ON24 Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 10 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the ON24 First Quarter 2024 Investor Call. Our host for today's call is Shaiode Deloitte, Investor Relations. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host.

Operator

Mr. Danoi, you may begin.

Speaker 1

Thank you. Hello and good afternoon everyone. Welcome to ON24's Q1 2024 Earnings Conference Call. On the call with me today are Saurabh Sharan, Co Founder and CEO of ON24 and Steve Vatsalone, 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 Q2 and full fiscal year 2024 as well as certain Q2 and full year non GAAP projections.

Speaker 1

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. ON24 cautions that these statements are not guarantees of future performance. All forward looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's periodic SEC filings and today's financial press release for factors that could cause our actual results to differ materially from any forward looking statements.

Speaker 1

We'd also like to point out that on today's call, we will report both GAAP and non GAAP results. We use these non GAAP financial measures to evaluate our ongoing operations and for internal planning and forecasting purposes. Non GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see reconciliations of these non GAAP financial measures, please refer to today's financial press release. I will now turn the call over to Sherat.

Speaker 1

Sherat?

Speaker 2

Thank you, and welcome everyone to ON24's Q1 2024 Financial Results Conference Call. We appreciate you joining us. With me today is Steve Battone, 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.

Speaker 2

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, 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 brought 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. Turning to Q1 results. I'm pleased to report that our momentum from the end of 2023 continued into Q1, With solid Q1 performance on the top line and another quarter of execution on our profitability target where we achieved positive adjusted EBITDA in Q1 for the Q4 in a row and also achieved positive non GAAP EPS for the 4th quarter in a row.

Speaker 2

Revenue from our core platform, including services in Q1 of 2024 was $36,800,000 and total revenue, including virtual conference was $37,700,000 Of total revenue for the quarter, subscription and other platform revenue was $34,800,000 and professional services revenue was $2,900,000 Now turning to ARR. We ended Q1 with $133,300,000 in ARR related to our core platform, representing a sequential decrease from Q4 of $2,900,000 in line with the expectations we provided on our last earnings call. We continue to see meaningful signs of improvement in our installed base. 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 sales as a percentage of the renewal base, another sign of the growing stability within our installed base.

Speaker 2

We are excited about our AI powered ACE solution. Although we are still in the early stages of ARR contribution, the initial signs are positive. Our 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 powered ACE 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. The marketing budget constraints continue to affect new logo acquisitions and as prospects remain in a longer holding pattern.

Speaker 2

Because of this, 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, we 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 twenty twenty four, driven by improving stability in our installed base, our new products and our enhanced go to market focus. Overall, I'm excited by the progress we have made and I'd like to provide an update on our 3 strategic growth priorities. 1st, the rollout of our next generation intelligent engagement platform, which includes our new AI powered ACE offering.

Speaker 2

2nd, continue to strengthen our enterprise go to market strategy, especially with mission critical digital transformation use cases across regulated industries. 3rd, focus on returning to growth, while continuing to deliver on our profitability targets. Starting with our next generation platform. 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 3 key ways.

Speaker 2

1, personalization at scale. We have developed what we believe to be the industry's 1st 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. Because personalization is such a business critical issue for enterprise go to market teams, we are seeing traction from our installed base. Since we made these features available, over 20% of our customers have turned on the capability and hundreds of segments built that facilitates personalization.

Speaker 2

2, derivative content. 1 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's generated AI makes it possible for our customers to turn their long form event presentations into new promotional copy, ebooks, snackable videos and others. With a simple click of a button, our customers can generate at least 5 times as many assets than they started with. Over the past 3 months, our customers have used our platform to produce thousands of new videos and written pieces of content, saving them resources and fueling their pipeline results.

Speaker 2

3, continuous engagement and nurtures. 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 platforms nurture capabilities unlocks 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. In Q1, we saw some of our early adopters get as much as 5% increase in engagement by using our automated nurtures to drive continuous engagement beyond their live event.

Speaker 2

Based on the success of our early adopters, we are optimistic about the traction of the intelligent engagement platform and AI Power Days. Since the beginning of the year, over 15% of our customers have used or tested our AI capabilities. As stated earlier, our AI powered ARR booked 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 ACE wins from Q1. The first AI powered ACE win I'll highlight is with a large enterprise software company with over 1,000 employees.

Speaker 2

After already seeing strong results using our 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 PowerDase, their U. S.-based corporate team will be able to develop global campaigns that their field marketing teams in APAC and EMEA can then localize and personalize for their specific market needs. This gives the resource strapped 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 multibillion dollar cloud software company with over 5,000 employees.

Speaker 2

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 powered ACE, 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. 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 actions 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.

Speaker 2

Moving to our next priority, our enterprise go to market focus. Our Q1 enterprise business performance was strong across our key metrics. The average core ARR per customer reached a record high, demonstrating our enterprise customer focus. Additionally, the percentage of ARR in multiyear agreements and the percentage of customers using 2 or more products again landed at record levels. 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 and financial services, including asset management and insurance.

Speaker 2

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 4 years. Overall, 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 our digital strategy for engaging healthcare professionals that supports compliance, enabling their company's brands to scale their commercial and medical education across the globe. Similarly, professional services organizations use our platform to take their continued professional education programs digital, automating the process to save their teams significant time and resources while generating more leads and pipeline. 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.

Speaker 2

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 1 of the world's largest hedge fund administrators, a company that manages trillions of assets and has over 10,000 employees. As they matured their digital sales and marketing strategy, this organization needed a purpose built platform that could help them scale professional certification and generate leads for their business development teams. 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.

Speaker 2

Next, we won a deal with 1 of the largest private hospital providers in the United Kingdom with over $1,000,000,000 in revenue and more than 8,000 employees. As a hospital network, the company operates a decentralized go to marketing strategy that requires direct patient outreach in local cities across the country. He 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. And finally, an update on profitability.

Speaker 2

In Q1, we continued our momentum from last year and achieved our profitability targets, delivering positive adjusted EBITDA and positive non GAAP EPS for the 4th 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 Q1 was a solid start to a pivotal year for ON24. We beat on our top line and profitability targets and are encouraged by the continued signs of stability we see in our installed 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 ACE and are building a healthy pipeline.

Speaker 2

And we are focusing our go to market execution successfully on customers with mission critical digital transformation initiatives. 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 flow. 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 state 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, I'd like to turn the call over to Steve.

Speaker 3

Thank you, Sharath, and good afternoon, everyone. I'm going to start with our Q1 2024 results and will then discuss our outlook for the Q2 of 2024 and full year 2024. 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 deemphasized the virtual conference product. We view the metrics from our core platform such as revenue and ARR as the best KPIs to measure our performance. Revenue from our core platform, including services in Q1 of 2024 was $36,800,000 representing a decrease of 11% year over year.

Speaker 3

Total revenue for the Q1, which includes revenue from our virtual conference product, was $37,700,000 Total subscription and other platform revenue was $34,800,000 Overages represented approximately 1% of total revenue in Q1. Total professional services revenue was $2,900,000 a decrease of 22% year over year, representing approximately 8% of total revenue compared to 9% in the year ago period. Moving on to ARR. ARR represents the annualized value of all subscription contracts at the end of the period and excludes professional services and overages. Ending ARR related to our core platform totaled 100 and $33,300,000 a decrease of $2,900,000 compared to Q4 of 2023 and in line with the expectations we provided on our last earnings call.

Speaker 3

As Sharath discussed, we saw continued signs of stabilization in our installed 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 continue to be cautious about making purchasing commitments in Q1 as their marketing budgets remained under pressure. Total ARR, including the contribution from our virtual conference product, was $136,500,000 at the end of Q1 2024 as compared to $139,700,000 at the end of Q4 2023. Turning to customer metrics. The ARR contribution from the $100,000 plus customer cohort continues to represent approximately 2 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.

Speaker 3

The number of customers contributing more than $100,000 in total ARR was 324, approximately flat from last quarter. 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 and multiyear contracts increased sequentially from the prior quarter and is now over 50% of our ARR. The percentage of our customers with 2 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.

Speaker 3

Total customer count at the end of Q1 was 1698 customers. Customers with less than $25,000 of ARR were the largest contributor to local churn in Q1. Before turning to expense items and profitability, I would like to point out that I will be discussing non GAAP results going forward. Our non GAAP results exclude stock based compensation, restructuring charges, impairment charges for real estate, amortization of acquired intangibles, shareholder activism related costs, as well as certain other items. Our GAAP financial results, along with a reconciliation between GAAP and non GAAP results, can be found within our earnings release.

Speaker 3

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 operations. Now turning to operating expenses. Sales and marketing expense in Q1 was $16,300,000 compared to $20,100,000 in Q1 last year. This represents 43% of total revenue compared to 47% in the same period last year and 42% last quarter.

Speaker 3

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 and D expense in Q1 was $6,700,000 compared to $8,200,000 in Q1 last year. 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 ACE solution along with the next generation of our platform, Beyond24 Intelligent Engagement Platform, demonstrating our commitment to continued product innovation.

Speaker 3

G and A expense in Q1 was $6,700,000 compared to $7,500,000 in Q1 last year. This represents 18% of total revenue, up slightly from 17% in the same period last year and last quarter. G and A spending in Q1 includes certain costs, which were seasonally higher in Q1, such as costs related to our annual audit. We took actions to reduce our G and A costs, and as a result, our G and A expenses in absolute dollars have decreased as compared to the prior year. Moving on to our bottom line performance.

Speaker 3

I'm pleased to report that we exceeded the profitability targets that we provided in the prior earnings call. We achieved positive adjusted EBITDA and non GAAP EPS profitability in Q1. This marks the 4th consecutive quarter positive adjusted EBITDA and non GAAP EPS profitability. 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 for Q1 was $800,000 or a negative 2% operating margin compared to an operating loss of $4,200,000 and a negative 10% operating margin in the same period last year.

Speaker 3

Net income in Q1 was $1,000,000 or $0.02 per share based on approximately 45,600,000 diluted shares outstanding. This compares to a net loss of $1,800,000 or $0.04 per share in Q1 last year using approximately 47,300,000 basic and diluted shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with $196,100,000 in cash, cash equivalents and marketable securities. Before turning to our cash flow metrics, I am pleased to announce that the $125,000,000 capital return program we announced in March 2023, which comprised a special dividend of approximately $50,000,000 paid to shareholders in Q2 of 2023 and a $75,000,000 share repurchase program was fully completed in February of this year.

Speaker 3

As a reminder, under our prior share repurchase program we started in late 2021, we returned $41,000,000 through February 2023. With the completion of these two programs, we have now returned approximately $166,000,000 to shareholders. We also announced a new $25,000,000 share repurchase program in March of this year. This repurchase program runs for 1 year or until March 2025. And to date, we have not utilized any amounts under this program.

Speaker 3

With just under $200,000,000 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 $2,100,000 compared to cash used in operations of $4,200,000 in Q1 of last year. Free cash flow was positive $1,100,000 in Q1 compared to negative $4,300,000 in Q1 last year. As a reminder, our cash flow in Q1 includes costs related to our restructuring efforts and we paid out $700,000 in Q1 related to this.

Speaker 3

Before I move into guidance, I want to reiterate that we are pleased with the substantial progress we have made to stabilize the installed base and the initial traction we are seeing from AI powered ACE. However, as Sharath mentioned, the macro backdrop for marketing budgets remains uncertain and visibility has not improved. In addition, our Q2 renewal base includes some larger customers. So we are factoring an incremental level of conservatism 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 twenty twenty four.

Speaker 3

Turning to Q2 guidance. We expect Q2 core platform revenue, including services, in the range of $35,000,000 to $36,000,000 and total revenue, which includes our virtual conference product, in the range of $35,800,000 to $36,800,000 Professional services is 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 $1,700,000 to $700,000 and non GAAP net income per share of $0.00 per share to $0.02 per share based on 46,900,000 diluted shares outstanding. We expect to be EBITDA breakeven in Q2 and we expect a restructuring charge of $600,000 to $900,000 in Q2 related to our ongoing cost reduction efforts, which is excluded from the non GAAP amounts provided above.

Speaker 3

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 deemphasized virtual conference product is expected to reduce by approximately $700,000 in Q2 compared to Q1. And we expect ARR from our virtual conference product to be approximately $2,500,000 at the end of Q2. Now let me turn to our annual guidance. For the full year, we expect core platform revenue, including services, to be in the range of $139,800,000 to $143,800,000 We expect total revenue to be in the range of $143,000,000 to $147,000,000 Professional Services is expected to represent approximately 8% of total revenue.

Speaker 3

We expect a non GAAP operating loss in the range of $5,500,000 to $3,500,000 and non GAAP net income per share of $0.03 per share to $0.07 per share using approximately 47,200,000 diluted shares outstanding. We expect gross margins to be consistent with 2023, which was 75%. We expect to be EBITDA breakeven for 2024. Restructuring charges and amortization of acquired intangibles are excluded from the full year non GAAP amounts provided above. This guidance reflects a balanced approach between maintaining cost discipline, while also allowing us to invest to return to growth.

Speaker 3

In summary, we continue to see signs of stabilization in our customer base, clear signs of improvement in retention and are excited about the recent launch of the ON24 intelligent engagement platform, which is showing early signs of traction with AI powered ACE 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 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, while balancing investments in product innovation with a long term goal to achieve double digit top line growth with double digit EBITDA margins in the future. With that, Shrott and I will open the call up for questions.

Operator

Your first question comes from Scott Berg with Needham. Your line is open.

Speaker 4

Hi, everyone. Thanks for taking my questions. I have a couple here. 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.

Speaker 4

This quarter, you mentioned it last quarter, you seem as convinced of that. And I get the conservatism in the second quarter guide with a couple of large deals. But when you look at that ARR in the second half, how high is your, I guess, confidence or visibility in SidiBility to actually grow ARR? And I ask it relative to, I think, a year ago, you were hoping to grow ARR in 23 as well, and that seems like to happen. So I'm just trying to understand what that what might be different this time versus your prior expectation?

Speaker 4

Thank you.

Speaker 5

Yes. 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 installed base and gross retention improved year over year by mid single digits and down sells improved for a second quarter in a row. I mean, you know we've had some challenges with down sells 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 double digit mark as a percentage of new growth ARR.

Speaker 5

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 includes pharma and life sciences. 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 ARR in Q2 due to these larger customer renewals coming due in Q2.

Speaker 5

And it is early in

Speaker 2

the quarter. Now you talked about the second half. First of all, we were almost there in Q4 last year.

Speaker 5

So we are very close to positive ANR. 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 churn and down sell. 2, we believe our focus on mission critical digital transformation use cases will be a driver of new business. And 3, we expect to continue to make progress on AI Power Days.

Speaker 5

Based on that, we still expect that

Speaker 2

we will return to sequential ARR growth in the second half of twenty twenty four.

Speaker 4

Got it. Helpful. And then, Steve, wanted to maybe think about how you're thinking about the model kind of going forward here. You've clearly taken out a lot costs in the model. I know we're still not quite profitable given what's going on with the overall business.

Speaker 4

But have you set up the model to require revenue growth to get to those long term adjusted EBITDA targets in the mid teens or better? Or is there a scenario where you can reach that in a market where budgets are still tight and constrained and ARR growth is maybe positive but minimal at the same time. It's a question I've had a lot from investors lately. It's just trying to understand where the profitability of the model can come in if we're still in a challenge macro for the next year or 2 for marketing budgets? Thank you.

Speaker 6

Scott, there were, I think, 2 questions. 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 4 quarters in a row. So we've now moved the company to a more profitable operating model this past year. We've improved our gross margins over the past year from 73% in Q1 of 2023 to 77% this quarter.

Speaker 6

And in addition, in Q1, we also delivered positive operating and free cash flow. So we now have a more streamlined organization and we're committed to maintaining that. We are guiding to EBITDA breakeven 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 costs and delivering EBITDA breakeven.

Speaker 6

Our goal for the company is long term gross margins, long term is to get to gross margins of 78%, 80% and 20% for operating margin. We're working to get there over time. Now your other question, do we need to invest more to grow? So currently, 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 that.

Speaker 6

We're always optimizing to return to top line growth, but we're also balancing profitability. Some of the investments we're looking at making are around AI powered ACE. We're bringing it to market and continuing to develop it. Regulated use case in Pharma and Financial Services and Shrott discussed that we're making some investments there. We are focused on making some other selected investments in certain categories, while also being disciplined on our cost.

Speaker 6

And in sales, the investments are going to be driven by productivity that we're seeing there.

Speaker 4

Understood. Very helpful. Thanks for taking my question.

Operator

Your next question comes from Rob Oliver with Baird. Your line is open.

Speaker 7

Great. Thanks for taking my question, guys. Shirot, I had a question on AI powered ACE. I know it's still early. Obviously really impressive when you guys did the demo event.

Speaker 7

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 being able to grow AR in the second half as well?

Speaker 5

So let me take the second one first. The answer is absolutely. We expect that 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 powered ACE includes 3 modules.

Speaker 5

1st is personalization at scale using audience segmentation. 2nd is ability to deliver derivative content like blogs, ebooks, takeaways from long form webinar content. And third, enhanced audience nurture using key moment videos from long form video content. So the AI powered AS bookings reached double digit mark as a percentage of growth here are in its Q1 after launch, we launched it at the end of January. And while it is early, the pipeline generated and the early wins received thus far from AI Power Days makes me optimistic about the future of this offering.

Speaker 5

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 1 of the largest technology companies in the identity and security space. Their marketing team now uses AI powered ACE to automatically produce streams of short form video content from their long form webinars and virtual events and delivers them across channels tailored for specific audiences. So overall, good start. We are learning from it and we are bullish about the ramp as the year progresses and into 2025.

Speaker 7

Okay, really helpful color. Thanks, Sharad. And then, Steve, just a follow-up for you. In response to the last question, you gave a lot of detail as well as in your prepared remarks around the various kind of cost considerations through the rest of the year. On the specifically around AI powered ACE, just curious around potential gross margin implications, particularly if we get and it would be a good problem to have like a lot of customers like that large identity management company.

Speaker 7

All is that also factored into your consideration as well or how should we think about that impact to margins? Thanks.

Speaker 6

Yes, 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 continue to be in the mid-70s, which is consistent with our full year 2023 margins, which were 75%.

Speaker 7

Great. Very helpful. Thanks, Steve.

Operator

Your next question comes from D. J. Hynes with Canaccord. Your line is open.

Speaker 8

Hey, guys. This is Ryan on for D. J. 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?

Speaker 8

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 this change.

Speaker 5

Yes. I think, Ryan, that's a very good question. It's what we are seeing interestingly that in markets like technology, which are currently the budgets are tight, but clearly they are the early adopters for things like the powered ace and 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 work related to AI these days. And some of that is even more acute in the regulated industries.

Speaker 5

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 3 different modules and some of them are simpler than others. So and that's where we are seeing more adoption. For example, things like derivative content, taking long form content and creating things like ebooks and takeaways, those are easier for people to understand and do and probably don't require as much regulation. But there are some in regular industry overall, there are a little more compliance hoops that we have to kind of jump through and that does delay the sales cycle a little.

Speaker 5

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.

Speaker 8

Okay. Yes, makes sense. And I guess just to piggyback off that, obviously Q2, you have a couple of big customers renewing. So with your go to market strategy for the ACE platform, are you actively like upselling into the installed base? Or are you just kind of waiting for customers' normal renewal cycles to push on that?

Speaker 5

No. We are selling AI powered days to both existing customers and to new customers. Clearly, the maturity of the existing customers is higher when you look at that at different levels of maturity. So we are seeing a lot more uptick at this stage from our existing customers related to AI PowerDACE. And again, there are 3 different modules, things like personalization at scale.

Speaker 5

We are seeing people gravitate a lot towards that, things like derivative content. So that's the way we are looking at it.

Speaker 9

Okay, awesome. Thanks guys. Appreciate it.

Operator

Your next question comes from Noah Herman with JPMorgan. Your line is open.

Speaker 9

Hey, Yane, 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 1 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. So just trying to get a sense for maybe what you're seeing down market with maybe some of your smaller customers and just anything you're doing there to sort of alleviate the customer churn there would be really helpful.

Speaker 9

Thanks.

Speaker 5

Yes. Noah, let me take it. 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 greater than 1,000 employees. I've outlined that as one of our top three strategic priorities. And our 100 ks plus ARR customers, as you said, which is you can look at that as a proxy for the large customers was approximately flat in a seasonally softer quarter.

Speaker 5

Yes, 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. Now we are looking at how to address that. That being said, I mean this is a group of customers 0 to 25 ks ARR cohort that is really feeling the pinch in this market environment.

Speaker 9

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 free cash flow turn positive and you essentially have breakeven EBITDA for the 3rd straight quarter. So just anything you can maybe do there that would surprise the upside would be helpful.

Speaker 6

Well, as I mentioned earlier, first off, we're always working to return to growth and that's the goal. And we're going to always look to balance profitability with our desire to return to growth. We'll continue to look at our cost structure as we always have. And if we need to make adjustments in the future, we'll certainly look at that.

Operator

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.

Speaker 5

Thank you all for joining. Really appreciate your time. Looking forward to speaking to you next time.

Operator

This concludes today's ON24 Q1 2024 Earnings Call. Thank you for attending and have a wonderful rest of your day.

Powered by Quartr
Earnings Conference Call
ON24 Q1 2024
00:00 / 00:00