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ON24 (NYSE:ONTF) Beats Q3 Sales Targets But Quarterly Guidance Underwhelms


Full Report / November 09, 2021
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Virtual events software company (NYSE:ONTF) reported Q3 FY2021 results that beat analyst expectations, with revenue up 15.9% year on year to $49.3 million. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $51.5 million, or 1.68% below analyst estimates. ON24 made a GAAP loss of $9.4 million, down on its profit of $6.6 million, in the same quarter last year.

ON24 (ONTF) Q3 FY2021 Highlights:

  • Revenue: $49.3 million vs analyst estimates of $48 million (2.76% beat)
  • EPS (non-GAAP): -$0.03 vs analyst estimates of -$0.08 ($0.05 beat)
  • Revenue guidance for Q4 2021 is $51.5 million at the midpoint, below analyst estimates of $52.3 million
  • Free cash flow was negative $1.6 million, down from positive free cash flow of $5.65 million in previous quarter
  • Gross Margin (GAAP): 75.5%, down from 79.7% same quarter last year

Started in 1998 as a platform to broadcast press conferences, ON24’s (NYSE:ONTF) software helps organizations organize online webinars and other virtual events and convert prospects into customers.

The Covid-19 pandemic has accelerated the shift to a digital-first world. Given the growing difficulty of organizing physical meetings, more companies are adopting digital channels to engage with customers and are realizing it is harder than just video streaming a presentation. One directional online webinars are missing the interactivity of real world conferences and potential customers either give up during the stream or leave without being able to engage anybody from the company to ask questions.

ON24’s software as a service helps companies organize interactive online events like webinars or conferences and create a library of engaging pre-recorded content. The software provides users with tools that handle everything from registrations, streaming the video itself, to analytics on how customers reacted during the talk. Most importantly it allows companies to enhance their webinars with interactive features that allow the viewers to ask questions, immediately start a free trial of the product or request a meeting with the company’s representative. ON24 also connects with marketing and sales automation data to provide better insights to sales teams, making it easier to convert prospects into paying users.

Online marketing and sales are expanding at a rapid pace. Compared to the offline advertising market, which has been affected by the Covid pandemic and is challenging to measure and improve, more organizations are expected to adopt data-driven digital engagement platforms to better engage their customers online.

ON24 faces competition from marketing and web engagement tools provided by companies including Zoom (NASDAQ:ZM), LogMeIn (NASDAQ:LOGM), Intrado, Cisco (NASDAQ:CSCO), and Cvent.

Sales Growth

As you can see below, ON24's revenue growth has been incredible over the last year, growing from quarterly revenue of $42.5 million, to $49.3 million.

ON24 Total Revenue

This quarter, ON24's quarterly revenue was once again up 15.9% year on year. But the revenue actually decreased by $2.75 million in Q3, compared to $2.01 million increase in Q2 2021. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.

Analysts covering the company are expecting the revenues to grow 8.66% over the next twelve months, although estimates are likely to change post earnings.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. ON24's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 75.5% in Q3.

ON24 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still a good gross margin that allows companies like ON24 to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from ON24's Q3 Results

With a market capitalization of $828.5 million ON24 is among smaller companies, but its more than $399.6 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see ON24 outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and gross margin deteriorated a little. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $18 per share.

Is Now The Time?

ON24 may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that ON24 is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And on top of that, its very efficient customer acquisition hints at the potential for strong profitability.

ON24's price to sales ratio based on the next twelve months is 3.8x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While ON24 wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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