ON24, Inc. (ONTF) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. My name is Drew Glaeser, and I'm on Sterling Auty's software technology team here at JPMorgan. Here with me today is Sharat Sharan, who is the Founder and CEO of ON24. Sharat, thank you for joining us today at your first ever JPMorgan tech conference.

ON24 has been a public company for nearly 4 months now, what new things have you learned about your business over that time period?

Drew, delighted to join. I believe the last 4 months have only validated what we knew with respect to the shift to digital-first engagement and the need for a cloud-based platform solution that is purpose-built for sales and marketing. We are very excited about the customer momentum we are seeing, both for new customer acquisition and existing customer expansion and upsell. In Q1, we delivered strong financial performance. Our revenue grew over 102%, while ARR grew 90% year-over-year. The future is about hybrid engagement led by digital engagement, and we are seeing amazing results across every industry and finding an ever-expanding set of use cases across these industries from technology companies, increasing their reach and unlocking prospect insights to drive business growth; to manufacturing companies, transitioning to digital-first engagement that allows them to showcase their innovation, enable complex supply chains and drive product demand; financial services companies engaging with clients, promoting their offerings and attracting new clients; and finally, pharmaceutical and life sciences companies, enabling health care providers to offer the latest in breakthrough treatments for their patients. All these markets enabled by our cloud-based, data-rich digital system of engagement. It's exciting.

Definitely. That's very helpful background. Just to make sure that everyone is up to speed on the ON24 story, could you provide a brief overview of the business in the markets that you compete in and the customers that you serve?

Yes. Let me take a minute to talk about the company. It's -- ON24 is a cloud-based sales and marketing platform that helps B2B companies convert customer engagement to revenue. Our data-rich system of engagement allows thousands of companies to convert millions of prospects into their own customers. The foundation of our platform are these rich, interactive, multimedia experiences. They include live, webinar experiences, immersive virtual conferences and AI-based, always-on multimedia content experiences. We take the engagement and the first-person data which we integrate deeply into our customer sales and marketing systems so that their salespeople can convert the prospects to customers. The more experiences that are delivered, the deeper the engagement, the better the data, the better the personalization, it creates a flywheel effect. Our customer list is a who's who group, 3 of the 5 biggest technology companies, 4 of the 5 top U.S. banks, 3 of the 5 biggest life sciences companies, 3 of the 5 largest manufacturers. Our customers are achieving incredible results and ROI from our solutions. They have seen increases in pipeline, customer reach, conversion rates, yield sizes and have seen measurable growth in revenue, all driven by our platform. We have a very large TAM, which we currently estimate to be over $42 billion worldwide annually. And just to add, we delivered strong financial performance during our first quarter. Revenue grew over 100%, and ARR grew 90% year-over-year.

That's great. So in 2013, you had the foresight to move away from powering large, one-off digital conferences to becoming a provider of cloud-based subscription products. So how has the market for digitizing B2B sales and marketing transformed over that time period?

8 years back, I had an epiphany. Social media and digital experience platforms like Facebook, YouTube and Instagram were transforming B2C marketing. These platforms deliver highly engaging experiences, which is why consumers enjoy spending so much time on them. As a result, these companies know so much about us that they're able to deliver highly personalized and effective advertising. I realize that there was nothing like that, Drew, in the B2B world, and that's when we decided to go all in to build a digital experience platform that creates deep engagement, first-person data and AI-driven personalization for B2B companies. We are also benefiting from tectonic shifts upending traditional sales and marketing strategies. According to Gartner, 80% of sales -- B2B sales interactions will occur in digital channels by 2025. According to Forrester, the B2B buyer is self-educating, just like a B2C lives, 70% of B2B buyers are self-educating. So we are seeing a powerful transformation happening in the B2B world, the archaic and automated technologies that B2B companies use. Spamming people with endless e-mails and ads that lack personalization simply don't work and offer really poor return on the sales and marketing investment. As we build this business, we believe that the new era in B2B sales and marketing is here that is led by engagement, and that is what we are driving.

Great. And switching over to the impact from COVID-19, so how would you characterize the pandemic's impact on your business? And do you view ON24 as a net beneficiary of COVID-19?

We were doing very well before the pandemic. We've been enabling digital engagement for our customers for several years, and now the market has come to us. So yes, we have benefited. Due, in part, to the global pandemic, companies have gone through 10 years of digital transformation in 10 months. They've been able to see the reach, the engagement, the richness of their data to get through our platform, the personalization, the AI-driven personalization. Now it's clear to them and to us that there's no going back to business as usual.

Yes. And so I guess which COVID-induced impacts will be permanent? And how sustainable is ON24's growth in the post-pandemic environment?

Yes. Great question. So in Q4 2019, we grew our ARR 25%. We delivered over 30% revenue growth in Q1 2020 pre-pandemic. We had 73% gross margins, and we're cash profitable. So our customers are now achieving incredible results and ROI from our solutions. They have seen increases in pipeline, customer reach, conversion rates, deal sizes and measurable growth in revenue, all driven by our platform. I'll just give you a few examples. Juniper, one of the largest cloud networking and infrastructure companies, is generating 5x more pipeline compared to in-person events. At our recent virtual conference, Salesforce presented stats that showed that using ON24 increased their marketing pipeline by 135% and average deal size by 60%, staggering. Zendesk, a customer service software company, created 9 events in 6 languages to reach more than 13,000 prospects, driving 65 of its sales pipeline during the quarter. And Plante Moran, a large professional services firm, has increased the number of engaged prospects by 7x at just 1/3 of the cost. It's not just a new normal. It is a better way, Drew. There is no going back.

Yes. Those customer stories are really helpful. So our primary research suggests that after the pandemic, a lot of businesses will employ a hybrid B2B sales and marketing motion that relies on both digital and in-person. Is that what you're hearing from customers as well?

Yes. Looking forward, we believe that the future is all about hybrid engagement. While physical events will come back in some form, they provide no data. They will be used to complement and augment a digital-first strategy. That is what our customers are telling us. In fact, we see the market -- entire market flipping on its head. We used to talk about bringing the physical event experience to virtual events. Now we are talking about bringing the benefits of digital engagement to physical events. We can provide the digital-first benefits of extended reach, continuous engagement, first-person data and ecosystem integration to physical events, and importantly, actually create a single, integrated simultaneous experience for both in-person and virtual attendees. We can provide a hybrid audience engagement attendees, whether virtual or physical, can view the same presentation, interact with the same content, participate polls, surveys, request trials or demos and network with each other with hybrid breakout rooms. We can collect first-person engagement data buying signals and create prospect profiles across physical and virtual events. This is a data-rich system of engagement in the hybrid world. We're really excited about it.

Definitely. And switching over to the ON24 products suite, could you just walk us through what your main offerings today are?

Yes. Before I jump into it, let me just step back. Our customers use our platform to engage with their prospects at scale. We take that deep engagement and convert that to first-party data which we integrate deeply in customer -- in our customer sales and marketing ecosystem. Net effect is we enable thousands of companies to convert millions of prospects to customers. And to be able to do that, there are 3 core components, Drew, of our platform: ON24 Experience, ON24 Intelligence and ON24 Connect. The ON24 Experience is a series of 4 experienced products: ON24 Elite, which is our flagship, live, interactive, webinar experience product; ON24 Virtual Conference, immersive, scalable, virtual conference product; number three, the ON24 Engagement Hub. That's a curated, always-on, multimedia content experience product; and finally, ON24 Target, a personalized hyper-relevant rich media content experience. Next is ON24 Intelligence. This is our data and AI layer. It has prospects engage with these experience as they generate first-person data, which we run through our AI engine. We capture a prospects lifetime activity and can automatically recommend relevant content and personalize their next experience, which increases conversion. And finally, through ON24 Connect, we make this data available to the sales and marketing ecosystem of our customers. We have built near real-time integrations with all leading CRM, marketing automation and BI tools.

Yes. So you mentioned that one of the major items that sets ON24 apart is the ability to gather real-time customer engagement data. Could you just dive into that a little bit more and talk about the metrics that ON24 Intelligence collects and how it uses those?

Yes. I mean that really is the secret sauce of the ON24 platform, our ability to capture first-person engagement data and buying signals. A single ON24 live experience averages 50 minutes to audiences of more than 200 attendees, delivering over 20 data points of engagement for each attendee. And most of our customers do hundreds of thousands of experiences. Last year alone, we delivered 200,000 live digital experiences, Drew, totaling 2.5 billion engagement minutes. Now first, on the analytics part, we create in-depth, AI-based Prospect Engagement Profiles. We also provide very detailed analytics at a prospect level, event level, account level and even benchmarks in an industry across all our products. We develop a prospect's lifetime activity, how they engage with any ON24 experience from the questions they ask, the polls they answer, the white papers they downloaded, all clues that current customer engagement into deep insights. And using AI, we are then able to determine their business interest. And it doesn't stop there. We then integrate that deeply within our customer sales and marketing ecosystem so that the buying signals and the engagement data is available to the sales force. We provide one of the largest sources, if not the largest source, of first-person engagement data for our customers. And like I said before, we build these near real-time deep integrations with all major marketing automation, CRM and business intelligence tools. We want to make sure that when a customer raises their hand and is ready to buy, that information moves through our platform to the CRM and marketing automations tools in near to real time so that salespeople can respond as soon as possible and close the deal.

Definitely. And you recently added integration capabilities with Veeva. So could you characterize the demand environment for digital transformation among health care and pharmaceutical companies and what you're seeing there?

Yes. Life science as an industry is -- and pharmaceuticals, in particular, are very exciting markets for us, Drew. These industries have generally had a long-standing tradition of in-person events which they have used to enable the health care providers and disseminate their research. And for years, they've been thinking about how do they engage health care professionals in a digital-first world. Now today, we are seeing pharmaceutical companies share groundbreaking discoveries and enabling health care providers to offer the latest treatments for their patients, all through a digital system of engagement. As an example, AbbVie, one of the largest pharmaceutical companies, using the ON24 digital experience platform, AbbVie created digital events, such as virtual conferences, live and on-demand seminars to engage virtual -- to engage health care professionals. Last year, they saw a 200% increase. Their numbers increase year-over-year in their engagement with health care professionals. Very strong engagement.

Yes. And you also recently announced ON24 breakouts. So what are the primary use cases for that product? And how has the initial traction with customers looked?

This is a very exciting new capability and something that our customers are very interested in. That's why we were so interested in bringing the breakouts to market -- ON24 breakouts to market. Now at ON24, we have created experiences that drive true audience engagement. Assuming you have 200 to 1,000 audience members in your live webinar experience. As these prospects engage and some are ready to buy, you can move them into one-on-one engagements with your salespeople. It really becomes not only an engagement platform but now a complete sales and marketing platform. So these breakouts allow our customers to now hold these virtual events where they can enable attendees to seamlessly enter into breakout rooms for peer-to-peer networking. They can hold more breakout sessions with truly interactive 2-way video, QA sessions with subject matter experts and then jump into one-on-one meetings with sales to close and accelerate buyer journeys, so a very exciting new capability.

And pivoting to the competitive landscape, how is ON24 differentiated from a solution like Zoom?

Yes. So I think Zoom is a tremendous company. They're a great video collaboration tool. They are doing video collaboration. They are doing voice. They are doing 10 other things. They've got a lot going on. It has become a horizontal utility which they sell to IT. We've only got one purpose, Drew. We are purpose-built. We built a holistic platform for sales and marketing. We are purpose-built to convert customer -- millions of prospects to buyers. The deep engagement, the data, the AI-driven personalization and deep integration with our customer sales and marketing ecosystems is something that sets us apart. We sell to sales and marketing. Interestingly, video collaboration tools like Zoom and Webex are a great source of customers for us because people may have used them as their -- as almost the 101 of digital engagement. But when they are ready for a purpose-built sales and marketing platform, purpose-built engagement and data platform, that's when they come to us.

Got it. And who else do you see from a competitive standpoint? And are there other solutions in the marketplace that can match the scale and data-gathering capabilities and integrations that are available with ON24?

Not that we have seen. Let me talk about 2 or 3 things you talked about. Let me talk about scale. So our platform has been developed to enable enterprise-grade scalability, performance and reliability. It is privacy-compliant and accessible, and we provide global reach and coverage. We have some of the largest enterprises in the world using our platform, and scale is an important factor in their decision to go with ON24. About data. We have a very robust, differentiated set of first-person data-gathering capabilities. I've talked about it. We develop a 360-degree view of every individual, how they engage with any ON24 experience from the questions they ask, the polls they answer, the white paper they download, if they book a meeting with sales or register for a free trial. And coupled with our AI technology, we can leverage that data capture to create personalized experiences and promote recommended content. And on third-party integrations, we have built the most robust set of integrations in our category. We spent millions of hours over the last 7, 8 years, Drew, to build very deep integrations with all of the key marketing automation and CRM systems like Adobe Marketo, Salesforce, Oracle, Eloqua. And we recently announced this integration with Veeva, which is the leading CRM in the life sciences market.

And could larger, better capitalized players like Google or Salesforce or Microsoft enter this market? And how long do you think it would take them for -- to either build or acquire comparable functionalities?

Yes. Let me first talk about Salesforce and Adobe. I mean they're both large customers of ON24, and we have over 1,000 customers at least that integrate with their platforms. I mean they are partners. Adobe also has a Adobe Connect, which they -- they don't use that for their sales and marketing digital engagement. They use ON24. Similarly, Microsoft is a large customer. We enable their virtual engagement at events globally. I know they have Teams, but that is a video collaboration tool sold to IT. It's not a sales and marketing platform, driving engagement and data. Our system is not about one product but multiple customer experiences interconnected. But most importantly, the data and integrations that we have built over the last 7, 8 years, it's very hard to replicate.

And how sticky is the platform overall? Or how hard would it be to switch for a customer?

As people engage with our platform,and they provide their digital body language, the more people -- the more time they spend, the more data, the more personalization, that information that we have on them, and it's all done in a privacy-compliant manner, then we also integrate that deeply. About 60% of our ARR is deeply integrated in the sales and marketing ecosystem. So it's integrated in the complete ecosystem of our customers. So once you implement that -- sorry. I just kind of went away for a second. So once you implement that, it's very hard for you to switch because the more time you spend on the platform, it's very hard for you to switch. It's almost like -- it's like the Facebook effect that the more people are on the platform, the more data they have, the more personalization there is. It's hard for people to move, especially when we are deeply integrated in our platform.

That makes a lot of sense. And switching over to go to market. So given that you focus on a land-and-expand strategy within the enterprise segment, is ON24 Elite almost always the initial customer sale? Or is there a way for customers to enter your platform through different products?

Elite is often the entry point for our platform, but we are increasingly entering deals with multiple products initially. And once we land, we're able to expand and upsell our customers to other products and features from there, including Engagement Hub and Target or even breakout rooms now. The other initial entry points to our product now is using the Virtual Conference product. It's also important just to mention that 30% of our customers, Drew, buy 2 or more products from ON24. So we are seeing great traction from Elite but also from our other products. Our customers now have multiple entry points to our platform. Many of them are buying multiple products upfront, which we further accelerate by cross-selling and upselling them.

Got it. And at the time of the IPO, you outlined your intention to double your number of quota-carrying reps over the next year. Where are you in the process of that hiring? And in what areas do you plan to have these reps focused?

We don't disclose sales rep numbers. What I can tell you that our sales expense increased 80% from Q1 2020 to Q1 2021, and it generally takes about 6 to 9 months to ramp. So I would expect, because we hired these people starting the second half of last year so to start showing by the end of this quarter. And where we hired them, we've hired in our enterprise and commercial teams. We've also entered new markets like Japan and Germany and more investments in our EMEA business, so significant investments across the board.

Got it. And just going back to the land-and-expand strategy, how does the expansion journey typically look for a customer? Is that taking on like additional departments within a company? Or how does the expansion typically look?

I mean once we enter, and we generally enter on a departmental basis, then as we go into multiple departments, people -- you can add workspaces and log-ins. You can attach our different products, Engagement Hub, Target, breakout rooms, et cetera. Then -- so then you expand internationally, in EMEA and APAC. You may go into -- just to give you an example, one of the largest global software companies, they started 3, 4, 5 years back with one particular department, one workspace, 2 log-ins for their demand-generation use case. 90 days later, they added workspace as a partner marketing and customer marketing. Then they went EMEA and APAC, more workspaces. Then they added Engagement Hub and Target. Then they added Virtual Conferences, so it's -- we have a very strong cadence of how we upsell and cross-sell these customers.

Got it. And touching on the international opportunity, what is the strategy there? And is there a specific area of the world or a specific region that you're focusing on now?

Yes. Let me highlight. So in Q1, 33% of our bookings came from international markets and about 25% of our revenue. And the largest in that is our EMEA business, followed by APAC. So in addition to investing in these markets, we also decided at the end of last year to enter Japan with a small team. And we generally go in -- we go in with a team of about 5 people. And then we've also entered Germany and DAC. So those are the additional new markets that we have entered in. And -- but we are extremely bullish about our growth in international markets.

Got it. And where do you think ON24 sits from a spending priority standpoint in a post-COVID environment?

The future is about digital-first hybrid engagement. When I talked about, Drew, and I gave the example of something like a company like a Salesforce that generated 135% more marketing source pipeline and 60% more deal size using ON24. AbbVie, that is doing 200x more engagement with their health care professionals. Our Plante Moran, that's been 5 to 7x more reach, it's -- those are staggering results that are driving revenue for these companies. We believe that -- and we're already seeing it. We are seeing much stronger expansion upsell and new customer wins in these customers. I think we're going to be a very important part of the spend for these companies because -- in addition, if you look at the larger trends, you look at -- Gartner talking about that 80% of sales and marketing is going to happen over digital channels by 2025. The B2B buyer is also self-educating. According to Forrester, 70% of the B2B buyers are self-educating. And with the results that we are providing, we believe that the future is about the era of engagement that we are driving. So we believe we've got sustainable tailwinds for the foreseeable future.

Yes. So touching on that, in the second quarter of this year, you're facing your largest renewal base. So what levels of churn and contract downsizing are you anticipating? And what are you seeing from the customers thus far?

Yes. First of all, I think it's important to recognize that we are seeing tremendous engagement, upsell and expansion from our customers. I said about -- when a customer like Salesforce reports the numbers I talked about, 135% increase in marketing source pipeline and 60% increase in deal size, how do you not go all in? That being said, yes, Q2 this year is our largest renewal cohort by far, both from an ARR and a number of customers perspective. The cohorts for Q3 and Q4 are significantly lower than Q2. Generally, Q4 is historically our largest cohort, but Q2 is now bigger. We did see some COVID-related buying at this time last year. And as we've talked about it in our Q1 call, we are seeing some churn and downsizing in a minority of accounts, but it's something we always expected and is factored in our guidance.

Got it. And is there a specific customer vertical that you anticipate will be disproportionately represented in terms of strength in the next few months when those renewals happen?

From a strength or from a -- are you talking about strength? Or are you talking about from a risk point of view?

I guess both. Which -- what customer verticals are kind of standing out right now in terms of strength? And are there any that you could see reverting to more like in-person events?

Yes. So I think, first of all, one thing to keep in mind, in-person events or virtual conferences is only about 10% of our revenue, okay? Sometimes people think physical is going to come back. That's only 10% of our revenue. So that's important to keep in mind. Important part. Now we focus on 6, 7 core verticals, Drew, technology, of course. Life sciences is a very important category for us. Financial services, manufacturing, professional services like accounting firms, law firms, et cetera, and media and entertainment companies. So -- and all these -- all those verticals are going through tremendous transformation. Manufacturing is -- the use cases are a lot more about partner enablement across the world because they've got such disparate product lines, and they use a very -- thousands of partners and OEMs to sell their products. So we are seeing very strong engagement across all the verticals. Generally, the most important thing for me, Drew, is how are these potential customers integrating our platform within their ecosystem? So if it's in life sciences, are they integrating that with Veeva? If it's in technology, are they integrating that with Marketo and Salesforce or Eloqua? And similar in other verticals. That's a very important part because then we are in their sales and marketing workflow. And in the Q2 cohort I talked about, there were a lot of people who are generally more in the SMB category who just jumped on the bandwagon a little, right? So we saw some of that buying. And some of that may go away in a minority of the accounts, but I feel very, very good about the verticals that we execute in. I think those are going to be tremendous for us.

Great. And then just zooming out, what kind of growth can ON24 sustain over the long term? And what are the key catalysts driving that growth?

Yes. It's -- I think I'll give you a guidepost based on the past. I mean prior to COVID, in Q4 2019, we grew our ARR 25%. In Q1 2021, our revenue growth was 31%. We were 73% gross margin, and we were cash flow profitable. So that's kind of a guidepost. Now our net dollar retention rate pre-COVID was 110% for our core business, our full business; and about 115% to 117% for our enterprise business. That is about 70% of our business. So even if you look at -- that normalization happen and the guidepost I gave you, but now the market has come to us. After we lap the COVID quarters, I talked about the shifts, the sales and marketing moving to digital channels, the buyer educating. I believe we have got sustainable tailwinds for the foreseeable future. In addition, we are making -- we've made significant investments. Sales capacity, as we discussed, in both our acquisition, expansion and upsell change. I talked about our entering markets, our investments in the EMEA market and more in Japan and in Germany and also the tremendous investments in new products that we are making. So we think we've got sustainable tailwinds for the foreseeable future.

Great. Well, all of that has been extremely helpful, and thank you for joining us, Sharat, and hope everyone else has a great evening. Thanks again.

Thank you, Drew. Really enjoyed it. Appreciate it.