2023-03-06 13:15:07 ET
Summary
- ON24 is expected to report a more substantial revenue decline in fiscal 2023, as a result of its significant exposure to the technology industry.
- But ONTF could potentially deliver positive normalized EPS as early as Q2 2023 with its plans to cut its workforce.
- I have a mixed view of ON24's shares which explains my Hold rating for the stock.
Elevator Pitch
I rate ON24, Inc.'s ( ONTF ) stock as a Hold. On the negative side of things, ONTF could potentially witness negative top-line growth for three consecutive years between FY 2022 and FY 2024. On the positive side of things, ON24 might achieve positive earnings per share or EPS by the second quarter of the current year. ONTF's mixed outlook, considering both revenue growth and profitability expectations, means that the stock deserves a Hold rating.
Company Description
Started in 1998 and listed on the NYSE in February 2021, ON24 refers to itself as an owner and operator of a "sales & marketing digital engagement platform" in the company's February 2023 investor presentation slides .
ON24's Key Product And Service Offerings
ONTF's List Of Selected Clients
ON24's February 2023 Investor Presentation
ONTF earned the vast majority or 90% of its fiscal 2022 top line from subscription & other platform revenue. Professional services revenue accounted for the remaining 10% of ON24's top line in the most recent fiscal year. The technology, financial services, professional services, manufacturing, and life sciences verticals contributed 34%, 17%, 13%, 12% and 11% of ONTF's FY 2022 Core Platform Annual Recurring Revenue or ARR, respectively. Another 13% of ON24's Core Platform ARR in the prior year was attributable to other industry verticals.
Weak Revenue Outlook For ON24
ON24's most recent quarterly top-line performance, as disclosed in its fourth quarter financial results press release , was poor.
The YoY revenue decline for ONTF worsened from -2.3% in the fourth quarter of 2021 and -3.6% in the third quarter of 2022 to -10.5% for Q4 2022. ON24's Core Platform ARR growth rate turned from a +11.7% increase for Q4 2021 into a -6.9% drop in the most recent quarter on a YoY basis. The company also saw a -5.7% YoY decrease in the number of ONTF's clients which generated more than $100,000 in ARR from 366 as of end-2021 to 345 as of December 31, 2022.
ONTF acknowledged at the company's Q4 2022 investor call on February 28, 2023, that "post-COVID, normalization and the current impact of the macroeconomic environment" were what hurt its revenue in the recent quarter.
To make things worse, the mid-point of ON24's full-year FY 2023 top-line guidance at $167.5 million points to an expected -12.3% revenue contraction for the company. In comparison, ONTF's top line declined by -6.3% in fiscal 2022 and its revenue even grew by +29.7% for FY 2021. Also, the current sell-side's consensus numbers suggest that ONTF will still register negative revenue growth in FY 2024.
In the preceding section, I highlighted that the technology vertical accounted for more than a third of ON24's Core Platform ARR, and it is inevitable that ONTF's substantial exposure to the technology sector will be a drag on its revenue for the current year.
ONTF Might Achieve Positive Normalized Earnings Per Share In Second Quarter
I am impressed with ON24's profitability outlook, even though ON24's revenue guidance for the current year was a disappointment.
ONTF disclosed in its recent quarterly results press release that its updated profitability guidance points to "breakeven, non-GAAP EPS in the second quarter of 2023, two quarters ahead of our initial expectations." As a reference, ON24's actual non-GAAP adjusted net loss for Q4 2022 and full-year were -$0.04 and -$0.37, respectively.
There are two major factors supporting ON24's expectations of achieving positive normalized EPS as early as Q2 2023.
The first factor is the reduction in ON24's staff strength. ONTF revealed that it is targeting to have the company's number of employees as of end-Q1 2023 -23% lower than what it was during Q2 2022. ON24's internal estimate suggests that the actions taken to shrink its workforce will generate around $39 million in annualized expense savings.
The second factor is share repurchases. ON24 has plans in place to spend $75 million (equivalent to 19% of its current market capitalization) on share buybacks in the next one year. This will lower ONTF's share count and boost the company's future earnings per share.
Shareholder Capital Return And Activist Involvement In The Spotlight
ONTF's new shareholder capital return plan and activist involvement should limit future downside for the company's shares to a large extent.
As part of ON24's Q4 2022 financial results announcement on February 28, 2023, the company revealed a new $100 million shareholder capital return plan which included $75 million in buybacks (as outlined in previous section) and special dividends of around $25 million ($0.50 per share). The amount of shareholder capital that ONTF plans to return to its shareholders is equivalent to approximately a quarter of the stock's market capitalization.
Also, there is an activist investor known as Indaba Capital Management , which has a 9% equity interest in ONTF and had played a part in pushing ON24 to return excess capital to shareholders. It is reasonable to assume that Indaba will continue to engage actively with ONTF's management to explore potential initiatives to create further shareholder value.
Closing Thoughts
It is encouraging to know about ONTF's guidance for positive EPS in Q2 2023 and its new $100 million capital return plan. On the flip side, a positive re-rating of ON24's share price and valuations will be challenging when the company is struggling to return to positive top-line expansion. This explains why I have chosen to award a Hold rating to ON24.
For further details see:
ON24: A Mixed View