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ON24 (NYSE:ONTF) Exceeds Q1 Expectations But Full Year Guidance Underwhelms


Full Report / May 10, 2022
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Virtual events software company (NYSE:ONTF) reported Q1 FY2022 results beating Wall St's expectations, with revenue down 3.2% year on year to $48.4 million. However, guidance for the next quarter was less impressive, coming in at $47.5 million at the midpoint, being 3.64% below analyst estimates. ON24 made a GAAP loss of $15.4 million, down on its loss of $2.83 million, in the same quarter last year.

ON24 (ONTF) Q1 FY2022 Highlights:

  • Revenue: $48.4 million vs analyst estimates of $47.5 million (1.88% beat)
  • EPS (non-GAAP): -$0.13 vs analyst estimates of -$0.15
  • Revenue guidance for Q2 2022 is $47.5 million at the midpoint, below analyst estimates of $49.2 million
  • The company dropped revenue guidance for the full year, from $202 million to $193 million at the midpoint, a 4.45% decrease
  • Free cash flow was negative $7.75 million, compared to negative free cash flow of $5.61 million in previous quarter
  • Gross Margin (GAAP): 73.3%, down from 78.6% 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 mediocre over the last year, growing from quarterly revenue of $50 million, to $48.4 million.

ON24 Total Revenue

ON24 is guiding for revenue to decline next quarter 8.86% year on year to $47.5 million, a further deceleration on the 43.4% year-over-year decrease in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 2.92% over the next twelve months.

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 73.3% in Q1.

ON24 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.73 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 around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. ON24 burned through $7.75 million in Q1, with cash flow turning negative year on year.

ON24 Free Cash Flow

ON24 has burned through $9.31 million in cash over the last twelve months, resulting in a negative 4.61% free cash flow margin. This below average FCF margin is a result of ON24's need to invest in the business to continue penetrating its market.

Key Takeaways from ON24's Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on ON24’s balance sheet, but we note that with a market capitalization of $548.9 million and more than $359 million in cash, the company has the capacity to continue to prioritise growth over profitability.

ON24 topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that ON24's revenue guidance for the full year missed analyst's expectations and the revenue growth was quite weak. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $10.77 per share.

Is Now The Time?

When considering ON24, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of ON24 we will be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately cash burn raises the question if it can sustainably maintain its growth.

ON24's price to sales ratio based on the next twelve months is 2.5x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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