Q1 2024 ON24 Inc Earnings Call
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Operator: Good morning, ladies and gentlemen, and welcome to the On24 First Quarter 2024 Investor Call. Our host for today's call is Sayo Denloye, Investor Relations. At this time, all participants are in a listen-only mode.
Good day, ladies and gentlemen, and welcome to the on when people were first quarter 'twenty 'twenty four investor call. Our hosts for todays call is child invoice Investor Relations at this time, all participants are in a listen only mode.
Sayo Denloye: Later, we will conduct a question and answer session. I would now like to turn the call over to your host. Mr. Denloye, you may begin.
Sayo Denloye: We will conduct a question and answer session I would now like to turn the call over to your host Mr. Dailey you may begin.
Sayo Denloye: Thank you. Hello, and good afternoon, everyone. Welcome to ON24's first quarter 2024 earnings conference call. On the call with me today are Sharat Sharan, co-founder and CEO of ON24, and Steve Vattuone, 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 second quarter and full fiscal year 2024, as well as certain second quarter and full year non-GAAP projections.
Sayo Denloye: Thank you Hello, and good afternoon, everyone welcome to our 24 as first quarter 2024 earnings conference call on the call with me today are Suraj, Iran, Co founder and CEO of our 24, HD Vest Bonnie Chief Financial Officer at 124.
Sayo Denloye: 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, including increased inflation.
Sayo Denloye: 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 second quarter and full fiscal year 2024, as well as here in the second quarter and full year non-GAAP projections.
Sayo Denloye: These forward looking statements are subject to known and unknown risks and uncertainties that could adversely affect our 24 its 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.
Sayo Denloye: Our business strategies growth or other future events or conditions, such as the impact of adverse economic conditions and macroeconomic deterioration including increased inflation.
Sayo Denloye: On 24 cautions that these statements are not guarantees of future performance, all four 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.
Sayo Denloye: On 24 are cautioned 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.
Sayo Denloye: Please refer to the company's periodic SEC filings in today's financial press release for factors that could cause our actual results to differ materially from any forward looking statements.
Sayo Denloye: Please refer to the company's periodic SEC filings in today's financial press release for factors that could cause our actual results to differ materially from any forward-looking statement. We'd also like to point out that on today's call, we'll report both GAP and non-GAP 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.
Sayo Denloye: We also like to point out that on today's call. We will report both GAAP and non-GAAP results we.
Sayo Denloye: 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.
Sayo Denloye: Reconciliations of these non-GAAP financial measures. Please refer to today's financial press release, I will now turn the call over to Surat Surat.
Sayo Denloye: 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 Sharat. Thank you and welcome everyone to ON24's first quarter 2024 financial results conference call. We appreciate you joining us. And joining me today is Steve Vattuone, Chief Financial Officer. Before we get into the results, a quick reminder of our platform and recent innovation. Our platform intelligently combines best-in-class digital experiences with AI-powered personalization and content to enable industry-leading B2B enterprise companies to drive engagement at scale, act on Connected Insights, and deliver cost-effective revenue growth while also supporting compliance for highly regulated industries. These capabilities make our platform an ideal fit for use cases, such as demand generation and technology and manufacturing. Healthcare Professional and Patient Engagement in Life Sciences
Sharat Sharan: Continuing education in the professional services industry and member enrollment and broker and agent enablement in commercial and health insurance. In January, we launched our next-generation intelligent engagement platform, which brings significant innovations, including our new AI-powered analytics and content engine called AI-powered ACE, which further drives revenue generation and more effective and efficient customer engagement. We'll share an update on our platform evolution, enterprise focus, and profitability milestones later in the call. Now, turning to Q1 results.
Sharat: Thank you and welcome everyone on 24 first quarter 124 financial results Conference call.
Speaker Change: We appreciate you joining us.
Sharat Sharan: But today is Steve <unk>, Chief Financial Officer.
Sharat Sharan: Before we get into the results a quick reminder of our plan and recent innovation.
Sharat Sharan: Our platform intelligently combine best in class digital experiences.
Sharat Sharan: High powered personalization and content to enable industrial leading me to be enterprise companies to drive engagement at scale.
Sharat Sharan: Axon clinical insights and deliver cost effective revenue growth, while also supporting compliance we're highly regulated industries.
Sharat Sharan: These capabilities make us from an ideal fit for use cases, such as demand generation and technology and manufacturing.
Sharat Sharan: Health care professional and patient engagement in life Sciences.
Sharat Sharan: Continuing education in the professional services industry, and member enrollment and broker and agent enablement and commercial and health insurance.
Sharat Sharan: In January we launched our next generation intelligent engagement platform, which brought significant innovations, including our new AI powered analytics and content engine called AI powered ace, which further drives revenue generation and more effective.
Sharat Sharan: Inefficient customer engaged.
Sharat Sharan: We will share an update on our platform evolution enterprise focus and profitability milestones later in the call.
Sharat Sharan: Turning to Q1 results.
Sharat Sharan: I'm pleased to report that our momentum from the end of 2023 continued into Q1. We achieved positive adjusted EBITDA in Q1 for the fourth quarter in a row, and we also achieved positive non-GAAP EPS for the fourth quarter in a row. Revenue from our core platform, including services, in Q1 of 2024 was $36.8 million, and total revenue, including virtual conferences, was $37.7 million. Of Total Revenue for the Quarter, Subscription and Other Platform Revenue was $34.8 million, and Professional Services Revenue was $2.9 million. Now turning to ARR.
Sharat Sharan: I am pleased to report that our momentum from the end of 2023 continued into Q1.
Sharat Sharan: With solid Q1 performance on the topline and another quarter of execution on our profitability target will be achieved positive adjusted EBITDA in Q1 for the fourth quarter in a row and also achieved positive non-GAAP EPS for the fourth quarter in a row.
Sharat Sharan: Revenue from our core platform, including services in Q1 of 2024 was 30 618 million in total revenue, including virtual conference was $37 $7 million.
Sharat Sharan: Of total revenue for the quarter subscription and other platform revenue was 30 $418 million and professional services revenue was $2 $9 million.
Sharat Sharan: Now turning to Anr.
Sharat Sharan: We ended Q1 with $133.3 million in ARR related to our core platform, representing a sequential decrease from Q4 of $2.9 million in line with the expectations we provided in our last earnings. We continue to see meaningful signs of improvement in our installations. Actions we have taken to improve our gross retention are having a positive impact, with gross retention posting a mid-single-digit improvement both year over year and compared to the average gross retention in 2023. We also continue to see meaningful reductions in down cells as a percentage of the renewal base, another sign of the growing stability within our install.
Sharat Sharan: We ended Q1 with $133 $3 million in Iraq related to our core platform.
Sharat Sharan: Renting a sequential decrease from Q4 of $2 $9 million in line with the expectations. We provided on our last earnings call.
Sharat Sharan: We continue to see meaningful signs of improvement in our installed base.
Sharat Sharan: Actions, we have taken to improve our gross retention are having a positive impact the gross retention posting a mid single digit improvement both year over year and compared to the average gross retention in 2023.
Sharat Sharan: We also continued to see meaningful reductions in down sales as a percentage of the renewal base another sign of the growing stability within our installed base.
Sharat Sharan: We are excited about our AI powered age solution. Although we are still in the early stages of ARR contribution, the initial signs are positive, are AI powered ACE ARR booked in Q1 as a percentage of growth ARR, during the quarter reached the double digit mark. And we believe AI Power Days will be a tailwind to our ARR growth in the future. Despite the positive trends we saw in Q1, it is important to note that we are still operating in an uncertain environment, where marketing budget constraints continue to affect new logo acquisitions and as prospects remain in a longer holding pattern. Because of this.
Sharat Sharan: We are excited about our AI powered <unk> solution.
Sharat Sharan: Although we are still in the early stages of <unk> contribution the initial signs of cost.
Sharat Sharan: Our AI powered east Anr booked in Q1 as a percentage of growth here.
Sharat Sharan: During the quarter reached the double digit Mark and we believe the half hour days will be a tailwind to our anr growth in the future.
Sharat Sharan: Despite the positive trends we saw in Q1 it is important to note.
Sharat Sharan: Operating in an uncertain environment.
Sharat Sharan: Their marketing budget constraints continued to set new logo acquisitions.
Sharat Sharan: And its prospects remain longer holding pattern.
Sharat Sharan: Because of this.
Sharat Sharan: Coupled with some larger customer renewals coming due in the quarter, we decided to be incrementally prudent with our expectations for ARR growth in Q2. At the same time, we continue to believe that as marketing budgets begin to normalize, you will see customers reinvest in revenue-generating initiatives, such as our platform. Further, we reiterate our expectation that, assuming no deterioration in the macro environment, we will return to sequential ARR growth in the second half of 2024, driven by improving stability in our install base, our new products, and our enhanced go-to-market focus. Overall, I'm excited by the progress we have made.
Sharat Sharan: Coupled with some larger customer renewals coming due in the quarter.
Sharat Sharan: Decided to be incrementally prudent with our expectations for <unk> growth in Q2.
Sharat Sharan: At the same time, we continue to believe that as marketing budgets begin to normalize you will see customers reinvest in revenue generating initiatives such as our plants.
Sharat Sharan: Further we reiterate our expectation that assuming no deterioration in the macro environment, we will return to sequential growth in the <unk>.
Sharat Sharan: Second half of 2024, driven by improving stability in our installed base, our new products and our enhanced go to market focus.
Sharat Sharan: And I'd like to provide an update on our three strategic growth priorities. Specifically, the rollout of our next generation intelligent engagement platform, which includes our new AI-powered Ace office. Second, continuing to strengthen our enterprise go-to-market strategy, especially with mission-critical digital transformation use cases across regulated industries. Third, focus on returning to growth while continuing to deliver on our profitability targets, starting with our next generation plan. As mentioned at the beginning of our call, in January, we announced the general availability of the ON24 Intelligent Engagement Platform, which includes AI-powered ACE. Now, our platform enables enterprises to do more with less, with a differentiated AI-driven solution in three key ways. One example is personalization at scale.
Sharat Sharan: Overall I am excited by the progress we have made and I'd like to provide an update on our three strategic growth priorities.
Sharat Sharan: Worse.
Sharat Sharan: The rollout of our next generation intelligent engagement platform, which includes our new AI powered is offering.
Sharat Sharan: Second.
Sharat Sharan: Continuing to strengthen our enterprise go to market strategy, especially with mission critical digital transformation use cases across regulated industries.
Sharat Sharan: Sure.
Sharat Sharan: Focus on returning to growth, while continuing to deliver on our profitability targets.
Sharat Sharan: Starting with our next generation plant.
Sharat Sharan: As mentioned at the beginning of the call in January we announced the general availability of the <unk> 'twenty for intelligent engagement platform, which.
Sharat Sharan: Which includes AI powered geese.
Sharat Sharan: Now our platform enables enterprises to do more with less.
Sharat Sharan: With a differentiated AI driven solution in three key ways.
Sharat Sharan: One personalization at scale.
Sharat Sharan: We have developed what we believe to be the industry's first and only capability for delivering unique messages to different audience segments within the same digital experience, whether a live webinar experience or an on-demand content experience. This means that our customers can turn standard experiences into personalized experiences that are highly targeted for the prospect, customer, or partner segments most important to their business, without losing their ability to scale reach across the globe.
Sharat Sharan: We have developed what we believe to be the industry's first and only capability for delivering unique messages to different audience segments within the same digital experience.
Sharat Sharan: Whether online webinar experience on an on demand content experience.
Sharat Sharan: This means that our customers can turn standard experiences into personalized experiences and a highly targeted for the prospect customer our partner segments, most important to their business.
Sharat Sharan: That losing their ability to scale reach across the globe.
Sharat Sharan: Because personalization is such a business critical issue for enterprise go-to-market teams, we are seeing traction from our install base. Since we made these features available, over 20% of our customers have turned on the capability, and hundreds of segments built with facilitate personalization. Two, derivative content.
Sharat Sharan: Because personalization is such a business critical issue for enterprise go to market teams, we are seeing traction from our installed base.
Sharat Sharan: Since we made these features available.
Sharat Sharan: 20% of our customers have turned on the capability hungrier than segments built with FIS.
Sharat Sharan: <unk> personalization.
Sharat Sharan: Two.
Sharat Sharan: During the discount.
Sharat Sharan: One of the most time-consuming and costly aspects of sales and marketing today is creating the different types of content and videos that are needed to execute a high performing digital campaign. Our platform Generative AI makes it possible for our customers to turn their long form event presentation into new promotional copy, ebooks, snackable videos, and others. With a simple click of a button, our customers can generate at least five times as many assets than they started with. In fact, over the past three months, our customers have used the platform to produce thousands of new videos and written pieces of content, saving them resources and fueling their pipeline results. Great
Sharat Sharan: One of the most time consuming and costly aspects of sales and marketing today is creating the different types of content and videos that are needed to execute our high performing digital campaign.
Sharat Sharan: Our platform is generating AI makes it possible for our customers to turn their long form event presentations into new promotional copy.
Sharat Sharan: Snacking more videos and others.
Sharat Sharan: With a simple click of a button or customers can generate at least five times as many assets than they started.
Sharat Sharan: Over the past three months, our customers have used our platform to produce thousands of new videos and written pieces of content saving them resources and fueling.
Sharat Sharan: <unk> results.
Sharat Sharan: Great.
Sharat Sharan: Continuous Engagement and Nurture. Today, it takes a significant number of marketing and sales interactions for enterprises to acquire and expand their customers. At the same time, there is increasing pressure for go-to-market teams to get revenue results faster, forcing teams to try to condense and expedite interactions. We believe our platform's nurture capabilities unlock a new way to expedite interactions personalized to the individual, extending the life of an event and its content beyond its live day, and helping our customers close this gap by nurturing people through the delivery of continuous personalized content.
Sharat Sharan: This engagement and nurtures.
Sharat Sharan: Today, It takes a significant number of marketing and sales interactions for enterprises to acquire and expand their customers.
Sharat Sharan: At the same time, there is increasing pressure for go to market teams to get revenue results faster.
Sharat Sharan: Forcing teams to try to condense and expedite interactions.
Sharat Sharan: We believe our platforms nurtured capabilities unlocks a new way to expedite interactions personalized to the individual extending the life of an event and it's gone beyond its line today and helping our customers close this gap by nurturing Pete.
Sharat Sharan: Through the delivery of continuous personalized content.
Sharat Sharan: In Q1, we saw some of our early adopters get as much as a 5% increase in engagement by using our automated nurtures to drive continuous engagement beyond their live event. Based on the success of our early adopters, we are optimistic about the traction of the Intelligent Engagement Platform and AI PowerDays. Since the beginning of the year, over 15% of our customers have used or tested our AI capability. As stated earlier, our AI-powered ACE ARR book in Q1, as a percentage of growth ARR during the quarter, reached the double-digit mark, and we continue to see a healthy pipeline of demand. To give some color, here are a few AI-powered A's wins from Q1.
Sharat Sharan: In Q1, we saw some of the early adopters get as much as 5% increase in engagement by using our automated nurtures, who drive continuous engagement beyond their minds event.
Sharat Sharan: Based on the success of our early adopters.
Sharat Sharan: We're optimistic about the traction of the intelligent engagement platform and AI powered ace.
Sharat Sharan: Since the beginning of the year or 15% of our customers have used our tested our AI capabilities.
Sharat Sharan: As stated earlier.
Sharat Sharan: Howard is ear are booked in Q1 as a percentage of growth here are during the quarter reached the double digit mark.
Sharat Sharan: Mark.
Sharat Sharan: And we continue to see a healthy pipeline of demand.
Sharat Sharan: To give some color here on a few AI powered ace wins from Q1.
Sharat Sharan: The first AI Power Ace win I'll highlight is with a large enterprise software company with over 1000 employees. After already seeing strong results using a platform in North America, this organization wanted to standardize their go-to-market execution across the globe and consolidate their tech stack on our platform, removing point solutions. By adding AI Power Days, their U.S.-based corporate team will be able to develop global campaigns that their field marketing teams in AIPAC and EMEA can then localize and personalize for their specific market needs.
Sharat Sharan: The first <unk> powered Ashwin I'll highlight is with the large enterprise software company.
Sharat Sharan: Over a thousand employees.
Sharat Sharan: After already seeing strong results using our platform in North America. This organization wanted to standardize the go to market execution across the globe and consolidate their tech stack or platform removing point solutions.
Sharat Sharan: By adding empowered as their U S based corporate team will be able to develop global campaigns that their field marketing teams in APAC, and EMEA, and then localized and personalized or their specific market needs.
Sharat Sharan: This gives the resource trap teams greater efficiency while giving them a more consistent and streamlined way to go to market. The next AI-powered ace win came from a multi-billion dollar cloud software company with over 5,000 employees. Having faced a reduction in resources, their team was looking for a way to efficiently nurture their prospects, increase conversion to pipeline, and accelerate deals. Using AI Power Days, their marketing team is able to automatically produce streams of short form video content from their long form webinars and deliver them across channels and tailor them for specific audiences.
Sharat Sharan: This gives the resource strapped teams greater efficiency, while giving them a more consistent and streamlined way to go to market.
Sharat Sharan: The next <unk> powered east win came from a multibillion dollar cloud software company with over 5000 employees.
Sharat Sharan: Having phase to the reduction in resources. The team was looking for a way to efficiently nurture their prospects increase.
Sharat Sharan: Increased conversion to pipeline and accelerate deals using AI powered as their marketing team enable to automatically produce streams of short form video content.
Sharat Sharan: From the law firm Webinars and deliver them across channels and tailor them for specific audiences.
Sharat Sharan: They believe this will help them increase engagement and better educate leads throughout the sales cycle, improving their pipeline efficiency and results. As we continue to develop and mature our next-generation offering, we are laser-focused on helping our customers take action with the first-party data our platform generates. We believe our foundation of first-party data that's been gathered across millions of experiences and hundreds of millions of B2B interactions gives us a competitive edge and uniquely positions ON24 to lead the market in AI innovation for marketing and sales engagement. Moving to our next briar.
Sharat Sharan: We believe this will help them increase engagement and better educate leads throughout the sales cycle, improving their pipeline efficiency and results.
Sharat Sharan: As we continue to develop and mature our next generation offerings. We are laser focused on helping our customers take actions with the first party data our platform generates.
Sharat Sharan: We believe our foundation of first party data that's been gathered across millions of experiences and.
Sharat Sharan: And hundreds of millions of B to B interactions gives us a competitive edge and uniquely positions on 24 to lead the market in AI innovation or marketing and sales engagement.
Speaker Change: Moving to our next priority.
Sharat Sharan: Our enterprise go-to-market focus. Our Q1 enterprise business performance was strong across our key metrics. The average score ARR per customer reached a record high, demonstrating our enterprise customer focus. Additionally, the percentage of ARR in multi-year agreements and the percentage of customers using two or more products again landed at a record level. In addition to the strong enterprise customer metrics in Q1, our go-to-market execution remains focused on our enterprise customers, with an increased emphasis on industries that are still in the early stages of digital transformation, primarily life sciences and financial services, including asset management and insurance.
Sharat Sharan: Our enterprise go to market focus.
Sharat Sharan: Our Q1 enterprise business performance was strong across our key metrics.
Sharat Sharan: The average <unk> per customer reached a record high.
Sharat Sharan: Demonstrating our enterprise customer focus.
Sharat Sharan: Additionally, the percentage of air are in multiyear agreements and the percentage of customers using two or more products again landed at record levels.
Sharat Sharan: In addition to the strong enterprise customer metrics in Q1, our go to market execution remains focused on our enterprise customers with increased emphasis on industries that are still in the early stages of digital transformation, primarily life Sciences.
Sharat Sharan: And financial services, including asset management and insurance.
Sharat Sharan: In fact, we've been able to diversify our business over the last few years, with these above-mentioned verticals, having grown from 20% to almost a third of our total core ARR in just over four years. Overall,
Sharat Sharan: In fact, we have been able to diversify our business over the last few years with these above mentioned verticals, having grown from 20%.
Sharat Sharan: Almost a third of our total core IRR in just over four years.
Sharat Sharan: Overall.
Sharat Sharan: Close to a quarter of our business now comes from mission-critical digital transformation use cases. For example, we work with large pharma companies to develop a digital strategy for engaging healthcare professionals that supports compliance, enabling their brands to scale their commercial and medical education across the globe. Similarly, professional services organizations use our platform to take their continuing professional education programs digital, automating the process to save their teams significant time and resources while generating more leads and pipeline.
Sharat Sharan: Close to a corner of our business now comes from mission critical digital transformation use cases.
Sharat Sharan: For example.
Sharat Sharan: We work with large pharma companies to develop our digital strategy for engaging health care professionals that supports compliance.
Sharat Sharan: Enabling the companys brands to scale their commercial and medical education across the globe.
Sharat Sharan: Similarly.
Sharat Sharan: Professional services organizations use our platform who paid their continuing professional education programs digital.
Sharat Sharan: <unk> in the process to save their teams significant time and resources, while generating more leads and pipeline.
Sharat Sharan: And in the financial services vertical, asset management and commercial insurance firms enable advisors, agents, and brokers through our platform, as well as directly engage new investors and members, helping to scale their reach and drive business growth. We believe that this diversification gives our business greater resiliency and positions us for growth. To give you more color on our enterprise focus, let me highlight a few new business wins in Q1. First, we landed one of the world's largest hedge fund administrators, a company that manages trillions of assets and has over 10,000 employees.
Sharat Sharan: And in the financial services vertical asset management, and commercial insurance firms enabled advisers agents and brokers to our platform as well as directly engage new investors and members.
Sharat Sharan: Helping to scale their reach and drive business growth.
Sharat Sharan: We believe that this diversification gives our business greater resiliency and positions us for growth.
Sharat Sharan: To give you more color on our enterprise focus let me highlight a few new business wins in Q1.
Sharat Sharan: First.
Sharat Sharan: We landed one of the world's largest hedge fund administrators. The company that manages trillions of assets and has over 10000 employees.
Sharat Sharan: As they matured their digital sales and marketing strategy, this organization needed a purpose-built platform that would help them scale professional certification and generate leads for the business development team. Given their investor and institutional focus, our first-party data was important to providing insights that they could use to deliver a high-touch, personalized customer experience at scale. Next, we want to deal with one of the largest private hospital providers in the United Kingdom, with over a billion dollars in revenue and more than 8000 employees.
Sharat Sharan: As they mature their digital sales and marketing strategy. This organization needed a purpose built platform that could help them scale professional certification and generate leads for the business development teams.
Sharat Sharan: Given their investor and institutional focus our first party data was important to providing insights that they could use to deliver high touch personalized customer experience at scale.
Sharat Sharan: Next we want to deal with one of the largest private hospital providers in the United Kingdom with over $1 billion in revenue and more than 8000 employees.
Sharat Sharan: As a hospital network, the company operates a decentralized go-to marketing strategy that requires direct patient outreach in local cities across the country. They came to us seeking a more cost-effective and data-driven way to engage patients while supporting compliance. Now, our platform will centralize patient education across each of their hospitals, streamlining and enriching their insights for more efficient execution and a better patient experience.
Sharat Sharan: As a hospital network the company operates a decentralized global marketing strategy.
Sharat Sharan: That requires direct patient outreach and local cities across the country.
Sharat Sharan: He came to us.
Sharat Sharan: A more cost effective and data driven way to engage patients while supporting compliance.
Sharat Sharan: Now our platform will centralize patient education across each of their hospitals, streamlining and enriching their insights for more efficient execution and a better patient experience.
Sharat Sharan: And finally... an Update on Profitability. In Q1, we continued our momentum from last year and achieved our profitability targets, delivering positive adjusted EBITDA and positive Non-Gap EPS for the fourth quarter in a row. We expect to be EBITDA breakeven in Q2 and remain committed to achieving our target of EBITDA breakeven for 2024. To conclude, the first quarter was a solid start to a pivotal year for ON25
Sharat Sharan: And finally.
Sharat Sharan: An update on profitability.
Sharat Sharan: In Q1.
Sharat Sharan: We continued our momentum from last year and achieved our profitability targets delivering positive adjusted EBITDA.
Sharat Sharan: And positive non-GAAP EPS for the fourth quarter in a row.
Sharat Sharan: We expect to be EBITDA breakeven in Q2 and remain committed to achieving our target of EBITDA breakeven for 2024.
Sharat Sharan: To conclude the first quarter was a solid start to a pivotal year for <unk> 24.
Sharat Sharan: We will be on our top line and profitability targets and are encouraged by the continued signs of stability we see in our install base, with the mid single-digit improvement of retention when compared to both Q1 2023 and 2023 as a whole. We are seeing early signs of traction with our newly launched AI-powered A's and are building a healthy pipeline. And we are focusing our go-to-market execution successfully on customers with mission-critical digital transformation initiatives.
Sharat Sharan: We beat on our topline and profitability targets and are encouraged by the continued signs of stability, we see in our installed base with a mid single digit improvement of retention when compared to both Q1 2023.
Sharat Sharan: In 2023 as a whole.
Sharat Sharan: We are seeing early signs of traction with our newly launched AI powered ace and are building a healthy pipeline.
Sharat Sharan: And we are focusing our go to market execution successfully on customers with mission critical digital transformation initiatives.
Sharat Sharan: Additionally, we have a streamlined organization that is meeting our profitability targets, and we are driving an improvement in our gross margin profile while maintaining a healthy cash position. In the longer term, we are attacking a massive market opportunity by enabling B2B companies to leverage ON24's digital engagement platform to more efficiently grow revenue and engage and understand their customers and prospects. These factors give me confidence that the stage is set for ON24 to continue executing on our strategic growth priorities and reach our long-term targets of double-digit revenue growth and double-digit EBITDA margins. With that said...
Sharat Sharan: Additionally, we have a streamlined organization that is meeting our profitability targets and we are driving an improvement in our gross margin profile, while maintaining a healthy cash.
Sharat Sharan: In the longer term, we are attacking a massive market opportunity by enabling <unk> companies to leverage on 24 as digital engagement platform to more efficiently grow revenue and engage and understand their customers and prospects.
Sharat Sharan: These factors give me confidence that the stage is set for <unk> 24 to continue executing on our strategic growth priorities and reach our long term targets of double digit revenue growth and double digit EBITDA margins.
Sharat Sharan: With that I'd.
Sharat Sharan: Like to turn the call over to Steve.
Speaker Change: Thank you, Sean and good afternoon, everyone.
Steven Vattuone: I'd like to turn the call over to Steve. Thank you, Sharat, and good afternoon, everyone. I'm going to start with our first quarter 2024 results, and we'll then discuss our outlook for the second quarter of 2024 and full year 2021. Before I get into the numbers, I wanted to remind everyone that our focus, as it was in the prior quarters, will be on the core platform business, as we have de-emphasized the virtual conference product.
Steve: I'm going to start with our first quarter 2024 results and we'll then discuss our outlook for the second quarter of 2024 and full year of 2024.
Steven Vattuone: Before I get into the numbers I wanted to remind everyone that our focus as it was in the prior quarters will be on the core platform business as we have de emphasized the virtual conference product.
Steven Vattuone: We view the metrics from our core platform, such as revenue and ARR, as the best KPIs to measure our performance. Revenue from our core platform, including services, in Q1 of 2024 was $36.8 million, representing a decrease of 11% year-over-year. Total revenue for the first quarter, which includes revenue from our virtual conference product, was $37.7 million. Total subscription and other platform revenue was $34.8 million. Overages represented approximately 1% of total revenue in Q1. Total professional services revenue was $2.9 million, a decrease of 22% year-over-year, representing approximately 8% of total revenue compared to 9% in the year-ago period.
Steve: We view the metrics from our core platform, such as revenue and <unk> as the best Kpis to measure our performance.
Steven Vattuone: Revenue from our core platform, including services in Q1 of 2024 was $36 8 million, representing a decrease of 11% year over year.
Steven Vattuone: Total revenue for the first quarter, which includes revenue from our virtual conference product was $37 7 million.
Steven Vattuone: Total subscription and other platform revenue was $34 8 million.
Steven Vattuone: Overages represented approximately 1% of total revenue in Q1.
Steven Vattuone: Total professional services revenue was $2 9 million a decrease of 22% year over year.
Steven Vattuone: Presenting approximately 8% of total revenue compared to 9% to the year ago period.
Steven Vattuone: Moving on to ARR, ARR represents the annualized value of all subscription contracts at the end of the period and excludes professional services and overtime. Ending ARR related to our core platform totaled $133.3 million, a decrease of $2.9 million compared to Q4 of 2023 and in line with the expectations we provided on our last earnings call. As Sharat discussed, we saw continued signs of stabilization in our install base in Q1, with gross retention in Q1 improving both year-over-year and also when compared to average gross retention for 2023 as a whole. Customers continued to be cautious about making new purchasing commitments in Q1 as their marketing budgets remained under pressure.
Steven Vattuone: Moving onto <unk>.
Steven Vattuone: <unk> represents the annualized value of all subscription contracts at the end of the period and excludes professional services and Overages.
Steven Vattuone: And they are related to our core platform totaled $133 3 million.
Steven Vattuone: A decrease of $2 $9 million compared to Q4 of 2023 and in line with the expectations. We provided on our last earnings call.
Steven Vattuone: As Sean discussed we saw continued signs of stabilization in our installed base in Q1 with gross retention in Q1, improving both year over year. It also when compared to average gross retention for 2023 as a whole.
Steven Vattuone: Customers continue to be cautious about making new purchasing commitments in Q1 as their marketing budgets remain under pressure.
Steven Vattuone: Total ARR, including the contribution from our virtual conference product, was $136.5 million at the end of Q1 2024, as compared to $139.7 million at the end of Q4 2023. Turning to customers, The ARR contribution from the $100,000 plus customer cohort continues to represent approximately two-thirds of our total ARR, which is consistent with the prior quarter and demonstrates the continued strength of our largest enterprise customers and their commitment to our platform. The number of customers contributing more than $100,000 in total ARR was 324, approximately flat from last quarter.
Steven Vattuone: Total <unk>, including the contribution from our virtual conference product.
Steven Vattuone: $136 $5 million at the end of Q1 2024.
Steven Vattuone: As compared to $139 7 million at the end of Q4 2023.
Steven Vattuone: Turning to customer metrics.
Steven Vattuone: The <unk> contribution from the $100000 plus customer cohort continues to represent approximately two thirds of our total <unk>, which is consistent with the prior quarter and demonstrates the continued strength of our largest enterprise customers and their commitment to our platform.
Steven Vattuone: A number of customers contributing more than $100000 in total IRR was 324 approximately flat from last quarter.
Steven Vattuone: Enterprise customers continue to be our focus, and throughout 2023, we continued to see our customers make longer-term commitments to our platform, and this trend continued into Q1 of 2024. The percentage of our ARR in multi-year contracts increased sequentially from the prior quarter and is now over 50% of our ARR. The percentage of our customers with two or more products also increased to record levels in Q1. In Q1, we also saw the average core ARR per customer increase to the highest level ever, at just over $78,000 per customer. The total customer count at the end of Q1 was 1,698 customers.
Steven Vattuone: Enterprise customers continue to be our focus and throughout 2023, we continued to see our customers make longer term commitments to our platform and this trend continued into Q1 of 2024.
Steven Vattuone: Percentage of our IRR and multiyear contracts increased sequentially from the prior quarter and is now over 50% of our IRR.
Steven Vattuone: The percentage of our customers with two or more products also increased to record levels in Q1 and.
Steven Vattuone: In Q1, we also saw the average core <unk> per customer increased to the highest level ever at just over $78000 per customer.
Steven Vattuone: Total customer count at the end of Q1 was 1698 customers.
Steven Vattuone: Before turning to expense items and profitability, I would like to point out that I will be discussing non-GAAP results going forward. Our non-GAAP results exclude stock-based compensation, restructuring charges, impairment charges for real estate, amortization of acquired intangibles, Shareholder Activism Related Costs, as well as certain other items.
Steven Vattuone: Customers with less than $25000 of <unk> were the largest contributor to logo churn in Q1.
Steven Vattuone: Before turning to expense items and profitability I would like to point out that I will be discussing non-GAAP results going forward.
Steven Vattuone: Our non-GAAP results exclude stock based compensation restructuring charges impairment charges for real estate amortization of acquired intangibles shareholder activism related costs as well as certain other items are.
Steven Vattuone: Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results, can be found within our earnings release. Gross margin in Q1 was 77%, consistent with Q4 of 2023. Our gross margins reflect the cost reduction actions we have taken to streamline our operation. Now turning to operating expense, sales and marketing expense in Q1 was $16.3 million, compared to $20.1 million in Q1 last year.
Steven Vattuone: Our GAAP financial results, along with a reconciliation between GAAP and non-GAAP results can be found within our earnings release.
Steven Vattuone: Gross margin in Q1 was 77% consistent with Q4 of 2023.
Steven Vattuone: Our gross margins reflect the cost reduction actions, we have taken to streamline our operations now.
Steven Vattuone: Now turning to operating expenses.
Steven Vattuone: Sales and marketing expense in Q1 was $16 $3 million.
Steven Vattuone: Compared to $21 million in Q1 last year.
Steven Vattuone: This represents 43% of total revenue compared to 47% in the same period last year and 42% last quarter. Our sales and marketing expenses have decreased in absolute dollars, both sequentially and year over year, largely due to the cost savings measures we have implemented as we focus on driving improved sales efficiency. R&D expense in Q1 was $6.7 million compared to $8.2 million in Q1 last year.
Steven Vattuone: This represents 43% of total revenue.
Steven Vattuone: <unk> to 47% in the same period last year and 42% last quarter.
Steven Vattuone: Our sales and marketing expenses have decreased in absolute dollars, both sequentially and year over year largely due to the cost savings measures. We have implemented as we focus on driving improved sales efficiency.
Steven Vattuone: R&D expense in Q1 was $6 7 million compared.
Steven Vattuone: Compared to $8 2 million in Q1 last year.
Steven Vattuone: This represents 18% of total revenue compared to 19% in the same period last year and 17% last quarter. While we have made adjustments to our spending levels, we will continue investing in product innovation to drive the next generation of our platform. In early 2024, we launched our new AI-powered solution, along with the next generation of our platform, the Beyond24 Intelligent Engagement Platform, demonstrating our commitment to continued product innovation. G&A expense in Q1 was $6.7 million, compared to $7.5 million in Q1 last year.
Steven Vattuone: This represents 18% of total revenue compared to 19% in the same period last year and 17% last quarter.
Steven Vattuone: While we have made adjustments to our spending levels. We will continue investing in product innovation to drive the next generation of our platform.
Steven Vattuone: In early 2024, we launched our new AI powered a solution along with the next generation of our platform beyond 'twenty for intelligent engagement platform, demonstrating our commitment to continued product innovation.
Steven Vattuone: G&A expense in Q1 was $6 $7 million compared to seven 5 million in Q1 last year.
Steven Vattuone: This represents 18% of total revenue, up slightly from 17% in the same period last year and last quarter. G&A spending in Q1 includes certain costs which are seasonally higher in Q1, such as costs related to our annual audit. We took actions to reduce our G&A costs, and as a result, our G&A expenses in absolute dollars decreased as compared to the prior year. Moving on to our bottom line performance, I am pleased to report that we exceeded the profitability targets that we provided in the prior earnings call.
Steven Vattuone: This represents 18% of total revenue up slightly from 17% in the same period last year and last quarter.
Steven Vattuone: G&A spending in Q1 includes certain costs, which are seasonally higher in Q1, such as costs related to our annual audit.
Steven Vattuone: We took actions to reduce our G&A costs as a result, our G&A expenses in absolute dollars have decreased as compared to the prior year.
Steven Vattuone: Moving onto our Bottomline performance I am pleased to report that we exceeded the profitability targets that we provided in the prior earnings call. We achieved positive adjusted EBITA and non-GAAP EPS profitability in Q1. This marks the fourth consecutive quarter of positive adjusted EBITA non-GAAP EPS.
Steven Vattuone: We achieved positive adjusted EBITDA and non-GAAP EPS profitability in Q1. This marks the fourth consecutive quarter of positive adjusted EBITDA and non-GAAP EPS profits. The continued improvements in our operational efficiency that we made throughout 2023 and in early 2024 have provided us with a more streamlined and efficient cost structure for 2024 and beyond. Operating loss per Q1 was $0.8 million, or a negative 2% operating margin, compared to an operating loss of $4.2 million and a negative 10% operating margin in the same period last year.
Steven Vattuone: Profitability.
Steven Vattuone: The continued improvements in our operational efficiency that we made throughout 2023 and in early 2024 have provided us with a more streamlined and efficient cost structure for 2024 and beyond.
Steven Vattuone: Operating loss for Q1 was zero point $8 million or a negative.
Steven Vattuone: <unk>, 2% operating margin compared to an operating loss of $4 $2 million and a negative 10% operating margin in the same period last year.
Steven Vattuone: Net income in Q1 was $1 million, or $0.02 per share based on approximately 45.6 million diluted shares outstanding. This compares to a net loss of $1.8 million, or $0.04 per share, in Q1 last year, using approximately 47.3 million basic and diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $196.1 million in cash, cash equivalents, and marketable security.
Steven Vattuone: Net income in Q1 was $1 million or <unk> <unk> per share based on approximately $45 6 million diluted shares outstanding.
Steven Vattuone: This compares to a net loss of $1 8 million or <unk> <unk> per share in Q1 last year, using approximately $47 3 million basic and diluted shares outstanding.
Steven Vattuone: Turning to the balance sheet and cash flow.
Steven Vattuone: We ended the quarter with $196 1 million in cash cash equivalents and marketable securities.
Steven Vattuone: Before turning to our cash flow metrics, I am pleased to announce that the $125 million capital return program we announced in March 2023, which comprised a special dividend of approximately $50 million paid to shareholders in Q2 of 2023, and a $75 million share repurchase program, was fully completed in February of this year. As a reminder, under a prior share purchase program we started in late 2021, we returned $41 million through February 2023.
Steven Vattuone: Turning to our cash flow metrics I am pleased to announce that the $125 million capital return program, We announced in March 2023, which comprise a special dividend of approximately $50 million paid to shareholders in Q2 of 2023, and a $75 million share repurchase program.
Steven Vattuone: Was fully completed in February of this year.
Steven Vattuone: As a reminder, under our prior share repurchase program. We started in late 2021, we returned $41 million through February 2023 with.
Steven Vattuone: With the completion of these two programs, we have now returned approximately $166 million to shareholders. We also announced a new $25 million share repurchase program in March of this year. This repurchase program runs for one year or until March 2025, and to date, we have not utilized any amounts under this program.
Steven Vattuone: With the completion of these two programs. We have now returned approximately $166 million to shareholders. We also announced a new $25 million share repurchase program in March of this year.
Steven Vattuone: This repurchase program runs for one year or until March 2025, and to date, we have not utilized any amounts under this program.
Steven Vattuone: With just under $200 million of cash and investments at the end of Q1, 2024, our balance sheet continues to remain strong. Turning to our cash flow metrics for Q1, cash provided by operations in Q1 was $2.1 million compared to cash used in operations of $4.2 million in Q1 of last year.
Steven Vattuone: With just under $200 million of cash and investments at the end of Q1 2024, our balance sheet continues to remain strong.
Steven Vattuone: Turning to our cash flow metrics for Q1.
Steven Vattuone: Cash provided by operations in Q1 was $2 1 million compared to cash used in operations of $4 2 million in Q1 of last year.
Steven Vattuone: Pre-cash flow was positive $1.1 million in Q1 compared to negative $4.3 million in Q1 last year. As a reminder, our cash flow in Q1 includes costs related to our structuring efforts, and we paid out $0.7 million in Q1-related expenses. Before moving to guidance, I want to reiterate that we are pleased with the substantial progress we have made to stabilize the install base and the initial traction we're seeing from AI-powered ACE However, as Sharat mentioned, the macro backdrop for marketing budgets remains uncertain, and visibility has not improved.
Steven Vattuone: Free cash flow was positive $1 1 million in Q1 compared to negative $4 3 million in Q1 last year.
Steven Vattuone: As a reminder, our cash flow in Q1 includes costs related to our structuring efforts and we paid out zero point $7 million in Q1 related to this.
Steven Vattuone: Before moving to guidance.
Steven Vattuone: I want to reiterate that we are pleased with the substantial progress we have made to stabilize the installed base.
Steven Vattuone: And the initial traction we're seeing from AI powered ace.
Steven Vattuone: However, as Sean mentioned, the macro backdrop for marketing budgets remains uncertain and visibility has not improved.
Steven Vattuone: In addition, our Q2 renewal base includes some larger customers, so we are factoring an incremental level of conservatism into our expectations for Q2 net new ARR. Overall, despite the strong progress we have made controlling what we can control, we continue to take a prudent approach to our top-line financial modeling for the remainder of 2024. And, assuming no deterioration in the macro environment, we continue to expect that we will return to sequential ARR growth in the second half of 2024.
Steven Vattuone: In addition, our Q2 renewal base includes some larger customers.
Steven Vattuone: So we are factoring an incremental level of conservatism into our expectations for Q2 net new IRR.
Steven Vattuone: Overall, despite the strong progress we have made controlling what we can control we continue to take a prudent approach to our topline financial modeling for the remainder of 2024.
Steven Vattuone: And assuming no deterioration in the macro environment. We continue to expect that we will return to sequential AOR growth in the second half of 2024.
Steven Vattuone: Turning to Q2 guidance.
Steven Vattuone: Turning to Q2, guys. We expect Q2 core platform revenue, including services, in the range of $35 to $36 million, and Total Revenue, which includes our virtual conference product, in the range of $35.8 million to $36.8 million. Professional services are expected to represent approximately 8% of total revenue. We expect gross margins to be in the mid-70s in Q2. We expect a non-GAAP operating loss in the range of $1.7 million to $0.7 million and non-GAAP net income per share of 0 cents per share to 2 cents per share based on 46.9 million diluted shares outstanding.
Steven Vattuone: We expect Q2 core platform revenue, including services in the range of $35 million to $36 million and total revenue, which includes our virtual conference product in the range of 35.8.
Steven Vattuone: $8 billion to $36 8 million.
Steven Vattuone: Professional services is expected to represent approximately 8% of total revenue.
Steven Vattuone: We expect gross margins to be in the mid seventies and Q2.
Steven Vattuone: We expect a non-GAAP operating loss in the range of $1 7 million to zero point $7 million and non-GAAP net income per share of zero cents per share to <unk> <unk> per share based on $46 9 million diluted shares outstanding.
Steven Vattuone: We expect EBIT to break even in Q2, and we expect a restructuring charge of $0.6 million to $0.9 million in Q2, related to our ongoing cost reduction efforts, which is excluded from the non-GAAP amounts provided above. We expect our core platform ARR at the end of Q2 to decline by 2 to 3% sequentially in Q2 compared to Q1. In addition, ARR from our de-emphasized virtual conference product is expected to reduce by approximately $0.7 million in Q2 compared to Q1, and we expect ARR from our virtual conference product to be approximately $2.5 million at the end of Q2.
Steven Vattuone: We expect to be EBIT breakeven in Q2, and we expect a restructuring charge of zero point $6 million to zero point $9 million in Q2 related to our ongoing cost reduction efforts, which is excluded from the non-GAAP amounts provided above.
Steven Vattuone: We expect our core platform.
Steven Vattuone: At the end of Q2.
Steven Vattuone: To decline by 2% to 3% sequentially in Q2 compared to Q1.
Steven Vattuone: In addition.
Steven Vattuone: <unk> from our deemphasize virtual conference product is expected to reduce by approximately zero point $7 million in Q2 compared to Q1, and we expect <unk> from our virtual conference product to be approximately $2 5 million at the end of Q2.
Steven Vattuone: Now, let me turn to our annual guide. For the full year, we expect core platform revenue, including services, to be in the range of $139.8 million to $143.8 million. We expect total revenue to be in the range of $143 million to $147 million. Professional services are expected to represent approximately 8% of total revenue. We expect a non-GAAP operating loss in the range of $5.5 million to $3.5 million and non-GAAP net income per share of $0.03 per share to $0.07 per share, using approximately 47.2 million diluted shares outstanding.
Speaker Change: Now, let me turn to our annual guidance.
Steven Vattuone: For the full year, we expect core platform revenue, including services to be in the range of $139 8 million.
Steven Vattuone: Two $143 $8 million.
Steven Vattuone: We expect total revenue to be in the range of $143 million to $147 million.
Steven Vattuone: Professional services is expected to represent approximately 8% of total revenue.
Steven Vattuone: We expect a non-GAAP operating loss in the range of five 5 million to $3 5 million and non-GAAP net income per share of <unk> <unk> per share to <unk> <unk> per share using approximately 47 2 million diluted shares outstanding.
Steven Vattuone: We expect gross margins to be consistent with 2023, which was 75%. We expect to be EBITDA breakeven for 2025. Structuring charges and amortization of acquired intangibles are excluded from the full year non-GAAP amounts provided above.
Steven Vattuone: We expect gross margins to be consistent with 2023, which was 75%.
Steven Vattuone: We expect to be EBITDA breakeven for 2024.
Steven Vattuone: Restructuring charges and amortization of acquired intangibles are excluded from the full year non-GAAP amounts provided above this.
Steven Vattuone: This guidance reflects a balanced approach between maintaining cost discipline while also allowing us to invest to return to. In summary, we continue to see signs of stabilization in our customer base with clear signs of improvement and retention, and are excited about the recent launch of the ON24 Intelligent Engagement Platform, which is showing early signs of traction with AI-powered ACEs starting to contribute to growth ARR, and we continue to diversify our business. We have received strong customer feedback on our new products and expect the pipeline and customer deployments for these initiatives to continue to grow as the year progresses.
Steven Vattuone: This guidance reflects a balanced approach between maintaining cost discipline, while also allowing us to invest to return to growth.
Steven Vattuone: In summary.
Steven Vattuone: We continue to see signs of stabilization in our customer base with clear signs of improvement in retention and are excited about the recent launch of the 24 intelligent engagement platform, which is showing early signs of traction with AI powered <unk> starting to contribute to growth they are.
Steven Vattuone: And we continue to diversify our business, we have received strong customer feedback.
Steven Vattuone: On our new products and expect pipeline and customer deployments for these initiatives to continue to grow as the year progresses on the spending front, we have continued to deliver on our profitability targets, while driving incremental improvements in our gross margins and cash flow and we will continue to be disciplined on spending.
Steven Vattuone: Balancing investments in product innovation with a long term goal to achieve double digit topline growth with double digit EBITA margins in the future.
Steven Vattuone: On the spending front, we have continued to deliver on our profitability targets while driving incremental improvements in our gross margins and cash flow, and we will continue to be disciplined on spending while balancing investments and product innovation with a long-term goal to achieve double-digit top-line growth with double-digit EBITDA margins in the future. With that, Sharat and I will open the call to questions. If you would like to ask a question at this time, please press star then the number one on your telephone keypad now. You will be placed in the queue in the order received.
Speaker Change: With that chart and I'll open the call up for questions.
Speaker Change: If you would like to ask a question at this time. Please press Star then the number one on your telephone keypad now you will be placed in the queue in the order received once again to ask a question. Please press Star then the number one on your telephone keypad.
Operator: Once again, to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Scott Berg with Needham. Your line is open. Hi, everyone. Thanks for taking my questions. I have a couple here.
Operator: Your first question comes from Scott Berg with Needham Your line is open.
Scott Randolph Berg: Hi, everyone. Thanks for taking my questions I have a couple here.
Operator: Yes.
Scott Randolph Berg: Let's start with the churn cycle Shiraz, you seem to be a little bit more comfortable with the statement of returning to <unk>.
Scott Randolph Berg: Let's start with the churn cycle, Sharat. You seem to be a little bit more comfortable with the statement of returning to ARR growth in the second half this year. This quarter, you mentioned it last quarter, you seem as convinced of that. And I understand the conservatism in the second quarter guidance with a couple of large deals.
Scott Randolph Berg: Our growth in the second half this year. This quarter you mentioned it last quarter, you're seeing as convinced of that and I get the conservatism in the in the second quarter guide with a couple of large deals, but when you look at that <unk> in the second half how high is your.
Sharat Sharan: But when you look at that ARR in the second half, how high is your, I guess, confidence or visibility in the ability to actually grow ARR? And I ask it relative to, I think, a year ago, you were hoping to grow ARR by 23 as well. And that didn't quite happen.
Sharat Sharan: Confidence or visibility in Sydney ability to actually grow a R. R and I ask it relative to I think a year ago, you were hoping to grow <unk> 23, as well and that didn't quite happen. So just trying to understand.
Sharat Sharan: What that what might be different this time versus prior expectation. Thank you.
Sharat Sharan: So just trying to understand what might be different this time versus your prior expectations. Yeah, let me know, Scott on ARR. First, on Q1 ARR, we delivered ARR performance in line with our expectations. I think we are seeing improved stability in our install base, and gross retention improved year over year by mid single digits, and down cells improved for a second quarter in a row.
Sharat Sharan: Yes.
Sharat Sharan: Scott.
Speaker Change: An error.
Speaker Change: First on Q1, we delivered an outperformance in line with our expectations.
Scott: I think we are seeing improved stability in our installed base and gross retention improved year over year by mid single digits and down sales improved for the second quarter in a row. I mean, you know we've had some challenges of a down sales in the last couple of years, but we are seeing steady improvement in that and our growth bookings as a person.
Sharat Sharan: I mean, you know, we've had some challenges with down cells in the last couple of years, but we are seeing steady improvement in that. And our growth bookings as a percentage of growth ARR in Q1 included an incremental uplift from AI Power Days that reached the double-digit mark as a percentage of new growth ARR. So.
Sharat Sharan: As a percentage of growth here are.
Sharat Sharan: In Q1 included an incremental uplift from airpower days that reached double digit mark as a percentage of new growth.
Sharat Sharan: So we delivered what we said in Q1.
Sharat Sharan: So we delivered what we said in Q1. And in Q2, when we think about it, we are making progress on retention. We believe as the business is continuing to stabilize, we are seeing traction on AI-powered ACE, and also our use case focus from a go-to-market on mission critical digital transformation use cases that include pharma and life science. But we are still operating in an uncertain environment where marketing budgets are constrained.
Sharat Sharan: And in Q2, when we think about it we are making progress on retention, we believe as a business is continuing to stabilize.
Sharat Sharan: Seeing fraction on AI powered days and also our use case focus from a go to market on mission critical digital transformation use cases that include pharma and life Sciences.
Sharat Sharan: But we are still operating in an uncertain environment, where marketing budgets are constrained. So we are and we are being incrementally prudent with our expectations for <unk> in Q2 due to these larger customer renewals coming due in Q2.
Sharat Sharan: So we are, and we are being incrementally prudent with our expectations for ARR in Q2 due to these larger customer renewals coming due in Q2, and it is early in the quarter. Now, you talked about the second half.
Sharat Sharan: And it is early in the quarter you talked about the second half first of all.
Sharat Sharan: First of all, we were almost there in Q4 last year, so we are very close to positive ANR. We are seeing stabilization in the installed base, and for the second half of 2024, we expect to make continued progress in gross retention, both in churn and downsell. Two, we believe our focus on mission-critical digital transformation use cases will be a driver of new business. And three, we expect to continue to make progress on AI-powered applications. Based on that, we still expect that we will return to sequential ARR growth in the second half of 2020. Got it, help Paul.
Sharat Sharan: We were almost there in Q4 last year. So we are very close to positive anr.
Sharat Sharan: We are seeing stabilization in the installed base and for second half of 'twenty 'twenty four we expect to make continued progress in gross retention both in children and down South.
Sharat Sharan: Two we believe our focus on mission critical digital transformation use cases will be a driver of new business and three we expect to continue to make progress on AI powered base based on that we still expect that we will return to sequential growth in the second half of 2024.
Speaker Change: Got it helpful and then.
Steven Vattuone: And then, Steve, I wanted to maybe, you know, think about how you're thinking about the model kind of going forward here. You've clearly taken out a lot of costs from the model. I know we're still not quite, you know, profitable given what's going on with the overall business, but have you set up the model to require revenue growth to get to those long-term adjusted even targets and the mid teams are better?
Speaker Change: Steve wanted to maybe think about how youre thinking about the model.
Steven Vattuone: Going forward here.
Steven Vattuone: Clearly taken out a lot of costs in the model I know, we're still not quite profitable.
Steven Vattuone: Profitable given what's going on with the overall business, but.
Steven Vattuone: Have you set up the model to.
Steven Vattuone: Require revenue growth.
Speaker Change: To get to those long term adjusted EBIT targets in the mid teens or better or is there a scenario, where you can reach that in a market where.
Steven Vattuone: Or is there a scenario where you can reach that in a market where, you know, budgets are still tight and constrained, and ARR growth is, it may be positive, but minimal at the same time? It's a question I've had a lot from investors lately, and they're just trying to understand where the profitability of the model can come in if we're still in a challenging macro for the next year or two for the market.
Steven Vattuone: Budgets are still tight and constrained in our growth as it may be positive.
Steven Vattuone: At the same time, it's a question I've had a lot from investors lately, just trying to understand where the profitability of the model come in it for you still any challenge medical care to the market.
Steven Vattuone: Yes.
Steven Vattuone: Scott, there were, I think, two questions in there, so let me go ahead and take the first one first, which is about profitability. So first, we did achieve adjusted EBITDA profitability and EPS profitability for four quarters in a row. So we've now moved the company to a more profitable operating model this past year. We improved our gross margins over the past year from 73% in Q1 of 2023 to 77% this quarter.
Speaker Change: Scott There are I think two questions. So let me go ahead and take the first one first which is about <unk>.
Steven Vattuone: Profitability. So first we did achieve adjusted EBITA profitability and EPS profitability for four quarters in a row. We've now moved the company to a more profitable operating model this past year.
Steven Vattuone: Improve our gross margins over the past year from 73% in Q1 of 2023.
Steven Vattuone: And in addition, in Q1, we also delivered positive operating and free cash. So we now have a more streamlined organization, and we're committed to maintaining that we are guiding to EBITDA, break even or better for the year in 2024. Now in 2024, we are taking a balanced approach; we're continuing to invest in the business, especially around AI, while remaining disciplined on cost and delivering, Eva Taw Breakeven. Our goal for the company is long-term gross margins; long-term, to get to gross margins of 78-80% and 20% for operating margin. We're working to get there over time. Now, the other question: do we need to invest more to grow?
Steven Vattuone: 77% this quarter and.
Steven Vattuone: And in addition in Q1, we also delivered positive operating and free cash flow.
Steven Vattuone: So we now have a more streamlined organization and we're committed to maintaining that we are guiding to EBIDTA breakeven or better over the year. In 2024 now in 2024, we are taking a balanced approach while continuing to invest in the business, especially around AI, while remaining disciplined on costs and delivering.
Steven Vattuone: EBITDA breakeven.
Steven Vattuone: Goal for the company is that long term gross margins long term is to get the gross margins of 78% to 80% and.
Steven Vattuone: And 20% operating margin.
Steven Vattuone: Working together over time.
Steven Vattuone: The other question do we need to invest.
Steven Vattuone: More of a ground so currently.
Steven Vattuone: So currently, you know, the expense structure is about where we want it, but we'll of course adjust it as needed, as we've done in the past. We will be making investments going forward, but those are really going to be based on the top line, and we'll continue to evaluate, we're always optimizing to return to top line growth, that we're also boosting profitability. Some of the investments we're looking at making, or are making, are in AI PowerDays.
Steven Vattuone: <unk> structure is about where we want it but will of course adjusted as needed as with government passed.
Steven Vattuone: We won't be making investments going forward, but those are really going to be based on the top line and we'll continue to evaluate that we're always optimizing to return to top line growth. While also balancing profitability. Some of the investments we're looking at making our automaking around AI powered as well, bringing it to market.
Steven Vattuone: We're bringing it to market and continuing to develop regulated use cases in pharma and financial services, and Sharat discussed that we're making some investments there. We are focused on making some other selected investments in certain categories while also being disappointed in our cost, and sales and investments are going to be driven by productivity that will, understood. Very helpful.
Steven Vattuone: And continuing to develop it.
Steven Vattuone: Related use cases pharma financial services.
Steven Vattuone: <unk> discussed that we are making some investments there.
Steven Vattuone: We are focused on making some other selected investments in certain categories are also being disciplined on our cost.
Steven Vattuone: And then sales and investments are going to be driven by productivity that we're seeing there.
Steven Vattuone: Okay.
Speaker Change: Understood very helpful. Thanks for taking my question.
Steven Vattuone: Your next question comes from Rob Oliver with Baird. Your line is open.
Scott Randolph Berg: Thank you for taking my question. Your next question comes from Rob Oliver with Baird. Your line is open.
Robert Cooney Oliver: Great. Thanks for taking my question guys charade.
Robert Cooney Oliver: Great, thanks for taking my questions, guys. Sharat, I had a question on AI-powered A's, but I know it's still early.
Robert Cooney Oliver: I had a question on AI powered Ace I know, it's still early.
Robert Cooney Oliver: You know, obviously really impressive when you guys did the demo event with the early adopters that you mentioned. What, what sort of uplift are you seeing there? And I guess, you know, maybe echoing Scott's question, you know, is that a component of the pipeline comfort that gives you comfort being able to grow AR in the second half as well?
Robert Cooney Oliver: Obviously really impressive when you guys did the demo event.
Robert Cooney Oliver: From the early adopters that you mentioned, what sort of uplift are you seeing there and I guess, maybe echoing Scott's question is that a component of the pipeline comfort that gives you comfort in being able to grow a are in the second half.
Robert Cooney Oliver: As well.
Robert Cooney Oliver: Yeah.
Speaker Change: So let me.
Speaker Change: Let me take the second one first the answer is absolutely we expect that the contribution for AI powered days to ramp.
Sharat Sharan: The answer is absolutely. We expect the contribution for AI Power Days to ramp during the course of the year and provide tailwinds into 2025. So, let me go back to the first question on utilization. And just to remind people, AI Power Days includes three modules. First is personalization at scale using audience segmentation. Second is the ability to deliver derivative content like blogs, eBooks, and takeaways from long-form webinar content. And third, enhanced audience nurture using key moment videos from long-form video content. So, you know, the AI-powered AS Bookings reached the double-digit mark as a percentage of growth ARR. In its first quarter after launch, we launched it at the end of January.
Sharat Sharan: The course of the year and provide tailwind into 2025. So let me go back to the first question on utilization and just to remind people airpower days includes key modules forces personalization at scale using audience segmentation.
Sharat Sharan: <unk> ability to deliver derivative content like blogs E books takeaways from long form webinar content and toward enhanced audience notices are using key moment videos from long form video content.
Sharat Sharan: So.
Sharat Sharan: <unk> powered air bookings reached double digit mark as a percentage of growth here are in its first quarter. After launch we launched at the end of January.
Sharat Sharan: And while it is early, the pipeline generated and the early wins received thus far from AI Power Days make me optimistic about the future of this. From a utilization point of view, since the beginning of the year, over 15% of our customers have used or tested our AI capabilities. I'll give you the example of one of the largest technology companies in the identity and security space. Their marketing team now uses AI-powered A's to automatically produce streams of short-form video content from their long-form webinars and virtual events and delivers it across channels tailored for a specific audience. So overall, you know, a good start. We are learning from it, and we are bullish about the ramp as the year progresses and into 2020. Okay, a really helpful call. Thanks, Sharat.
Sharat Sharan: And while it is early the pipeline generated in the early wins received thus far from AI powered days makes me optimistic about the future of this offering.
Sharat Sharan: From a utilization point of view since the beginning of the year over 15% of our customers have used our tested our AI capabilities I'll give you. The example of one of the largest technology companies in the identity and security space.
Sharat Sharan: Their marketing team now uses AI powered days to automatically produce streams of short form video content from their long form webinars and virtual events and deliver them across channels tailored for specific audiences. So overall.
Sharat Sharan: Good start we are learning from it.
Sharat Sharan: And we are bullish about the ramp.
Sharat Sharan: The year progresses and into 2025.
Robert Cooney Oliver: And then, Steve, just a follow up for you. You know, in the response to the last question, you gave a lot of detail as well as in your prepared remarks around the various kinds of considerations for the rest of the year. On the specifically around AI-powered, just, you know, curious around potential gross margin implications, particularly if we get, you know, and it would be a good problem to have a lot of customers like that large identity management company, you know, all this. Is that also factored in to your consideration as well? Or how should we think about that impact on margins?
Speaker Change: Okay really helpful color. Thanks, and then Steve just a follow up for you.
Robert Cooney Oliver: The response to the last question you gave a lot of detail as well as in your prepared remarks around the various kind of core operations for the rest of the year.
Robert Cooney Oliver: On the specifically around AI powered east just can.
Robert Cooney Oliver: Curious around potential gross margin implications, particularly if we get it.
Robert Cooney Oliver: It would be a good problem to have like a lot of customers like that large identity management company.
Robert Cooney Oliver: All of this is that also factored into your consideration as well or how should we think about that impact to margins.
Robert Cooney Oliver: Okay.
Steven Vattuone: Thanks. Yeah, it is factored in our guidance on margins already, and just a quick recap on margins. Our gross margins were 77% in Q1, and that's up from 73% in Q1 a year ago, and that really reflects our disciplined approach to cost management that we've taken. For 2024, we expect our gross margins to continue to be in the mid 70s, which is consistent with our full year 2023 margin. Great. Very helpful. Thanks, Steve. Your next question comes from D. J. Hines with Canaccord. Your line is open. Hey guys, this is Ryan.
Steve: Yes, it is factored into our guidance on our margins already and just a quick recap on margins. Our gross margins were 77% in Q1 and Thats up from 73% in Q1 a year ago.
Ryan: And that really reflects our disciplined approach to cost management that we've taken.
Ryan: For 2024, we expect our gross margins to continue to be in the mid seventies, which is consistent with our full year 2023 margin.
Ryan: Which were 75%.
Ryan: Great very helpful. Thanks, Steve.
Ryan: Your next question comes from DJ Hynes with Canaccord. Your line is open.
D. J. Hines: I'm from DJ. Thanks for taking my question. So I know you've been building up this regulated industry go-to-market motion, but I'm just kind of curious, has the appetite here for AI and the Ace platform been any softer than, I guess, some of your lesser regulated industries? I just feel like we've been seeing some industries that maybe aren't as far along in terms of digitization being kind of more reluctant to change.
Steven Vattuone: Hey, guys. This is Ryan on for P. J. Thanks for taking my question.
D. J. Hines: So I know you've been building up this regulated industry go to market motion, but I'm just kind of curious.
D. J. Hines: Right here for AI and the Ace platform.
D. J. Hines: Any softer than I guess some of your lesser regulated industries.
D. J. Hines: Feel like we can see.
D. J. Hines: In some industries that maybe aren't as far along in terms of Digitization kind of.
D. J. Hines: More reluctant to change.
D. J. Hines: Yeah, I think that that's, that's, that's a very good question. It's what we are seeing, interestingly, that in markets like technology, where currently the budgets are tight, but clearly, they are the early adopters for things like AI-powered AI and others. And even in that, we generally see that larger enterprises tend to have, you know, everybody's trying to do a little more compliance-oriented work related to AI these days. And some of that is even more acute in regulated industries.
D. J. Hines: Yes.
Speaker Change: I think that's.
D. J. Hines: That's a very good question.
D. J. Hines: What we are seeing interestingly that in.
D. J. Hines: Markets like technology, which are currently the budgets are tight but clearly they are the early adopters for <unk> for things like Yadkin powered as in others and even in that we generally see that the larger enterprises tend to have everybody is trying to do a little more compliance oriented.
D. J. Hines: And work related to AI. These days and some of that is even more acute in the regulated industries. So I think I think your thought process. There is right. The one thing that we are looking at on one thing. We are doing is because we literally have three different mar deals and some of them are simpler.
D. J. Hines: So I think your thought process there is right. The one thing that we are looking at, and one thing we are doing is because we literally have three different modules, and some of them are simpler than others. And that's where we are seeing more adoption, for example, things like derivative content, taking long-form content and creating, you know, things like e-books and takeaways. Those are easier for people to understand and do and probably don't require as much regulation.
D. J. Hines: Than others, so and that's where we are seeing more adoption for example, things like derivative content, taking long form content and creating.
D. J. Hines: Things like E books, and takeaway those are easier for people to understand and do and probably don't require as much regulation, but there are some in regulated industrial overall, there are a little more compliance hoops that we have kind of jumped through and that does delay the sales cycle that being said.
Sharat Sharan: But there are some in the regular industry overall; there are a few more compliance hoops that we have to kind of jump through, and that does delay the sales cycle a little. That being said, at the end of the day, what we are doing is we are really allowing people to do more with less and getting more engagement and data points. So it's a victory for our customers, even though it may take a little longer in some cases. Okay, yeah, makes sense.
Sharat Sharan: At the end of the day, what we are doing is we are really allowing people to do more with less and getting more engagement on data points. So it's a it's a victory for our customers, even though it may take a little longer in some cases.
D. J. Hines: And I guess just to piggyback off that, you know, obviously, Q2, you have a couple of big customers renewing. So with your go-to-market strategy for the Ace platform, are you or are you actively, like, upselling into the install base? Or are you just kind of waiting for customers' normal renewal cycles to push on that?
Speaker Change: Okay, Yes, it makes sense and I guess just to piggyback off of that.
D. J. Hines: Obviously Q2, we had a couple of big customers renewing so with your go to market strategy for the Ace platform are you where are you actively like upselling into the installed base or are you just kind of waiting for a customer's normal renewal cycles to push on that.
Speaker Change: Uh huh.
Sharat Sharan: You know, we are selling AI Power Days to both existing customers and to new customers. Clearly, the maturity of the existing customers is higher when you look at it at different levels of maturity. So, we are seeing a lot more uptick at this stage from our existing customers related to AI Power Days. And again, there are three different modules, things like personalization at scale. We are seeing people gravitate a lot towards that, things like derivative content.
D. J. Hines: No we are selling power days.
Sharat Sharan: To both existing customers and to new customers literally the maturity of the existing customers is higher when you look at that are.
Sharat Sharan: Different levels of maturity. So we are seeing a lot more uptick.
Sharat Sharan: At this stage from our existing customers related to AI powered days and again there are three different modules things like personalization at scale you are seeing people gravitate a lot towards that things like derivative content. So.
Sharat Sharan: So that's that's the way we are looking at it.
Sharat Sharan: So, that's the way we are looking. Okay, awesome. Thanks, guys. Appreciate it. As a reminder, to ask a question at this time, please press star, then the number one on your telephone keypad. Your next question comes from Noah Herman with J.P. Morgan. Your line is open. Hey, Johnny.
Speaker Change: Okay Awesome. Thanks, guys appreciate it.
Noah Ross Herman: As a reminder to ask a question at this time. Please press Star then the number one on your telephone keypad.
Noah Ross Herman: Your next question comes from NOLA Herman with J P. Morgan Your line is open.
Noah Ross Herman: Thanks for taking the question. So, it was good to see that for the 100,000-plus ARR customer count, that only sequentially declined by one this quarter. I think during the same period last year, it declined by about 12. But at the same time, the total customer count sequentially decreased by a higher clip compared to the same period last year.
Noah Ross Herman: Hey, guys. Thanks for taking the question.
Noah Ross Herman: It was good to see that up about 100000, plus our customer count.
Noah Ross Herman: Not only sequentially declined by one this quarter.
Noah Ross Herman: During the same period.
Noah Ross Herman: Last year.
Noah Ross Herman: Highlight about 12.
Noah Ross Herman: But at the same time, the total customer count sequentially decreased by a higher court.
Noah Ross Herman: No.
Noah Ross Herman: The same period last year, so just trying to get a sense for maybe what you are seeing downmarket with maybe some of your smaller customers. I guess anything you are doing there to sort of alleviate the customer churn that would be really helpful.
Sharat Sharan: So, just trying to get a sense for maybe what you're seeing downmarket with maybe some of your smaller customers and just anything you're doing there to sort of alleviate the customer turnout would be really helpful. Thanks. Yeah, Noah, let me take it up.
Noah Ross Herman: You know, our main focus right now, especially in the time that we are seeing this macro uncertainty and budget pressures, and they're really even a lot more on the down market is our, so our focus has been on companies with greater than 1000 employees. I've outlined that as one of our top three strategic priorities. And our 100K plus ARR customers, as you said, which is, you can look at that as a proxy for the large customers, were approximately flat in a seasonally softer quarter. Yes, the logo count overall decreased by 86, but it's primarily driven by our smallest customers, which had a disproportionately large number of customers coming up for renewal this quarter.
Sharat Sharan: Yes.
Speaker Change: No let me take it up.
Noah Ross Herman: Our main focus right now, especially in the time that we are seeing this macro uncertainty and budget pressures and they're really even a lot more on the down market.
Noah Ross Herman: <unk> is our so our focus has been on companies greater than 1000 employees.
Noah Ross Herman: Line that is one of our top three strategic priorities.
Noah Ross Herman: And our 100 gig plus are our customers as you said.
Noah Ross Herman: You can look at that as a proxy for the large customers was approximately flat in a seasonally softer quarter.
Noah Ross Herman: Ah, Yes logo count decline overall decreased by 86, but it's primarily driven by our smallest customers, which had a disproportionately large number of customers coming up for renewal. This quarter now we are looking at how to address that.
Sharat Sharan: Now we are looking at how to address that. That being said, I mean, this is a group of customers in the zero to 25K ARR cohort that is really feeling the pinch in this market environment. Got it. And then, I guess going forward, how should we think about maybe some of the other levers you can pull to improve the profitability profile? It was good to see your free cash flow turn positive, and you essentially have break-even EBITDA for the third straight quarter. So just anything you can maybe do there that would surprise on the upside would be helpful.
Sharat Sharan: That being said I mean, this is a group of customers zero to 25 gig LR cohort that is really feeling the pinch in this market environment.
Sharat Sharan: Got it and then I guess going forward, how should we think about moving into some of the other levers.
Sharat Sharan: Paul.
Sharat Sharan: The profitability profile.
Sharat Sharan: See what free cash flow to turn positive in <unk>.
Sharat Sharan: Essentially have breakeven EBITDA Street corridor.
Sharat Sharan: Anything you can maybe do that.
Sharat Sharan: No surprise to the upside.
Sharat Sharan: That would be helpful.
Speaker Change: Well as I as I mentioned earlier first off we're always working to return to growth.
Noah Ross Herman: Well, as I mentioned earlier, first off, we're always working to return to growth. And that's, that's the goal. And we're going to always look to balance profitability with our. We'll continue to look at our cost structure as we always have.
Speaker Change: The goal and we're good at.
Noah Ross Herman: Always look to balance profitability with our desire to return to growth.
Noah Ross Herman: We will continue to look at our cost structure as we always have.
Steven Vattuone: And if we need to make adjustments in the future, we'll certainly look at that. At this time, there are no further questions in queue. I'd like to turn the call back over to management for any further remarks. Now, thank you all for joining us. I really appreciate your time. I look forward to speaking to you next time. This concludes today's On 24 first quarter 2024 earnings call. Thank you for attending and have a wonderful rest of your day.
Noah Ross Herman: And if we need to make adjustments in the future, we'll certainly look at that.
Steven Vattuone: At this time there are no further questions in queue I'd like to turn the call back over to management for any further remarks.
Steven Vattuone: Thank you all for joining really appreciate your time looking forward to speaking to you next time.
Steven Vattuone: This concludes today's on 24 first quarter 2024 earnings call. Thank you for attending and have a wonderful rest of your day.
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Operator: I'm going to meet with George S. Bush and say something special about him. I'm going to meet him and say something special about him. I'm going to meet with him and say something special. (Inaudible)
Operator: Yeah.