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ON24 (NYSE:ONTF) Posts Better-Than-Expected Sales In Q2 But Stock Drops 11.5%


Full Report / August 10, 2021
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Virtual events software company (NYSE:ONTF) announced better-than-expected results in the Q2 FY2021 quarter, with revenue up 43.4% year on year to $52.1 million. ON24 made a GAAP loss of $2.51 million, down on its profit of $5.27 million, in the same quarter last year.

ON24 (ONTF) Q2 FY2021 Highlights:

  • Revenue: $52.1 million vs analyst estimates of $51 million (2.06% beat)
  • EPS (non-GAAP): $0.04 vs analyst estimates of $0 ($0.04 beat)
  • Revenue guidance for Q3 2021 is $48 million at the midpoint, below analyst estimates of $51.1 million
  • The company dropped revenue guidance for the full year, from $209 million to $202.7 million at the midpoint, a 3.01% decrease
  • Free cash flow of $5.65 million, up 77.6% from previous quarter
  • Gross Margin (GAAP): 77.2%, down from 78.6% previous quarter

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 $36.3 million, to $52.1 million.

ON24 Total Revenue

And unsurprisingly, this was another great quarter for ON24 with revenue up an absolutely stunning 43.4% year on year. On top of that, revenue increased $2.01 million quarter on quarter, a strong improvement on the $3.18 million decrease in Q1 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 14.8% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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, licences, technical support and other necessary running expenses was at 77.2% in Q2.

ON24 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, 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 Q2 Results

With market capitalisation of $1.5 billion ON24 is among smaller companies, but its more than $396.3 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were impressed by the exceptional revenue growth ON24 delivered this quarter. And we were also excited to see it that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue guidance for the full year was downgraded. Overall, this quarter's results could have been better. The company is down 11.6% on the results and currently trades at $28.5 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. We think ON24 is a good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its impressive gross margins are indicative of excellent business economics.

ON24's price to sales ratio based on the next twelve months is 6.6, suggesting that the market is expecting more moderate growth. There is definitely a lot of things to like about ON24 and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $62.8 per share right before these results, implying that they saw upside in buying ON24 even in short term.