Virtual events software company (NYSE:ONTF) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue down 12.8% year on year to $42.1 million. However, next quarter's revenue guidance of $38 million was less impressive, coming in 4.46% below analysts' estimates. ON24 made a GAAP loss of $12.8 million, improving from its loss of $16.2 million in the same quarter last year.
ON24 (ONTF) Q2 FY2023 Highlights:
- Revenue: $42.1 million vs analyst estimates of $41.4 million (1.54% beat)
- EPS (non-GAAP): $0.04 vs analyst estimates of $0 ($0.04 beat)
- Revenue Guidance for Q3 2023 is $38 million at the midpoint, below analyst estimates of $39.8 million
- The company dropped revenue guidance for the full year from $163.5 million to $158.5 million at the midpoint, a 3.06% decrease
- Free Cash Flow was -$4.87 million compared to -$4.34 million in the previous quarter
- Gross Margin (GAAP): 71%, down from 72.4% in the 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 has been declining over the last two years, shrinking from $52.1 million in Q2 FY2021 to $42.1 million this quarter.
ON24's revenue was down again this quarter, falling 12.8% year on year.
Next quarter, ON24 is guiding for a 20.1% year-on-year revenue decline to $38 million, a further deceleration from the 3.62% year-on-year decrease it recorded in the same quarter last year. Before the earnings results announcement, Wall Street was expecting revenue to decline 11.9% over the next 12 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 71% in Q2.
That means that for every $1 in revenue the company had $0.71 left to spend on developing new products, sales and marketing, and general administrative overhead. ON24's gross margin is lower than that of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. ON24 burned through $4.87 million of cash in Q2 , increasing its cash burn by 45% year on year.
ON24 has burned through $22.3 million of cash over the last 12 months, resulting in a negative 12.4% free cash flow margin. This low FCF margin stems from ON24's poor unit economics or a constant need to reinvest in its business to stay competitive.
Key Takeaways from ON24's Q2 Results
Although ON24, which has a market capitalization of $371.5 million, has been burning cash over the last 12 months, its more than $240.5 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
It was comforting to see that ON24 topped analysts' revenue expectations this quarter, even if just narrowly. That really stood out as a positive in these results. On the other hand, its full-year revenue guidance missed analysts' expectations and the company keeps burning cash. Overall, the results could have been better. The stock is down 2.01% on the results and currently trades at $7.79 per share.
Is Now The Time?
When considering an investment in ON24, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of ON24, we'll be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. On top of that, unfortunately its customer acquisition is less efficient than many comparable companies and cash burn raises the question if it can sustainably maintain its growth.
ON24's price to sales ratio based on the next 12 months is 2.3x, 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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