Oneflow AB (publ) (ONEF) Earnings Call Transcript & Summary

Okay. Good morning. It's 10 sharp, and welcome to the Oneflow Interim Report Third Quarter Presentation. So today, with me here, I have done, Ilona, our CFO. And my name is Anders Hamnes, and I'm CEO and the founder of the company. First, some highlights for the quarter. End of Q3, we had SEK 80.5 million in ARR, which is our North Star KPI and 61% growth year-over-year. The net new ARR came in at SEK 5.8 million for the quarter. I will deep dive, of course, into these numbers later in the deck. ARR to net sales ratio of 131%. So we are a pure ARR company. And with a quite fast growth, it's natural that this ratio is also quite high. Retention net and gross retention is 117% and 93%. And our LTV:CAC ratio close to SEK 12. So it means that for every kroner we invest, we get SEK 12 back. First, I would like to -- before we dig into the numbers in more details, I would like to just invest some time on 3 slides. To those of you that are new to Oneflow, give you a quick intro on what we are doing. So Oneflow is an e-contract platform. You can manage all your steps in the contract process in Oneflow. We talk about pre-sign, sign and post-sign. So in pre-sign, you can create powerful templates. You can collaborate in real time with your counterparties. You can, of course, e-sign the contract when everything is ready. And then post-sign, you can manage the contracts in Oneflow. You can be notified on key events. You can work with the data in the contracts. And throughout this process, we analyze and give our users a very powerful insight on what they can do and so on in the process. We have 3 main sales channels. It's direct sales, where it all started. Then we do outbound sales and also, of course, inbound. We get a lot of leads from marketing and that end up at the sales desk, so outbound and inbound mix. Partnerships. We have different programs there, starting to become a very decent share of our business, very important for us to have strong partnerships, and we have so in several countries. So this is a very interesting channel for us also when we enter new markets going forward. Self-serve is maybe the most -- some would say maybe exciting because this is very like no- or low-touch sales. We get leads from marketing, get traffic to the homepage and some of those sign-up for freemium or trial. And then a percentage of those again is -- will convert to a paid plan. Or the second version of self-service which is product-driven, a Oneflow user send a contract to a counterparty, that get a demonstration of Oneflow, of course, from our user and then this counterparty can convert to a freemium and later to a paid plan. So this is a very interesting challenge for us going forward. Yes, so those are the 3 decisions. And also one more slide before we go into numbers in more detail on the market. I would just like to share our reflections on the potential going forward because if you think about it, everybody, every company, every department in the whole world have contracts. But the potential here in terms of users is so much bigger than, for example, CRM. CRM is only for companies with the sales team and if you have more than a few hundred customers, but that's far from more companies. So I would say that the number of user potential is very much higher when it comes to contracts because every department, every company have contracts. It's like the backbone in business. You buy, you sell, you hire, you make different kind of agreements and so on. So -- and we have just started to scratch the surface. The e-sign companies came first with a very like simple click on a button, sign a PDF document, but there is so much more you can do when it comes to contracts, pre-sign, post-sign, the whole process into a system. So this is where we are operating, very exciting times. Then if we look at third quarter, one of the highlights for the quarter was that we actually, in the end of the quarter, increased our prices quite a lot as we have 3 paid plans and 1 freemium plan. The first paid plan is called Essential. It's a very simple plan. We took down the price deck quite a lot actually from SEK 280 to SEK 180, but we increased the price on Business with 26% and on Enterprise with 42%. And the reason we increased or decreased the price on Essential has to do with PEG. So this is how we grow -- all going to grow in the years to come. We want the freemium users easily to convert to a paid plan. We want to remove friction. It should be very easy to buy Essential. It should be not a question, low touch, no touch sales. And then we're going to demonstrate the capabilities in Essential and create -- and with the smart gating, of course, we want the customers to upgrade to Business, Enterprise. Essential is a very small part of our business. Our goal is not for anybody to end up there. That's not the end stop. It's just for some of the self-serve customer, it's the first stop, not the end stop. And our sales reps, they never sell Essential, rarely happens. They focus on Business and Enterprise. So Essential is only for no-touch, low-touch sales and it's not the end stop, it's the first stop. And we had our new price -- we launched these prices in the end of Q3, and so now they have been live now for about 1.5 months. And we did a lot of research ahead of that change, of course, but you never know before you go live, of course. At some point, you just have to push the button. But I had a quite close follow-up with our sales leaders over the last weeks. And the feedback that they gave me is that there have been no friction in the sales process with our new prices. It doesn't seem to be an issue at all. So we are also working on increasing our prices for existing customers, of course, that's going to be a longer process, but we have an initiative ongoing to that as well. The ARR is, of course, our most important KPI. So SEK 81 million for the quarter, up 61% year-over-year. And as you can see, there has been some kind of decline. The reason we had this peak in Q2, Q3 and so on last year has to do with the pandemic that started 1 year earlier. So then in the beginning of the pandemic, the things went a little bit slower. And then we had like an extra growth kind of the year after, which is naturally. So I would say that we are in a 60% to 70% growth range, and we are not going to change our target. Our target of reaching SEK 600 million by the end of 2026, which means that we have to be north of 60% growth year-over-year to be able to achieve that. So we don't see this as a trend that's going to continue to drop -- go down. We clearly have an ambition to be in the growth range about 60%. If we look at the net new ARR for the third quarter, it was up 15% since last year. And this was slightly below our own prediction. It's still strong, but it was slightly below. And what is hard about -- I mean, we're quite good at estimating internally our sales, but third quarter is special. It is harder to estimate because there is a very short sales window. Most of our business are still in the Nordics or and even in Sweden. And here in July is, as you know, quite slow, the first half of August is slow as well. So you actually have 5 to 6 weeks to make the quarter. And to be able to have a good quarter, you need a few bigger deals in the mix. And larger deals, they have a longer sales cycle. So that's what makes it tricky to predict exactly where these bigger deals with a longer sales cycle is going to land within a very short window. So that's why it's hard to predict the quarter. And also, that's why it came down a little bit, still okay, good, but still a little bit below our internal goals. Another reason that also was challenging for the quarter is that we opened 2 offices in the quarter, one office in Paris and one in Amsterdam in the first week of September. So we have a team now in those cities as well. We opened office in U.K. in May. So we have a decent amount of new sales reps in 3 new countries. And of course, we have used our -- a lot of our resources here in Sweden to train and onboard these people. So that's been also a challenge during the quarter, but the fun challenge. And also just before we leave this slide, this does not mean that we grow 15%. So this is growth on growth, kind of. The growth is 61% year-over-year because net new ARR in itself is growth. So if the net new ARR was growing like 0%, we would still have been growing quite a lot, growth on growth. Next slide. Net retention at 117% and gross at 93%. So gross include churn and downgrade but not expansion sales. Net include also expansion sales. And net -- I mean, both numbers are quite strong. And the reason that net came down a little bit was the same reason as in the previous slide, expansion sales was a little bit lower in the third quarter due to the -- it's hard to predict. It's a very short window. And churn has always been low at Oneflow. And even despite the war and the global recession, churn remained low during the third quarter and in line with previous quarter, actually. We've had the same level of churn during the whole year. So no pickup during the quarter. However, we might see a slight impact on churn going forward due to the global recession might. And because this happened also in the beginning of the pandemic, then we saw that some of the larger accounts decided to downgrade a few seats because they had a few -- lower head count and also typically very small accounts that had a hard time to -- they were just cutting costs or going out of business. So we saw that in the beginning of the pandemic. So it might be depending on how this deep this is going to -- this recession is going to take us and how long it will last, but of course, we might see some impact as well. On the other hand, new sales will benefit, of course, from the very strong return on investment in automation by deploying contract management software. So with layoffs and with downscaling also comes the needs for being cost-effective and digitalizing the manual resource-heavy processes. So in a potentially more, I would say, challenging economic environment, companies will have to put more focus on productivity. So there are 2 forces here that's dragging in different directions, so to say. A number of paying users close to 27,000 end of the quarter, up 65% since 1 year ago. This is, of course, only the paying seats, so it doesn't include any counterparties or freemium seats. If we look at the average revenue per user is quite stable around SEK 3,050 to SEK 3,100. And we haven't changed the price during this time frame in the graph. So it is -- it has actually been the same. The reason it goes up and down a little bit has to do with the mix of companies that we signed during the quarter because if you are a very big company buy a lot of seats, we have a volume discount model. So you will get a lower average price. So I would say that the variations on the graph here has to do with -- if it's -- if we signed a lot of big deals during the quarter, then naturally the average price is going to go down, yes. So we increased our prices quite a lot actually during -- in the end of the quarter -- this quarter -- the third quarter. But since we show here -- what we show here is the average of our all customers, all time. So it will take some time before you can see the effect here. But of course, you will see the effect here going forward, but it's going to take some time. So this is the total average. Yes. Sweden net sales came in at SEK 17.8 million for third quarter. Sweden is still a huge market for us, and we have a lot more to do in Sweden. I mean we can grow a lot in Sweden still. It's a lot more business opportunities out there, but we are focused now on expanding and we are very, of course, happy that we are increasing our share of sales outside Sweden, which came in at 25% for the quarter. And of course, we expect that to increase going forward. A few words about expansion. So we have been active now in Norway for a few years. We opened the office in Finland in the beginning of '21 and the office in U.K. in May this year and France and then The Netherlands in September. So from an operational point of view, the third quarter has been characterized by, of course, our European expansion. And in new markets, we have an unknown brands or teams are new. It will take time to fully establish ourselves, but we are doing in line with our plans. We are very satisfied with our performance so far. And we have done some really, really great hires. So we are very excited about next years and the years to come. So when we enter new markets, it's based on a very deep and thorough analysis of the market maturity, the market size, the competition and we have followed -- like we have a lot of different dimensions that we monitor. And we were quite confident that -- U.K., France and Netherlands, they met the [indiscernible] that we are looking for. And it feels -- where we stand right now in the middle of the fourth quarter, it feels that the choice we made was a very good choice. We don't need to have offices everywhere, of course, because we have a SaaS model -- we are in the process of doing this pivot from being a sales and marketing head company to be more product led -- be more product-led, which means that the product is going to grow our sales or generate the traffic and sales going forward and more. And we have customers, as you can see, in close to 30 countries. So we are present in, I mean, even New Zealand and in Caribbean and Alaska and so on. So it's quite a different spread, but -- yes, so some strategic capitals. We also want to combine the key movement with local presence and sales because big enterprises or larger accounts there's huge potential there still to work with sales. And even in the future, in a pure PLG context, you would still need sales reps because most of the product-led sales will be sales assisted. Based on data, use the product just to generate lead the traffic, then you can based on what KPIs you look for in the product, then you can have sales reps to follow up and so on. Yes, next slide, I guess.

So looking at the costs, the gross margin has been stable at around 95%, 96% and enables a high scalability potential. Our cost to maintain the service is very low and it exists of hosting the related -- sorry, hosting-related expenses and also sales commission to partners. And sales commission to partners is the largest part and standing for about [ 5 5% ] of the costs. And we expect the gross margin to remain high going forward. Looking at EBITDA. EBITDA for the third quarter was minus SEK 11.8 million compared to minus SEK 3.2 million the third quarter last year, which gives an EBITDA margin of minus 66% compared to minus 28% same period last year. And the increased costs are completely in line with OnePlus plan to invest in the future with a focus on product development and in new markets and increased costs mainly consists of higher employee costs. The group had 145 employees at the end of the third quarter compared to 91 same period last year. And we have also, during the third quarter, opened 2 new offices, as Anders said, outside the Nordic. And this is further more entitled higher costs. And EBIT was minus SEK 17 million compared to minus SEK 6.7 million in the third quarter last year, which gives an EBIT margin of minus 96% compared to minus 58% the same period last year. And we are investing a lot in the product development, so the depreciation increased compared to last year. But as planned, we will turn around the profitability with our goal to 2026 have an EBIT margin of 20%.

Thank you, Ilona. LTV CAC, one of the other important KPIs that we follow closely, came in at 11.7 for the quarter. So for every kroner we invest, we get SEK 12 back. The LTV has been stable during this time period in the graph. But the CAC has been going up. And that's why this ratio is declining. And the CAC goes up, of course, because of expansion. So we hire a lot of people, and we have a lot of costs with the new offices. So this is the reason it's going down and it's according to plan. When you invest at least in our business, the return will come a little bit later. So we are very confident about this metric and at some point this concern. I just want to comment on the calculation here because it can be done in different ways. If you look at the LTV, how we've done it here, that's the most simple way. We just take the wealth of the customer this year and divide it on the churn, then you get the lifetime value of the customer. That number is a little bit wrong because what it does not account for is the growth, the expansion sales that you do on the customer because we have a net retention has been around like 120% or 117% last quarter, but around 120% before that, so we are growing on our existing customers a lot, which is not included in the LTV. But we wanted to keep it simple. I mean that would even increase this LTV CAC ratio more, but yes, to keep it simple, we started to use the simple formula. That's the formula that most SaaS companies use, but there is also a different formula that is more advanced, but yes. So we always talk about culture at Oneflow. This is -- we believe this is one of our key components for the success that we've had so far and also going to have for the future because to build a successful company, it's about the people you hire and it's about the culture we built. Talent and happiness are the keys to success. So we started to measure this metric in 2019 and about 30 is good and above 50 is excellent. The average in Sweden is 90. So even back in the 20 -- in the first quarter 2019, we were quite good actually, but it has increased. And today, we are like one of the best places to work. People here have really enjoy to be here. And we focus a lot on talent superpowers and culture fit when we hire. This is -- to be able to build a successful company, this is the most important formula. We are in a potential, I would say, more challenging economic environment. Going forward, companies will have to put more focus on productivity and Oneflow is very well positioned to help our customers become more digital and effective and streamline all processes involving contracts. And we are not slowing down. We have a very strong financial position. We have almost SEK 0.25 billion in the bank. We will invest our money wisely. And our base scenario is to grow the company organically. And our 2026 goal is based on organic growth, but of course, we will have an opportunistic approach to all opportunities that come our way. So -- but despite our hunger for growth, we will never compromise, never compromise our strong financial position and always be humble and strive to make sound long-term business decisions. But even though based on -- even based on the statements that we see in the market right now, we want to remain our goals of achieving at least SEK 600 million in ARR in [ 2010 to '26 ] and even an EBIT margin, the same year of at least 20%.

So with that, we are ready for the Q&A session. And there is a Q&A button in your Zoom menu, where you can use. And yes, popping in and now. So the first question is, what has been the feedback and traction with recent price increases? So we have had a lot of conversations with our sales leaders about that, and there has been -- and we don't feel any friction so far. So it feels that the increases that we did was not like a problem at all. So, so far, no friction around that. The sales leaders are happy, especially the enterprise team were super happy that they finally could get bigger deals. And we're also working on increasing our prices for the existing customers. When it comes to recruitment, how many do you aim to be by the end of the year? Well, we have never guided on that number. But I mean, a lot of people are coming out in the market now. A lot of companies are laying off people. So there is more talent out there now. What I can say is that we will use our funds wisely. We don't chase short-term wins. We always think long term, and we're going to be smart about how we invest this money. So -- but we can't give any guidance on the headcount going forward, but we're going to be smart here. Cash flow tied up working capital also did that in third quarter last year, typically seasonally. Will Ilona want to comment on that one? You can see the questions here.

Yes, and that's actually a typical seasonal because we have less sales during the Q3, so we don't increase our prepaid customer.

What you can say then, though, is that now when we expand into new markets and more of our sales that comes outside Sweden and the Nordics, then in the future, Q3 might be less vulnerable because in some -- in other markets, it's not like closed down in July and the first half of August. I mean in U.K., it's business as usual during July or almost at least. So in a different like holiday patterns in different countries. So that might make it easier for us to predict the quarter as well and even to have higher sales in the quarter, but yes. Traction in the new offices. Yes, we do close deals all the time in the new offices. We haven't given any numbers on that. But what we have said is that we are -- so far, we are in line with our own conditions, and we are happy so far with where we are right now. Did any large contracts fall into Q4 from Q3? Yes, several. So that was -- we thought Q3 should be amazing and it became good. But -- so the answer to that question is, yes, we had several very large contracts that slide into the next quarter. This is a very long question. So I know you mentioned that the global recession could both mean higher churn, but also increased demand for cost-effective software, so could you maybe elaborate on that? And if you are seeing any changes to customer behavior in terms of prolonging sales cycles, has it and buying behavior or maybe slower up-selling? So far, not any significant changes. So when I said that we might see an increase in churn, that was also based on when you look at the window and read the papers. But what we have seen, and a long conversation with our Head of Enterprise team about this a few days ago, and if something, then maybe a little bit longer decision time on bigger deals, if something, maybe a little bit longer sales cycles on large deals. And what this situation is going to mean for our churn and downgrades is a little bit too early to say, actually, but we think that, I mean, depending on how deep this is going to go and how long it's going to last, but of course, when people -- when big companies lay off people, they might also need fewer seats in Oneflow. And we know that small companies -- a lot of small companies have problems to survive on accounting costs. So -- and if you sign a few deals like a month, then -- so yes, we're not going to be -- but that's on the negative side. There are also really, really strong arguments for now eliminating manual work because the most -- the highest expense companies have is not the software they buy, it's salaries, human beings. That's -- it's so much, much bigger costs. So it's -- there are some really, really strong arguments for becoming effective and to eliminate manual work. And if you go for an e-signing tool, which is maybe our main competitor at the moment, then -- or it is, then you only solve a very small piece of the process. So there are really strong augments for changing from e-signing to an e-contract platform because then you can -- because you say much more time pre and post sign. Signing is just like a button. It takes 2 minutes to print and scan a contract. So there is so much more to it than just the signing part. And in a broader perspective, what would be your best guess on how the recession would impact you? Do you think that invest in this type of software will be postponed a bit until your customers have more visibility on the macroeconomic environment and how they need to adjust the organization? What are your thoughts on this? Yes, I guess I answered that also in the previous question, maybe a little bit longer sales cycles, but still maybe because before -- this is just based on Q3. We didn't -- before the summer, it was like nothing, no change at all. So this is more based on the last like few weeks if that's significant enough data too early to say, but maybe a little bit longer sales cycle. Yes, there are a few more questions here, but I think you already answered those actually. Okay. So then I think that we can -- yes, thank you for attending today, and wish you all a wonderful Friday and weekend. Sorry, there is one more, relating to the price increase, it might be a simple calculation, but could you explain how we should think about the net new ARR adjusted for the price change to get an idea of the sort of volume development to your subscription base of the quarter? We have to give you an answer on that, we would have to give you the mix on seats across different price plans. And we have not done so up until now, and we might do that going forward, but I don't think I can comment on that before we make a decision on doing a more deep breakdown on the numbers. So I think about it mainly for the future, but I can't disclose more information about that actually at the moment. Thank you. Have a nice weekend to all of you. Okay. Cheers. Bye-bye.

Bye.