ON24: Gearing Up For A Recovery

seekingalpha08-27

Shares of ON24 have staged the beginnings of a recovery rally after posting better-than-expected results in Q2.Though ARR and revenue are still declining, the company's declines are moderating with an...

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Luis Alvarez/DigitalVision via Getty Images It's often hard to bank on turnaround names when the market has re-entered into a stretch of volatility, but with the S&P 500 continuing to hover around all-time highs, these names often offer tremendous value that can offer a buffer in case the market turns south. ON24 (NYSE:ONTF), in my view, is a name well worth considering. The software company, which provides technology that enables companies to host online webinars, has shrunk considerably in the post-pandemic era. But now, as a much smaller company, ON24 management is focused on executing its niche better - and in my view, it could be a target for a buyout, especially at a small scale. Data by YCharts I last wrote a bullish note on ON24 in June, when the stock was trading in the mid-$5s. Since then, the stock has started a small rally driven by stronger-than-expected Q2 results and a lift to the full-year guidance outlook. ON24 is appearing on track to its target of returning to ARR growth in the second half of this year, driven by management's new customer retention efforts. With this in mind, I'm reiterating my buy rating on ON24. Aside from the company's confidence in returning to growth this year, here in my view are the top reasons to remain bullish on ON24:   Niche and simple product. Complex software integrations may be getting de-prioritized in today's budget environment, but simple webinar products like ON24's may be considered \"quick wins\" that make for easy installs in the current macro landscape.   Blue chip customer base. Though a small company itself, ON24 has a strong blue-chip base of customers ranging from Microsoft (MSFT), SAP (SAP), Eli Lilly (LLY), General Electric (GE), and Caterpillar (CAT).  New AI-powered platform. The company has a new flagship product, which it calls ACE, that embeds generative AI capabilities into its conference-hosting tools. This can give ON24 the marketing push it needs to start winning new clients.  The company's cash is almost equivalent to its market cap, and ON24 is trading at an incredibly low valuation. Low confidence in the company's ability to stage a turnaround has rendered this stock at bargain-basement values.  Valuation, meanwhile, remains the biggest draw for this company. At current share prices just above $6, ON24's market cap is just $266.6 million. But after we net off the $193.8 million of cash (against no debt) on the company's balance sheet, its resulting enterprise value is just $72.8 million. ON24 outlook (ON24 Q2 earnings release) Meanwhile, ON24 has raised its full-year revenue outlook to $145-$147.8 million (representing a -11% to -10% decline), higher than a prior view of $143-$147 million (representing a -13% to -10% decline). It's worth noting as well that the company currently ha a ~$131 million ARR (annualized recurring revenue), which it expects to return to growth in the second half of this year. This means that ON24 trades at a fraction of its top-line metrics:  0.5x EV/FY24 revenue 0.5x EV/current ARR  To me, these bargain multiples represent quite an attractive entry point. Stay long here as the company continues to claw itself out of a difficult situation and recover to a more reasonable valuation. Q2 download Let's now go through ON24's latest quarterly results in greater detail. The Q2 earnings summary is shown below: ON24 Q2 results (ON24 Q2 earnings release) ON24's revenue declined -11% y/y to $37.3 million. Though not particularly an exciting result, the company beat Wall Street's more modest expectations of $36.2 million (-14% y/y) while also accelerating versus Q1's worse decline of -13% y/y.  Note as well that the company's guidance for Q3 calls for $35-$36 million in revenue, the midpoint of which represents a -9% decline: again, improving from Q2 and Q1.  The big test for ON24, however, has been its retention and ARR. The chart below shows the company's core platform ARR, which declined by roughly $2 million sequentially to $131 million: a function of small business churn, which other software companies have reported amid current macro conditions. ON24 ARR trends (ON24 Q2 earnings release) The company notes that it has seen improving retention, particularly among its enterprise customer base: some renewals of which have resulted in expansion deals. Per CEO Sharat Sharan's remarks on the Q2 earnings call:  We remain laser focused on returning to ARR growth. We ended Q2 with $131 million of ARR related to our core platform, a decrease from Q1 of $2.2 million, which is meaningfully better than the expectations we provided on our last earnings call. What really excites me are the dynamics behind these metrics. Importantly, our focus on improving our in-period growth retention rates is bearing fruit. The changes we have made, organizationally and execution-wise, are resulting in an improvement, and for the third quarter in a row, growth retention trended much better than the average rates we've seen for each of the past three years. In fact, Q2 growth retention improved sequentially from last quarter, and we posted close to double-digit improvement from Q2 of 2023. Disaggregating growth retention into churn and downsells, we saw a huge improvement in churn in Q2, and in fact, it matches the best it has been in the last three years. In addition, we saw meaningful reductions in downsells as a percentage of the renewal base in Q2, close to the best in the last three years. Finally, we were pleased that large customer renewals that came due in Q2 were better than expected, with half of them resulting in growth. It is great to see the results of our strategic priorities beginning to pay off, and I'm really proud of the team's successful execution, especially as we have navigated through a tough macro environment over the last two years.\"  The company expects \"breakeven to -1% decline\" in ARR in Q3, with similar results for Q4. Profitability is also improving. As shown below, adjusted EBITDA grew 85% y/y to $0.8 million, or a 2% margin: versus a 1% margin in the year-ago period.  ON24 adjusted EBITDA (ON24 Q2 earnings release) We note as well that ON24 managed $2 million of positive FCF in the first half of FY24, versus a -$9.2 million burn in the year-ago period: ON24 FCF (ON24 Q2 earnings release) Risks and key takeaways We of course shouldn't undermine the execution risks that this company faces. ON24 has been declining because companies are cutting their sales and marketing budgets in the midst of a potential recession (and thus, the need for webinars), and also because videoconferencing/webinar products like Zoom reached a peak during the pandemic and saw a retrenchment thereafter. In the effort to simplify IT stacks, many companies may turn to a single provider like Zoom or Cisco Webex (CSCO) for their webinar needs as well as their video needs.   That being said, all in all, at just a ~0.5x revenue and ARR multiple, I think ON24 is worth the bet.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.27.0","shortVersion":"4.27.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462494651"}