CVT - ON24 Cuts More Staff Amid Attempt To Cut Losses

2023-03-16 17:42:09 ET

Summary

• ON24, Inc. reported Q4 2022 financial results on February 28, 2023.
• The firm provides a range of digital engagement tools for businesses.
• ON24 has produced declining revenue and has cut headcount to reduce operating losses.
• Until we see revenue growth restarted and progress toward operating breakeven, I'm on Hold for ON24, Inc.

A Quick Take On ON24

ON24, Inc. (ONTF) reported its Q4 2022 financial results on February 28, 2023, beating revenue and EPS consensus estimates.

The company provides a range of online video-enabled software solutions for events and sales & marketing purposes.

I'm on Hold for ONTF until management can reignite revenue growth on a smaller headcount and cost structure while making a meaningful move toward operating breakeven.

ON24 Overview

San Francisco, California-based ON24, Inc. was founded to develop an online video and virtual event system with related sales & marketing customer/prospect engagement technologies for enterprises.

Management is headed by co-founder, president and CEO Sharat Sharan, who has previously held numerous positions in media, entertainment and telecommunications companies.

The company's primary offerings include:

• Online webinar software

• Virtual events

• Multimedia content

• Behavioral insights

• Third-party app ecosystem.

The company pursues customer acquisition via a direct sales and marketing organization as well as through ISVs, technology partners and consulting firms.

ON24's Market & Competition

According to a 2018 market research report by Global Market Insights, the global market for video conferencing is expected to exceed $20 billion by 2024.

This represents a forecast CAGR of 10% from 2018 to 2024.

The main drivers for this expected growth include demand from enterprise applications, which are expected to account for 65% of the growth.

Also, it is likely that these growth figures are substantially lower than the new reality of a pandemic-affected business world, which has adapted to the pandemic with enthusiastic adoption of online conferencing solutions.

Major competitive or other industry participants include:

• Zoom

• LogMeIn

• Intrado

• Microsoft

• Cisco

• Google

• Cvent Holding Corp. (CVT)

• Amazon.

ON24's Recent Financial Results

• Total revenue by quarter has trended lower in recent quarters:

• Gross profit margin by quarter has also trended lower recently:

• Selling, G&A expenses as a percentage of total revenue by quarter have varied, as the chart shows below:

• Operating income by quarter has remained materially negative in recent months:

• Earnings per share (Diluted) have followed a similar trajectory to that of operating income:

(All data in the above charts is GAAP.)

In the past 12 months, ONTF's stock price has fallen 41.3% vs. that of Cvent's rise of 21.7% (as of the Blackstone acquisition agreement), as the chart indicates below:

As to its Q4 2022 financial results , total revenue fell 10.4% year-over-year and gross profit margin dropped five percentage points.

The company's net dollar retention rate for its core platform was only 90%, indicating sub-par product/market fit and sales & marketing efficiency.

SG&A as a percentage of total revenue has fallen sequentially while operating losses remain substantial.

For the balance sheet , the firm finished the quarter with $328.1 million in cash, equivalents, short-term investments, and no debt.

Over the trailing twelve months, free cash used was $24.2 million, of which capital expenditures accounted for $3.7 million. The company paid a hefty $38.5 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For ON24

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be Cvent, which is being acquired by Blackstone for $4.6 billion; shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ONTF's most recent GAAP Rule of 40 calculation was negative (33.8%) as of Q4 2022, so the firm has performed poorly in this regard, per the table below:

(Source - Seeking Alpha.)

Future Prospects For ON24

In its last earnings call ( Source - Seeking Alpha ), covering Q4 2022's results, management highlighted that it is "de-emphasizing" its virtual conference software as it is seeing less demand for the service along with the waning of the pandemic and the return of in-person events.

The firm's technology customers produced significant declines in engagement and revenue production. This is particularly worrisome as the technology group is the largest vertical for the company.

Customers have also increased their decision-making time, slowing sales cycles and negatively affecting ON24's revenue trajectory.

In response, management has increased its headcount reduction efforts, reducing its workforce by 13% through natural attrition and layoffs. This will lower headcount to the same level at the end of 2020.

As for the new product development, the company is planning to launch "embedded AI-based content generation tools" to help customers increase their efficiency in generating sales and marketing content.

Subsequent to the conference call, ON24, Inc. announced the expansion of its capital return program from $100 million to $125 million in the form of a special cash dividend.

Looking ahead, for the full year 2023, management expects total revenue to decline by 8.5% at the midpoint of the range and non-GAAP operating loss of $9.5 million at the midpoint.

Non-GAAP figures usually exclude stock-based compensation, which in ON24's case has been a large $38.5 million in the past 4 quarters.

The company's financial position indicates it has ample cash and no debt to be able to adjust its cost structure to its revenue level.

Regarding valuation, the market is valuing ONTF at an EV/Sales multiple of around 0.3x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.2x on February 23, 2023, as the chart shows here:

So, by comparison, ON24, Inc. is currently valued by the market at a very large discount to the broader Meritech Capital SaaS Index, at least as of February 23, 2023.

The primary risk to the company's outlook is the likelihood of a macroeconomic slowdown or recession, which may further slow down sales cycles and reduce its revenue growth trajectory.

I don't see a serious organic catalyst to ON24, Inc. stock in the near term, so investors in ONTF stock may need to "hunker down" for the next six months.

I'm on Hold for ONTF until management can reignite revenue growth on a smaller headcount and cost structure.

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