ON24, Inc. (ONTF) Q2 2021 Earnings Call Transcript

ON24, Inc. (ONTF -1.86%)
Q2 2021 Earnings Call
Aug 10, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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. [Operator instructions] Please note that this call is being recorded. And at this time, I would like to turn the conference over to Lauren Sloane with Blueshirt Group.

Lauren Sloane -- Investor Relations

Thank you. Hello, and good afternoon, everyone. Welcome to ON24's second-quarter 2021 earnings conference call. On the call with me today are Sharat Sharan, founder and CEO of ON24; and Chief Financial Officer Steve Vattuone.

I would like to remind everyone that some information provided during this call may include forward-looking statements, including, without limitation, statements on ON24's future events, expected financial and operating results, business trends, global economic trends, and expected timing and benefit, if any, of such trends. These forward-looking statements may contain such words as project, outlook, future, expects, will, anticipate, believes, intends are referred to as guidance. These forward-looking statements reflects beliefs, estimates, and predictions as of today, and ON24 expressively assumes no obligation to update any such forward-looking statements. These forward-looking statements are only predictions and are subject to substantial risks.

Factors that could cause or contribute to such differences include, but are not limited to, risks associated with our ability to attract new customers and expand to existing customers, fluctuation in our performance, competition in our market and any decline in demand for our solutions, our ability to expand our sales and marketing capabilities and otherwise manage our growth, the impact of COVID-19 pandemic and other risks identified in the company's SEC filings. For a detailed description of risks and uncertainties, which could impact these forward-looking statements, you should review ON24's periodic SEC filings, included the risks identified today -- in today's financial press release. We would 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 reconciliation of these non-GAAP financial measures, please refer to today's financial press release. I'll now turn the call over to Sharat. Sharat, please go ahead.

Sharat Sharan -- Founder and Chief Executive Officer

Thank you, and welcome, everyone, to ON24's second-quarter 2021 financial results conference call. Thank you for joining us. For the second quarter, we reported total revenue of $52.1 million, which grew 43% year over year. Subscription and other platform revenue grew by 68%, year over year, excluding legacy.

Additionally, we continue to demonstrate significant leverage, which drove non-GAAP operating income of $2.5 million and $5.7 million in free cash flow for the quarter. Our second-quarter ARR was $164.1 million, up 44% from $114.2 million in the second quarter of 2020, which itself was up 70% from the second-quarter 2019. Q2 2021 was a transition quarter, where we went from a peak of COVID in Q2 2020, to peak of vaccinations in Q2 2021. New business bookings remained healthy, even though in Q2 2021, there was some uncertainty as many businesses anticipated they might be starting to return to some form of post-pandemic normalcy.

In the second quarter, we added 183 new customer logos, similar to Q1 and almost 10% higher than Q4. However, we also experienced higher-than-expected churn and down-sell from customers we signed up in the second quarter of last year during the peak of COVID. This higher churn was primarily in the first-time renewal cohort, customers who signed up one-year contracts last year and who were up for renewal. We, of course, recognize that during the pandemic, companies of every size were searching for tools to quickly deploy to reach customers, whom they could no longer connect with in person.

That was true with SMB buyers and non-ICP ideal customer profile buyers focused on one-time events, who rushed to find alternative solutions to in-person business. This is normally not our primary target audience. As a result, Q2 2021 was our largest renewal cohort ever and the share of first-time renewals in Q2 2021 was outsized, accounting for over 60% of the cohort. We saw significantly higher churn and down-sell within this group, while the rest of our business had strong retention equivalent to pre-pandemic levels.

We expect the business from first-time renewal base that did renew to have the same strong retention profile as our existing customer base. We anticipate that this churn and down-sell pressure will ease meaningfully in the second half of the year, but the proportion of first-time renewals continues to drop from over 60% in Q2 to 30% in Q4, a significant reduction that brings us more in line with pre-COVID cohorts. Additionally, the total Q3 and Q4 renewal cohorts are meaningfully smaller than Q2. Most importantly, when we look at Q2, the lower churn was primarily in the SMB.

Our enterprise customers remained very solid throughout the quarter. In addition, our customer quality has increased. For example, in Q2, we added over 20 net new $100,000 ARR customers, similar to recent quarters. Our gross enterprise logo retention was the same as our pre-COVID enterprise retention.

We saw some downsizing in these accounts to normalize for some of the peak of COVID buying, but are very pleased with enterprise customer retention. We also saw multiyear deals grow as a percentage of ARR and the number of customers buying multiple products increased in Q2 over Q1. As a result of these factors, we believe that we have gotten past the worst of the churn, and we have significantly reduced the number of customers that do not meet our normal target profile. It also speaks to the underlying strength of our business, especially in our focus area, the enterprise.

Enterprises deploy our platform as a data-rich system of engagement, purpose-built for enterprise-class marketing and sales. Many of our enterprise customers enabled by the self-service capabilities in our platform deliver hundreds or thousands of experiences per year. For many of these customers, we have become their top pipeline-generating platform and they're standardizing on ON24 for their prospect engagement and conversion. The pandemic has accelerated the global enterprise awareness of our offerings, and we now have a larger served market than ever before.

And as a new digital-first enterprise business pattern emerges and as our category leadership grows, our future is more exciting than ever before. Importantly, our digital system of engagement provides our customers with the assurance that regardless of the uncertainty of what the new normal may look like and any changes to it, ON24's platform will support our customers' revenue continuity by having a sales and marketing solution that drives revenue. Our solution is available globally with enterprise scale and options and features to enable our customers to make privacy and compliance choices that align to their needs. Our market leadership position has been further validated by the numerous industry recognitions and awards we have received.

In June 2021, it was announced by G2, one of the largest software marketplace and user review platforms, that based on user reviews, ON24 Elite was recognized as the top webinar software for enterprises and mid-market companies. In addition, in July 2021, TrustRadius, another review site for business technology, named ON24 the best webinar software for enterprises. Let me now walk you through some Q2 customer examples. There are three core use cases that we focus on at ON24: these are demand generation; partner enablement; and event marketing.

These are all categories with very large global and growing TAMs. Starting with demand generation. Today, we are enabling thousands of customers to convert millions of prospects to buyers. Our customers can scale prospect engagement and turn that engagement into actionable insight, thereby increasing sales conversion and driving revenue growth.

One great example is with a large approximately $15 billion market cap, architecture, engineering, and construction software company. In Q2, they expanded their investment with ON24 with an approximately $0.5 million deal. The standardized webinar demand generation and virtual customer engagement on ON24 using ON24 Elite and Engagement Hubs and adding new Breakouts for two-way engagement. Last year, they ran more than 1,000 experiences.

They also leverage ON24 Connect for deep data integration with SAP's Marketing Cloud. Over the past two years, we've increased ARR with this customer by 800%. Another important use case is partner enablement. ON24 provides a scalable digital approach for companies to enable and train thousands of OEMs, distributors, technicians, partners, and advisors on their extensive portfolio of products and services.

These companies span industries, including manufacturing, consumer packaged goods, financial services, and pharmaceuticals. One of the world's largest construction equipment manufacturer expanded their spend in Q2 and is nearing $1 million in annual spend with ON24. In Q2, they began to expand our solution globally, deploying ON24 Elite and Virtual Conference across Europe and Latin America to provide training and education to their vast network of dealers and consultants. Finally, for event and field marketing professionals, ON24 provides webinars, virtual conferences, and integrated on-demand digital engagement hubs.

We are seeing event marketing as a growing use case for our platform. In addition, the ON24 platform can uniquely support hybrid event engagement, providing the same interactive experiences to both virtual and physical audiences simultaneously. One of the world's leading exhibition organizers who runs thousands of physical and virtual events for leading B2B brands across Asia, North America, and the Middle East, expanded their investment in ON24, after having successfully deployed nearly 3,000 ON24 experiences, they recently increased the number of experiences by over 20% to meet growing client demand. In addition to these great use case examples, I wanted to highlight some additional new customer wins and customer expansions from this past quarter.

In our second quarter, we acquired new customers from various industries, including technology, life sciences, financial services, higher education, and others. One new six-figure win was with one of the world's top medical device companies. They chose ON24 over other solutions. They use ON24 Elite and Engagement Hub to drive top-of-funnel engagement and continuous activity for their prospective and existing customers.

The ability to deliver branded experiences and integrate our data with Salesforce's CRM and Adobe Marketo's marketing automation were deciding factors in choosing ON24. Next, a leading cloud-based HR solution company switched from a competitive solution to ON24 Elite. Our ability to collect audience engagement data and make that data actionable through our Salesforce CRM integration was viewed as critically important difference here. A large Fortune 500 American bank holding company, leading a platform purpose-built for sales and marketing, chose ON24 as their preferred vendor for their webinars.

ON24's ability to provide first-person data and buying readiness signals to the marketing and sales organization was a major competitive advantage. They're using ON24 Elite and ON24 Connect. In addition to the new customer wins, we saw a large number of expansion deals in Q2. Let me share just a few of the incredible examples.

One large expansion deal nearing $0.5 million was with one of the world's largest pharmaceutical companies. They are quadrupling the number of experiences they deliver with ON24 Elite to engage and educate key opinion leaders and healthcare providers on new drugs and treatments. Second, a top 20 business insurance company increased their spend by almost 300% with ON24 for both lead generation and virtual events. They were previously using a combination of tools to host an event for thousands of attendees, but wanted to deliver a better attendee experience, so they shifted to ON24 Virtual Conference.

One of the world's largest network telecommunication companies increased their spend. Digital audiences can interact and engage with the same experience at the same time. Virtual attendees can now view the same presentations, interact with the same digital content, participate in the same Q&A, polls, and network with Breakouts. The in-person attendee has access to the same interactivity tools.

Importantly, we are collecting first-person engagement data and buying signals, creating profiles across both in-person and virtual attendees. Finally, our hybrid engagement platform preserves for our customers the digital-first benefits of extended audience reach and ecosystem integration. As I mentioned earlier, our ability to support hybrid engagement provides our customers the assurance that regardless of the uncertainty of what the new normal may look like and any changes to it, ON24's platform provides our customers with additional sales and marketing solution that can help them drive prospect engagement and ensure revenue continuity. And we continue to further enhance the self-service capability of all our experience platforms.

Another key innovation in customer experience was at the launch of ON24 Breakouts. This expanded the functionality and interactivity of webinars built with ON24 Elite and will also be generally available in our virtual conference product by the end of this month. Breakouts enable attendees and presenters to network with each other face-to-face virtually. Sales teams to connect immediately with prospects and subject matter experts to offer two-way communication to support customer education and training.

This new product has been met with a great deal of early success. The other key area of innovation for ON24 is in our AI-based analytics and personalization engine, ON24 Intelligence. In Q2, we launched a new AI-based personalized recommendation engine. Based on our users' engagement history, our AI engine creates unique content recommendations specifically tailored to their individual interests, creating journeys that are uniquely matched with each individual lead or prospect, helping to accelerate the conversion of prospects to buyers.

In addition to this, we recently expanded the first-party data displayed for each individual user to now include virtual conference engagement data parts. We are now able to track over 50-plus data points over the prospect's lifetime of behavior across live, always-on, and personalized content experiences. Finally, I would like to talk about the platform enhancements that we have made to support our global enterprise growth and entries into new international markets. One example is in the Japan market.

We are supporting our Japanese market clients with a new back-end user interface. The Japanese language availability in ON24 Elite, ON24's expanding global localization of its platform and services, and we can see the impact of these investments with a great momentum and wins that we are seeing in this region. Those were just a few recent innovation highlights. We look forward to continuing to update you in this area.

Finally, I would like to update you on some important investments that support our core growth vectors. First, we continue to grow our investment in our sales capacity to drive new customer acquisition, expansion, and upsell. These sales investments are focused across both the enterprise and mid-market segments. Second, we continue to invest in international markets in both EMEA and APAC, with especially focused on Japan and dock.

Third, we are increasingly focused on building channel leverage into our business model. There are two key new channels we are developing. The first is a partner network made of sales and marketing agencies. These agencies have the ability to standardize on the ON24 platform to deliver digital engagement and virtual events on behalf of their clients.

The second area of channel focus is with our key ecosystem technology partners. We are making investments in the joint go-to-market with major CRM, marketing automation, and other vendors. While the percentage contribution of the channel business is currently in the mid-single digits, we expect this to grow in the subsequent quarters. And finally, we continue investing in our R&D organization to develop new products to add to our overall platform offering.

To wrap up, I wanted to highlight a few things. We are an industry leader in a market space that has been redefined and is a very large market. The pandemic has accelerated the global enterprise awareness of our offerings, and we now have a larger served market than ever before. And as our category leadership grows, our future is more exciting than ever before.

With sales and marketing increasingly shifting the digital channels even before the pandemic, Gartner projects 80% of B2B sales and marketing to be over digital channels by 2025. ON24 is increasingly becoming a must-have in the enterprise. Finally, our digital system of engagement provides our customers with the assurance that regardless of the uncertainty of what the new normal may look like and any changes to it, ON24's platform will support our customers' revenue continuity and growth by having a sales and marketing solution that drives revenue. With that, I'll hand it over to our CFO, Steve Vattuone, to walk you through our Q2 results in more detail. 

Steve Vattuone -- Chief Financial Officer

Thank you, Sharat, and good afternoon, everyone. I'm going to start the discussion of our results with revenue. Total revenue for the second quarter was $52.1 million, an increase of 43% compared to Q2 of 2020. Subscription and other platform revenue for the second-quarter 2021 was $44.4 million, an increase of 64% compared to the second quarter of 2020.

As a reminder, this includes overages, which are generally around 3% to 4% of our revenue, but can fluctuate depending on customer usage of our platform and seasonality. Professional services revenue in the second quarter was $7.7 million, a decrease of 16% year over year, representing 15% of total revenue. This compares to the second quarter of 2020 when our professional services revenue was significantly higher than historical norms as a percentage of total revenue as a result of unusually high demand for our professional services during the peak of the COVID pandemic in 2020. 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. Total ARR at the end of Q2 '21 was $164.1 million, an increase of 44% year over year. As Sharat mentioned, Q2 2021 was a transition quarter for ON24. We had our largest renewal cohort ever, which was meaningfully larger than our upcoming Q3 and Q4 renewal cohorts.

In addition, the share of first-time renewals in Q2 '21 was outsized accounting for over 60% of the cohort. We saw high churn and down-sell within the first-time renewals cohort, which primarily included a substantial number of SMB buyers and nonideal customer profile buyers focused on one-time events who rush to find alternative solutions to in-person business, but are normally not our primary target audience. Other customers had strong retention equivalent to pre-pandemic levels. Also, in the second quarter of 2020, a larger-than-typical percentage of customers added were SMB customers, and these customers accounted for approximately 50% of our logo churn.

Our net incremental add of 16 new customers in the quarter was lower primarily due to the churn in SMB customers. We ended the second quarter of 2021 with 2,078 customers. Importantly, our customer quality from the cohort coming out of Q2 2021 improved. We added 20 new $100,000 ARR customers, similar to Q1 levels, and in Q2 with 345 customers with ARR of $100,000 or more, an increase of 51% from Q2 in the prior year.

Going forward, we expect our customer renewal cohorts to meaningfully improve through the second half of 2021 as the percentage of first-time buyers from the 2020 COVID quarters up for renewals declined significantly in Q3 and further in Q4. While we still expect some impact from the first-time COVID renewals as we continue to lap the COVID quarters, we expect this impact to drop significantly over the next couple of quarters as Q4 will have only 30% of its renewals in the first-time cohort. As we see a decline over the next two quarters in the first-time renewal customer cohort, which made purchases during the peak of COVID, we expect that our renewal cohort dynamics will be more in line with pre-COVID renewal cohorts. We are confident that our ARR growth will simultaneously normalize and meaningfully increase in Q3 and Q4 relative to Q2, especially as our quarterly comparison about the quarters which occurred during COVID.

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 in our earnings release. Gross profit in the quarter was $40.7 million, representing a gross margin of 78%, consistent with the same year-ago period.

We intend to continue to invest in scaling the business throughout fiscal 2021. And as a result, we expect this to reduce gross margins in the near term. Turning now to operating expenses. Sales and marketing expense in Q2 was $23.9 million, compared to $12.6 million in Q2 last year.

This represents 46% of total revenue, compared to 35% in the second quarter last year. As we have grown our sales force and expanded our marketing efforts since Q2 of 2020, our sales and marketing expense has grown in both absolute dollars and as a percentage of revenue compared to Q2 2020. The strong increase in the sales and marketing expense reflects our confidence in the resiliency, strength of our business, and the large TAM for our solutions. R&D expense in Q2 was $7.3 million, compared to $4.5 million in Q2 last year.

This represents 14% of total revenue versus 12% in the same period last year. We have increased our R&D spending both as a percentage of revenue and in absolute dollars over the past year. And as we move through 2021, we intend to continue to invest in R&D. G&A expense was $7 million for the quarter, compared to $4 million in the second quarter last year.

G&A was 13% of revenue versus 11% of revenue last year. Our G&A expenses have increased as a percentage of our revenue due to the costs associated with being a publicly traded company. Over time, we expect G&A expense to decrease as a percentage of our revenue. Operating income for Q2 was $2.5 million or a 5% operating margin, compared to operating income of $7.3 million and an operating margin of 20% during the same period last year during the peak of the COVID pandemic.

Net income in Q2 was $2.5 million or $0.04 per diluted share based on approximately 55 million weighted average diluted shares outstanding. This compares to net income of $7.1 million or $0.69 per share in Q2 last year using 10.3 million diluted shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with $396 million of cash, cash equivalents, and marketable securities.

Cash flow from operations in the second quarter was $6.9 million, compared to $14 million in Q2 last year. Free cash flow was $5.7 million in Q2, compared to $13.8 million in Q2 last year. Free cash flow margin was 11% in the second quarter, compared to 38% in Q2 last year. Before I discuss guidance, I'd like to discuss our professional services business.

A meaningful amount of services revenue in the latter part of 2020 was due to higher-than-typical demand for implementation and deployment services on our Virtual Conference platform and services associated with one-time events in the SMB market. I have discussed previously the churn and down-sell in our first-year renewal cohort. Many of these same customers require a lot of services. This is normalizing in 2021.

We also made improvements in our platform to make it as self-service as possible for our customers, which reduces the need for professional services. As a result, we expect our professional services revenue to decrease as a percentage of total revenue in the second half of 2021 as compared to 2020. And finally, turning now to guidance. Although we are pleased with the positive momentum, we are seeing with new customer additions, we are revising our 2021 fiscal-year guidance, given the impact of customer churn ARR in the second quarter and even more impactfully, a smaller percentage of our revenue we expect to come from professional services in the second half of 2021 as platform revenues become a larger share of our overall revenue.

For the third quarter of 2021, we expect revenue in the range of $47.5 million to $48.5 million, which represents year-over-year growth of approximately 12% to 14%. We anticipate professional services revenue to contribute approximately 10% to 11% of total revenue for the third quarter of 2021. We expect a non-GAAP operating loss in the range of $4 million to $3 million and a non-GAAP net loss per share of $0.09 to $0.07 per share using 47.5 million basic and diluted shares outstanding. And for the full-year 2021, we expect revenue in the range of $201.2 million to $204.2 million, which represents year-over-year growth of approximately 28% to 30%.

We anticipate professional services revenue to contribute approximately 13% to 14% of revenue for the 2021 fiscal year and 12% to 13% of revenue for the second half of 2021. We expect a non-GAAP operating loss in the range of $4.3 million to $1.3 million in a non-GAAP loss per share of $0.13 to $0.06 per share using 44 million basic and diluted shares outstanding. In summary, when we look to the remainder of the year and long term, we are confident in the power of our platform. We have seen an accelerated awareness, primarily by enterprises of ON24's offerings as more businesses recognize the necessity for virtual and hybrid experiences.

With the influx of new customers over the last year, we are now serving a larger market than ever before. Our new business pipeline is robust, and our customer profile is improving. As we continue to invest in the strength of our product portfolio and expand and improve our customer base, we are confident in our strategy and our ability to continue to increase our position as a category leader. With that, Sharat and I will open the call up for questions.

Operator? 

Questions & Answers:

Operator

[Operator instructions] And first, we'll go to Bhavan Suri from William Blair.

Bhavan Suri -- William Blair & Company -- Analyst

Hey, guys, can you hear me OK?

Sharat Sharan -- Founder and Chief Executive Officer

Yes, Bhavan. I can hear you.

Bhavan Suri -- William Blair & Company -- Analyst

Great. Thanks for taking my question. I guess, let's just dive right in into some of the churn conversation around the renewals. I guess you talked about sort of 50% of that is in SMB.

And I'm fine with that. I think that's pretty clear there's a sort of very tactical use cases. But obviously, there's some larger businesses in there. I'd love to just unpack a little bit of, in the larger businesses, maybe they weren't businesses you wanted, but I'd love to know sort of why that was or if there was sort of a tactical use case in large businesses that made that churn happen? Or were they cases where some customers were hoping would stay churned but they haven't figured that out? Just unpacking some of the non-SMB renewal surprise.

I'd love to sort of understand what you saw and what you think is going on there.

Sharat Sharan -- Founder and Chief Executive Officer

Yeah. So Bhavan, let me answer that question, and then I just want to kind of give you a high level of what the business dynamics that we saw. But on the enterprise, we were extremely pleased because our enterprise retention -- global retention within the quarter was extremely strong. It was equivalent to pre-COVID levels, OK? We did see some down-sell in the enterprise, but down-sells are OK.

I mean -- we talked about all in the prepared remarks, all the great expansion that we're seeing for down-sell. I'm fine with down-sell, but our enterprise-level churn from a logo perspective was very strong. It was equaling to pre-pandemic levels. So we are very happy about that, OK? Now let me spend a minute, if I may, and just talk a little bit about more color compared to -- elaborate on the business dynamics that impacted our business in Q2.

OK. We've talked about it was a result of significant COVID-driven buying from Q2 2020. I mean you know that when businesses at that time were rushed and there was panic buying to continue to market to -- and reach prospects virtually, we added 28 million in a year in Q2 2020, Bhavan, three times more than previous quarter. A significant portion of this was buyer's one-time needs and SMB buyers.

This COVID cohort that we signed up in Q2 2020 was unprecedented. We had no history. Now we communicated to you and others that this cohort would have higher churn and down-sell. But frankly, we were surprised on the magnitude.

We could not outrun the churn. Half of it was churn and half was down-sell. Now like I said, down-sell we will make back. On the positive side, as I just said, the enterprise business was very strong, which is our focus.

Our logo retention here was similar to pre-COVID levels. You talked about that. We did see some down-sell, but we'll make it up. And the cohort of existing customers that we went in, both for churn and down-sell renewed at pre-COVID levels.

So that was very strong. Net-net, we've also increased the customer quality as we have cleaned up this cohort. The worst of churn is over. And the water level of this cohort that we came under at the end of Q2 is still higher, and we now expect to renew at pre-COVID levels.

And regarding Q3 and Q4, I just wanted to add a couple of comments. Now that we have Q2 behind us, at least now we have a data point to project Q3 and Q4 for this COVID cohort. The size of these renewals reduces in Q3, and it goes down to 30% of the total cohort in Q4 from about 60%. So the headwinds to our ARR adds should decline.

We expect to add ARR in Q3 and meaningful ARR in Q4. I just wanted to provide that color.

Bhavan Suri -- William Blair & Company -- Analyst

No, that's helpful. And I appreciate the conservatism you're using for Q3, Q4 now that you have sort of a baseline and data point from Q2. So I appreciate that color. I'll just add a quick follow-on.

And it's tied to the customer down-sell. If I look at the customer base, you've built some of this holistic platform. Looks like, I think, as of December last year, you had about 70% of customers still using single ON24 products. And I'm sure that's ticked up a little bit, but again, that number varies every quarter.

I guess how -- tactically, when you look at that down-sell and you look at trying to get them back up, as well as continuing expansion, how do you drive more customers to adopt the full platform if they didn't do so during the pandemic? Like that was the option to just say, OK, I need sales. I need marketing. I need new gen. I need customer segmentation.

I need analytics. I need breakout rooms, everything else. And yet, if I go back a couple of quarters, you still want product. Help me think through the tactics, how you're importing your sales force, the account managers to drive an upsell or cross-sell into the base.

Sharat Sharan -- Founder and Chief Executive Officer

Yeah. So let me first start. The percentage, so Elite has been the largest percentage of our product, but the debt percentage is now probably about two-thirds, approximately there, right? Because we are focused on both driving a full platform right upfront for new customers, and we are also -- they have an expansion and upsell team that does that, OK? Now we brought in all the data from the Virtual Conference and the Elite product as one prospect profile becomes easier for us to sell that platform together more and more. We recently launched ON24 Breakouts.

Now that has been people, who I believe, people who have Virtual Conferences, they are buying more and more of the ON24 Breakouts with that. And the overall contribution of the additional products is continuing to increase. So from a sales -- from a product point of view, we are integrating the products more. So as soon as you finish your live experience, you automatically go into the Engagement Hub for the on-demand experience, OK? We're also bringing that data together.

Now from a sales perspective, like I said, the sales team is going in more with more bundled pricing in some of these categories. Also, we have an expansion and upsell team. We just launched Breakouts. That has already delivered close to seven-figure, small seven-figure in kind of ARRs.

Then we also have our customer success team that once -- as they engage with the customers, that is part of their engagement cadence also to upsell additional products with the customers. Overall, more and more, what we are seeing is when customers implement our full product, including Elite, for on-demand engagement, Engagement Hub, they want to do virtual summits using Virtual Conference and use Target for personalized landing pages, irrespective of what the new normal is, they have the system of engagement that helps them drive revenue continuity and growth continuity. They have the assurance that that system is going to work. So again, it is a transition quarter, but we are making progress on this across the board.

Bhavan Suri -- William Blair & Company -- Analyst

Great, great. And I think it was helpful to provide this color, some of the various teams, and their approach. I appreciate it. Thank you for taking my questions.

Sharat Sharan -- Founder and Chief Executive Officer

Thanks.

Operator

And next, we'll go to Rob Oliver from Baird. Your line is open.

Rob Oliver -- Baird -- Analyst

Great. Thank you for taking my question. Steve, I had one for you. So I appreciate the detail on the guidance.

And just looking at the variance between the Q3 guidance and the full year, it does imply some continued weakness into Q4. I know you mentioned that there'll be less professional services. But when we look at the kind of three buckets, which I think we're talking about here, if I understand them properly, which is continued enterprise down-sells and SMB churn and then the services element, could you help us understand kind of how those three play out from a contribution perspective looking into the back half of the year? And then I had a quick follow-up. Thanks. 

Steve Vattuone -- Chief Financial Officer

Yeah, yeah. Let me make a few comments about our guidance. So first of all, we are taking a prudent approach to our guidance. We only have added $1.1 million of ARR in Q2.

But based on what we've seen so far in Q3, we do expect Q3 ARR additions to be higher in Q2 and a more meaningful increase in Q4. Now the primary factor for this was our first-year renewals, which Sharat mentioned, being over 60% of the renewal mix in Q2. And we did see higher churn and down-sell than we were initially expecting. Now, this declined to about 30% of the renewal cohort by Q4.

So this is effectively getting cut in half by Q4, and that's going to create a lot less headwinds for us by Q4. Now also, we do expect services to be a lower percentage of revenue in the second half in the low teens. Many of our non-ICP buyers that are churning were more full-service customers who use a lot of services. When I say churn, we expect services revenue to decline as a percentage of revenue.

The product continues to improve and become more self-service. So we see customers using fewer services, even as the number of experiences they run increases over time. Hopefully, that gives you some additional flavor of how we're thinking about it.

Rob Oliver -- Baird -- Analyst

It does. Yup, yup. Thanks, Steve. Appreciate it.

And then, Sharat, one for you. The new customers and enterprise over $100,000 continued to be strong after last quarter. When you look at some of the enterprise-related down-sells, are there patterns there that you guys have been able to uncover that can help you both perhaps mitigate the risk of further churn within that -- the enterprise cohort, as well as to inform some of your new sales? Thank you.

Sharat Sharan -- Founder and Chief Executive Officer

Yeah, yeah. Rob, I think what we are seeing is as the cohort of the first time, cohort reduces the contribution to churn and down-sell region on that will also similarly be reduced. One of the things we learned, now that we know the data points and why these people churn, if they don't integrate our platform in this one-time use case, that's not the customer I want. But now we are running a lot more proactive plays, figuring out who deals -- what this customer profile is, how should we be engaging with them, and are they more event marketing kind of customers? So we go to them with a high-growth engagement platform offering, so which where we have engaged, go with a more ON24 Breakouts kind of a product offering.

Now that we have a data point, that really helps us. So not only is the cohort getting better, but now that we know who these customers are and how they behave, some are really not the ideal customer profile for us. But the ones that are, we are making from sales, renewals, and customer success, very strong proactive plays.

Rob Oliver -- Baird -- Analyst

OK. Thank you. 

Operator

And next, we'll go to David Hynes from Canaccord. Your line is open.

Luke Morison -- Canaccord Genuity -- Analyst

Hey, guys. This is Luke on for DJ. So I'm curious, as we make our way through reopening, have many of your virtual-only customers shifted to hybrid events? If you can quantify that in any way? Or are those still largely virtual-only? And as hybrid and physical events come back, what are you seeing in terms of platform engagement?

Sharat Sharan -- Founder and Chief Executive Officer

Yeah. Let me -- Luke, let me provide a perspective on this. In Q2, at the peak of vaccination, there was a clear sense that we were back -- the world was going to be a little more back to a lot more normalcy in the second half. We saw a lot more of our customers focused on the -- on hybrid engagement, OK? And so of course, we enhanced our offering to be able to support that.

We are still hearing that from our customers. This is a permanent change in customer behavior in. The future is about hybrid engagement and how data from that engagement can transform sales and marketing. You asked about the platform and the usage.

The engagement minutes per attendee on our platform has gone up about 10% from the end of Q4 last year. So we are very happy about that. The number of experiences in the platform in Q2 compared to Q1 were about 20% higher. So we are very happy about that.

So now we've all heard about the Delta variant and now it's -- it's changing day by day. So we may see some of these people who were planning to go hybrid, who were planning to go a little more physical, focused on -- continue to focus on more virtual. The key thing is, in a way, we don't really care. For us, the thing that make -- the thing that we want to make sure that our customers are secured.

Once they implement ON24, our data system of engagement, that irrespective of what the new normal will be, they have a sales and marketing system that provides revenue and growth continuity and continues to deliver revenue. So hopefully, that helps.

Luke Morison -- Canaccord Genuity -- Analyst

Yeah, that's helpful. Thank you. And then maybe just to dovetail off that. You said the Delta variant.

I'm curious, are you seeing any noticeable effects from that on customer or funnel activity? Or is it not really noticeable?

Sharat Sharan -- Founder and Chief Executive Officer

I think, as you know, it's early in the cycle. It is changing day by day. That being said, we are a lot smarter as a company, too. We focus on our ideal customer profile.

And just to kind of highlight, it's companies who are focused on solving the sales and marketing or partner enablement, engagement problem. We focus on seven core verticals, high propensity that our customers integrate our platform in their sales and marketing ecosystem and these are generally enterprise and mid-market customers. So we're also smarter of how we engage with this because, after the learning, we want to make sure that we don't have a similar cohort emerge going forward. So again, it's early, but we are also smart.

Luke Morison -- Canaccord Genuity -- Analyst

Excellent. Thank you.

Operator

[Operator instructions] Next, we'll go to Scott Berg from Needham. Your line is open.

John Godin -- Needham & Company -- Analyst

Hey, guys. This is John Godin on for Scott Berg. Thanks for taking my questions. The first one, you mentioned some additional partner integrations and joint go-to-market efforts.

I guess how do you see this kind of newer go-to-market motions evolving over the next couple of quarters? What gives you confidence that this can grow to be a larger contributor to revenue over time?

Sharat Sharan -- Founder and Chief Executive Officer

I just want to make sure, you asked -- your question was about the partner channel?

John Godin -- Needham & Company -- Analyst

Yup, correct.

Sharat Sharan -- Founder and Chief Executive Officer

Yes. So as I said in my prepared remarks, this is an important area of focus for us. It's currently about mid-single digits. It's improved a couple of points in the last year.

But our focus is, we're focused on this quite aggressively, and there are two areas of focus there. One is we are building an ON24 agency network of sales and marketing agencies whose customers may need our solutions. So these are in North America, in EMEA, and APAC. Hundreds of these customers, we want to make sure we are partners with them as their customers look for our solutions.

And the second part of the technology partners is people that we are integrated with, people on the marketing automation, CRM systems that we're integrated with, again, looking at focus on go-to-market with that. This is a multi-quarter initiative, but our focus is to get to double digits in the next few quarters and build it from there. Very important for our continued growth.

John Godin -- Needham & Company -- Analyst

Got it. Thank you, guys.

Operator

And next, we'll go to Sterling Auty from JPMorgan. Your line is open.

Drew Glaeser -- JPMorgan Chase & Co. -- Analyst

Hey, this is Drew on for Sterling. After you get past these churn and down-sell headwinds, do you expect total customer additions to return to pre-COVID levels? Or do you think that the digitization boost from COVID will lead to a heightened demand environment over the coming years?

Sharat Sharan -- Founder and Chief Executive Officer

Drew, let me say one thing. Listen, I'm not happy with the churn and down-sell and the net ARR adds that we had in Q2, OK? But here's what I know. The worst of churn is over. The cohorts get better in the second half.

We've talked about Q4 close to pre-COVID levels. Our enterprise logo retention is strong, same as pre-COVID levels. Existing customer cohort in Q2 behaved close to pre-COVID levels and our customer quality improved. We added 20 $100,000 ARR customers, 51% growth year to year.

The industry -- we are an industry leader in a market that has been redefined. It is very large. More than anything, this pandemic has accelerated the global enterprise awareness of our offerings. We have a very large served market.

And our future is very, very -- our future is more exciting than ever before. And coming down to the thing -- as a churn pressure -- as the headwinds to our business reduce, we will be able to retain more of these customers. And with the increased sales capacity, with the increase of over 75% in sales and marketing expense that we have in Q2 and continue to invest there, we believe we have a very exciting future in terms of customer adds.

Drew Glaeser -- JPMorgan Chase & Co. -- Analyst

Got it. Thank you.

Operator

And next, we'll go to Steve Enders with KeyBanc. Your line is open.

George Kurosawa -- KeyBanc Capital Markets -- Analyst

Hi. this is George on for Steve. Thanks for taking the question. For the first time -- excuse me, the first year SMB customers that you saw a churn in the quarter, were these primarily driven by customers shifting to an alternative provider? Or were these customers leaving virtual engagement platforms altogether? And as a quick follow-up, were there any products that were disproportionately churned off of relative to your overall revenue makeup? Thank you.

Sharat Sharan -- Founder and Chief Executive Officer

Yeah. Let me -- Steve, let me take that. First of all, I explained our ideal customer buyer profile, and I think it's important to keep in mind that we focus on solving the sales, marketing, and partner engagement platform, right? People who -- customers who integrate our products in their sales and marketing ecosystem. Now we have the churn that we saw was down-sell, that we would win back.

And we also talked about the SMB customers being -- and the one-time buyers were the large part of the churn. So let me talk about the SMB and one-time buyers. As these folks saw in Q2 that life may return to some form of normalcy, they're focused on going back to physical events and then also probably thought about going back to cheaper point solutions, cheaper virtual event platforms, OK? In some cases, what I would call ankle buyers, OK? And there's also probably a small portion of people who -- our sales and marketing customers but don't care about data and integration. They may have looked at cheaper video conference tools.

The net overall effect is that as we ended Q2, our customer quality is very strong, OK? And our -- we anticipate that this should renew at pre-COVID levels. Any other -- did that help?

George Kurosawa -- KeyBanc Capital Markets -- Analyst

Yes. No, that helps a lot. Thanks for taking the question.

Operator

And our next question comes from Brent Bracelin from Piper Sandler.

Clarke Jeffries -- PIper Sandler -- Analyst

Hi. This is Clarke Jeffries on for Brent. First question, growth in sales and marketing investments accelerated again this quarter. Could you give us an update on the hiring efforts and maybe where you're trending compared to your targets for the year? And what are you seeing in terms of sales productivity for the first post-pandemic hired reps that are now reaching a fully ramped status?

Sharat Sharan -- Founder and Chief Executive Officer

Yeah. Let me -- we started hiring in the end of Q2. And those early stage reps are starting to show some impact right now. And we expect that that sales capacity will produce results in the second half of this year.

We are continuing to ramp our sales hiring based on the confidence in our business and the market opportunity. So that is going to continue to happen. Now this quarter and this year in a way is a transition quarter for us. As you can imagine, sales productivity is never going to be like 2020, OK? That was a very unique year.

And as we ramp up -- as we are ramping up our sales capacity, there is -- we expect it to normalize by the time it settles down to about Q4 2019 levels. It's a little up and down quarter by quarter right now, but -- as the ramp is coming on, but we expect it to normalize by Q4 2019 pre-pandemic levels.

Clarke Jeffries -- PIper Sandler -- Analyst

Got it. Thank you. And then, Steve, maybe it would be helpful for investors that there was a way to get a quantification of the churn impact on ARR. And maybe if not possible to get that number, maybe help us think through whether new bookings were higher in Q2 than Q1, and that the sequential change in ARR in Q2 is being primarily driven by the churn?

Steve Vattuone -- Chief Financial Officer

Yeah. Well, let me throw out a few pieces of information that I think will be helpful. First of all, as Sharat mentioned, we added over 180 new logos in Q2. So we had a good quarter in terms of new logo additions.

It's actually higher than Q4 of last year. And as we do lap these COVID quarters and the profile of the renewal cohort gets better, the churn profile is going to improve, both in dollar terms and in terms of customer churn. A lot of the churn this quarter in customers was in the SMB space. About 50% of it was below the churn with SMB.

Now I think you're also asking me about NRR indirectly. So our NRR was strong in the quarter. And as expected, enterprise retention was higher than the company as a whole, as it has typically been here. So remember, our NRR pre-COVID, as we've said before, was about 110%, and enterprise was typically 5 to 7 points higher, which we see as a normalized rate.

And in 2022, we do expect to normalize at those levels. We did see higher churn in Q2, and we are lapping the COVID quarters in Q3 and Q4, and that may make our NRR debt temporarily in the low hundreds and in the second half of the year, but that's factored into our current guidance.

Clarke Jeffries -- PIper Sandler -- Analyst

Thank you. That's very helpful. Appreciate it. 

Operator

And now I'll turn everything back to Sharat Sharan for closing remarks.

Sharat Sharan -- Founder and Chief Executive Officer

Thanks, everyone, for being on the call today. The second quarter was clearly a transition quarter, but we exit Q2 as a stronger company with new customer momentum, a much stronger customer base, and having lapped the worst of the COVID cohort. While we will continue to see some impact in Q3, we are seeing a lot less of an impact than Q2. We are an industry leader in a large market, and I've never been more excited about our future in a post-COVID world.

Thank you.

Operator

[Operator signoff]

Duration: 73 minutes

Call participants:

Lauren Sloane -- Investor Relations

Sharat Sharan -- Founder and Chief Executive Officer

Steve Vattuone -- Chief Financial Officer

Bhavan Suri -- William Blair & Company -- Analyst

Rob Oliver -- Baird -- Analyst

Luke Morison -- Canaccord Genuity -- Analyst

John Godin -- Needham & Company -- Analyst

Drew Glaeser -- JPMorgan Chase & Co. -- Analyst

George Kurosawa -- KeyBanc Capital Markets -- Analyst

Clarke Jeffries -- PIper Sandler -- Analyst

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