Q4 2022 ON24 Inc Earnings Call
Hello.
Greetings and welcome to the on 24 fourth quarter and full year 2022 financial results.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Lauren Sloane Investor Relations for <unk> 24.
You may begin.
Thank you Hello, and good afternoon, everyone welcome to our 24th fourth quarter and fiscal year 2022 earnings conference call on the call with me today are sure Armstrong co founder and CEO twenty-four Steve ask Bonnie Chief Financial Officer on 24.
Before we begin I would like to remind everyone that some information provided during this call.
Forward looking statements regarding future events and financial performance.
Including the execution of our capital return program and guidance for the first quarter and fiscal year 2023, as well as certain second quarter non-GAAP projections.
These forward looking statements are subject to known and unknown risks and uncertainties that could adversely affect our 24th actual results and cause these forward looking statements to be inaccurate.
Including our ability to grow revenue attract new customers and expand sales to existing customers.
Our new products and capabilities and other statements regarding our ability to achieve our business strategies growth or other future events or conditions, such as the impact of adverse economic conditions and macroeconomic deterioration including increased inflation.
On 24 are 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 statements to reflect 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.
We use these non-GAAP financial measures to evaluate our ongoing operations and for internal planning and forecasting purposes non.
non-GAAP financial measures are presented in addition to and not a substitute for financial measures calculated in accordance with GAAP.
Please see the reconciliations of these non-GAAP financial measures. Please refer to today's financial press release.
I'll now turn the call over to shrunk. Please go ahead.
Thank you and welcome everyone 120 for fourth quarter and full year 'twenty, one or two financial results conference call.
We appreciate you joining us with me today is Steve that warning Chief Financial Officer.
Before we get into the results as a reminder, the ongoing book platform includes six products to create by all of us on and personalized experiences that work together to drive deep engagement generate first party data and provide a unified set of customer insights that integrate with our.
<unk> business systems, so that sales and marketing organizations and take the right actions will deliver pipeline and revenue growth.
We define this as a core platform, which excludes the managed service virtual conference product.
As we stated on our last call we are deemphasizing, the virtual conference product with.
With the return of large scale unfortunate events.
Less demand for this product and have experienced a churn rate that is significantly greater than our core products over the past several quarters while the.
The end of this year, we expect the IRR from this product to be low single digits as a percentage of our total.
The focus on the core platform, we now view the metrics from this business such as revenue E. R R and NRI.
Turning to Q4 results.
Revenue from our core platform, including services in Q4 of what it wanted to was $44 2 million and total revenue, including virtual conference was $46 6 million.
Of total revenue for the quarter subscription and other platform revenue was $42 million and professional services revenue was $415 million.
We posted a non-GAAP operating loss of $3 $5 million in Q4, as we continue to take significant actions to align our cost structure towards achieving profitability, which I will elaborate on momentarily.
We ended 2020 to one.
$152 $6 million in ear are related to our core platform.
Representing a sequential decrease from Q3 of $3 million when excluding the impact of foreign currency, which is currently $400000.
Let me provide some commentary on the performance.
While we had guided to a sequential decrease in our ear are for the core platform net of foreign currency, we saw a higher reduction than anticipated.
Since our last call the macro environment has become more challenging.
Of the five verticals, which each accounted for 10% or more of our annual or platform IRR. We saw mid single digit percentage reductions in ALR between Q3, and Q4 2020 do in technology and manufacturing.
Technology, our largest vertical which accounts for over a third of core platform <unk> was especially affected with over a thousand technology companies, having layoffs. According to third party data.
This had the single greatest impact on our core platform MLR performance.
We also saw challenges of new business logo acquisition, both in enterprise and commercial segments due to customer hesitancy in the current macro environment.
From a geographical perspective, Europe continued to be soft and our international business revenue declined almost two times the rate of the overall business in Q4 2022.
Despite those challenges our life Sciences, and professional services verticals saw positive traction with low to mid single digit percentage growth in both mass sequential growth from Q3, Q4, 2022.
We saw improvements during Q4 in the in period gross dollar retention, which reflects both churn and down sales from existing customers of our core platform with Q4 gross redemption among the highest in 2022.
Additionally, the in period Q4 dollar churn rate improved to near historical levels.
The contribution from new products that we launched in 2022 was the highest in Q4 and our customers are committing to longer multi year contracts, which ended the year at the highest level ever.
As we look toward the larger digital transformation trends that have accelerated our business over the past few years are still unfolding and we are aligned with several market trends that will provide tailwind the business once the macro pressure eases.
These include the amortization of sales and marketing and the move to digital channels to drive pipeline and revenue growth.
Transition of the BW prospect, the self educate and research online before engaging with sales.
And the importance of first party data as compliance and privacy regulations become increasingly restrictive.
The Tam for our solutions is very large and we are in the early stages of this market opportunity.
We have managed through several economic downturns before and we are intently focused on our four main priorities to set our business for success as the macro environment recovers.
These are <unk>.
One accelerating our path to profitability in 2023.
To the relentless platform and product innovation.
Tree laser focus on enterprises with over 1000 employees.
For our global footprint across Europe and APAC.
First I'll talk a little bit about our path to profitability.
Looking ahead, we are focused on what we can control.
Continuing to improve our execution and running the business in a profitable manner, while driving long term durable growth.
I'm pleased to share that we've accelerated our timeline to reach breakeven non-GAAP EPS to next quarter, which is two quarters ahead of schedule from our initial target of Q4 2023.
To achieve our accelerated go we have initiated additional cost reduction measures in the first quarter across all areas of the company.
In addition to reducing non employee related costs, we are undertaking an approximately 13% reduction in head count in Q1 related to December 22 boats through natural attrition without back filling positions and through head count reductions.
Once complete these actions in addition to those already taken in 2020 do restore head count the similar levels to the end of 2020.
We have an incredibly talented team and this was a difficult but necessary decision to best position on 24 will deliver long term profitable growth achieving breakeven profitability under our accelerated timeframe.
Steve will share more about this shortly.
Next I'll explain a relentless focus on platform and product innovation.
Engagement on the platform as measured by engagement per attendee was at record levels in Q4 with audiences spending more time and having more interactions with our experiences.
The uplift in audience engagement levels demonstrates the majority of our platform and pay off of developing our extensive experience product portfolio over recent years.
This level of deep engagement provides our customers with unmatched first party engagement data and buying intent to drive their pipeline and revenue results.
In the near term you are most focused on leveraging our platform Foundation of course, BARDA engagement data and buying intent to develop new capabilities across three major product areas.
The first is personalized segmentation, which enables our customers to dynamically personalize experiences for their prospects based on rule sets.
And third party intent data and real time audience behavior.
Second, we're making enhancements to our analytics and insights with a first of its kind key moments report that measures. The performance of live experiences based on audience behavior and launch of our new Rois attributions dashboard and Salesforce.
This allows companies to measure the pipeline attribution to 124 solutions.
The third product focus is one we are very excited about our roadmap of new AI driven content generation capabilities.
Content creation is one of the most important yet costly resource intensive and time consuming aspects of sales and marketing today.
As companies reduced head count it is even more important to have solutions that enable them to do more with less.
Starting in Q2, we will introduce several features to help our customers solve this problem starting with embedded AI based content generation tools.
We believe that the combination of our first party engagement data personalization and EBITDA driven content generation capabilities and further strengthen our platforms significant competitive advantage and uniquely position us for future growth.
I'll now discuss our laser focus on the enterprise.
Close to 80% of our business is with companies with over 1000 employees.
As a onetime disclosure I'd like to unpack our in period gross retention performance within this segment.
Gross dollar retention reflects John and down so as.
As we move through the post Covid normalization quarters, we saw gross dollar churn rate within the enterprise segment deteriorate by a mid single digit amount compared to our historical churn rate.
I am pleased to share that as a result of our initiatives and customer success in the thousand employee and above customer cohort gross dollar churn rate.
Improved sequentially for the past three quarters and improved to 10% in Q4, which is consistent with pre COVID-19 levels.
This is a compelling data point as it shows that customers that comprise an overwhelming majority of our business and our primary focus are committed to the plants.
However, down sales remained elevated given customer budgetary constraints in the current macro environment, which we believe is transitory and gives us confidence in the growth of our business when the recovery comes.
As previously discussed Lifesciences and professional services verticals were strong performers.
Where we increased core platform are our quarter over quarter and year over year.
While technology and manufacturing we're behind.
To further bolster our enterprise go to market strategy across new customers and expansion of existing customers. We have refocused resources from mid market to our enterprise segment.
We also continue to build out our partner ecosystem and develop new partnerships with service providers will focus on enterprise clients in our key verticals.
In Q4, we saw the overall percentage of partner influence bookings increased low teens and we expect to see further leverage in 2023 is this motion matures.
Finally, our international business.
We have already invested in expanding our footprint outside of the U S with teams in place across Europe , and APAC, including Japan and have a marquee customer base across these regions.
While these regions have been impacted by the macro trends over the past year. We strongly believe there will be important growth vectors. During the recovery process given that many organizations are still very early in the adoption of digital engagement.
At the same time as we're executing on these priorities the board and the management team have taken a deep look at our balance sheet and capital position relative to our investment needs and our ability to maintain sufficient capital in the current macro environment.
Combined with significant shareholder engagement around these topics the board determined to authorize a new 100 million capital return program comprising a special dividend.
And a combination of an accelerated share repurchase and a share buyback program.
<unk> will share more specifics on this program, but I wanted to underscore that this new program reflects our confidence in our business. We believe it balances maintaining our focus on growth and enhancing near term value for our shareholders, while leaving ample liquidity to invest in strategic priorities and navigate uncertain.
Macroeconomic headwinds.
Furthermore, the $100 million return is in addition to our prior share repurchase program through which we have returned $41 million to date, bringing the total of the $141 million of capital being returned to shareholders since December 2021.
We are committed to this program and we intend to complete the entirety of the return in the next 12 months.
The management team and board regularly evaluate the capital needs of the business and we will continue to assist as dynamically as the year moves forward.
Now, let me highlight a few key new business wins for our company.
I'll start with the new wind from Japan, which comes from a multibillion dollar it services and consulting conglomerate with over 100000 employees.
He came to us to help centralize and scale their sales and marketing operations across multiple business units.
After struggling with the current collaboration tool and decided to overhaul their digital engagement strategy and build a single online destination for live experiences and on demand content using a combination of 122 relief and engagement hub.
In addition.
We brought on our global health and wellbeing solution providers with over 10000 employees, which is disrupting traditional health care by providing employers with an innovative way to support and deliver employee benefits.
Our ability to deeply integrated with hub spot and sales force was a key differentiating factor given their sales and marketing teams critical insights to drive pipeline and demonstrate the value being provided to employees back to their HR leadership teams.
Finally, we added the nation's largest banking association to our customer base in Q4 by providing them with a comprehensive solution for scaling their life certification programs and increasing member adoption.
Our engagement data gives them a powerful set of insights to improve cross sell broader membership base and drive more sponsorship revenue.
Turning to our installed base.
We are powering their digital transformation initiatives at a multibillion multinational pharmaceutical and biotech companies with more than 19000 employees as they innovate how their field reps and pharma brands engage healthcare professionals and set the standard for HCP engagement across all their markets.
Two 120 for ALLETE and forums, there'll be able to build and scale hundreds of HCP experiences brand consistency from one to one face to face virtual discussions for the field reps to larger one too many brand led digital summit's, whilst captured all the engagement and data in our platform after landing discussed.
We were in 2020, you've tripled our footprint and they are now a seven figure <unk> customer.
In addition, we had a meaningful expansion with one of the world's largest multibillion dollar software companies with over 20000 employees, who came to US we help them take all their data rich live experience content and use it to fuel inbound lead generation by making it available as an always on risk.
Source center within their website.
<unk> already proven significant ROI, but driving millions and pipeline growth from their live experiences their demand generation center of excellence wanted to double down on their digital engagement strategy with us and consolidate all of their experiences onto our platform.
Since acquiring this customer five years ago, we've been able to grow our business with them by 10 times into a seven figure <unk> customer.
Finally, we widened the footprint of the nation's leading association or certified public accountants.
Over the last two years.
<unk> grown our business with them, but two five times into a seven figure are our customers in.
In Q4, the double down on their digital engagement strategy expanding their use of our platform by adding our new 124 forums experienced product while integrating this new experience into their portfolio. The association with enhance its offerings to include VIP level professional training with sponsors and members.
In closing I'd like to highlight a few important points or you can take away.
In the recent past our revenue has been impacted by two major events.
Covid normalization and the current impact of the macroeconomic environment.
So we are focused on what's in our control.
We will continue to retain and expand our customers with greater than 1000 employees, which account for nearly 80% of our core platform IRR and landing new customers that matched this profile within our key verticals.
Next we are relentlessly focused on platform innovation and lastly, we are accelerating profitability, which will intern help us fuel sustainable and profitable growth.
Additionally, we remain bullish on the long term fundamentals and market opportunity for the business.
We're confident in the long term business trend of digital transformation as <unk> sales and marketing moves to digital channels.
We are in the early innings of large market opportunity and having managed through economic downturns before we know that would be appropriate investments. This is an opportunity to increase market share.
Lastly, while the macroeconomic environment may continue to be bumpy.
Tinsley focused on and confident as ever in delivering long term shareholder value, which is evident in our commitment to the new $100 million capital return program that we expect to execute in 2023.
Thank you, Sean and good afternoon, everyone I'm going to start with our fourth quarter 2022 results.
And discuss our outlook for the first quarter of 2023 and full year of 2023.
Before I get into the numbers, our focus going forward will be on the core platform business. As we are deemphasizing the virtual conference product for that reason, we now view the metrics from our core platforms such as revenue.
<unk> and NR as the best Kpis, which I will be leading with in the following discussion.
Revenue from our core platform, including services in Q4 of 2022 was $44 2 million, representing a decrease of 7% year over year.
Total revenue for the fourth quarter, which includes revenues from our virtual conference products was $46 6 million, representing a decrease of 11% year over year.
Total subscription and other platform revenue was $42 million, a decrease of 7% year over year.
This includes Overages, which were approximately 1% of total revenue in Q4 of this year compared to 2% of total revenue in Q4 of the prior year.
Total professional services revenue was $4 5 million a decrease of 36% year over year, representing approximately 10% of total revenue.
<unk> to 14% in a year ago period.
As we have previously discussed on our earnings calls our professional services revenue declined in 2022 as more customers elected to be self service and utilized less services in the current macroeconomic backdrop.
Moving onto <unk> IRR.
The annualized value of all subscription contracts at the end of the period and excludes professional services and Overages.
Related to our core platform was $152 6 million a decrease of $3 million from Q3, excluding the impact of foreign currency fluctuation, which was <unk>.
$4 million.
From our virtual conference product was $7 million at the end of 2022.
<unk> from $13 8 million at the end of 2021.
This resulted in total IRR of $159 6 million at the end of 2022 as compared to $171 4 million at the end of 'twenty 2021.
Given that virtual conference product now stands at only 4% of <unk> at the end of 2022, we do expect the headwinds from this product to dissipate in 2023.
With that I'd like to share some perspective on our Q4 performance and what we are seeing in the macroeconomic environment.
In Q4, <unk> was impacted by slower new business logo acquisition or expansion rates in the technology and manufacturing verticals as well as a higher level of down sells in the latter part of Q4 as a macro uncertainty worsens and.
In addition to <unk> commentary is it one time disclosure I would like to share some additional color on how our various verticals performed for the full year.
Our five verticals, which each account for more than 10% of our core platform AOR.
Technology, which was our largest vertical with over one third of our core IRR life.
Life Sciences financial services professional services and manufacturing despite.
Despite the macro headwinds this year, we did see core platform AOR grow in three out of the five verticals in 2022.
Mid single digits for both life Sciences, and professional services and low single digits for financial services.
Throughout 2022, we have seen softness in the technology and manufacturing verticals, particularly in the latter part of Q4 as many technology companies reduce their head count and spending and manufacturing companies had their budgets squeezed. However.
However, we remain optimistic that there is the macro environment improves over time these verticals will rebound.
Turning to customer metrics.
The number of customers contributing more than $100000 in total IRR totaled 345 marginally down from 351 in Q3.
This number was impacted by down sales in Q4, as our customers face budgetary pressures and some customers on this cohort renewed at lower commitment levels.
The $100000 threshold.
For our core platform.
Our average <unk> per customer was the highest ever at the end of 2022.
Our average var for customer, including our virtual conference product was close to the highest.
They are our contribution from the $100000 plus customer cohort continues to represent approximately two thirds of our total IRR, which is consistent with the prior quarter.
This data point reiterate <unk> comments on the relative strength of our larger customers the retention on our platform.
Total customer count was 1990 customers compared to 2122 in Q4 last year we.
We experienced a sequential decline compared to Q3, given the slower new business acquisition environment and churn with an SMB, which is companies with less than 200 employees, which was the largest contributor to logo churn in Q4.
We continue to see our customers make longer term commitments to our platform with multiyear contracts comprising 41% of our IRR at the end of 2022 as compared to 35% at the end of 2021.
<unk> of our customers with multiple products at the end of 2022 was 36%.
While we have seen some customers rationalize our entitlements as budgets tightened in the latter part of 2022, we were pleased to see these metrics increase in 2022.
Our dollar based net retention or NR in 2022 for our core platform was 90% for the enterprise segment it was 93%.
The IRR for our total business three points lower than our core platform.
As a reminder, NR as a lagging indicator and reflects the impact of elevated down cells that we experienced in 2020 to as many companies tightened their budgets.
As a onetime disclosure I would like to provide some additional context on our in period gross dollar retention performance.
The in period dollar churn rate for the core platform improved in Q4 by more than 700 basis points as compared to our highest churn rate period, Q2, 2021, and now experienced near pre COVID-19 levels.
However, down sales continue to remain elevated at approximately twice the percentage compared to what it was pre COVID-19 driven by customer budgetary constraints and the current macroeconomic environment.
We are pleased with the progress from the initiatives, we have undertaken in customer success to improve churn rate.
I would expect to see further improvements in our view the elevated level of down sales is transitory, which gives us confidence in our ability to return to growth as the macro improves before turning to expense items and profitability I would like to point out that I will be discussing non-GAAP results going forward.
non-GAAP results exclude stock based compensation restructuring charges amortization of acquired intangibles 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 profit in the quarter was $34 3 million, representing a gross margin of 74%, which is a three point decrease year over year consistent with the commentary we provided on the prior earnings call.
While we have made meaningful cost reductions across our business. We have invested in our public cloud infrastructure. This past year and certain costs related to delivery of our products, where a larger portion of our revenue this quarter as compared to prior periods, resulting in a modest decrease in our margins.
Now turning to operating expenses sales and marketing expense in Q4 was $21 1 million compared to $24 9 million in Q4 of last year.
This represents 45% of total revenue compared to 48% in the same period last year and 47% in the prior quarter largely due to the cost savings measures implemented in Q4.
R&D expense in Q4 was $9 million compared to $8 1 million in Q4 of last year.
This represents 19% of total revenue compared to 16% in the same period last year and 19% from last quarter.
We increased our R&D spend this past year as we have brought new products to the market and expanded our platform.
This is consistent with past guidance for relatively moderate increases in R&D spending throughout 2022.
G&A expense in Q4 was $7 7 million compared to $8 9 million in Q4 last year. This represents 17% of total revenue compared to 17% in the same period last year and consistent with 17% of revenue last quarter.
G&A expenses have decreased as compared to the prior year as we have taken actions as part of our broader cost containment measures to moderate our G&A costs.
Operating loss for Q4 was $3 5 million or a negative 7% operating margin compared to an operating loss of $1 8 million and a net.
I gave 3% operating margin in the same period last year.
Net loss in Q4 was $2 million or <unk> <unk> per share based on approximately 48 million basic and diluted shares outstanding.
This compares to a net loss of $1 7 million or <unk> <unk> per diluted share in Q4 last year, using approximately $47 8 million basic and diluted shares outstanding.
Turning to the balance sheet and cash flow.
We ended the quarter with $328 1 million in cash cash equivalents and marketable securities.
Our strong balance sheet has allowed us to return a total of $41 million under our existing share repurchase program to date, including approximately $7 million in Q4, 2022, and an additional approximately $5 million in early Q1 2023.
As we have previously announced we are replacing our prior share repurchase program with a new $100 million capital return program.
We believe that the capital return program strikes the appropriate balance between maintaining our focus on growth and enhancing near term value for our shareholders. We are planning that our capital return program will consist of two components. The first component will be a special cash dividend of <unk> 50 per share which.
We plan to pay in the second quarter of this year.
The second component will be a combination of an accelerated share repurchase program and a share buyback program of approximately $75 million.
We expect the accelerated share repurchase and share buyback programs to be completed within 12 months. We are pleased to be able to undertake this meaningful capital return to our shareholders. While also maintaining ample liquidity to invest in strategic priorities and navigate through the current macro environment.
We believe there is a significant opportunity ahead for our 2004 to create additional value for our shareholders.
Turning to our use of cash for the quarter cash used in operations in Q4 was $7 6 million compared to cash used in operations of $4 5 million in Q4 of last year.
Free cash flow was negative $8 9 million in Q4 compared to negative $5 6 million in Q4 of last year.
Free cash flow margin was negative 19% in Q4 compared to negative 11% in Q4 last year.
Before turning to guidance, let me discuss our plan to accelerate our path to profitability.
Last quarter, we discussed our commitment to reach non-GAAP EPS breakeven by Q4 2023.
We've now accelerated this timeline by two quarters and expect to reach non-GAAP EPS breakeven by Q2 2023.
We are able to do this by meaningfully reducing our expense run rate our expense run rate in Q4, 2022 ended at approximately $4 $5 million lower per quarter or approximately $18 million lower on an annual basis than where it stood in Q2 of 2022.
And we plan to continue to lower this run rate by initiating an additional cost reduction program in Q1 of 2023.
It will lower head count by approximately 13% relative to December 2022, head count levels, which involves a combination of attrition we are not back filling and involuntary headcount reductions.
This will result in a total head count reduction by the end of Q1 2023 of 23% relative to where head count stood in mid Q2, 2022 and will bring our head count back to levels similar to what it was at the end of 2020.
We expect the bulk of our additional 2023 cost reduction program to be completed by the end of Q1.
By the time, we exit Q2. This program will have lowered our annual expense run rate by approximately 38 million to $40 million per year relative to our annual expense run rate in Q2 2022.
Our cost reduction measures have spanned all areas of the company and involve both employee and non employee related spending.
We have lowered our spending with a number of vendors.
Tightening discretionary spending.
And are also rationalizing our real estate footprint.
The measures, we have taken make us well positioned to deliver long term profitable growth.
Moving to guidance, we are confident in our strong market position and are optimistic about our long term growth opportunity.
However, we are operating in a period of heightened macroeconomic uncertainty, resulting in greater budgets drove the from customers, particularly in the technology and manufacturing verticals with technology being over one third of our IRR and manufacturing approximately 12%.
Our guidance for 2023 assumes that we continue to see softness in these verticals and that macro uncertainty continues for the year for Q1, we expect core platform revenue, including services and a range of $40 2 million to $41 2 million and total revenue which includes our.
A virtual conference product in the range of $42 million to $43 million.
Professional services is expected to represent approximately 9% of total revenue.
We expect a non-GAAP operating loss in the range of $5 4 million to $4 4 million and a non-GAAP net loss per share of <unk> <unk> per share based on $47 5 million basic and diluted shares outstanding.
We expect a restructuring charge of $3 8 million to $4 3 million in Q1.
This includes a charge of one three to $1 $5 million for.
<unk> real estate, we expect to take in Q1, although the timing on this may vary.
The restructuring charge is excluded from the non-GAAP amounts provided above.
In addition, we expect to incur certain expenses related to shareholder activism in Q1, and possibly future quarters.
As we do not consider these cost core to our business. We are excluding them from our non-GAAP guidance provided above.
For the full year, we expect core platform revenue, including services to decline 10% to 7%.
And to be in the range of $160 million to $165 million.
We expect total revenue to be in the range of $165 million to $170 million.
Professional services is expected to represent approximately 9% to 10% of total revenue.
Any restructuring charges incurred in Q1 or in future quarters are excluded from the full year non-GAAP amounts provided above.
We expect a non-GAAP operating loss in the range of $11 million to $8 million.
On a non-GAAP net loss per share of eight to.
<unk> per share using $45 7 million basic and diluted shares outstanding.
Our estimate of shares outstanding takes into account the impact of our capital return program.
Our bottom line annual guidance reflects the cost reduction efforts I discussed earlier, which includes reaching breakeven non-GAAP EPS by Q2 of 2023.
In terms of margins, we expect gross margins in 2023 to be in the low to mid seventies.
Let me share some perspective on <unk>.
For core platform given.
Given the current macroeconomic backdrop and weakness in the tech and manufacturing verticals, our guidance assumes a sequential decline of approximately 2% and core platform <unk> in Q1.
In addition, as we deemphasize our virtual conference product, we expect our virtual conference product <unk> to decline.
$1 million in Q1.
This would result in total are declining sequentially in Q1.
By approximately almost 3%.
We do expect to see a modest sequential increase in our core IRR starting in the second half of this year, assuming the macro environment does not worsen from here.
For a virtual conference product, we expect to continue to see sequential decreases throughout.
Throughout 2023 with that product ending the year in the low single digits as a percentage of Ara and.
In summary, we are intensely focused on executing our strategy and believe that we are now well positioned to deliver long term profitable growth.
Steadfast in our commitment to enhancing shareholder value as evidenced by our new capital return program.
With that Sean and I will open the call up for questions.
Operator.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session. If.
If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star key please limit yourself to one question and one follow up question only.
Our first question comes from the line of John back to you with William Blair. Please proceed with your question.
Perfect. Thanks, guys for taking the question.
Sure at one once you're through the macro headwinds the COVID-19.
Normalization, how do you think about the normal.
Sustainable growth rate of the business.
That's right you have the market trends.
Or in your favor you new products being launched pricing power et cetera.
Should we view the normalized growth rate longer term right now what's going to happen in Q1 Q2, but over the next few years, what is a growth rate that we can attribute to the business.
Uh huh.
One we are focused on driving long term profitable growth.
Our focus is to get the company back to mid teens growth and above.
Ideally to where we were pre COVID-19.
And here's how we get there is the macro eases.
First of all bringing gross retention back to pre COVID-19 levels.
And from a churn perspective in Q4.
<unk> churn was already close to being there.
Number two close.
Close to 80% of our businesses with customers greater than 1000 employees.
The core platform average <unk> per customer is.
He is at its highest ever you saw that in Q4.
Three new product contribution will continue to increase as products are more mature and continue to gain traction in Q4, new product contribution was the was the highest in the year.
We've also shared there'll be headwinds on the technology and manufacturing verticals, which comprise approximately 50% of our ALR.
These headwinds should ease as the macro improves.
And finally, the EMEA business should rebound as that business has declined more than two X the rate of the overall business.
That's what gives me.
Hi confidence for driving long term profitable growth for the company.
Yeah.
Got it thank you and maybe I'm one of the points that you made there.
Just in terms of exposure to some of these verticals.
Dragging down growth at higher rates than others, how do you think about that.
<unk> outside of Tech and maybe less so outside of manufacturing right. What can you do and go to market and product to drive.
A broader exposure to other industries that are maybe not being as impacted by some of the near term trends.
Layoff announcements.
Et cetera, what are the initiatives underway on that side.
Yes.
So let me tell you what we've already done I mean, if you look at at the end of 2019 origin.
Our tech exposure was about 39% close to 40% and now at the end of 2022, it's 34%.
Manufacturing exposure is also less on life Sciences.
Business has grown from.
About 30% more for many of our point of view as a percentage of total similarly for our financial services business not as beef unpack. These vertical as we unpack. These verticals all year long I mean, we're taking resources into areas, where taking resources mid market resources and putting that in companies over 1000 employees. That's.
And we're also taking resources and putting them more in our <unk> strategy on areas like like life Sciences like insurance within financial services and the professional services category. So the verticals that are working we are taking resources and our growing almost all in those verticals.
While reducing the resources on the other side.
That's very helpful.
Following the money.
Yes.
Our next question comes from the line of Patrick <unk> with Robert W. Baird. Please proceed with your question.
Hey, guys. Yeah. Thanks for taking my question, you mentioned customers being just a little more hesitant around signing deals and just some increased deal scrutiny can you just talk about how sales cycles trended throughout the quarter and what youre seeing so far in Q1 had sales cycle has gotten longer for new deals, particularly area on the 100008 hour threshold.
Up.
But let me let me take that.
Like others, we are seeing longer sales cycles, particularly with business over the 100 K plus threshold.
I think I think that is continuing currently I don't see.
Any significant change in the macro compared to what we saw in the latter half of Q4 <unk>.
Generally our sales cycle has still continued to be between three to six months with the enterprises being on the longer side of that so again still short.
But thats, what youre, saying.
Yes.
Okay. No. That's helpful. And then just a quick follow up question just around operating margins you guys have taken a lot of costs out of the business in recent quarters, including what you talked about the plans for Q1 with the workforce reduction and other expense efficiencies how should we be thinking about the progression of operating margin throughout the year would it be fair to assume sequential margin improvement each quarter, just any commentary there would be helpful.
Yeah. This is Steve.
One we're committed to running the business in a profitable manner, while driving long term durable growth and two we've accelerated our timeline to beach breakeven non-GAAP EPS by two quarters in Q2 of 2023, which is next quarter.
To improve our cost structure.
We are reducing head count in Q1 this year by 13% now.
Now compared to Q2 of 2022, which was the high watermark for head count.
Would've reduced head count by 23% by the time, we exit this.
This quarter that we're in currently in terms of total cost and implies a reduction of $38 million to $40 million coming out of the annual total expenses exiting Q2, 2023 compared to a year earlier and its expense structure, it's going to provide us operating leverage to drive profitable growth.
In terms of progression as I mentioned.
The cost reduction plan will be substantially completed by Q1 of 2023, so some of the costs a lot of market.
Fully been baked into the quarter and in 2023, So I would expect.
Improvement in Q2 of 2023, and that's baked into that EPS.
Guidance, we provided.
For next quarter.
Just just to add to what Steve said.
We believe that we have right sized the business and as growth resumes, we expect to drive profitable growth in many of much of that to flow through the bottom line.
Okay. Thanks, I appreciate the color and thanks for taking my questions.
Okay.
Our next question comes from the line of DJ Hynes with Canaccord. Please proceed with your question.
Hey, guys. Thanks for all the color on the call, especially some of the onetime disclosures it's helpful to put things in context.
Steve maybe I could start with you do you expect the core net revenue retention should see modest improvement in 'twenty three.
Yes, let me let me talk about how is it.
Cora platform and all of that dollar retention as we mentioned was 90% for the company and 93%.
Enterprise and as a reminder, it's you know it's a lagging indicator.
Let me unpack that a bit for you starting with gross retention.
In period.
Dollar churn was good we did see higher down sells at approximately twice what it was compared to pre Covid now in our view. We believe this is transitory due to the macro on.
On the expansion perspective, close to 50% of R&R was in tech and manufacturing verticals, where we did see a lot of pressure during the year, particularly in latter part we did see strong expansions in our life Sciences and professional services verticals.
And we saw a number of customers increase their usage there now as we move forward, we expect the headwinds on down sales and tech and manufacturing verticals to abate as the economy improves and we would expect it to improve over time as that happens.
Okay. So just just in that context, and I guess rare.
Relative to your guidance for minus 10 to minus 7% core revenue growth.
It essentially implies very little growth from net new customers and 23 am I.
Thinking about that right and is that perhaps where there is some conservatism in the guide.
Yes, there is one thing to remember I mean revenue is a bit of a lagging indicator.
That's impacted by the ALR dynamics that.
We saw that just played out in Q4 and also in Q1, so what I would expect to see as a core platform.
<unk> to start to grow sequentially in the second half and then revenue growth.
We'll follow since it's a bit of a lagging indicator.
Okay.
Let me just add DJ about what Steve just said.
You're talking about.
Second half growth era of growth in the second half and as Steve said, we're not assuming a significant uptick in new business and growth ALR.
<unk>.
The new products will be more mature and we expect a larger contribution from them. The largest driver that we see is an improvement in gross retention, which is partially driven by cohort dynamics.
Less dollars up for renewal one that is more are in multiyear agreements. So that's where we see it playing out this year and also that we are shifting resources and focus on the verticals like life Sciences and professional services that are growing and employed companies with employees.
Lloyds, which is our sweet spot.
Yeah got it and maybe one for you just how focal has price been a topic of renewal conversations and I think of 124 as a premium product and I think it's priced as such like how sensitive are buyers to price in this environment.
Yes, let me take that.
Like most companies that do that we have seen pricing pressure.
One on new deals our ESP for new deals actually was consistent in Q4 with the prior quarters, Yes, we do have to discount more to get their deals done.
And on renewables customers are planning to renew in some cases under the 100 gig threshold due to budget constraints.
And we also see some customers reducing entitlements.
Renewed deal with the macro.
But in spite of this our core platform <unk> per customer.
Is that the highest ever and the highest percentage of <unk>.
Is it multiyear deals at the end of Q4.
Got it okay. Thank you for the color.
Okay.
Our next question comes from the line of Noah Herman with J P. Morgan. Please proceed with your question.
Hey, guys. Thanks for taking our questions.
You mentioned, a little bit about customer budget scrutiny, given the macro and this is sort of little related to the pricing question, but are.
Are you seeing any change on the competitive front in any of your discussions with the customers.
Are you seeing.
Any change there.
What is your expectations sort of going forward.
Thanks.
Yes.
No.
Focus has to be a one stop sales and marketing digital engagement platform that converts engagement into data and insights that drives revenue.
And it at enterprise scale, Nobody does what we do.
If anything our competitive position has never been stronger and let me explain.
This call Doug described that our competitive landscape is bifurcated between collaboration providers like zoom more focused on the butter and these point solutions for virtual events.
We are seeing that the ladder these point solutions.
Small venture backed private companies that are focused on events and others. This started.
Greetings.
So.
So you know so we are seeing them become less of a competitor there and on the collaboration providers. These guys sell to it they don't provide much.
Data and insights.
And.
What we continue to see that this collaboration providers serve as great lead Gen tool for us as customers get their first days of additional engagement, there and when they need a data rich sales and marketing platform then they turn to us. So we feel that our competitive position has never been stronger.
Okay.
Got it that's really helpful. And then maybe just a quick follow up.
As it relates to the.
Incremental head count reduction can you, just maybe parse out which areas.
I'll take the most impact.
What sort of the impetus for it.
Yes.
It was broad based across all areas of the company.
So every one all the different functions contributed to it.
We did take a hard look at our go to market.
Resources and made alignments there in some cases shifted resources into some of that verticals that work doing better like professional services and life Sciences, but it was across all areas of the company.
Got it thank you.
Our next question comes from the line of Scott Berg with Needham. Please proceed with your question.
Hi.
Thanks for taking my questions today.
Steve I wanted to follow up with one of the other questions that was kind of asked on operating margins and operating income.
Certainly understand the pull forward of non-GAAP positive EPS or at least breakeven EPS in the second quarter here, but how do we think about operating income going forward because the delta is really kind of driven by positive interest rates and your high cash balance driving that positive earnings and youre going to spend $100 million.
<unk>.
Capital allocation return to shareholder program with some concern obviously interest rates decline next year, but should we think about your return to operating income.
As a function of required revenue growth or can you get there by further reducing some of your costs.
Yes, Scott Let me, let me talk to that point, yet so our guide for the year with an operating loss of 11 to eight.
$8 million or $9 5 million at the midpoint.
If you look at our Q1 midpoint of our guide.
More than half of that loss comes in Q1 and then.
Q2, some of that we.
We see further reductions.
Reductions as well, so youre going to see progression in terms of getting towards operating profitability.
As the upfront.
Now when we get to non-GAAP .
We have an EPS on that in Q2.
There is an interest income component to that as you pointed out.
And it also takes into account.
That's something you know the $100 million capital buyback, which ones interest.
By the time, we get to Q4, we're getting pretty close to EBITA.
Breakeven.
No.
Gives us good operating leverage going forward once the macro starts improving yeah, a little bit of start seeing revenue growth, which will fall they are growth.
It's us back to profitability on a much lower cost structure.
Okay.
Got it quite helpful and I apologize for the noise of the airport here in the background.
And then yeah. No shot you you also sound pretty positive about returning to growth.
Growth in the second half of the year, even in this current macro I guess, where does that confidence come from given that your largest vertical still having some challenges I understand the three verticals are doing well, but your largest one.
I think a lot of us agree might still be others remain at least under some pressure for a couple of quarters.
Yes.
Yes, Scott.
Okay.
I think I don't have a crystal ball.
Talk about I mean, unless the macro for the deal rates I mean.
The confidence is based on as we look at the renewal cohorts going into the second half of the year. We are seeing more of the business and multiyear deals we talked about at the end of Q4 it was 41%.
We are we are making progress on the dollar churn part of the business, even though the downside a little more elevated.
So we are expecting to see performance improvements on our.
From a retention point of view. In addition, we are shifting resources and focus in verticals like life Sciences and professional services that are growing taking some of our mid market resources and putting them in the enterprise companies.
Direction so.
For this year as well.
If you look at the guidance I mean, we're not expecting we're not planning for a significant uptick in the new business and growth.
Dominic will be seeing that from the retention profile and shifting some of the resources.
I've talked about how as the as the macro eases.
But then we expect to see of course gross retention some of the other verticals that have been under pressure.
Some ease of pressure on the new logo acquisition and some is a pressure on the international business.
Really kick in but that's what we are factoring for this year and and also Portland, when the macro eases.
We're not factoring that in at least for this year.
Yeah.
Our last question comes from the line of Brent <unk> with Piper Sandler. Please proceed with your question.
Hi, guys. This is Hannah Rudolph on for Brent today. Thanks for taking my question just first one customers with two or more products is at 36% now versus 35% a year ago. I guess, how you think about accelerating multiple multiple multi product adoption across customers going forward.
Yes, I think some of the challenge because this also includes the virtual conference thing.
Some of that is basically because of the.
The reduction in the in the in the virtual conference product.
It would be it would be a little higher I don't have the exact number right now so that's been because that product actually was.
One of the top attach products on that.
But what we're seeing is our newer products in Q4.
Okay.
As a percentage of gross bookings had the largest contribution we are seeing forums forums doing quite well, even though it's starting from.
Lower percentage. So we our focus is to continue to increase that number but in 2022. It was mainly impacted by the reduction of the virtual conference site.
Okay. Great. That's helpful. And then second question can you elaborate on the additional efficiency. If you were able to drive this past quarter lots of initiatives from your new Chief customer officer, and a new CFO .
Yes.
Yeah.
I talked about.
Let me talk about the chief customer success Officer, then the CMO.
Q4, or so some of the work that we've done.
We started doing before of course, but in Q4, we'd be as we talked about the dollar churn on the full core.
<unk> platform cohort was.
One of the best in the year and it was comparable to pre COVID-19 or historical levels. I think downloads were a little elevated we did some more work on customer held I think.
Percentage of customers that are integrated.
Integrate our platform with their sales and marketing ecosystem is at its highest ever over 70%. So we're making some very steady and good progress. There we have focused our resources a lot more on companies with 1000 plus employees.
So that's what the customer success side related to the CMO.
The things that we did as he brought Caroline young is.
<unk> very strong pipeline chops now.
I'm pretty excited about the work we are doing there now.
Q4, we still saw some softness.
Especially in the latter part on the pipeline front, especially with some challenges in technology and manufacturing.
As customers were deliberate but we are pretty excited about the impact that we're seeing on the pipeline as we are moving forward because a lot of our focus going forward is larger customers more vertical lives, but I think both of these executives are really making making strong impact.
Great. Thank you.
Okay.
Okay.
All the time, we have for questions I'd like to hand, it back to Sean Sharon for closing remarks.
Thank you. Thank you everyone for joining us today, we look forward to meeting with you soon issue.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.