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Greetings and welcome to the ON24 Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce, [indiscernible], Investor Relations. Thank you. You may begin.

Thank you. Hello and good afternoon, everyone. Welcome to ON24's fourth quarter and full-year 2023 earnings conference call. On the call with me today are Sharat Sharan, Co-Founder and CEO of ON24; and Steve Vattuone, 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 first quarter and full fiscal year 2024, as well as certain first quarter and full-year non-GAAP projections. 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, including increased inflation. 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'd also like to point out that on today's call, we will report both GAAP and non-GAAP results. 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 Sharat. Sharat?

Thank you, and welcome everyone to ON24's fourth quarter and full-year 2023 financial results conference call. We appreciate you joining us. With me today is Steve Vattuone, Chief Financial Officer. Our platform allows industry-leading B2B enterprise companies to engage with their prospects and customers through a portfolio of experiences that drive engagement at scale, generate date-driven insights, and support compliance for highly regulated industries to deliver cost-effective revenue growth. We believe AI has fundamentally changed B2B sales and marketing functions, and moving forward, that change will accelerate. Over the past year, because of our first-party data, we've been able to quickly develop significant innovations, including those that are powered by generative AI, to help our customers advanced in the efficiency, ROI, and results they gain from our platform. And to that end, just a few weeks ago, we launched the next generation of our platform, called the ON24 Intelligent Engagement Platform, which includes our AI-powered analytics and content engine, called ACE, to thousands of our customers and prospects at our global virtual launch event, ON24 Next. This announcement builds on these significant innovations. And now, our platform intelligently combines best-in-class digital experiences with AI-driven personalization and content to enable our customers to capture and act on connected insights and data at scale. We will share more about this exciting milestone later in our call. Turning to Q4 results, while we have lots of work still ahead, we are pleased to report Q4 results, which include solid top line results, and that we delivered on our profitability targets, achieving positive non-GAAP EPS and positive adjusted EBITDA. Revenue from our Core Platform, including services, in Q4 of 2023 was $38.3 million, and total revenue including Virtual Conference was $39.3 million. Of total revenue for the quarter, subscription and other platform revenue was $35.8 million, and professional services revenue was $3.6 million. The solid revenue performance for the quarter was driven by an improvement in sequential ARR performance during the quarter despite an ongoing environment where our customers remain cautious regarding their investments in marketing and their budgets remain under pressure. Now, turning to ARR, we ended Q4 with $136.2 million in ARR related to our Core Platform, representing a sequential decrease from Q3 of $300,000, approximately flat sequentially. The sequential improvement in ARR performance was driven by an improvement in in-period gross retention, which was highest it has been in the last three years, and new business acquisition, which was the highest in the last six quarters. Specifically, looking at our installed base, churn and downsell trends both improved in Q4. As we look at churn specifically, we saw broad-based improvement within our customer renewal cohorts, and the quarterly in-period churn was the best performance we have seen in three years. And we saw fewer reductions in contract entitlements or downsells as a percentage of the renewal base, which was the lowest in the year, and consistent with the best performance we have seen in almost two years. We are clearly starting to see stability in our installed based. We also were pleased to see a sequential increase in $100K-plus ARR customers, which increased by eight customers. And while marketing budgets are still under pressure, we also have a healthy pipeline of demand for our newly launched AI-powered ACE solution, and we even saw some initial orders placed at the end of December. On the whole, we saw improvements in key metrics. At the end of 2023, we saw record levels for the percentage of ARR in multiyear agreements, and percentage of customers using two or more products. As 2023 proved, our business is resilient. While there is still tremendous uncertainty in the market, especially from many of our customers working with constrained marketing budgets, we are controlling what we can control, to position ourselves to capitalize on our large-market opportunity as our customers' budgets stabilize. We are excited about our Intelligent Engagement Platform, a new AI-powered ACE offering. But we also recognize that, like most new products coming to market, it will take time for our platform's AI-powered ACE solution to drive meaningful ARR growth. As I look back at 2023, we started the year with the goal of setting the stage for long-term profitable growth, and we have delivered on that. We implemented meaningful cost reduction strategies which led to successfully achieving our profitability targets, while driving incremental improvements in our gross margins and cash flow. We executed on our product development roadmap with the launch of our next-generation AI-powered platform, and made tremendous progress in improving the stability in our customer base with improvements in customer retention. And due to the progress we made on these initiatives, we exited 2023 with a business that is stabilizing and positioned to drive an inflection in ARR growth. While we are seeing continued macro pressure on marketing budgets, I am excited about the opportunities that our platform's AI-powered ACE brings to ultimately drive growth. Let me provide more color on the progress we have made, and how we are thinking about 2024. In 2023, I laid out three strategic business priorities. First, the launch of our next-generation Intelligent Engagement Platform, which includes our new AI-powered ACE offering. Second, continue to strengthen our enterprise go-to-market strategy, especially with mission-critical digital transformation use cases across regulated industries. Third, continuing to deliver on our profitability targets with a focus on returning to growth. First, let me discuss the launch of our next-generation Intelligent Engagement Platform. AI is at the center of our strategy to provide enterprises with a differentiated and intelligent platform for digital engagement. Backed by our foundation of first-party data that's been gathered across millions of experiences and hundreds of millions of B2B interactions, our platform intelligently combines our portfolio of best in class digital experiences with AI-driven personalization and content to enable our customers to capture, act on connected data and insights at scale. We believe that our platform's foundation of first-party data that's gathered from analyzing the engagement of hundreds of millions of business professionals gives us a competitive edge and uniquely positions ON24 to lead the market in AI innovation. As I mentioned at the beginning of our call, last month we announced the general availability of the ON24 Intelligent Engagement Platform, which includes AI-powered ACE, our new AI-powered analytics and content engine. ACE is part of our next generation platform that brings our portfolio of digital experiences and first-party data and insights together with all the innovations we've developed this past year, including one, the ability to dynamically deliver hyper-personalized messaging, calls-to-action, content and more to unique audience segments through our platform. Two, the use of generative AI to automate content creation, saving teams time and feeding ongoing nurture streams that keep engaging prospects and customer; three, a heat map report of key moments that identifies the most engaging segments of a live experience and automatically creating snackable video highlights to drive continuous engagement without needing more resources. And finally, ways to analyze and automatically surface intelligent analytics that enable sales and marketing teams to act on connected insights at scale, increasing impact and ROI. With our launch, we introduced streamlined pricing and packaging, which we believe will make it more straightforward for our customers to purchase and adopt our next generation offerings. We are monetizing the Intelligent Engagement Platform in two ways. We are offering pre-configured subscription packages, which include our AI-powered ACE solution to new customers. And we are offering AI-powered ACE as an upgrade solution to our existing customers. As I shared earlier, we are already seeing positive momentum within our install base and getting very enthusiastic customer feedback from early adopters. Some of the initial benefits we are hearing from our customers is time savings in creating content and videos, being able to more efficiently personalize experiences for unique audiences and having greater visibility and insights into their prospects and customers to help their teams drive revenue growth. We are especially proud that our innovation roadmap is based on customer's feedback we've gathered over many years and a long-term vision behind our first-party data advantage. While our current platform is already a market leader and highly differentiated, we believe this launch will further enhance our competitive position. And this is just the beginning. We expect AI to fuel an entire suite of offerings in the next generation of our platform. Moving to our second priority, our enterprise go-to-market, throughout 2023, we continued to see traction with our enterprise customers in highly regulated industries who are at the early stage of undergoing digital transformation. These use cases require an enterprise-grade solution like our platform to execute mission-critical go-to-market use cases while supporting compliance. Our solutions provide a unique ability to support their go-to-market use cases on an enterprise scale, including healthcare professional engagement in pharma and life sciences, member enrollment and broker enablement in commercial and health insurance, and continuing professional education and certification for professional services. In aggregate, these digital transformation use cases drove sequential quarter-over-quarter and year-over-year ARR growth in the single digits this quarter despite a difficult macro environment. As these organizations look to adopt AI innovations and are earmarking AI budgets, we believe our enterprise credibility and track record combined with our next generation platform gives us a go-to-market advantage. We believe we are well-positioned for adoption from verticals that are traditionally early adopters like technology companies, as well as within the highly regulated industries I mentioned above. We also believe that our new pricing and packaging will help us land bigger deals, simplify the purchasing process, and enable customers to consolidate point solutions onto our platform. In addition, we also expect our next generation platform packages and AI-powered ACE solutions to further strengthen our expand motion within our install base. With the initial orders for AI-powered ACE, we also saw a modest quarter-over-quarter uptick in customers with two-plus products, which was at the highest level of the year in Q4. And finally, an update on our profitability, throughout 2023, we consistently achieved our profitability targets by driving gross margin improvements and by taking a disciplined approach to our cost reduction initiatives. We maintained a healthy balance sheet while also returning $166 million of capital to our shareholders over approximately two years. The implementation of these effective cost reduction strategies allowed us to achieve positive non-GAAP EPS and positive adjusted EBITDA in Q2, Q3, and Q4. We are committed to achieving adjusted EBITDA breakeven and positive non-GAAP EPS in 2024. The balance between growth and profitability is always a focus. And at this juncture, while we are maintaining a disciplined approach to our cost structure, we're also investing in growth as we look to capitalize on the launch of our next generation Intelligent Engagement Platform. We believe ON24 is well-positioned for long-term profitable growth. Before handing it over to Steve, I want to highlight a few new logo and expansion deals in Q4, especially those resulting from initial orders of our Intelligent Engagement Platform and AI-powered ACE premium offerings. On the new logo front, we landed one of the largest wireless carriers in the United States, a monthly billion dollar telecommunications leader with more than 70,000 employees. As they move their focus up market and advance their B2B marketing arm, this organization needed a trusted partner to provide a platform that could scale to support each of their different teams and provide real-time first-party data and customer insights to help them deliver against their pipeline and revenue goals. This company pre-ordered our AI-powered ACE solution to provide personalized experiences to their customers and prospects. Another Q4 new business deal was with a multinational law firm with over 2,000 employees and over $2.5 billion in revenue. Their business development team was looking to move off their legacy point solution because it lacked the ability to scale and meet the needs of their continuing professional education use case. With our purpose-built platform, this organization has the breadth and depth needed to automate their live certification process, support compliance, and provide detailed insights about their audience, saving time and improving their team's ability to retain and acquire clients. The first expansion I will highlight is with one of the world's largest asset management and financial services organizations that has trillions of assets under management and over 50,000 employees. With the goal to acquire millions in assets under management, their marketing team needed a way to acquire new institutional investors and financial advisors and quickly qualify them for sales. Our platform became a linchpin for their growth initiative and with first-party data generated and integrations we provide, it's playing a key role in a larger digital transformation initiative for their go-to-market organization, resulting in 4X growth of our footprint. Lastly, I'll wrap up our Q4 install-based momentum by sharing a pre-order for our AI-powered ACE solution that came from a global medical device and pharmaceutical company with over $9 billion in revenue and more than 24,000 employees. With multiple types of healthcare providers to educate, we will use our platform's capabilities to personalize experiences at scale, provide content unique to different products and treatments and understand the behavior of these different types of HCPs by segment. Because our platform was already proven and trusted by their team, they felt confident adopting our new AI innovations. Ladies and gentlemen, as we look ahead, we will continue to focus on improving retention, increasing new customer acquisition, and achieving our 2024 profitability targets. We are excited about bringing our AI-powered next-generation Intelligent Engagement Platform to market earlier this quarter, which we believe will help us better address our TAM and continue to strengthen our competitive moat. Generative AI in our business will be a monumental shift in the market and AI is at the center of our strategy to provide enterprises with a differentiated and intelligent platform for digital engagement. We believe that our platform's first-party data advantage uniquely positions ON24 to define the future of digital engagement for prospects and customers, ultimately providing a tailwind to growth. Against the macroeconomic environment that has brought uncertainty and a contraction of customer demand in 2023, we believe we enter 2024 in a much stronger position with a profitable business and a more stable customer base. Although we are seeing stabilization in our business, we have yet to see macro uncertainty abate and we have not yet seen signs that our customers and prospects' marketing budgets are improving. In the interim, we will continue to focus on what we can control, leading the industry in innovation, especially around AI, improving our go-to-market strategy, especially in regulated industries and delivering on our profitability targets. I remain optimistic that we will see a return to sequential ARR growth in the second-half of 2024, which should continue into 2025, and we remain committed to our long-term goal of generating double-digit top-line growth with double-digit EBITDA margins. With that, I'd like to turn the call over to Steve.

Thank you, Sharat, and good afternoon, everyone. I'm going to start with our fourth quarter 2023 results, and we'll then discuss our outlook for the first quarter of 2024 and full-year 2024. Before I get into the numbers, I wanted to remind everyone that our focus will be on the core platform business as it was in the prior quarters, as we have de-emphasized the virtual conference product. We view the metrics from our core platform, such as revenue and ARR, as the best KPIs to measure our performance. Revenue from our core platform, including services in Q4 of 2023, was $38.3 million, representing a decrease of 13% year-over-year. Total revenue for the fourth quarter, which includes revenue from our virtual conference product, was $39.3 million. Total subscription and other platform revenue was $35.8 million. Overages represented approximately 1% of total revenue in Q4. Total professional services revenue was $3.6 million, a decrease of 21% year-over-year, representing approximately 9% of total revenue compared to 10% 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 $136.2 million, and net new ARR was approximately flat compared to Q3. Our ARR performance was better than we had anticipated, and represents a meaningful improvement from net new ARR performance in Q3. The improvement in Q4 was primarily driven by stabilization in our install base, with gross retention improving significantly from Q3 to the highest levels we have seen in the last three years. We also saw less pressure from customer down sells compared to prior quarters, and we saw broad-based improvements in churn across our renewal cohorts. New business activity in Q4 was the strongest in six quarters. Expansions continue to be challenging, but we did see improvements compared to earlier quarters. Total ARR, including the contribution from our virtual conference product, was $139.7 million at the end of Q4 2023, compared to $140.2 million at the end of Q3 2023. Turning to customer metrics, the ARR contribution from the $100,000 plus customer cohort continues to represent approximately two-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. The number of customers contributing more than $100,000 in total ARR increased to 325, up from 317 last quarter. This increase was due to new logo wins in Q4, as well as certain customers increasing their spend with us above the $100,000 threshold in Q4. Throughout 2023, we have continued to see our customers make longer term commitments to our platform. Multi-year contracts increased to 49% of our ARR at the end of 2023, which was the highest level ever, and notably up versus 41% of our ARR at the end of 2022. In addition, the percentage of our customers with two or more products ended the year at 37%, up slightly from 2022 year-end levels. We were pleased to see this metric increase in 2023 during a year when many of our customers were dealing with tighter marketing budgets and spending constraints. Total customer count was 1,784 customers. Our dollar-based net retention, or NRR, in 2023 was 84% for our core platform. As a reminder, NRR is a lagging indicator and reflects the impact of elevated down sales we experienced earlier in 2023, as many of our customers reduced their marketing budgets in a difficult macro environment. Given the stabilization and retention metrics that we are seeing in our customer base, we believe NRR will trend upwards in 2024. 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. Gross margin increased in Q4 to 77% from 76% last quarter. The sequential increase in our gross margin in Q4 reflects the cost reduction actions we took in 2023. Now turning to operating expenses, sales and marketing expense in Q4 was $16.7 million compared to $21.1 million in Q4 last year. This represents 42% of total revenue compared to 45% in the same period last year and 45% last quarter. Our sales and marketing expenses have decreased in absolute dollars both sequentially and year-over-year largely due to the cost savings measures we have implemented as we focus on driving improved sales efficiency. R&D expense in Q4 was $6.7 million compared to $9 million in Q4 last year. This represents 17% of total revenue compared to 19% in the same period last year and 18% last quarter. While we made adjustments to our spending levels in 2023, we continue to invest in product innovation. As we have discussed, we are excited about our new AI-powered ACE solution, which we launched in early 2024 along with the next generation of our platform, the ON24 Intelligent Engagement Platform. G&A expense in Q4 was $6.6 million compared to $7.7 million in Q4, last year. This represents 17% of total revenue, which is consistent with the same period last year, and up slightly from 16% last quarter. We took actions in 2023 to reduce our G&A costs, and as a result our G&A expenses in absolute dollars have decreased as compared to the 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. We achieved positive non-GAAP operating income, positive adjusted EBITDA, and EPS profitability in Q4. The continued improvements in our operational efficiency that we made throughout 2023 have paid off, and position us with a more streamlined and efficient cost structure for 2024. Operating income for Q4 was $200,000 or a 1% operating margin, compared to an operating loss of $3.5 million and a negative 7% operating margin in the same period last year. Net income in Q4 was $2.6 million, or $0.06 per share based on approximately 46 million diluted shares outstanding. This compares to a net loss of $2 million or $0.04 per share in Q4 last year, using approximately 48 million basic and diluted shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $198.7 million in cash, cash equivalents, and marketable securities. I want to provide an update on the progress of the $125 million capital return program that we announced in March 2023, which comprised a special dividend of approximately $50 million paid to shareholders in Q2 of 2023, and a $75 million share repurchase program. Under the share repurchase program, we utilized $54.5 million in the first nine months of 2023, and an additional $15.3 million in Q4 of 2023, for a total of approximately $70 million during 2023. In Q1 of this year, we utilize the remaining, approximately $5 million under the program, completing the entire $75 million share repurchase program. Combined with the $50 million special dividend paid in Q2 of 2023, we have returned approximately $125 million to shareholders under this capital return program. As a reminder, under our prior share repurchase program we started in late 2021, we returned $41 million through February 2023. With the completion of these two programs, we have now returned approximately $166 million to shareholders. With almost $200 million in cash and investments at the end of 2023, our balance sheet continues to remain strong. Turning to our use of cash in the quarter, cash used in operations in Q4 was $900,000, compared to cash used in operations of $7.6 million in Q4 last year. Free cash flow was negative $2 million in Q4, compared to negative $8.9 million in Q4 last year. As a reminder, our cash flow in Q4 includes costs related to our restructuring efforts. Before turning to guidance, I want to provide an update on our cost reduction efforts. The cost reduction plans we have initiated over the past quarters have allowed us to achieve positive adjusted EBITDA and positive non-GAAP EPS for the past three quarters. Our run rate annual total cost structure was approximately $61 million lower in Q4 than it was six quarters earlier, in Q2 of 2022. We will continue to remain disciplined on costs across the business as we focus on driving profitable growth. Moving to guidance, we are pleased to see the stabilization in our installed base, an improvement in net new business during Q4, we're also operating in a choppy environment where many customers continue to face constrained marketing budgets. As such, we are taking a prudent approach to our top line financial modeling for 2024. Turning to Q1 guidance, we expect Q1 Core Platform revenue, including services, in the range of $35.6 million to $36.6 million, and total revenue, which includes our Virtual Conference product, in the range of $36.5 million to $37.5 million. Professional services, which is typically seasonally softer for us in Q1, is expected to represent approximately 7.5% of total revenue. We expect gross margins to be in the mid 70s in Q1. We expect a non-GAAP operating loss in the range of $2.7 million to $1.7 million. For non-GAAP earnings per share, we expect a net loss per share of $0.02 per share to net income of $0.00 per share or breakeven EPS based on 41.2 million basic and diluted shares outstanding, and 45.7 million diluted shares outstanding, respectively. Our Q1 top and bottom line guidance reflects the historical seasonality in our business, including certain costs such as employer payroll taxes and annual audit costs, which are seasonally higher in Q1. We expect a restructuring charge of $600,000 to $900,000 in Q1 related to our ongoing cost reduction efforts, which is excluded from the non-GAAP amounts provided above. Before we move to 2024 guidance, I want to provide some color on how we're thinking about ARR. Our expectations for ARR take into account the historical seasonality in Q1 for new and expansion business coupled with our assumption for a constrained demand environment for marketing software in the first-half of the year. Given this backdrop, we expect our Core Platform ARR to decline by 2% to 2.5% sequentially in Q1, as compared to Q4 2023. In addition, ARR from our deemphasized Virtual Conference product would reduce sequentially in Q1 by approximately $500,000. Our current view is that we will return to sequential ARR growth in the second-half of 2024, assuming there is no deterioration in the macro environment. Now, let me turn to our 2024 annual guidance. For the full-year, we expect Core Platform revenue, including services, to be in the range of $139.5 million to $143.5 million. We expect total revenue to be in the range of $143 million to $147 million. Professional services is expected to represent approximately 8% of total revenue. We expect a non-GAAP operating loss in the range of $5.5 million to $3.5 million, and non-GAAP net income per share of $0.02 per share to $0.05 per share using 47.6 million diluted shares outstanding. Our estimate of shares outstanding takes into account the impact of our capital return program. We expect gross margins to be consistent with 2023, which was 75%. Restructuring charges and amortization of acquired intangibles are excluded from the full-year non-GAAP amounts provided above. While we are not providing specific quarterly guidance beyond Q1, our annual bottom line guidance assumes we achieve adjusted EBITDA breakeven in Q2, with sequential improvement in Q3 and Q4, resulting in breakeven adjusted EBITDA for the full-year 2024. This guidance reflects a balanced approach that recognizes the importance of fiscal discipline while also investing in growth. In summary, we are seeing encouraging signs of stabilization across our business, and are optimistic that we will return to ARR growth by the second-half of 2024. On the profitability front, we made significant cost reductions over the past six quarters, and will remain fiscally disciplined even as we invest in our key AI products to drive growth. We are excited by the strong customer feedback for our new products, and expect pipeline to build throughout the year. With that, Sharat and I will open the call for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Thanks, guys. I appreciate taking the question. Sharat, maybe we can start with the ACE and the new platform. Can you talk a little bit about whether the new capabilities allow customers to be more open from a data perspective because we do know, and once you start talking about first-party data, right, there's quite a bit of fragmentation in the space. And the more you can consolidate, the better it is, both from an experience and an AI perspective. But I'm curious what you're doing on that front with ACE. And then, when you're talking about adoption, is there an uplift that comes with it for existing customers or this is going to be a like-for-like migration that happens?

Arjun, let me take the second question first. I think as we go to market, we are doing two things. On the new business side, we have created a premium, the three packages; two of them include AI-powered ACE. And those are premium offerings, but they are preconfigured subscription packages. On the expansion front, what we are doing is we are offering our customers our AI-powered ACE upgrade that they can add to their existing offering, so there it is clearly monetized on top of that. And we expect AI-powered ACE to help in expansion, new business, and also on the retention front. So, that's on the adoption side. Now from a first-party data perspective, if you ask B2B customers, whether it's a technology company or others, we are one of the largest sources of first-party data for them already. So, we are -- with ACE, what we are doing is -- with AI-powered ACE, what we are doing is we are helping them build on that momentum. So, now, one of the capabilities in ACE is how do you help you hyper-personalize in segment. You can have customers, you can have prospects, you can have the same webinar but you can have different experiences there, allows you to provide different things and get different data points to add to what you already have. On the other side, it's beyond the webinar. Once a webinar is done, based on how people have interacted with it, based on what are the most important things, we allow you to nurture your audience's prospects and other with some of the key moments, allowing you to get more data. So, essentially what we are doing is we're allowing our customers to build more data and insights with their customers and prospects, and then provide them through the integrations that we have with them already in their CRM and marketing automation, so, becoming even more important to them in their stack from a first-party data perspective. And AI-powered ACE will allow us to do that.

Okay, that's helpful. Thanks. And just when we're thinking, it was encouraging to hear some of the downsell and churn metrics getting more favorable. When you're thinking of -- I know we've been talking about multiyear renewals for some time now, but when you're thinking of some of those cohorts that are renewing for the first time or still on multiyear contracts, are we through most of that at this point or when do you sense that might be at a trough?

Arjun, we've talked about, and we've talked for some time, so the pre-COVID cohorts have pretty much all stabilized. They've been through maybe one or two levels of normalization. What has been impacting us has been the macro environment that's been choppy for marketing budgets. I am encouraged with where we are as we see our business stabilizing. We've talked about that in-period gross retention was, in Q4, the highest in three years. As we move into 2024, we continue to expect that our gross retention is going to continue to stabilize, and having close to 50% of our ARR in multiyear agreements helps. It was 41% last year, it's 49% now. I feel quite optimistic that now we have exciting new products which are getting good reaction. We are seeing stability in our installed base. We are EBITDA profitable, and with mid 70s gross margins. I believe the company is now positioned with some assist to generate double-digit top line growth and double-digit EBITDA margins down the line.

And just this last one for me, maybe for Steve, now that the repurchase is done, the $75 million is completed. You still have $200 million on the balance sheet. Can you just talk a little bit about your capital allocation philosophy from here?

Yes, we just finished this month a capital return program of $125 million, which we started the year earlier. And with the $41 million we returned under the prior share repurchase program, we've returned $166 million to shareholders in approximately two years. Now, our balance sheet remains strong, and that will allow us to invest in our strategic priorities. In terms of any future plans, our Board always evaluates our capital structure and balance sheet, and with the goal of maximizing shareholder value.

All right, thanks for taking the questions.

Our next question comes from the line of Patrick Schulz with Robert W. Baird. Please proceed with your question.

Hey, appreciate you guys on this afternoon. So, you mentioned some of the early success you're seeing with ACE offering, and I appreciate all the color there. Just curious where the spend is coming from out of your customers' budgets. Are you seeing early signs of platform consolidation on to ACE or is this spend going to be incremental for customers? Just any additional color around feedback with pricing fashion would be helpful?

Yes, let me -- I think, right now, we are seeing -- when you look at our customers -- let me back up. When you look at our customers, they've got their spend, and they are trying to consolidate those spends, but our customers are also spending incremental dollars in terms of AI-based investments, okay, that help them drive revenue growth or cost optimization. So, when we share with them that AI-powered ACE can help them, of course, drive more revenue but at the same time allows them to do more with less, for example, the ability to kind of create more derivative content like e-books and PDFs, and takeaways, which earlier took them a lot of time to do, you can do that very simply using AI-powered ACE; they can do more with less. So, two things; they are finding more dollars within their current spend across the organization because it allows them to do more with less. Also, they are looking at adding more AI kind of budgets -- they're deploying more AI budgets because they want to use AI to drive more revenue, while at the same time reducing their costs. So, some is coming from existing budgets, some is coming from their AI allocations that they are focused on.

Okay. No, I appreciate that color there, very helpful. And maybe just one on the margins too, outside of the natural flow-through that comes with any potential upside to revenue, what are some of the biggest margin drivers at your disposal for this year? Is it possible that the ACE offering or a future product roadmap could cause a step up in your R&D investments? And then maybe any comments on current headcount levels and hiring plans for the year? Thanks, guys.

Yes, let me go ahead and take that. There were a couple of questions. So, let me start with margin. So, our gross margins were 75% for the year, and 2023 with Q4 a bit higher at 77%. And our Q4 margins also reflect some of the seasonal strength we typically see in Q4 revenue, which helps margins, as well as our cost reduction efforts we've taken throughout 2023. Now, for 2024, we did say we expect our gross margins to continue to be in the mid 70s, consistent with our full-year 2023 gross margins, which were 75%. We do expect to see gross margin improvement over time, and our target model is have those at 78% to 80%. Now, you asked about current investment levels. In terms of the expense structure, it's currently where we want it to be for now, but of course we'll adjust that as needed. Our investments, going forward, are going to be based on the top line, and we'll continue to evaluate that. We're always optimizing to return the top line to growth, and then also balancing profitability. In terms of the investments we're looking at on the AI-powered ACE, bringing it to market and continuing to develop it. We are making progress with regulated use cases of online financial services, so we've made investments there, and seeing progress there. And we are focused on making select investments in certain categories, while also being disciplined on costs. And sales investments, those are going to be driven by the productivity that we're seeing there.

Thank you. I appreciate the color.

Our next question comes from the line of Noah Herman with J.P. Morgan. Please proceed with your question.

Hey, guys, thanks so much for taking the questions. Just first with respect to linearity in the quarter, can you provide some color just on the top of the funnel demand and conversions you saw through the quarter and just any insight year-to-date as well. Thanks.

Noah, this is Sharat. Are you talking about linearity in Q4?

Yes, exactly.

Yes, I think, let me take that. We saw a very strong December compared to October and November in the quarter. I think it would be fair to say that more than 50% or maybe even closer to 60% of the business closed in December. And so, that's kind of what we saw in Q4. Now, as it pertains to -- that's about the new and expansion business, especially on the newer side. But if you look at the retention profile of the business, the install base, we saw stability throughout the quarter. And we expect that to continue within 2024. Now there is some cohorts -- some quarters are larger cohorts, some quarters are smaller, so that's a variability. But that gives you a color how we saw Q4 from a linearity perspective.

Yes, that's super helpful. And then, maybe just on the guidance, it's great to see the stabilization comment that you made around ARR and some of the retention metrics. But totally understand given that the marketing budgets are so under scrutiny, you're being prudent with the guidance, but just curious, are you layering an extra layer of conservatism with respect to the guidance and has that approach changed, compared to last year around this time? Thanks.

Yes, let me start that. I think when you say, when you asked about compared to last year at this time, I think what the difference between last year and this time and now is one of the key things our install base we feel is stabilizing. So, we have a very strong foundation to build on. We don't have the pre-COVID contracts. There were some stragglers last year from a renewal point of view in that. What we are now -- I believe we are kind of at the tail end of this macro cycle. That's what I believe because it's eight quarters in since the macro uncertainty began. So, we do feel a lot more confident and comfortable at the end of this -- at the end of Q4 with where our install base is. Now, of course, we expect you asked a question about guidance. So, let me give you a little more there. All key metrics in Q4 improved. So, I'm incredibly excited about that, but we are in a choppy macro environment for marketing budgets, as you talked about. So, we have to temper our enthusiasm for 2024 based on that. We are not factoring a significant uptick to the macro, especially for marketing budgets. If it comes back stronger, it'll be good for us. I'm excited about the launch of the ON24 Intelligent Engagement Platform and AI-powered ACE. It's the most important product we've had in the last five years, but it is still early days as it has just launched. As we've outlined in our last earnings call too, we expect ARR to turn positive in second-half of the year. Now, the place where we have to temper our enthusiasm and expectations is on the new and expansion business that's based on the marketing budgets. And that's keeping that in mind, we are taking a prudent approach towards guidance.

Great. Thanks so much for the color.

Our next question comes from the line of DJ Hynes with Canaccord. Please proceed with your question.

Hey, this is Luke on for DJ. Thanks for taking the question. So, encouraging to see your net new 100k customer account go positive again. I'm wondering, do you see that as a signal that perhaps maybe the worst of large customer down sales behind us, and do you foresee that metric staying positive going forward?

So, Luke, we are excited too that the 100k plus ARR customer increased by eight, by high single digits. It was the best quarterly performance in 2023, so we are pleased with that. And we are also because some of that was based on new customer wins, and some of that was based on customers that moved above the threshold from less than 100k or up. As we said, our downsell performance in Q4, was probably the best we've seen in the last six quarters. So, just from an overall sense, from the cohorts stabilizing, we do believe we've seen the worst of the downsells. It's still choppy. So, it's still choppy, but I think the worst of the downsells that we saw in Q2, Q3, and even Q1 last year, I think we are past that. There may be some episodic issues as we move forward, but overall we feel that our cohorts are stabilizing. Now, regarding 100k plus ARR growth, I will have more confidence about saying we expect that to be consistent once we have a little better sense of the macro environment for marketing budgets. So, I just need to be a little more prudent about that.

Got it. That makes sense. And then, maybe one more from me, as we think about your sales focus on regulated industries. I think you said those are low-single digit percentages of ARR today, but where do you think that could go over time as you lean into sort of that motion and are you seeing better sales efficiency yet as you reorient your sales strategy towards those?

I want to make one clarification and I'll answer the sales productivity question. The regulated industries, we talked about healthcare professional engagement, life professional certification, and member enrollment and broker enablement. Those are about a quarter of our total ARR. Okay, what we talked about, we talked about the growth on a year-to-year basis in aggregate of that ARR cohort was in the single digits. So, I just wanted to make sure that. And yes, that has been a part of our focus to control what we can control in the environment where companies like technology and manufacturing companies have been under pressure. And with our focus, we expect that to continue to improve. Now, related to the question of sales productivity across the board, with our focus on the regulated industries, sales productivity improved in the second-half of 2023. Actually in Q4, it was the best in the year and was broad based across our go-to-market segments. It is still not as high as I would like to be, but it's trending in the right direction. And as I mentioned, we have reallocated sales resources and adjusted the size of our sales teams, especially as it relates to pointing people in the direction of those highly regulated industries.

Thank you.

Our next question comes from the line of Tom Blakey with KeyBanc. Please proceed with your question.

Hi, guys. Thanks for taking my question. Sharat, I was just wondering with the improvement, I think it's been asked maybe a couple of times, I'll just try it another way. The improvements you're seeing exiting the year, it sounds really positive. What are the may be top one or two, maybe it's by vertical, maybe there's some big contracts coming due, maybe stragglers in the beginning of '24. What are the top one or two items that are probably leading you to be maybe a little bit overly prudent here with this guide in terms of your negative 15% exit rate here in 4Q with all the improving metrics? And then, secondly, when you talk with the initial C-suite folks that you're talking to about ACE, what are the top maybe one or two use cases that are different from the typical insights that your large customers were already gleaning from your platform with all the first-party data they've been collecting for years anyway? That'd be very helpful, I think. Thank you so much.

Yes, I think your first question about we saw good strength and why are you being overly prudent in what you are saying. As I just talked about, I think one of the things that we saw from a linearity point of view that December was very strong, but October and November were okay. We saw pipeline build, especially pipeline for AI-powered ACE built, but December was stronger than we had expected. As we have come into Q1, we are still seeing a choppy environment for marketing budgets. We are beginning to ramp up the building of our pipeline as Q1 generally tends to be a little more seasonally softer too and we have just launched AI-powered ACE only a month back, so we had two or three months behind us, we'd be able to kind of give a little better sense, but that is what is making us be prudent for the year as we move forward. And if there's an uptick in the macro, if the marketing budgets improve, they come back stronger, it will be very good for our business. So, that's the thing on how we are thinking about the business, but we are, as we look at 2024, are factoring in an improvement in the install base from the point of view of retention and improvement in churn and downsell for the year. We expect that to improve as we move forward. Now, your specific question about AI-powered ACE and how that is different, let me give you just two examples how it is different. Within the same webinar experience, now you can do two different things. You can have different content for -- and you can target your customers separately from your prospects. You can have different calls-to-action, you may have different kind of surveys, you can have different things for people to add. So, you are spending less money but getting more signals within the same webinar experience. That's the hyper-personalization and segmentation. That's one part. The other part is you're going beyond the webinar. It's not just an event, which is for 60 minutes. You're going to be able to figure out two, three different clips out of that, that are the key highlights, and you can send them to people who did not join and say, "Hey, you didn't join, here are the key highlights." Those people engage with those bite-sized amounts of content, there's more data that they will basically bring and those can be monetized. So, just to give you a sense, going beyond the webinar and allowing people to do more with less with things like segmentation and personalization. So, those are some of the additions that we are doing, and we're going to keep adding there. Tom, you're going to keep adding there in AI-powered ACE to make it more valuable for our customers.

You're sitting on top of a lot of data. That's great. Thank you. It's very helpful, Sharat.