into sales conversations. So all these integrations, one is the data integration, those are extremely, extremely important from a stickiness point of view, from our side, but also the value it brings to our customers and the other integrations that we are also doing on the engagement part of the platform making sure it continues to transform sales and marketing for our customers.

[Operator:]

Rob Oliver with Baird has our next question.

[Rob Oliver:]

Thanks for taking my questions. That Sharat I had one for you to start. Just, I know you guys are making some investments in both international and the go-to-market side as well as on the product side on language and I just wanted to touch on those and in particular in the wake of your user event where we saw some big companies, big multinationals like Honeywell , talk about how they're kind of redefining their dealer and distributor model using ON24. So I'm curious know as we talk about the expansion within existing accounts, how you look at that of the addition of new languages as a driver for expansion with some of these accounts that are already using you guys that are true multinational corporations? And then I had a quick follow-up for Steve.

[Sharat Sharan:]

Yes, I think Rob, we have built this enterprise great accessible, reliable, scalable, privacy compliant, multilingual platform for global enterprises and commercial companies, that's where we focus on. And so the example of when we bring the customer, we talked about the Japan-based customer in my prepared remarks and once we bring that customer, our focus really is to expand that customer globally and because that's how these multinationals expand. I want to give you an example of one of the largest industrial manufacturing companies. They've been a customer of ours for a long time, but they brought in several divisions in multiple parts of Europe in 2020 and as they expanded into those, the first division - one of the divisions for the first live experiences that it, there over 1,000 attendees. And their audiences are also more engineering, supply chain, all of these people really gravitate more towards digital even more than physical, so these guys are committed to more of a hybrid engagement going forward. So when we talk about languages and others, our focus really is we might bring somebody from DACH or Germany, but then our focus is expanding that across the world that's a very key part and that's what you also heard in the virtual conference. So enterprise scale, multiple languages, privacy compliant that's a very important part of what we provide to our customers and take their headache out as they're trying to engage with their prospects at scale and that's probably what you heard in the conference too.

[Rob Oliver:]

Okay, great, that's helpful Sharat. Thanks and then Steve, just a quick one for you as you thought about the guidance for the rest of the year, just curious for any color on what assumptions you had embedded in there for a return in the economy. I know we're still at various stages globally in terms of lockdown and stuff and just curious how you guys thought about the impact of COVID relative to the guidance? Thank you, guys.

[Steve Vattuone:]

Sure. Our annual guidance reflects our best view as we see the business going forward at this point. Our customers continue to engage with us quite well. We're seeing a very high level of customer engagement across the board with our customers and that's reflected in our Q1 results and also the guidance that we've provided and Sharat, do you want to add anything to that?

[Sharat Sharan:]

No, I think we are seeing very strong trends from a new customer wins to expansion and upsell, we do Rob - as we do look at Q2, and the year if we are early in the year, we don't want to get ahead on our skews. We did if you look at Q2, it is our toughest comp quarter by far. The renewal base in Q2 is largest by a significant magnitude and so that's also something that we factored in our guidance because in Q2, we did see some COVID related buying but we always have factored that within our guidance.

[Operator:]

We'll now hear from Brent Bracelin with Piper Sandler.

[Brent Bracelin:]

I guess, Sharat, I want to drill down a little bit more on the peak renewal cycle. How are customer conversations shifting as we get close to the reality of a reopening? How are some of the early renewal conversations going? Are there any customers that are going to completely go physical and not virtual, it's going to be hybrid? Just walk us through how you're engaging with some of these existing customers and how there may be the messages pivoting more heavily towards lead-gen or something else? Just trying to get an early view on what those existing customers and renewal conversations look like today.

[Sharat Sharan:]

Yes, so let me answer it in two parts Brent. So first of all, we are thrilled with the customer engagement that we saw in Q1 and that has continued in Q2. And based on what our customers are telling us, the future is about hybrid engagement. There has been a permanent change in behavior. As a data point, I'll tell you, it's a time people spent - attendees spent on our platform in Q1 is up from Q4 last year, it is 4% or 5% higher. I'll give you the example of one of the largest HMOs in the country. And in 2020, they moved their - they accelerated to digital, their sales people interacted with hospital, that's what they did, but in spite of there moving into more of a hybrid cadence this year, they increased their spend with us. So, those are the conversations that we are hearing again and again with many of our customers. In my prepared remarks, I talked about one of the largest CRM companies that increased their deal size by 60%, marketing source by 135%, average contract value by 200%. So with that kind of business impact, there is no going back for these companies. That being said, we didn't know that in Q2 last year - it was the peak of COVID-related buying and many of these accounts are up for renewal, but - we expect that some showing downsizing in a minority of those accounts and we've always factored that in our guidance. So, we are prepared for that. And that's what we've already factored in.

[Brent Bracelin:]

Good, that's - certainly a helpful color there. And then my last one really is just around just sales capacity. If I look at sales and marketing investments, it's up I think 87% year-over-year into Q1. You talked about heavily investing in adding capacity over the last couple of quarters? How much more do you have to go here, how are you feeling relative to kind of coverage relative to kind of the plan at this point, just any additional color relative to additional investments in sales and marketing going forward here exiting kind of Q1?

[Sharat Sharan:]

Yes, so - last year, we - were caught. We were really behind Brent right. So part of that was and also the productivity numbers increased significantly and other stuff. So this year we are planning for - we are trying to catch up and adding the capacity. So we've added a significant number of sales capacity this year, we've added marketing and we expect to add that more. I think we are not done yet, but we should expect that the people we hired in the second part of last year, because that's when we really started to ramp and generally assuming a six to nine months ramp that some of those people will start reducing by the end of Q2 and the areas that we're going to focus on has been enterprise, commercial and international, including new markets. I think we will continue to add more people on the commercial side. I expect that we will continue to add more people on the international side, those are areas we are seeing good traction.

[Brent Bracelin:]

Totally makes sense and certainly you're seeing a pretty good uptake in 100,000 new customer cohort numbers there. So it sounds like that strategy is working at least here in Q1, so thanks. That's all I had.

[Operator:]

We'll now hear from Arjun Bhatia with William Blair.

[Arjun Bhatia:]

Yes, thank you for taking my questions, Sharat maybe I can follow-up on the last one on the commercial side of things with Virtual Conference Pro. And maybe just remind us if this is a newer part of the market that you're going after or it's something that you've had an established presence? And if you are moving a little bit more down market to a higher velocity sales - sales model, what do you think needs to change in the go-to-market motion or the purchasing process to see results from this segment?

[Sharat Sharan:]

So I think - Arjun, you got two questions, one is really related to commercial right and the second is related to the Virtual Conference Pro, so let me address both of them so, on the commercial part of the market. We go up to 2,000 customers and down so we break it into various categories and we see a very large TAM in what we call commercial one which is 200 people and down. So we are investing in that market. As we bring in now the Elite product with the Breakouts, I think that is also going to be an important product that we are going to take to that market. So, we see potential in our business using the data rich system of engagement for the - not the SMB market per se, but little higher than the SMB market. So, we see pretty strong potential there. And we have a team and we are expanding that team on a global basis that sells all our products. Now related to Virtual Conference Pro, our Virtual Enterprise - our Virtual Conference overall business is about 10% of our business. The Virtual Conference Enterprise product did require a little more hand holding Arjun than we wanted then - I think is more palatable in the commercial market, also the price point a little lower. So it's our version of making it not completely self-service, but a lot more self-service compared to before and reduce the price point. I'm not sure it's still a SMB kind of level price point, but it's somewhere in the middle and it's a good entry point for the commercial market.

[Arjun Bhatia:]

Okay, that's very helpful. And if I can touch on the Breakout announcement seemed very exciting and certainly seemed like something that would resonate in the market, just curious how you're pricing that, is that going to be part of the core platform? Is that an add-on? Is it a totally different offering that customers need to purchase? Just help us understand the pricing model there.

[Sharat Sharan:]

Yes, it's like - I can't disclose the pricing model, but I think, as we have taken out and Elite, Arjun, it's an uplift to their existing subscription. So if somebody has a $75,000 subscription, one workspace and two logins, it's an uplift to that subscription and it's early, so we're still trying to kind of figure that thing out, but we are selling that as a subscription as an add-on, okay. Now as this thing launches in the virtual conferencing, we may take a different tack in the different products, but that is the approach we have. So we are going to market with all of our customers from an upsell and expansion cadence as and uplift to this.

[Operator:]

Our final question will come from Steve Enders with KeyBanc.

[Steve Enders:]

Hi, great, thanks for taking my question. I wanted to follow-up on an earlier question about the renewal opportunity that you're saying in another probably a couple of months into it at this point from the first big push from a year ago. But I guess how are those conversations progressing for either driving longer term usage or long-term use of the platform and facilitating multi-year deals with these customers?

[Sharat Sharan:]

Steve, do you want take that?

[Steve Vattuone:]

Yes, I can go ahead and take that. In terms of the - it was kind of two questions you asked that, let me start with the multi-year deal question then I'll pivot to the other one. So in terms of multi-year deals, we're very pleased with how those are going. We don't really provide guidance on how to report a quarterly, but it is trending in similar fashion to what we saw in the second half of 2020, even with our customer count in ARR growing significantly. So we're really pleased with how our customers continue to see the long-term strategic value in our offering and we continue to sign multi-year deals with them. In terms of the renewal opportunity, we're happy with where things are at and that's reflected in our guidance. As Sharat mentioned, Q2 of last year was the peak of COVID-related buying and many of these accounts are up for renewal. We do expect some churn and downsizing in a minority of these accounts. And that was always factored into our guidance we provided both last quarter and again this quarter and we are guiding to a 40% plus year-over-year growth rate that's coming off a tough compare in 2020 which was a year of explosive growth for us. So we're really excited about how that's going. We're excited about our new customer wins in Q1 and the great level of engagement we continue to see with our customers.

[Steve Enders:]

Okay, that's great to hear. And just a quick follow-up, I know you mentioned last quarter, but some of that things you wouldn't make in the agency channel, and I'm just wondering how that kind of progressing so far?

[Sharat Sharan:]

Yeah, I think, Steve, we are making the investment. We hired another channel executive also in EMEA, but these things take a little while as you know to kind of progress, so our expectation is we are starting from a low base, so there is only upside here. I mean the announcement with Veeva is an important one. We hope to drive more ISV related pipeline in the life sciences category. So this has got a multi-quarter run way, Steve. So we will keep you updated, but this will take us a few quarters.

[Steve Enders:]

Okay great thanks for taking my question.

[Sharat Sharan:]

Because we are starting so low, I mean there is only upside here as we move forward.

[Operator:]

That will conclude today's question-and-answer session. I would now turn the call over to Sharat Sharan for any additional closing remarks.

[Sharat Sharan:]

Thank you, everyone for joining us today. See you next quarter. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation, you may now disconnect.