August 19, 2021 - 11:31am EST by
2021 2022
Price: 19.80 EPS 0 0
Shares Out. (in M): 54 P/E 0 0
Market Cap (in $M): 1,080 P/FCF 0 0
Net Debt (in $M): -396 EBIT 1 3
TEV (in $M): 683 TEV/EBIT higher high

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ON24 is a cloud-based video platform that helps businesses convert audience engagement into revenue. The company IPOed early this year in a very different market at 14x revenue, and after several months of a general sentiment shift away from technology and a less than impressive q2 results due to tough comps from 2020, it now trades close to 3x next year's revenue, which we have a hard time imagining going lower. This is too cheap for a SaaS type business with ~80% gross margins and Net retention of ~110% that should get back to growing at least mid-teens after covid.  We think the stock is an attractive asymmetric bet today.


The company was founded in 1998 by current CEO Sharat Sharan, but the current iteration of the business really began 7-8 years ago when the company started focusing on B2B digital engagement. The CEO’s insight was that despite the data enabled innovation that was happening in the B2C side (like Facebook and YouTube) B2B interactions were not evolving as quickly. Now, their mission is to “transform the way businesses drive revenue customer engagement through data-rich digital experiences”. The way ON24 tries to solve this is through their unique interactive webinars.

Interactive webinars can be a powerful sales tool if done well. Like physical events, it’s great at engaging with customers, while at the same time allows the gathering of customer data as websites and emails do. ON24’s webinars are not only about video and audio, but include numerous interactive components that are necessary in a B2B sales interaction. Imagine two different customers, customer A, who watches all 50 minutes of a webinar, takes part in a survey, downloads two pieces of content, and asks a question, while Customer B only watches the first five minutes and have no other forms of engagement. The sales team can look at that data and decide to hop on a sales call with Customer A, while not wasting time and resources on Customer B. This is just an example, but a platform like On24 can provide data and insight that can boost sales productivity.  Some customer success stories include:

-        Service now: ON24 is now the #1 pipeline-driving channel

-        Salesforce: saw a 135% increase in marketing pipeline.

-        Juniper networks: reported 5x more pipeline compared to in person events.

-        Plante Moran: reported 7x expansion in client reach.


The core platform enables interactive webinars and virtual event experiences that can be integrated with a sales team’s own CRM system like Marketo (Adobe) or Salesforce. As the audience engage with the different part of the webinar (watching a video, participating in surveys, clicking on various links etc.), ON24’s customer can collect valuable first person data that they then can then personalize future sales tactics. Physical events are not only expensive, but it lacks personalization and the only data point that can be collected at scale is whether someone attend the event or not. With ON24’s webinars, sellers can collect data on things like polls and surveys answered, minutes viewed, questions asked and more. An average On24 live experience engages with 200+ attendees and delivers 20+ data points per attendee, which is far more first-person data than most other conventional sales channels.  The customer has complete control over the design and overall experience through their ON24 subscription, and it can be suited for any vertical in a variety of different settings.

Gartner expects 80% of B2B sales interactions to occur in digital channels by 2025. Buyers increasingly want a digital first experience when it comes to making buying decisions, and sales teams must adapt to this changing reality. Like how the car buying experience has changed drastically in recent years (doing your own research online, reading online reviews and watching videos before talking to any sales rep) the B2B sales experience will change with the digital age. Forrester reports that 70% of B2B buyers prefers to do to their own research online, and MarketingTech expects the virtual events sector to grow 27% p.a. from 2020 to 2027. Numerous surveys confirm that both buyers and sellers in the B2B sales landscape are adopting to digital channels, and Covid has hastened the transition.

Zoom may dominate the one-on-one or small group video conferencing space, but ONTF’s focus is about serving sales and marketing teams in enterprises (larger businesses) who need to run webinars and various virtual interactions in a much larger scale that requires much more than reliable video and audio. This is obviously a hot market right now with plenty of customer offering point solutions like webinars or virtual conferencing products, but ON24 so far is the only player at scale of its kind. Market validations includes recognition in G2 (one of the largest software marketplace review platform) as the top webinar software for enterprises and mid-market companies and in TrustRadium (another review site for business tech) as the best webinar software for enterprises.

Competitive characteristics

On24 have deep integration with most of the large CRM software like Marketo (Adobe) Salesforce, Oracle, and Eloqua. They recently announced integration with Veeva as well, which could open up the life science market. This integration is a huge value add to customers who can easily sync data gathered from the On24 platform with their existing CRM, to be able to gather and analyze data, and ultimately make sales decisions all in one place. This integration creates stickiness with customers, confirmed by the healthy dollar retention rates we see and the numerous customer testimonials we’ve seen. There probably is a first mover advantage playing out, but the technological barrier is probably not too high.

Could a much larger players like Zoom or Teams start competing? It’s always a possibility, but the product focus seems to be very different. Teams and Zoom are video collaboration tools for smaller gatherings, but they’re not sales and marketing platform that drive engagement. ON24’s much smaller revenue base, and TAM that has certainly grown with Covid, should mean there is plenty of growth left for the company, even with more competition down the road. There really hasn’t been a direct competitor so far, and Microsoft, Adobe, and Salesforce, which are prime candidates that could enter the market, are currently major partners and customers that use ON24 themselves. Adobe has Adobe Connect, their web conferencing application, but again, they don’t use it for sales and marketing digital engagement – they still use ON24 for that. It has taken the company 7-8 years to build the technology and the data integration and we think the company should be able to maintain their market position and continue to grow at a healthy clip.


Recent churn issue & numbers.

The stock dropped more than 30% when it released q2 earnings. The big item was what churn was much higher due to very tough comps.  Q2 wasn’t a complete surprise, as management had said in q1 that q2 2020 was when they had a material covid bump, and the possibility of higher than usual churn and down sell was discussed. Management says the worst is behind and 2h of 2021 should be much better. While due to churn q2 numbers were weak, logo growth was still 17%, and the % of customers contributing over $100K annually continued to grow. ARR growth remained positive QoQ and we expect it be the case for the rest of the year.

Q2 was a transition quarter as it saw the largest renewal cohort ever. A larger than typical percentage of customer added a year ago were SMB customers who rushed to find alternative solutions for in-person business. There were more on-time demand and the customer base is not ON24’s primary target audience. The company still added 183 new customers (similar to q1 2021), and the % of customers with $100,000 ARR continued its upward progression. We didn’t think numbers suggested any fundamental problems with the business and find recent selling of the stock as an opportunity to build a position.

Once the company laps difficult covid comps, management is targeting a return to ~25% ARR growth (perhaps 2H22 and beyond).  NRR should returns to the ~110% range and we think top line can sustain a mid to high teens level for the foreseeable future at the least.   The company is aggressively expanding their sales and marketing efforts, roughly doubling their quota-carrying headcount in the last ~18 months. Their much larger sales capacity and a general tailwind in their business should support the argument for at least 15%+ topline growth normalized.


We see ONTF at 3.3x fwd revenue after accounting for stock options, which is well below US-listed SaaS peers.  ONTF’s gross margin of ~80% is as good as other SaaS stocks, while its normalized growth profile is not that much lower to warrant that much of a discount.

The company went from -10% EBITDA margin pre-covid to 17% last year and is now reverting back to breakeven point. FCF generation will likely be slightly negative to minimal for at least the next 2-3 years. Eventually, margins should get up to 30-40%. The company also has a massive cash and marketable securities portfolio worth $396M (~40% of current equity value), which provides us with an extra layer of margin of safety going forward.

From today’s price, the bar is set pretty low. We’re not certain on whether normalized growth will be in the teens or closer to 30%, but our entry price means that growth and margins could come out to be at the low end of our range and current prices would still be way too cheap. We think Vista Equity would be happy to buy this thing at $35 /sh, or a reasonable 7x fwd revenue in today’s market.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Return to >15% revenue growth in 2Q22.

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