ON24 Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 7 speakers on the call.

Operator

welcome to the ON24 Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Shail Daloier.

Operator

Please go ahead.

Speaker 1

Thank you. Hello, and good afternoon, everyone. Welcome to ON24's Q3 2024 Earnings Conference Call. On the call with me today are Shiraz Churan, Co Founder and CEO of ON24 and Steve Vazaroni, Chief Financial Officer of ON24. Before we begin, I would like to remind everyone that some information provided during this call will include forward looking statements regarding future events and financial performance, including guidance for the Q4 full fiscal year 2024 as well as certain 4th quarter and full year non GAAP projections.

Speaker 1

These forward looking statements are subject to known and unknown risks and uncertainties that could adversely affect ON24's future results and cause these forward looking statements to be inaccurate, including our ability to grow our revenue, attract new customers and expand sales to existing customers, the success of our new products and capabilities, other statements regarding our ability to achieve our business strategies, growth or other future events or conditions such as the impact of adverse economic conditions and macroeconomic deterioration. ON24 cautions that these statements are not guarantees of future performance. All forward looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Please refer to the company's periodic SEC filings and today's financial press release for factors that could cause our actual results to differ materially from any forward looking statements. We also like to point out that on today's call, we will report both GAAP and non GAAP results.

Speaker 1

We use these non GAAP financial measures to evaluate our ongoing operations and for internal planning and forecasting purposes. Non GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see the reconciliations of these non GAAP financial measures, please refer to today's financial press release. I will now turn the call over to Sharath. Sharath?

Speaker 2

Hi. I am Sharath Sharath, CEO of ON24. Thank you for joining us for our Q3 2024 financial results conference call. Our Chief Financial Officer, Steve Batuoni is also with me today. Let's start by discussing our financial results this quarter.

Speaker 2

Our 3rd quarter results showed significant improvement across key metrics. AI adoption continues to gain momentum and our focus on mission critical use cases in regulated industries like life sciences is yielding positive results. We have started to win back some key customers that left us for cheaper but less effective options. I will go into all of these developments in more detail later in the call, but first I will touch on our financial results. Revenue, gross margins, adjusted EBITDA and EPS all came in above guidance.

Speaker 2

Q3 revenue from our core platform including services was $35,600,000 and total revenue including virtual conference was $36,300,000 Of total revenue for the quarter, subscription and other platform revenue was $33,900,000 and professional services revenue was $2,500,000 We delivered our 6th consecutive quarter of adjusted EBITDA profitability and our 3rd consecutive quarter of positive free cash flow generation. Our results in Q3 and year to date underscore our improved retention profile, operating expense discipline and cash flow improvement. I'd like to elaborate on these achievements to highlight the progress we have made this year starting with ARR. We ended the quarter with $129,700,000 of core platform ARR, a decrease of $1,370,000 or approximately 1% from Q2. Total ARR at the end of Q3, including ARR from our virtual conference product was $132,200,000 Our core ARR performance has improved meaningfully compared to 2023 with a 5% year over year decrease in Q3 2024 compared to a 12% year over year decrease in Q3 2023.

Speaker 2

We recognize we have further work to do in this area, but we are making steady progress in stabilizing our business and executing across our growth vectors. On 24, AI Powered ACE, our AI Powered Analytics and Content Engine solution is an important growth driver that continues to gain traction. In Q3, AI powered ACE ARR performance reached a new high as a percentage of growth ARR despite ongoing pressure on marketing budgets. New business acquisition performance in Q3 was consistent with Q2 levels in a seasonally softer Q3. Our in period gross retention in Q3 improved significantly from Q3 of last year, showing a high single digit year over year increase in both Q3 and on a year to date basis compared to the 1st 9 months of 2022.

Speaker 2

Churn and down sales both improved on a year over year basis. Additionally, net retention in Q3 increased by mid single digits from 2023 year end. Next, on margin performance and operating expense discipline. Gross margin improved by approximately 200 basis points year to date in 2024 compared to the same period in 2023. Our adjusted EBITDA margin improved on a year to date basis by over 300 basis points in 2024 compared to the same year to date period in 2023.

Speaker 2

Finally, free cash flow year to date was positive $2,100,000 compared to negative $12,400,000 in the same period in 2023, an improvement of $14,500,000 Next, I'd like to remind you of our 3 strategic pillars and share with you the enhancements that we saw in each of these areas in Q3 that give us continued confidence in our strategy. 1, relentless platform innovation including our AI solutions. 2, continuing to focus our go to market execution on the enterprise with an emphasis on highly regulated industries and 3, returning to growth while hitting our profitability targets. Beginning with our AI platform innovation, we are excited to see sequential growth in the percentage of core platform ARR coming from our AI powered ACE solution, which is only introduced at the beginning of the year. In Q3, our number of AI powered ACE customers reached triple digits and we are seeing a strong correlation between AI powered ACE and overall customer health metrics.

Speaker 2

This customer cohort tends to invest at higher levels for longer periods and uses multiple products in our portfolio. As a reminder, AI Powerbase includes 3 differentiated capabilities: 1, personalization at scale to target priority audiences 2, AI generated content to automate and scale content creation 3, automated campaigns and nurtures to drive continuous engagement with prospects and customers. Each of these capabilities help offset the significant resource strain faced by B2B sales and marketing teams today by leveraging the work they're already doing and delivering better conversion rates, broader global reach and greater pipeline results. Importantly, these capabilities directly match with B2B growth initiatives and align our platform with the AI technology budget that enterprises are prioritizing for investment. Let me share how one of our AI powered ACE customers, a public mid market global SaaS company is having success with AI powered ACE.

Speaker 2

Through AIACE's personalization at scale capabilities, they can now precisely target and engage 3 unique audiences with just one campaign, combining into one experience content that was previously delivered over many weeks and required totally separate campaigns. This platform innovation not only improves their team's efficiency and saves a lot of time, it also gives them more qualified leads to convert to pipeline and has accelerated buying journeys. I'd also like to share the story of an AI powered ACE win with a new customer, a public mid market provider of enterprise cloud based tools. Their marketing leadership was looking to make AI a central part of their go to market team's growth strategy as part of a top down initiative from their CEO. Recognizing the time savings, pipeline growth and ROI that they could gain from our platform's AI powered AS solution, they decided to upgrade from a collaboration tool and will use our platform's AI capabilities to generate demand, automate content creation and deliver personalized experiences at scale to their diverse customer base that spans a 20 plus product portfolio.

Speaker 2

As these two examples illustrate, we believe that our AI platform innovations are helping us recapture budget in the technology vertical and industry segment where we recently faced the greatest amount of pressure due to budget concessions. In fact, 2 of our larger Q3 new business deals came from the tech sector where AI powered ACE was a critical factor in their buying decision. With the overall tailwind of AI technology investment, we are continuing to invest in an aggressive AI innovation roadmap and focusing our development on advancements that will help customers get more intelligent on their prospects engagement data and improve their pipeline and revenue results. With over a 1,000,000,000 engagement minutes per year of 1st party customer data generated on our platform, we have a competitive advantage and solid foundation for ongoing AI based innovation. For example, we've added a new AI driven capability that surfaces key insights called Smart Tips to our customers.

Speaker 2

By delivering a continuous stream of insights, customers can apply these Smart Tips to their campaigns upfront to help them get even greater revenue results with the ON24 platform. When we look at the customers who've been using AI powered days between January the end of Q3, we see those customers typically improve their conversion rates and achieve more uplift of their average reach per campaign. This is an extremely positive indication of a downstream increase in pipeline in revenue results. We are excited about the performance gains our AI powered AS customers are experiencing and we believe our future innovation can extend that uplift even further. Next, I'd like to turn to our 2nd strategic priority, our enterprise go to market strategy.

Speaker 2

The percentage of ARR in multiyear agreements and the percentage of customers using 2 or more products hit new record highs. We are stabilizing our ARR and we are working to return to growth. To help improve our sales execution and return to growth, we recently up leveled our sales leadership by hiring a new Head of North America Sales. I'm particularly excited that we are seeing encouraging signs on customer win backs, especially from customers who are coming back to us after failing to get results from collaboration tools and point solutions. In fact, in Q3, the percentage of new core ARR which came from Boomerang customers was in the high single digits.

Speaker 2

To provide more color, I'll share a few examples of win back deals in Q3. One Boomerang deal was with a $5,000,000,000 plus global cybersecurity company. Facing budget pressure earlier in the year, this customer opted for a collaboration tool and within just a few months realized their mistake. They recognize that without a global purpose built platform for engaging experiences and first party actionable data and insights, their pipeline was negatively impacted and they found themselves falling short of their sales targets. In Q3, they reengaged with us to help them refuel their global demand generation engine.

Speaker 2

They're excited about our latest innovations and have reinvested in our platform with a 6 figure commitment. Another boomerang deal in Q3 was with a $1,000,000,000 plus IT services and solutions provider. Over the past year or so, the company went through a merger and resorted to a point solution. As they started to centralize and streamline their sales and marketing operations, they quickly found that their point solution could not scale enterprise wide or integrate with their technology stack. Leveraging the breadth and depth of our capabilities, especially the addition of our AI powered AS solution, this customer's demand generation, customer education and field and content marketing teams are now standardized on our platform.

Speaker 2

Using ON24 as a single platform to run digital campaigns, generate customer insights and automate their end to end process. We believe that these win backs demonstrate how differentiated our platform is when it comes to supporting mission critical go to market use cases for enterprise organizations. This is especially true when it comes to highly regulated industries like Life Sciences, where we have a dedicated go to market motion and platform roadmap. We saw low single digit sequential core ARR growth from the Life Sciences vertical in Q3 and we remain excited about this customer cohort. To illustrate the strength of our Life Sciences vertical, I'd like to highlight an expansion with one of our long term customers, a $50,000,000,000 plus American pharmaceutical company that is among the top 10 biopharma companies in the world.

Speaker 2

As a trusted partner, their team came to us to help advance their healthcare professional digital engagement strategy with a focus on HCPs that their sales teams are restricted from seeing in person. Through our platform, they will be able to engage these hard to reach HCPs, providing them with an always on content hub full of educational resources. And with the behavioral data from a platform, the go to market teams will be able to gain invaluable HCP insights. Finally, turning to profitability. We continue to deliver on our targets.

Speaker 2

We achieved positive adjusted EBITDA and positive non GAAP EPS for the 6th consecutive quarter. Free cash flow was positive for the 3rd quarter in a row and we achieved a gross margin in the high 70s. We expect to exit 2024 with positive adjusted EBITDA and positive EPS. In 2025, we expect to be profitable for the year as a whole across both of these metrics, while we maintain our focus on returning to growth. We remain committed to our long term profitability target of generating double digit EBITDA margins.

Speaker 2

To conclude, we are controlling what we can control despite the macro challenges. Gartner reported that in 2019, the year preceding the pandemic, average marketing budgets were approximately 11% of overall revenue. And in the 4 years since, they've dropped to 8.2%. Despite the headwinds of ongoing macro uncertainty and softness in marketing budgets, our 3rd quarter results underscored stabilization in our business performance and our ability to consistently achieve our profitability targets. We have improved year to date performance across our key metrics as compared to 2023 and entered Q4 with positive momentum.

Speaker 2

We have more work to do with the strength of our AI solution, our focus on mission critical use cases in regulated industries and recent customer win back momentum are very encouraging signs as we look to return to growth. We expect a sequential improvement in new business acquisitions as we exit 2024. Coupled with improving stabilization in our installed base, we have confidence in our ability to return to ARR growth in 2025. With that, I'd like to hand it over to Steve Batuany, our CFO.

Speaker 3

Thank you, Sharath, and good afternoon, everyone. I'm going to start with our Q3 2024 results and will then discuss our outlook for the Q4 2024 and full year 2024. Before I get into the numbers, I want to remind everyone that our focus, as it was in the prior quarters, will be on the core platform business as we have deemphasized the virtual conference product. We view the metrics from our core platforms such as revenue and ARR as the best KPIs to measure our performance. Revenue from our core platform, including services in Q3 of 2024 was $35,600,000 representing a decrease of 7% year over year.

Speaker 3

Total revenue for the 3rd quarter, which includes revenue from our virtual conference product, was $36,300,000 Total subscription and other platform revenue was $33,900,000 Overages represented approximately 1% of total revenue in Q3. Total professional services revenue was $2,500,000 a decrease of 12% year over year, representing approximately 7% of total revenue, the same as in the year ago period. Moving on to ARR. ARR represents the annualized value of all subscription contracts at the end of the period and excludes professional services and overages. Ending ARR related to our core platform totaled $129,700,000 a decrease of approximately $1,370,000 compared to Q2 of 2024.

Speaker 3

While we still have work to do in this area, ARR performance has improved sequentially each quarter this year. We are encouraged by signs of continued stabilization in our installed base with in period gross retention improving by high single digits year over year in both Q3 and year to date as compared to the same periods in 2023. In fact, in Q3, the percentage of new core ARR, which came from previous customers who returned to us after failing to get results from collaboration and point solutions, was in the high single digits. Total ARR, including the contribution from our virtual conference product, was $132,200,000 at the end of Q3 2024. Turning to customer metrics.

Speaker 3

The ARR contribution from the $100,000 plus customer cohort continues to represent approximately 2 thirds of our total ARR, which is consistent with the prior quarter and demonstrates the continued strength of our largest enterprise customers and their commitment to our platform. 311 customers contributed more than $100,000 in total ARR. Enterprise customers continue to be our focus and we have seen these customers commit to longer term contracts. The percentage of our ARR in multiyear contracts increased sequentially from Q2 and now stands at the highest ever with over 50% of our ARR in multiyear agreements. The number of customers with 2 or more products was also at an all time record.

Speaker 3

In Q3, the average core ARR per customer was consistent with last quarter at approximately $78,000 per customer. Total customer count at the end of Q3 was 1666. Before turning to expense items and profitability, I would like to point out that I will be discussing non GAAP results going forward. Our non GAAP results exclude stock based compensation, restructuring charges, impairment charges for real estate, amortization of acquired intangibles, shareholder activism related costs as well as certain other items. Our GAAP financial results along with a reconciliation between GAAP and non GAAP results can be found within our earnings release.

Speaker 3

Our gross margin in Q3 was 77%, consistent with the past several quarters and up 100 basis points from Q3 of last year. On a year to date basis, gross margin is up 200 basis points from the same period a year ago and reflects the cost reduction actions we have taken to streamline our operations. Now turning to operating expenses. Sales and marketing expense in Q3 was $15,900,000 compared to $17,600,000 in Q3 last year. This represents 44% of total revenue compared to 45% in the same period last year and 42% last quarter.

Speaker 3

Our sales and marketing expenses have decreased in absolute dollars year over year largely due to the cost savings measures we have implemented over the past quarters to improve efficiency in our go to market organization. R and D expense in Q3 was $6,700,000 compared to $7,000,000 in Q3 last year. This represents 18% of total revenue compared to 18% in the same period last year last quarter. While our R and D expenses have decreased in absolute dollars over the past year, we have continued to invest in product innovation related to AI, including our AI powered ACE platform. G and A expense in Q3 was $6,200,000 compared to $6,300,000 in Q3 last year.

Speaker 3

This represents 17% of total revenue, up slightly from 16% in the same period last year and consistent with last quarter. We have taken actions to streamline our G and A functions and reduce our G and A costs. And as a result, our G and A expenses in absolute dollars have decreased as compared to the prior quarter and prior year. Moving on to our bottom line performance. I am pleased to report that we exceeded the profitability targets that we provided in the prior earnings call.

Speaker 3

In Q3, we achieved positive adjusted EBITDA and non GAAP EPS profitability for the 6th consecutive quarter. Operating loss for Q3 was $800,000 or a negative 2 percent operating margin compared to an operating loss of $1,100,000 and a negative 3% operating margin for the same period last year. Net income in Q3 was $1,100,000 or $0.02 per share based on approximately 45,600,000 diluted shares outstanding. This compares to net income of $1,500,000 or $0.03 per share in Q3 last year using approximately 48,300,000 diluted shares outstanding. Turning to the balance sheet and cash flow.

Speaker 3

We ended the quarter with $188,800,000 in cash, cash equivalents and marketable securities. In March of this year, we announced a new $25,000,000 share repurchase program, which runs for 1 year until March 2025. This new share repurchase program follows the completion of 2 earlier capital return programs, which collectively returned $166,000,000 to shareholders. Under the new $25,000,000 share repurchase program, we have utilized $16,200,000 to date with approximately $5,000,000 utilized in Q2, dollars 8,300,000 utilized in Q3 and approximately $2,900,000 utilized thus far in Q4. Our balance sheet continues to remain strong with almost $189,000,000 of cash and investments at the end of Q3.

Speaker 3

Turning to our cash flow metrics for Q3. Cash provided by operations in Q3 was $300,000 compared to cash used in operations of $2,900,000 in Q3 of last year. Free cash flow was positive $100,000 in Q3 compared to negative $3,200,000 in Q3 last year. This is our 3rd quarter in a row of positive free cash flow. Our cash flow in Q3 includes cash outflows related to our restructuring efforts, which totaled $700,000 in Q3.

Speaker 3

Before I move on to guidance, I want to provide our outlook on Q4 ARR. We are encouraged by the continued stabilization in our installed base with gross retention up meaningfully compared to prior year levels and our net dollar retention rate increasing by mid single digits compared to year end 2023 levels. Our AF Powered ACE platform continues to gain traction, reaching new ARR record levels in Q3. Looking at Q4, it's our largest renewal cohort of the year by dollar value. And from a linear perspective, it is back end loaded.

Speaker 3

We expect to see continued stability in our installed base. However, recognizing that marketing budgets are still under pressure, we believe at this stage it is prudent to apply conservatism to our core ARR outlook. And as such, we are forecasting a sequential reduction of core ARR of 1% to 2%. ARR from our deemphasized virtual conference product is expected to reduce by approximately $400,000 in Q4 compared to Q3 and is expected to be $2,100,000 at the end of Q4. We expect growth ARR to show a positive trend in Q4 along with a continued strong demand for our AI powered ACE platform.

Speaker 3

In terms of net dollar retention, we expect to end 2024 with a net dollar retention rate higher than 2023 by mid single digits. As we move into 2025, we expect continued improvement in gross and net retention performance, continued momentum in our growth ARR and to echo what Sharath said earlier, we have confidence in our ability to return to ARR growth in 2025. Turning to Q4 guidance. We expect Q4 platform revenue, including services, in the range of $34,700,000 to $35,700,000 and total revenue, which includes our virtual conference product, in the range of $35,400,000 to $36,400,000 Professional services is expected to represent approximately 9% of total revenue. We expect gross margins to be in the mid to high 70s in Q4.

Speaker 3

We expect a non GAAP operating loss in the range of $1,300,000 to $300,000 and non GAAP net income per share of $0.01 to $0.02 per share using approximately 45,700,000 diluted shares outstanding. We expect a restructuring charge of $400,000 to $700,000 in Q4 related to our ongoing cost reduction efforts, which is excluded from the non GAAP amounts provided above. Lastly, we expect Q4 to deliver the 7th quarter in a row of positive adjusted EBITDA. Now let me turn to our annual guidance. For the full year, we expect core platform revenue, including services, to be in the range of $143,600,000 to $144,600,000 We expect total revenue to be in the range of $146,800,000 to $147,800,000 Professional services is expected to represent approximately 8% of total revenue.

Speaker 3

We expect a non GAAP operating loss in the range of $3,300,000 to $2,300,000 and non GAAP net income per share of $0.08 per share to $0.10 per share using approximately 45,800,000 diluted shares outstanding. We expect gross margins for the year to be approximately 200 basis points higher than 2023 gross margins, which were 75%. We expect to have positive adjusted EBITDA for 2024. Restructuring charges and amortization of acquired intangibles and certain other items are excluded from the full year non GAAP amounts provided above. This guidance reflects a balanced approach between maintaining cost discipline and delivering positive adjusted EBITDA for the year and positioning the company for a return in growth.

Speaker 3

To summarize what we have accomplished thus far in 2024, we are stabilizing the business with churn in down sales improving significantly. We have continued to make progress in growth vectors, including momentum in AI powered ACE and in regulated industries like life sciences and financial services. In addition, we have started to see increasing win backs from Boomerang customers who left us for cheaper but less effective solutions and have since returned. On gross margins, EBITDA profitability and cash flow, we have made significant improvements in performance thus far in 2024 as compared to the prior year. While we know we still have work to do, our progress in 2024 gives me confidence about our business heading into 2025.

Speaker 3

While we are not providing 2025 guidance on the call today, our goal is to maintain adjusted EBITDA and EPS profitability for the year as a whole in 2025 with a focus on returning to ARR growth. Additionally, for modeling purposes, I want to remind everyone that Q1 is typically a seasonally softer quarter for us with fewer days in the quarter to deliver platform revenue and is seasonally softer for services. As such, we would expect quarterly revenue to increase in 2025 from seasonally soft Q1 levels. In summary, we are pleased that we exceeded both our revenue and profitability targets in Q3 and have raised our 2024 annual guidance for both of these metrics. With increased stability across our installed base and notable progress across our 3 strategic pillars, we are well positioned to return AR growth in 2025 while maintaining adjusted EBITDA and EPS profitability.

Speaker 3

Lastly, we remain committed to our long term goal of generating double digit top line revenue growth and double digit EBITDA margins. With that, Sharat and I will open the call up for questions.

Operator

Thank you. We will now be conducting a question and answer session. First question comes from Rob Oliver with Baird. Please go ahead.

Speaker 4

Great. Thank you. Good evening. Thanks for taking my question. Encouraging to hear about some of the win backs from customers who maybe went to other competitors less functional or not as strong as you guys.

Speaker 4

And would love to hear a little bit more color on that, Sharath. You guys have obviously done a ton to enhance the platform during this tougher period for marketing spend with AIAs and would love to hear what those conversations are like? And then any commentary you can give us relative to what you're seeing in the kind of general spending macro relative to marketing spend and trends would be great? Thanks very much.

Speaker 2

Hey, Rob. Let me take the win back question first. I'm particularly excited that we are seeing encouraging signs on these customer win backs, especially customers who are coming back to us after failing to get results from collaboration tools and point solutions. We talked about this in Q3, the percentage of new core ARR, which came from what we are calling boomerang customers, was in the high single digits. And let me share a win back deal from Q3.

Speaker 2

1 was with a large global cybersecurity company. They were facing budget pressures earlier in the year and this customer opted for a collaboration tool and within just a few months realized their mistake. They recognized that without a purpose built platform for engaging experiences and first party actionable data and insights, their pipeline was negatively impacted. And in Q3, almost with after a quarter, they have reengaged with us to help them refuel their global demand generation engine and have reinvested in our platform with a 6 figure commitment. Another example other examples are where companies have found they may have gone to point solutions that they are not scaling enterprise wide.

Speaker 2

They don't have the first party data capabilities or the AI capabilities that match ON24. Now the next thing that you talked about, any change about the marketing budgets and how I'm seeing that. So yes, Rob, it's been the last 2, 3 years have been tough. That being said, if you ask Gartner, they would say, hey, the marketing spend in 2024 was about 280 basis points compared to 2019. So that's a significant reduction.

Speaker 2

So there have been some headwinds, but at the same time, I'm very encouraged because we are seeing increased stabilization. And based on our customer conversation, especially as win backs we are seeing, there are some green shoots. Our customers are still committed to our platform. They're seeing value in our platform. Our ARR per customer is over $78,000 The number of customers in multiyear contract is significantly the largest we've had.

Speaker 2

So look, companies have focused on reducing their MarTech and tech stacks for 2 to 3 years now. They have cut real deep. Now if the win backs are any guide, we see that as a sign of stabilization and we expect these companies to start investing in the revenue generating products in 2025. We are cautiously optimistic.

Speaker 4

Great. Thanks for all that color, Shahriar. I really appreciate it. Thanks, guys.

Operator

Next question Arjun Bhatia with William Blair. Please go ahead. Hey guys, this is Linda Lee on for Arjun. Thanks for taking my question. Shiran, what does the run back pool look like right now?

Operator

And what percentage of that pool expected to run back from here on forward?

Speaker 2

So overall, we do expect as the market stabilizes that the percentage of companies or the number of companies that are going to come back to ON24 and really focus on driving revenue and demand generation and other various things will continue to accelerate. At this stage, it's hard for me to give you a number on that particular thing, but we are also running seeing the stability and seeing that as we go into next year, our customers are probably going to be more focused on revenue generating activities as an execution team from a sales and marketing point of view. We are also aggressively focused on that. So if you were to ask me, as we go into 2025, we do expect continued momentum on win backs. Another thing I will point out is, we've talked about how life sciences and financial services has become a third of our ARR in the last 4 years compared to 20% in 2019.

Speaker 2

So that's great. The other thing that we are seeing is we are seeing these win backs, a lot of them coming from the technology sector. So we are also seeing green shoots in the technology vertical there with increased win backs and momentum with AI Power Days. So that's a good thing. We feel that our business is now more diversified and well positioned to drive broad based growth once investments in front end software return next year.

Operator

Got it. Very helpful. And what does down sell and churn look like from here?

Speaker 5

This is Steve. Let me go ahead and take that. So you're asking me, I think about gross retention. So let me start with that. In period gross retention in Q3 compared to the same period last year improved by high single digits, and I'm especially encouraged by the positive trends related to gross retention.

Speaker 5

For the Q4 in a row, we've seen a period gross retention trending much better than the average annual rates that we've seen at least in the past 3 years. And we saw meaningful improvement in down sells, in fact, close to the best performance in the last 3 years. And we started seeing more significant win backs, as Shailat discussed, at the high single digits as a percentage of our growth ARR. Several customers who left for us for cheaper tools came back and it tells me that customers are beginning to think about revenue growth again as Sharath said. And in addition, we have more multiyear contracts.

Speaker 5

In fact, it was the highest ever at the end of Q3 2024 as a percentage of our ARR. So we feel that we've stabilized the business. And as I look at 2025, we expect to improve our gross retention in both churn and down sell performance.

Operator

Got it. Thank you. Next question comes from Noah Herman with JPMorgan. Please go ahead.

Speaker 6

Hey guys, thanks for taking the questions. Maybe if you could just double click on some of the go to market changes that you're implementing. I know you're bringing in some new leadership, especially in the Americas region. Just curious if there's anything changing fundamentally on the go to market side? And then I have a quick follow-up.

Speaker 2

Yes. So I think when we if you look at our ARR performance, Noah, there are 5 things. There are 4 things we've talked about stabilizing a business. We've talked about the win backs. AI powered ACE has become a strong growth vector for us.

Speaker 2

The regulated industries, financial services and life sciences is a third of our business is becoming an important growth vector. The one area for improvement that we are focused on is our new business execution. And we have hired a new sales leader for our North America business. We must make our execution here to be more business outcome oriented and we need to do a better job in orienting our solutions to solving business challenges and creating these measurable outcomes by the various verticals and use cases. I mean, especially at a time when we believe that the marketplace is stabilizing and there's going to be more appetite for revenue generating things.

Speaker 2

So one, our focus has been is bringing in the right talent from a leadership point of view and a sales and other part. But the other thing is to really optimize our execution to be even more benefit solution oriented by the various verticals and use cases that we focus on. And I believe that this will allow us to drive growth, better profitability and cash flow for our shareholders. So that's a very important thing that we are doing. And like look, we've learned to operate in this tough environment with some headwinds.

Speaker 2

Like I said before, this cannot continue. We are seeing increased stability with the win backs, with the enhancements in the go to market. After 2 years of deep cuts, companies will have to start investing in these revenue growth opportunities, revenue growth solutions, which will help us and we are beginning to see that.

Speaker 6

Great. Thank you. And then maybe just on 2025, you provided some helpful commentary around Q1, but with more customers now under multi year agreements, just anything to call out in terms of seasonality as we think about next year? Thank you.

Speaker 5

Let me go ahead and take that one. Go ahead, Trot.

Speaker 2

No, please do, sir.

Speaker 5

Thank you. So we're not giving 2025 guidance today. I will be doing that on our earnings call next quarter, but we do expect to return ARR growth during 2025. And our goal is to get ARR positive next year. In terms of Q1 revenue, that's typically a seasonally softer quarter for us.

Speaker 5

As I mentioned in the prepared remarks, there are fewer days in Q1. Our service business is also seasonally soft. So we'd expect that Q1 would be the trough for revenue in 2025, and we would expect revenue to increase from there. In terms of the bottom line, we've shown that we can be disciplined on cost and a tough macro for marketing dollars. In fact, we've taken $69,000,000 of annual run rate cost out of the business since Q2 of 2022, which is a reduction of over 30%, and that's resulted in margin improvement and positive cash flow for the year.

Speaker 5

On the bottom line, we'll continue to balance returning the growth with profitability and we expect to maintain adjusted EBITDA and EPS profitability for 2025 as a whole. In terms of our thoughts on ARR, I'll let Shroad go ahead and provide some color on that. Yes.

Speaker 2

Let me add to what Steve said. Look, I recognize that we have not delivered ARR growth this year so far, but we have accomplished a reasonable amount this year in a tough environment. While we still have work to do in this area, we have limited the decline in ARR and ARR performance has improved sequentially each quarter this year. And I'll talk about the four things stabilization, win backs, AI powered ace, regular industries and that we are focused on improving our new business execution better. So based on the progress this year, it makes me encouraged about 2025.

Speaker 2

The market is stabilizing. We are seeing that in the win backs. We believe we are at the cusp of turning ARR positive. And I expect ARR turn positive during the year. And our goal is to have positive ARR for the year.

Speaker 2

And if you add that to the discipline that Steve talked about in margin, profitability and cash flow performance, it positions us well for 2025.

Speaker 6

That's really helpful. Thanks guys.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
ON24 Q3 2024
00:00 / 00:00