The Company
Presenting ON24 (NYSE:ONTF) to the board, a B2B ‘Digital Experience Platform’ company that IPO’d in February this year and counts Microsoft, IBM, Salesforce and Deloitte amongst others as customers. Here’s a brief summary in the CEO and founder, Sharat Sharan’s words:
‘The foundation of our platform was built around the idea that interactive, multimedia experiences increased audience engagement, which delivered better data, and with better data, you could further personalize the next experience. It creates a flywheel effect.’
Essentially ON24 offer a digital marketing SaaS platform that businesses can use to create personalised experiences for their potential customers in order to turn them into real, paying customers. The platform was 77% of revenue in Q4 with the remainder consisting of professional services (23%). Management did note that there is some seasonality to the latter, with it normally landing in the mid-teens as a percentage of total revenue.
Although US/International revenue does not appear to be broken out, the impression given during the latest earnings call is that international expansion is still very much in its nascency. Sharat was more forthcoming regarding enterprise vs smb revenue:
‘And the way to think about it is pre-pandemic, our NRR was about 110% with a little more than 115% for our enterprise business, and 70% of our ARR is in the enterprise.’
The platform offerings consist of Webcast Elite (flagship product), Engagement Hub (advertised as a ‘Netflix channel for your brand’), Target (personalised media content) and Virtual Conference (digital events) which all feed back customer engagement data. Another snippet from the CEO for what then happens to this data:
‘As customers engage with these experiences, they generate first-person data, which we run through the ON24 analytics platform. This is the secret sauce. We develop a 360-degree view of every individual from the questions they ask to the polls they answer to the content they download, all clues that turn customer engagement into rich insights. And those insights fuel our AI engine, recapture prospect’s lifetime activity, the history of business interest to automatically recommend relevant content and personalize the next experience. This propels buyers forward, taking them from one relevant experience to the next, reducing friction and accelerating conversion and revenue. Finally, through ON24 Connect, we make the data available in the sales and marketing ecosystem of our customers. We have built near real-time deep integrations with all the leading CRM, marketing automation and business intelligence tools.’
So far so good. What’s special about them then?
The Numbers
All non-percentages in millions
**Revenue Rev QoQ % Rev YoY% NRR Gross Margins ARR ARR QoQ % ARR YoY % Net Income/Loss NI/L % of Rev NI/L per share Op Income/Loss OI/L % of Rev FCF Cash**
53.3 - 123.00% 149.00% 81.10% 153.4 - 100.00% 11 20.64% 0.57 9.6 18.01% 10.3 58.2
Yes, they are growing from a relatively small base and we only have one quarter to pore over but even so, the numbers are impressive across the board particularly the level of operating income as a percentage of revenue given they are a small and growing SaaS business.
Time for the other side of the story. As expected, Covid has been a significant tailwind for a business whose primary product is based around webinars and digital experiences, as shown both in the CFO’s prepared statement;
‘COVID became an accelerant for us as more businesses turned to ON24 to engage with potential customers when physical meetings came to a halt. We began adding new clients at a rapid pace and expanding our footprint with existing customers, driving exceptional growth in ARR and revenue. Looking ahead of this year, we will begin lapping these quarters of exceptional growth at a more normalized rate. While we continue to see fantastic engagement from our customers in the early stages of 2021, our guidance reflects our expectation that we will see some normalization in growth.’
And in annual numbers in the most recent 10k filing:
**Year ARR (Millions) ARR YoY NRR Customers Customers YoY $100k Customers $100k Customers YoY**
2018 61.25 - 107.00% 1241 - 116 -
2019 76.85 25.47% 108.00% 1401 12.89% 144 24.14%
2020 153.36 99.56% 149.00% 1994 42.33% 302 109.72%
Overlooking the crazy conversion rate of >$100k ARR customers in the past year(!) the pandemic has created a clear and significant tailwind for the business and there is likely to be a hefty drop-off in this metric as the world starts to re-open and they lap the covid quarters. The question is how hefty? Well, the guide for FY21 revenue is $207 million at the midpoint, or 32% YoY vs 100% for FY20. Oof. As we only have one public quarter on which to base our assumptions it’s hard to know ON24’s leadership tendencies with regard to sandbagging but even assuming a 10% beat, that’s a nosedive of sizeable proportion when compared to the year just gone. This guidance along with the general drawback in SaaS names in the past few weeks probably goes a fair way to explain the poor stock performance since IPO. Either way, there should be some further clarity when Q1 21 earnings are announced on 12th May.
It’s also worth mentioning that the concentration of Webcast Elite revenue as a percentage of ARR could be a cause for concern:
‘We ended last year with close to 30% of our customers having multiple products. As you know, Elite is about over 70% of our ARR. I think it’s followed by Engagement Hub and Virtual Conferences and almost around the same and followed by Target. A lot of our focus this year is to continue to increase the expansion of the other products.’
I view this similarly to Datadog landing with their flagship APM product before customers expand into additional modules, the primary difference being that ON24 is not a nuts and bolts service; they fall into the category of ‘nice to have’. 149% NRR in Q4 indicates there is a good deal of stickiness to the platform but it does concern me that if a Zoom or Salesforce entered the space, the low uptake in multiple modules could contribute to high churn rates. This highlights the biggest unknown for me - how hard would it be for a competitor to replicate the platform?
Conclusion. For now…
Initially impressed by the financials, this is the section where I thought I would have a number of reasons for owning shares but over the course of researching the company there are really just two main justifications for adding to my small position barring any unwelcome revelations:
1. I believe the combination of stellar NRR and the significant uptick in enterprise customers as well as the capacity to now upsell to a large number of newly acquired customers will lead ON24 to handily beat their guidance for this year.
2. Despite having almost identical numbers in most metrics to a similarly sized SaaS business, JFrog, ON24 is currently around half the price at around 14x trailing EV/S yet, in the most recent quarter has grown at 3x the rate with a similar level of profitability.
(JFrog does have greater cash reserves though ON24’s latest earnings cash balance excludes $348 million in net proceeds from IPO).
Finally, I will readily admit that neither marketing nor finance are my areas of expertise so it is entirely possible that I have missed something obvious/made a glaring error in my analysis. Disclaimer out the way, I would love to know people’s thoughts!
Footnote - Thanks to Saul and the board & a bit about me.
This has been said many times in many different ways but my first post would be amiss without thanking Saul, the moderators (some of the best I’ve seen in an online forum) and all contributors to the board, as well as the Motley Fool. In order to do so, a bit of background for those that are interested.
I’m another UK-based investor (there seem to be a few on the board now!) currently working in the healthcare sector and am still in the early years of my career. After becoming increasingly frustrated about the state of interest rates a couple of years ago, I started looking into investing - then following a year of underwhelming returns buying UK shares and a lot more reading - investing specifically in US-based software businesses, eventually leading me to this board. Having lurked in the shadows for a while, reading and digesting as much wisdom and information as I can, I still find it incredible that the board is free to access and feel unbelievably lucky to have stumbled across such a brilliant community whilst relatively young. The Motley Fool likely has a customer for life as thanks for hosting it. In my cynical British ways I’ve always been slightly sceptical of anything purported to be ‘life-changing’ but for myself and evidently many others this board truly has been. Thank you Saul for not only starting it but putting so much of your time and effort into maintaining it.