ON24 INC. Q4 FY2021 Earnings Call

Good afternoon and welcome. Please note that the live and interactive webcast of today's call may be accessed via the Investor Relations section of the company's website at www.investors.on24.com. Upon completion of the prepared remarks, we will open the call for questions, which may be submitted via the webcast portal or the dial-in line. Please note that this call is being recorded. At this time, I would like to turn the conference over to Nate Pollack, Vice President of Investor Relations. Please go ahead.

Thank you. Hello and good afternoon, everyone. Welcome to ON24's Fourth Quarter and Full Year 2021 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 in financial performance, including guidance for the first quarter and full fiscal year 2022. These forward-looking statements are subject to known and unknown risks and uncertainties. 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 statements to reflect events that occur after this call. Please refer to the company's periodic SEC filings in 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'll use these non-GAAP financial measures to evaluate our ongoing operation 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 2021 Financial Results Conference Call. Thank you for joining us. On today's call, I'll share some 2021 highlights, review our Q4 results, address some near-term factors relevant to our outlook, and outline our priorities for fiscal 2022. Looking back, 2021 was the most pivotal year in the company's history. I'm proud to share some of the numerous milestones we achieved in terms of business accomplishments and financial results. Across our platform our customers delivered hundreds of thousands of immersive digital experiences to tens of millions of attendees, which helped them drive measurable business results. We saw attendee engagements with tools such as polling, content, surveys and other buying signals increase more than 30% year-over-year. Total revenue increased by 30% year-over-year to $203.6 million: subscription and other platform revenue increased by 43% year-over-year to a $175.9 million, and we generated positive free cash flow for the year. Our investment in new geographies, such as Japan and Germany, is paying off with international revenue growth of 43% year-over-year. We are a market leader serving over 2,100 global customers, including 366 with ARR over $100,000 representing 21% year-over-year growth in that cohort. Our wallet share continues to grow with average ARR per customer 47% higher than the end of 2019. As a sign of our increased strategic positioning, we now have 19 customers with ARR over $1 million representing 36% year-over-year growth in that cohort. Customers are also increasingly making longer-term commitments to our platform with multi-year contracts comprising 35% of our ending ARR compared to 29% at the end of 2020. We made early inroads with our partner channel with new bookings contribution increasing from low single digits in Q1 to high single digits by Q4. Lastly, we doubled down on R&D investment and the pace of innovation in 2021, launching two new experience additions to our platform Breakouts and Go Live, and introducing the next generation of our flagship product, Webcast Elite. Our platform approach is resonating with customers, evident by the fact more than 35% of our customers have two or more products compared to 30% in 2020 and 17% in 2019. We are keeping up the drumbeat on product innovation and will continue to bring new products to the market. Let me briefly highlight some of our exciting wins within the fourth quarter. One of the largest healthcare membership organizations, with over 100,000 members, runs hundreds of sponsored webinar experiences per year, which is a key revenue stream. Previously, they had been using a legacy vendor that lacked data insights and analytic capabilities. Realizing that they could deliver more value to their sponsors, they turned to ON24 for our deep engagement data and AI-driven analytics, including our prospect engagement profile, which will be integrated into their Salesforce Marketing Cloud. This was a highly strategic six-figure platform deal, which included Elite, Engagement Hub and breakout rooms, and has provided substantial ROI to the customer. In Germany, we landed a six-figure win with a leading building and construction software company that had been using a legacy vendor to drive demand generation with approximately 500 global webinar experiences per year. We displaced this legacy vendor based on our real-time integrations across the customer's market stack, user experience, and world-class services and support. One of the world's largest oil field services companies has been using ON24 for both demand generation and thought leadership, as their end-users and buyers are increasingly moving to digital. In the fourth quarter, they expanded with us to cover four of their divisions and more than tripling their annual spend. The strength of our data, the real-time integration, and enterprise-scale reliability, privacy, and compliance were the deciding factors for this customer expansion. Lastly, we signed the largest single deal in our history of a three-year global enterprise-wide subscription agreement with an existing customer in the pharmaceutical industry. Given the scope, the customer had a global RSP and we won based on the scale of our platform, deep integrations across their entire marketing stack, and best-in-class compliance and support. Let me review high-level results from the fourth quarter. For the fourth quarter, we reported total revenue of $52 million at the high end of our guidance range. Subscription and other platform revenue in the quarter was $45 million, representing an increase of 9% year-over-year against a very challenging comparable of 115% growth in the year-ago period. Professional Services revenue was $7 million, a decrease of 41% year-over-year, and in line with our expectations that we provided last quarter. Net new ARR was $4.2 million resulting in ending ARR of $171.4 million. We posted a non-GAAP operating loss of $1.8 million for the quarter ahead of our guidance. While we had solid Q4 financial results, we have also experienced some recent challenges which are impacting our Q1 and full-year outlook. As we previously discussed, we believe Q1 2022 marks the last COVID-influenced renewal quarter and this cohort comprises a significant portion of large deal renewals, which included expansions throughout COVID that are renewing for the first time. During January as it became clear, the world was moving from pandemic to endemic. We have seen a handful of customers with large expansions since the beginning of 2020 reassess their post-pandemic digital budgets. While we had forecasted some rationalization to take place, our visibility into these specific customers whose pandemic needs was limited. For context, it is important to note that these select customers had expanded by as much as three times during COVID and their annual spend still stands at an average meaningfully higher than Q1 2020. Let me share an example. One of our customers is a leading international exhibition organizer, which runs thousands of physical and digital events for leading B2B brands. When the physical conference world was shutdown, this customer turned to ON24 to run thousands of digital experiences with amazing success and increased their spend by three times since Q1 2020. As we move through this post-pandemic world, the customer has begun to shift some of the events back to in-person, but will continue to use ON24 for its digital strategy, committing to a multi-year seven-figure annual investment with spend still two times higher than pre-COVID. Our Q1 outlook reflects the impact of the higher than anticipated rationalization and the full-year incorporates our early view on post-pandemic digital budgets. Looking ahead we believe that Q1 will mark the trough for 2022. By far, our largest challenge in 2021 was the first-time renewal cohort, which is four times the dollar value of first-time renewals in 2019 and had a churn rate that was approximately double than our first-time renewals in 2019. We see an improving customer profile for first-time renewals with a lower representative share in future cohorts, and also believe that many customers have now adjusted the prior expansions accordingly to align with their post-pandemic needs. As a signpost, gross retention for pre-2020 cohorts has been stable, which gives us confidence that overall retention will begin to trend upwards in 2022 as we move past the last of these COVID-influenced cohorts. Steve will provide more details on our outlook later on this call. Moving forward, we are also proactively making improvements in areas of our business to re-accelerate growth and continue towards our path of reaching $500 million of ARR and beyond. To help achieve this, we have set four key priorities for fiscal 2022. One, enhancing our customer success and retention capabilities. Two, scaling our go-to-market for better operational leverage. Three, improving our multi-product sales motion in the enterprise segment. Four, delivering upon our robust product innovation roadmap. Turning to our first priority, enhancing our customer success and retention capabilities. Since the end of 2019, the ON24 customer base has grown by more than 50% and our ARR renewal base has more than doubled. Over the years we've built a solid foundation of our customer success function. As we become a more strategic partner to customers, it is crucial that we have a best-in-class customer success motion. After taking a closer look we have identified enhancements that can be made to the functions and which are now underway in order to create a better integrated customer journey. We believe the first 90-day experience for a new 2022 customer is critical. Recently we have revamped our onboarding program to ensure that the transition between sales and the customer success manager is more seamless and we have better enabled the customer so we deliver faster time to value. As a product, we continually mix new enhancements to our platform, guiding our customers to adopt the full breadth of the platform, including our leading integrations must be a top priority across the organization. We are expanding the team to improve coverage ratios as well as bringing in new senior talent with the experience at scale to drive best practices and operational rigor. Combined, we believe that these changes will improve our overall retention rate in the quarters ahead. Moving to our second priority, scaling our go-to-market for better operational leverage. In fiscal 2021, we saw steady growth in business sourced through our small partner channel increasing from low single digits percentage of new bookings in Q1, to high single digits by Q4. To continue our momentum and scale ON24 to the next level, we believe that it is critical to strengthen our ecosystem of partners across interacting agencies, large strategic Marketing Cloud platform players, ISVs, and system integrators, each having an important role in our long-term success. Last week, we announced the launch of the ON24 partner network, creating an ecosystem of leading solutions and technology partners, and formalizing how we integrate go-to-market and customer engagement together. This ecosystem will broaden our reach, extend our product and service offerings, and drive leverage in our go-to-market model. In the months ahead, we'll be enabling our partners on the ON24 platform, building more integrations and driving pipeline. Our goal is to grow partner bookings over time to a 20% or higher contribution. This is not something that happens overnight, but the early progress we have made, formalizing partnerships with over 40 partners gives us confidence in the long-term partner leverage opportunity. Now to our third priority, improving our sales motion in the enterprise segment. Today, we count approximately 20% of the Fortune 1000 as customers and still have massive whitespace to further penetrate the enterprise. As I mentioned last quarter, we are focused on a multi-product sales motion for enterprise acquisition, which is leading to larger, more complex deals. These deals require a more focused consultative selling approach to elevated levels of the organization compared to a single product sales motion to practitioners that worked in our earlier years. As such, we are making improvements to more effectively enable our enterprise sales team with the right resources for this type of sales motion, that not only makes them more successful, but also makes the enterprise customers excited to engage with us in consultative ways. Turning to our fourth priority, product innovation. In 2022, we are focused on continuing to execute against our robust product innovation roadmap across each of the three pillars of our platform: Revenue on marketing, virtual events, and personalized content experiences. Our vision is anchored by delivering a system of engagement for marketing and sales teams to create digital experiences that engage audiences, turn engagement data into insights, and use those insights to drive results. Within our virtual events pillar, Go Live is the newest solution and released at the end of December. It's a self-service, multi-session video and networking event experience that maximizes social networking and audience participation. Organizations can build complete end-to-end external or internal events such as roadshows, user groups, virtual pop-ups, customer and partners summits, town halls, or company meetings using pre-built templates and an easy-to-use engaging interface. First-party engagement data continues to be the foundation of each of our products on our platform. In ON24 Go Live registered event activity and attending engagement is captured along with other ON24 experiences into a single dashboard in the prospect engagement profile. We have received positive market feedback and expect this product will ramp in the coming quarters as we build awareness in the market and throughout our customer base. According to a recent McKinsey report, two-thirds of corporate customers intentionally now reach for digital or remote engagement over in-person engagement when given a choice and they're doing so at every stage of the purchasing journey. As a result, sales and marketing teams are dealing with a new set of buyer expectations to gather attention in a crowded field. To adapt to this new world, we believe creating personalized digital experiences at scale is critical to breaking ahead from the pack, but must go beyond just the name and logo; it should be driven by first-party data insights. Throughout the year we will be releasing enhancements to our AI-driven personalization capabilities. Whether our customers are targeting known or unknown individuals, our platform will be able to tailor personalization experiences by, among other things, account to the specific organization, contact to a specific role, call-to-action and content, and buyer intent and segmentation. All of this is driven by the first-party data and insights collected from every ON24 digital experience. These personalization enhancements will empower our customers with a deeper understanding of buyer preferences, and deliver real-time personalized experiences directly within our platform. To sum up, I continue to be optimistic as ever about our future. We have experienced tremendous growth in a short period of time with our ARR increasing by 143% over the past two years. While we are now moving into a post-pandemic world, a powerful transformation continues to be underway in the B2B world. Across industries, sales and marketing for B2B organizations is rapidly moving towards digital channels and there's an increasing need for our digital engagement platform that leverages data and insights to drive revenue growth. We are focused on improving areas of our business and remain confident on both our long-term growth opportunity and the ability to re-accelerate growth in the coming quarters. ON24 is a growth business against the backdrop of powerful secular trends and a large total addressable market. With that, I'll hand it over to our CFO, Steve Vattuone, to walk you through our Q4 results in more detail and provide our outlook. Steve?

Thank you, Sharat, and good afternoon, everyone. I'm going to start with our fourth quarter and full-year 2021 results and then we'll discuss our outlook for the first quarter and full-year 2022. Total revenue for the fourth quarter came in at the high end of our guidance range at $52 million, representing a decrease of 2% year-over-year against a comparison of a 123% growth in the year-ago period. Subscription and other platform revenue was $45 million, an increase of 9% year-over-year against the historical comparison of 115% growth in the year-ago period. As a reminder, other platform revenue includes customer overages, which has historically trended in the range of 3% to 4% of total revenue depending on customer usage of our platform and seasonality. We are seeing more of our customers choosing to add additional capacity into their contracts at the time of renewal, with the overages representing approximately 2% of total revenue in Q4, and we expect that trend to continue. Professional Services revenue was $7 million, a decrease of 41% year-over-year and representing approximately 14% of total revenue compared to 23% in the year-ago period. This decrease was in line with our expectations that we provided in the last quarter. For the full year, total revenue was $203.6 million, an increase of 30% year-over-year. Subscription in other platform revenue was $175.9 million, an increase of 43% year-over-year. Professional Services revenue was $27.7 million, a decrease of 19% year-over-year. Moving on to ARR, which represents the annualized value of all subscription contracts at the end of the period and excludes Professional Services and overages. Net new ARR in Q4 was $4.2 million, resulting in ending ARR of $171.4 million. This represents an increase of 12% year-over-year, against a comparison of 100% ARR growth that we delivered in 2020. We continue to see customers making longer-term commitments to our platform with multi-year contracts comprising 35% of our ending ARR, compared to 30% at the end of 2020. Our dollar-based net retention rate or NRR ended the year at 97%. As a reminder, NRR is a lagging indicator and reflects the impact of elevated churn that we experienced over the past three quarters with first-time renewals, particularly with organizations that were not our ideal customer profile and had one-time needs, as well as some customers that rationalized their expansions. In fiscal 2022, we expect that we will see improvement in our NRR as the year progresses. Despite the elevated churn, our average ARR per customer at the end of 2021 stands at $81,000 compared to $77,000 in 2020, and $55,000 in 2019. Turning to customer metrics, we had a strong quarter for new logo acquisition. Total customer count increased by 68 quarter-over-quarter to 2,122. We ended the year with 366 customers contributing ARR of $100,000 or more, representing an increase of 21% from the prior year. These $100,000 plus ARR customers comprise 67% of our ending ARR. As a sign of our strategic positioning and strong expansion, we now have 19 customers contributing ARR of $1 million or more, representing an increase of 36% year-over-year. 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, 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 profit for the quarter was $40.1 million, representing a gross margin of 77% and a decrease of 400 basis points year-over-year. We continue to invest in our cloud infrastructure capabilities to enable sustained growth and grow our customer success teams. Turning to our operating expenses. Sales and marketing expense in Q4 was $24.9 million compared to $19.5 million in Q4 last year. This represents 48% of total revenue compared to 37% in the same period last year. We have been investing in go-to-market enablement in marketing to drive market awareness. R&D expense in Q4 was $8.1 million compared to $5.8 million in Q4 last year. This represents 16% of total revenue compared to 11% in the same period last year. We have been ramping our investment in R&D as we accelerate our pace of product innovation and bring new products to market. G&A expense in Q4 was $8.9 million compared to $6.9 million in Q4 last year. This represents 17% of total revenue compared to 13% in the same period last year. Our G&A expenses have increased due to the costs associated with being a publicly traded company. Over time, we expect G&A expense to scale and decrease as a percentage of our revenue. Our operating loss for Q4 was $1.8 million or a negative 3% operating margin compared to operating income of $11.1 million in an operating margin of 21% during the same period last year. For the full year, operating income was $2.1 million or a 1% operating margin. Net loss in Q4 was $1.7 million or $0.03 per share based on approximately $47.8 million basic and diluted shares outstanding. This compares to net income of $11 million or $0.57 per diluted share in Q4 last year using approximately $19.1 million diluted shares outstanding. For the full year, net income was $1.4 million or $0.03 per diluted share using approximately $51.5 million diluted shares outstanding. Turning to the balance sheet and cash flow. Cash used in operations in Q4 was $4.5 million compared to cash flow from operations of $10.7 million in Q4 last year. Free cash flow was negative $5.6 million in Q4 compared to positive $10.3 million in Q4 last year. Free cash flow margin was negative 11% in Q4 compared to positive 19% in Q4 last year. For the full year, we generated free cash flow of $1.6 million and ended the year with $382.6 million in cash, cash equivalents, and marketable securities. In December 2021, the Board of Directors authorized a $50 million share repurchase program. During the fourth quarter we repurchased 428,218 shares at a weighted average price of 16.88 per share, utilizing $7.2 million of the $50 million authorized under the program. We believe our current market valuation does not reflect our long-term growth potential, and we will continue to be opportunistic with our share repurchase program. With that, let's turn to guidance. At a high level, we look at FY2022 as a tale of two halves with a challenging start, and improving sequentially each quarter. Our largest challenge that we experienced in 2021 was the first-time renewal cohort, which was four times the dollar value of first-time renewals in 2019, and we experienced a churn rate that was approximately double that of the 2019 cohort. The share of first-time renewals in 2022 is expected to normalize back towards 2019 levels against the backdrop of an improving customer profile. We believe Q1 2022 will mark the last COVID-influenced renewal quarter. The Q1 renewal cohort comprises a significant portion of large deal renewals, and we have experienced higher than anticipated customer rationalization, particularly with a handful of customers who previously signed large expansions during COVID that were up for renewal for the first time. Our gross retention for pre-2020 cohorts has been stable, which gives us confidence that overall retention will begin to trend upwards in 2022 as we move past the laps of these COVID-influenced cohorts. For Professional Services, we are continuing to see more of our customers electing to be self-service, which speaks to our platform's ease of use and overall user experience. As a result, we expect that the mix of Professional Services revenue will be in the low teens as a percentage of total revenue in fiscal 2022 compared to 14% in 2021 and 22% in 2020, which will drive a low teens year-over-year decline for Professional Services revenue in 2022. As I mentioned earlier, overages which are included in other platform revenue have been trending lower to approximately 2% of total revenue as more customers choose to add additional capacity in their contract at the time of their renewal. We estimate the combination of lower expected professional services and overages revenue will act as an approximately 3-point headwind to our full year revenue growth rate with the larger impact from the first half. As Sharat highlighted, it has become clearer that the world is moving from pandemic to endemic and we have incorporated our early view of post-pandemic digital budgets into our outlook. Lastly, we're enhancing our customer success capabilities, launching our partner ecosystem, bringing new products to market, and making improvements to our multi-product enterprise sales motion. We're optimistic that we will see a positive impact from these initiatives, but we believe it will take a couple of quarters to realize the benefits. Now moving to Q1 guidance. Our bookings in Q1 2021 were more heavily weighted toward the early part of the quarter compared to our normal back-end loaded quarters, which is driving atypical linearity for the Q1 2022 renewal cohort. In January, we experienced higher than anticipated customer rationalization, particularly with a handful of customers that have large expansions in prior periods. The challenges we faced with rationalization coupled with the non-linearity of renewals will have an impact on the timing of recognized revenue, resulting in lower sequential subscription revenue. Professional Services revenue is seasonally lower in Q1 compared to Q4, and we expect that it will represent approximately 10% to 11% of total revenue. Overages represented approximately 4% of total revenue in Q1 2021, and we now see overages trending to approximately 2% of total revenue in Q1 2022. As such, we expect total revenue in the range of $47 million to $48 million. We expect a non-GAAP operating loss in the range of $8 million to $7 million, and a non-GAAP net loss per share of $0.17 to $0.15 per share based on $47.7 million basic in diluted shares outstanding. And for the full year 2022, we expect revenue in the range of $200 million to $204 million. We believe 2022 will be a tale of two halves, with Q1 marking the trough and subsequent improvement in net new ARR throughout the year. As the profile of renewal cohorts improves, we expect customer rationalization of expansions in 2020 and '21 to also subside. Exiting Q4, 2022, we expect an ARR growth rate in the low teens, which will accelerate into fiscal 2023. In the second half of the year, with the comparisons largely behind us, we expect subscription and other platform revenue growth to re-accelerate to the mid-single digits. Professional Services revenue is expected to be approximately in the low teens as a percentage of total revenue for the full-year 2022 compared to 14% in fiscal 2021 and 22% in 2020, resulting in a low teens year-over-year decline. Given the moving parts within revenue, we believe ARR is the most appropriate metric to evaluate the underlying momentum of the business. We expect a non-GAAP operating loss in the range of $30 million to $27 million, and a non-GAAP net loss per share of $0.64 to $0.58 per share, using $49 million basic and diluted shares outstanding. As I mentioned, we faced headwinds in 2021, primarily from the elevated churn within first-time renewal cohorts and rationalization from large expansions during COVID. We're confident that these headwinds will soon abate and believe that our long-term market opportunity has not changed. As a result, we believe that we have a unique opportunity to invest in accelerating our long-term revenue growth rate and advancing our leadership position. In 2022, we plan to make targeted investments in our go-to-market function, public cloud infrastructure and product development initiatives. Overall, we do expect to see bottom-line improvement throughout the year as the top-line re-accelerates, and we drive leverage from the investments made over the last year. As we look ahead, we are laser-focused on further accelerating ARR growth in an efficient manner, improving net dollar retention, and driving operational improvements across the business. We expect an improving bottom line in 2023, and we believe that we have a clear path over the next several years to achieve our target model of 20% or higher non-GAAP operating margins and driving top-line growth. With that, Sharat and I will open the call up for questions.

Thank you. We'll now take our first question from Arjun Bhatia with William Blair. The line is open. Please go ahead.

Perfect. Thank you and thanks for taking my questions. I wanted to start off with asking how you're thinking about profitability in 2022 and how you think about the ROI of the investments that you're planning to make next year, especially as the world moves from pandemic to endemic? As you've pointed out, the demand environment is being impacted, a little bit of customer rationalization going into 2022. I would love to hear more on the go-to-market investments that you're making. But, if you can answer broadly as well, that would be great.

Hi, this is Steve. I'll go ahead and take the profitability questions. First let me start by saying we grew our ARR by a 123% over the last two years and we've been profitable both years. Now our market opportunity has not changed; every company is now digital. Now we are facing some near-term factors overlapping the last of the COVID impacted quarters here, with some larger rationalizations in Q1, but we believe Q1 will be the trough for that. We're seeing new customer acquisition strength; we added 68 net-new logos in Q4 and we're pleased with the pipeline. But we believe ARR is the best metric to evaluate the momentum of the business, and revenue is a bit of a lagging indicator. Now we've always run this company prudently, but we are making targeted investments to drive growth. The major issue really has been churn, and we believe that will be behind us shortly, and we'll start to see the growth inflect in the second half.

Let me expand on what Steve just mentioned. Churn has been our primary challenge. In 2021, while we saw significant growth in ARR, we were unable to outpace the churn. Specifically, the first-time renewal cohort experienced the highest churn, which was four times larger than in Q1 of 2019. Additionally, the churn for the first-time renewal cohort was double that of 2019, showing that we are struggling to manage this issue. On a positive note, as we enter Q2, we have already renewed the largest portion of last year's Q2 cohort. The existing renewal cohort, which makes up about two-thirds of our total, has remained stable, with retention levels holding steady throughout COVID. Regarding investments, we are concentrating on targeted initiatives where we observe increased sales productivity, particularly enhancing the customer success function. We've made investments in this area and continue to learn from our customers about coverage ratios, talent, and leadership, determining our next steps. We are upgrading the quality of our onboarding program. Recently, we launched two new products in 2021, and Breakouts performed exceptionally well. At the end of last year, we introduced Go Live and are witnessing good momentum with these products. We plan to add more products in Q2 as we progress. There has been an improvement in our partner channel leverage. Earlier in 2021, its contribution was in the low single digits, but by the end of the year, we raised it to high single digits. I aim to increase that figure to around 20% in the future. It is also essential to focus on our enterprise sales execution across multiple products, ensuring a consultative approach that allows us to sell various offerings. While we will make cautious investments, we remain committed to growth. Our focus is on ensuring that with these investments, we aim to finish the year with low teens growth in ARR, which we plan to accelerate to high teens in 2023. That is our goal.

That's very helpful color. Thank you.

We'll now move on to our next question from Brent Bracelin with Piper Sandler. Your line is open, please go ahead.

Hi, guys this is Hannah Rudoff on for Brent today. Thank you for taking my questions. I guess the first one is just could you talk more broadly about how you're thinking about your durable growth rate in the post-pandemic world? And what is giving you confidence in that?

Yeah. Let me take that. Our market opportunity has never been larger. We still see a large TAM over $40 billion. I mean, we know that sales and marketing are moving, increasing their digital channels, so nothing has changed there. The way we look at it is, Q1 is the trough of our business. Churn has been our biggest issue. And as we lapped the COVID quarters, there are two things that are happening. One is, our cohorts literally get better. Once we get past the Q1 cohort, the cohorts get better. So just from a mathematical point of view, it is easier for us to get past some of those churn issues. Again, I just want to highlight the existing renewal cohort has been quite stable. Now, in terms of growth rate with the investments that we're making and the things that we're doing, we feel quite comfortable that we should end the year at a lower teens ARR growth rate, which we can further accelerate in 2023 to high teens. That's what we feel quite good about, discussing based on the investments that we're making currently.

Great. That's helpful. And then could you remind me where you are in terms of your full credit activities for your sales force?

We closely track sales productivity, and in 2021 the sales productivity was slightly higher than 2019 in spite of the large number of hires that we made. So ARR in 2021 was mainly impacted by the churn in the first-time renewal cohort. Now we want to improve the productivity that we had in 2021. Again, it was better than 2019, but we are laser-focused in terms of improving our churn; we are laser-focused in terms of increasing our productivity, but I feel good about the capacity that we have and the productivity right where we are. And we are planning to not make large investments, but very selective and targeted additions in areas where we see strong productivity-like markets like Japan, like our installed base and expansion business. So that's where we intend to continue to invest.

Great. Thank you.

We move onto our next question from Srinek, your line is open. Please go ahead.

Hey, this is Srinek staying in for Rob. Apart from the COVID-affected downgrades and the SMB churn along with the non-ideal customers that you've been talking about and you've been dealing with, it also appears that the net new $100K ARR customer adds slowed quite a bit sequentially. Can you elaborate on the underlying factors, like how much of it is just demand pull and rationalization affecting the gross ads versus churn, specifically amongst these larger customers or is there anything else that's going on which we're missing, and just a follow-up after that?

Yeah, Srinek, we added four net adds to the $1 million plus ARR customer cohort, now we have 19 in total. We added that in Q4. We had a strong quarter of about 68 net new logos. The best add group in Q1 at about the same levels in 2021. We saw some initial courses that were just under the $100K mark, and we expect to expand those over time. Just to provide you a little more context, our average new enterprise ASP in Q4 was the highest on a year-to-date basis. That was the highest that we have all year. We feel quite good about where we are, and that should provide your perspective.

Got it. Just a quick follow-up. I know you mentioned this briefly; what are the behaviors you’re observing from your most important enterprise customers in terms of multi-product adoption, new product adoption trends, Go Live which is now GA and so on?

Yes, let me address that in several parts. First, our multi-product adoption reached 35% in Q4, which is double what it was at the end of 2019. We're noticing that our customers are increasingly using multiple products, and we intend to maintain this trend, particularly with Breakouts and Go Live initiatives. Regarding Go Live, we launched it at the end of last year, so it has been about a month and a half since then. The feedback from customers has been excellent. We are generating awareness and building our pipeline, and we anticipate that usage will ramp up throughout the year, with contributions accelerating towards the end of the year. Additionally, I want to highlight something important. In my prepared remarks, I mentioned a large customer who significantly increased their spending with us during COVID, tripling their investment. They just renewed their contract with us in January, which reflects the rationalization we've discussed. They signed a multi-year agreement with an annual recurring revenue spend in the seven figures, which is double their pre-COVID spending. They increased to three times and then adjusted to two times, but that still represents a substantial increase in their investment with us. We're seeing this trend among many of our large customers. The positive aspect is that by the time we reach Q2, these customers will have experienced a complete cycle of rationalization, and we're optimistic about that. I hope this provides clarity on how we see our customers evolving their spending in the future.

The percentage of our ARR multi-year agreements at the end of the year was 35%, and that's the highest it's ever been.

Got it. That's really helpful. Thanks, Sharat. Thanks, Steve.

Thank you. We move on to our next question from Sterling Auty with JPMorgan. Your line is open. Please go ahead.

Hi, this is Drew on for Sterling. You mentioned that ARR growth should be in the low teens as you exit 2022; should we expect more of that to come from average ARR per customer or from customer growth?

I think you'll see it coming from both. We're seeing our average ARR per customer has ticked up year-over-year. Drew. It went from $77,000 per customer at the end of 2020 to $81,000 per customer at the end of this past year. We're pretty good at expanding within our customers. So, I'd expect both will contribute to that number.

Just to add to what Drew just said, and I just talked about that, Drew, is we added 68 net-new customers in Q4, which in spite of the churn we feel very good about. So of course the installed base will contribute, but we're also very laser-focused on net-new adds, which is the driver of the business.

Got it. Thank you.

We'll take our next question from Scott Berg with Needham. Your line is open, please go ahead.

Hey guys, this is Josh on for Scott. If you look at the customers who are downsizing their subscription, is there any commonality in terms of the industry or how they were affected by the pandemic? And then, is this entirely lower usage renewals or they also decrease in the number of modules that they're using as well?

Yeah. I think during the pandemic, what happened is, when the physical world had stopped, people had added a lot more workspaces, log-ins on a global basis across the organization. If you are a large enterprise, you needed more licenses in different markets. And so, people may have gone based on the example I gave you about this physical and digital events company. People may have expanded their usage much wider; in many cases they expanded their users to three or four times what they were doing pre-COVID. What we have seen as people are rationalizing their usage in Q1, what we've seen them reduce some modules, remove some workspaces and logins; and then to really optimize it to what they really need going forward. But again, when you look at our top renewals, what you will see is the ARR contribution of the top renewals, even after rationalization, is meaningfully higher than where it was pre-COVID, so that's a very important insight.

Okay, got it. That's helpful. The guidance implies that you are still investing pretty aggressively in the business in terms of growing operating expenses over the next year. Can you give us some more color on what are the priorities for investment this year and how should we think about that split and whether it's across sales and marketing, R&D versus G&A? Thanks.

Yeah. In terms of investment priorities this year, can you elaborate on the split between sales and marketing, R&D, and G&A? Thanks.

Let me go ahead, Sharat.

I want to start by saying that we are focused on making targeted investments this year, and Steve will provide more details. We discussed enhancing our partner channel and areas where we are seeing strong sales productivity. In those areas, we will increase our investments. Last year, we were significantly affected by churn, but we can overcome it. As expected, we continue to invest in our engineering and product functions because we anticipate bringing more functionality. On the customer success function, we are continuing to look at leadership and talent to enhance our go-to-market. But in each of these cases, we are very focused on very targeted investments. If you look at our expense structure, we did go up pretty significantly compared from 2020, when we started investing in the second half, to the second half of 2021. But since then, our investments have generally been a lot more targeted.

I'll add a little bit of color to what Sharat was saying in terms of the gross margin. We do expect to see some gross margin compression of probably a few hundred basis points year-over-year in 2022. Now we are making investments in customer success to enhance our capabilities and coverage ratios that are essential to improve our customer retention. And also, our newer product offerings that run in the public clouds do have a slightly lower margin profile. And we're continuing to invest in our network infrastructure. Now we're not planning a wholesale move of the platform to the cloud; it’s really the newer products that will be cloud-native. We are committed to our long-term gross margin target of 78% to 80% as we grow and see leverage over time, but we are making some of these targeted investments there in 2022.

Got it. Thanks, guys.

Thank you. It appears there are no further questions at this time. I'd now like to turn the conference back to Sharat for closing remarks. Thank you.

In closing, to reiterate, 2021 was the most pivotal year in the company's history and I couldn't be more excited about what lies ahead. I want to thank all of our dedicated employees and amazing customers for the incredible milestones that we achieved. We are the leading B2B sales and marketing platform for digital engagement; delivering actionable data and insights to drive measurable business growth. While we have some near-term factors impacting our outlook, we have a roadmap for execution and strong confidence in our vision and strategy. We're proactively making improvements in areas of our business and the entire team is focused on executing against our priorities for 2022. Finally, I invite all of you to join our customer conference, The ON24 Experience on April 20th, where you can learn more about our platform vision, hear firsthand from our customers, and see the exciting product innovation in action. Thanks everyone for being on the call today.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.