OneStream, Inc. (OS) Earnings Call Transcript & Summary

Thanks, everybody, for joining us this afternoon. I'm Steve Enders, part of the software research team. And with us for the next session at the Citi Global Technology Conference, we have Bill Koefoed, CFO of OneStream. Bill, thank you so much for being here today.

Thank you for including me. As we discussed before, this is our first as a new public company and excited to be here as part of your conference.

Yes. Glad that we could ask the first one out the gate. So maybe we just start there. I mean you recently went public 6 weeks ago, maybe more than that, 2 months ago, time runs together at this point. Maybe you can just run through the high-level founding story and where OneStream has come from?

Yes. So we are really excited. Becoming a public company was definitely a part of our journey. But a little bit back on the founding of the company, there was a predecessor company that Tom and Craig Colby, another one of our cofounders, had started. Their experience was in finance, but obviously, Tom also had a computer science background. And while they were in finance in the Detroit area, they realized that there was a gap between ERP systems, and at the time, kind of Hyperion or CPM systems that were kind of the precursor to OneStream. And so they built a company called Upstream and the thesis of it was you're taking data up from an ERP system and pushing it into Hyperion at the time. And it ended up being a huge driver of success for Hyperion. I would say, over time, as that success permeated itself, Hyperion ended up acquiring Upstream in kind of 2005 time. The interesting thing is I think they have like 60 employees at the time that they were acquired and 55 of those employees work for us today. So after Oracle bought Hyperion in 2007. And the founders left. I think they were expecting that there was going to be some investment into the Hyperion portfolio. And when there wasn't, I think they came back or they did come back with the thesis that like we want to build, a born in the cloud, single platform, infinitely extensible software company. And so they did that, they call that OneStream. And they spent a year -- they spent over a year building software, but then they spent a year implementing it at their first customer, which was Federal Mogul. And it was a multibillion-dollar public company, complicated. And so in your first company it's like a very complicated implementation, you learn a lot. And so then the next year, they had five customers. And today, we have nearly 1,500. Just -- and one more thing along the journey, they never took money from outside investors. They built this company with customer success. They realized that -- and so it was basically selling perpetual licenses, kind of cash upfront. In 2018, they realized that they needed to change to a SaaS model that created some investment that changed the economics on cash flow. And so KKR invested around $0.5 billion in 2019. And they've been a fantastic partner and been an integral part of the journey to where we are today.

Okay. No, that's great context, great background. And I guess that maybe leads us to the next phase of the journey. You're public now. And I think one of the questions we get is, why is now the right time for OneStream to go public? What has been a public company provide to OneStream?

Yes. I mean I think, I think for every company, I think being a public company is obviously important for a variety of different things. One is it gives you a lot of credibility with customers. And while we've been successful and we've been moving through that, not having to put the CFO on the call to talk about financials with customers will be a timesaver for me. I didn't have to do that many over the last couple of years, but -- and certainly, when KKR invested, that helped but didn't entirely solve that. It provides liquidity to our employees for sure. It also brings others into our success, other investors and some of you all are here. So thank you for that. And then also bring some additional awareness. And as we talked about during our road show, we've done some external data analysis. And it's a small fraction of CFOs that actually are aware of OneStream and getting that awareness, and it's not going to add some people today that ask like, like what have we -- has that changed over the last 5 weeks. It's only been 5 weeks. So not a ton, but earnings calls and media and press and being more visible is certainly a really important part for us. We do think that we have the best software. We do think that we have the best solution for customers. But getting that message out to them is something that's really important for us.

That's great context, and it makes complete sense there. Maybe talk about just the macro situation right now. I think office of the CFO over the past couple of years has maybe been a little bit tough. It seems like it may be coming back a little bit. But it would be great to just kind of get your view on what you're currently seeing in the market? And what's led to the resilience of the OneStream model compared to some of the other, other public selling into that space?

That Tom mentioned on the earnings call the other night, we see a "normal selling environment". It's -- 2021 was obviously fantastic. I think it was fantastic for a lot of -- kind of post-COVID for a lot of different companies. 2022, when the Ukraine war started, inflation obviously impacted, I think, macro ended up becoming tougher for sure. It started in Europe and obviously then kind of moved to the U.S. If you remember a year ago, there were -- auto companies were on strike. And so that impacted not just the major OEMs, but the whole supply chain. And so that made it tough last year. But in answer to the second part of your question -- and so we're seeing that kind of more normalized this year, as I said before. But the second part of your question of the office of the CFO, we've talked about this. I mean there hasn't been -- it's a little bit of the cobbler's child. There hasn't been investment in the office of the CFO really in 20 years. I mean people are still using software for a company that was acquired 20 years ago, and still on-prem, still legacy software. And so we are starting to see -- and I think this is going to be a multiyear journey, but we're starting to see CFOs invest in their own software. We're seeing finance transformation. We're seeing people realize that there's a better solution to 20-year-old legacy software, and I think we've been a beneficiary of that.

That's great to hear. Maybe as we think about -- maybe back to the original question to the start of this, but Bob and Craig and Tom have built a pretty incredible company so far and come from that historical kind of Hyperion base I guess, what were kind of the learnings from that first iteration that they're now applying to OneStream to make a better software platform that works for CFOs today?

Yes. Tom -- or sorry, for those of you who don't know, Bob Powers was the architect of HFM, which is Hyperion Financial Management, which is the most pervasive, has the highest share of the legacy software. I mean our analysis, and I used an outside consulting firm to do this, our analysis is there's somewhere around 15,000 to 16,000 companies that are still using Hyperion. There's another several thousand that are using what was BusinessObjects and then BusinessObjects was a couple of different companies that they had acquired. IBM, obviously, had Cognos and TM1 that is still being used and then there's some other legacy. But when Bob built HFM, what he did -- and then Tom's when -- they acquired them Tom's product was separate and they were kind of stitched together. And this whole concept of having a single data model, a single security model. Again, as I mentioned, born in the cloud, we ended up choosing Microsoft as the hyperscaler that we would use for not only our cloud software, but obviously SQL and Windows Server at the time. And so we architected our whole software environment around that single platform, and again, that being on Azure. One of the things that -- it was a big bet back at the time. But one of the things that Microsoft actually provides for us is this is the book of record for our customer. We're a single tenant, we're a single tenant because our customers require that because like I mentioned, we are the book of record for them. Microsoft, because of Azure capabilities, they actually back up, I think it's like 3x a minute. So if you have an issue or if it goes down, then they can bring you up quickly, and it's not like you're going to lose a whole day's worth of data. So those things are really important to us as we built -- again, that we want to be that gold standard for the office as CFO, and we think we've really built that platform and that environment to do so.

I guess maybe this is a good time to ask, CrowdStrike outage hitting Microsoft and others. I guess any impact from that? Or do you see anything there?

We don't use -- we're not a customer of CrowdStrike's. We didn't see any impact from that. That being said, I think it's a good test for making sure that you're ready for that type of a situation, whether you use that software or use any software. And so certainly, we -- we've paid attention to it. Our team has done some, we call it, could it happen here models to make sure, and what would happen if it did, if a situation like that happened and how would we be prepared because, again, our customers require that.

Okay. Makes sense. I do want to ask about -- I think you talked a little bit about the platform and what you all did differently this time around I guess, how does that kind of manifest itself in the competitive landscape? And what are kind of the real differentiators versus maybe what Hyperion and Oracle now trying to move that to the cloud is doing? And how do you kind of differentiate versus them or others in the market?

Yes. So I mentioned -- I mean, we're the only company that has a single close consolidation, planning, reporting and analysis, single data model, single security platform, as you mentioned. And as I mentioned. The other thing that really differentiates us is that we have a solutions exchange. And so people are going to write software on our software. And that makes us infinitely extensible. So we have a number of applications. We use the iPhone as a bit of an analogy, but writing software on your software with single security with single data just allows you to have a more, a more secure and a more extensible infrastructure. We didn't have account recs transaction matching as part of our initial product back when Tom architect it. But as we found and we learned more, we built the applications in the marketplace so that customers can go use account reconciliations and a transaction matching and go compete with some other public companies. I don't know if you followed them or not, but -- and have some success there and increase our footprint and increase the number of seats. But we're also extending. We talked about -- actually, our machine learning capability is actually a marketplace application. We announced at SPLASH a sales performance management application that's seeing a lot of customer demand right now. And so the monetization and the continued, again, extensibility of our -- again, like who knows -- who knew that you'd be turning your sprinklers on with your iPhone back when they started it. And the more customers that we get, we're finding the more people want to build on our platform because it's a bigger ecosystem that they'll be able to monetize. So we're really excited about that.

I want to ask about the AI stuff before doing that. You have talked about this platform that you have and the number of partners that you -- that built applications on OneStream. How do you think about, as a company, what it makes sense for OneStream to build and the use cases that make sense for you to own versus leveraging the development platform or the partners to like help build out there?

Yes. I'd say there's kind of not one size fits all. Again, we have some first party that we've built, as I mentioned. Partners -- part of the reason why we opened it up initially, not that dissimilar to when Apple actually did it was, partners came to us and said, "Look, we built this application and we built it for a specific customer, but we think this is more relevant to other customers. And so we'd love to put that in the store so that we could be able to monetize that". And that was candidly like the first wave of our external solutions exchange partners. We do have over 250 partners at this point. And certainly, we'll see more of the partners that are developing on it. But as I mentioned earlier, the thing that's like the most exciting for us is -- as I mentioned, the sales performance management, this is a third-party ISV that is basically building their whole company on OneStream. And in terms of building out the ecosystem, finding more ISVs. One of the nice things back to the visibility of being public is I've had a lot of outreach. Unfortunately, our corp dev person ended up taking another job within the organization. So I'm the kind of de facto corp dev guy right now. But there's a lot of people who are reaching out saying, either that they that they're interested in being on the platform. Are they interested in us acquiring them to be on the platform. We do need that to be on our platform as opposed to something that would be outside our platform. But there's a lot of -- there's a huge amount of basically infinite opportunity for people to be able to develop on that. And we're going to continue to work hard to build out that ecosystem because, as you know, I know you know this, but ecosystems win. So it's really important for us.

Yes, definitely important to enable developers and create that community. I do want to make this interactive, so if there are questions in the audience, I want to make sure that we can get to those. But I do want to ask on the AI side now. I think being at SPLASH earlier this year in talking to customers, I think a lot of interest in sensible ML and what you're doing there. Can you maybe just talk about the strategy with that kind of broader AI portfolio and maybe how is sensible ML different than maybe some of the other AI use cases that we -- that I'm sure everyone hears about?

Yes. So let me start with a bit of history on ML. Tom and the team started investing in ML back in 2016, 2017. So a while ago, there's the quantitative side, this is my -- these are my words. The quantitative side of AI is really machine learning. And so there's some really we're obviously a financial statement, as I mentioned, book of record. So having numbers, having quantitative opportunities to improve the business was spot on, on that. And so Tom started investing back in '16, '17. We started creating a product. It kind of wasn't what we wanted. We continue to evolve and ultimately decided to build our own. We kind of looked externally. Is there something at one of the hyperscalers or one of the other companies that advertises their kind of AI and machine learning capabilities and decided it wasn't really appropriate for us. So we invested in our own engine. We came out -- we started private previews with sensible machine learning back a couple of years ago. Again, similar to what we did when we started the company we started one customer at a time. And initially, customers wanted, we call these proof of values, but they basically wanted to prove it before they bought it. And so that was what we were doing pretty consistently for like the last couple of years, and we were kind of winning one customer at a time. This last year has really been a pretty pivotal year for us. Our customers are seeing double-digit improvement in their demand forecast. We've got case studies for these on our website. But when you're talking to customers that are like billions of dollars of revenue and they're being able to improve their demand forecast, double digits, in some cases, more than 20%, in some cases, more than 10% or in the 15% range. This is like a real massive ROI. And particularly for the price that we're charging for the software and the benefits that they're receiving has shown massive benefits. And so now we're seeing customers -- we're seeing a couple of things. One is customers are just saying, "Hey, look, you have enough success stories in this business that were -- in the road show, we showed a case study where a customer bought", call it, $1 million of our core software and then they bought machine learning, which is $1.9 million, so 2x what the original price was, but showing huge ROI. So our initial use case is really around demand forecasting. We think that there's a huge opportunity there. But you'll continue to see us invest in other capabilities around large language models. Tom has called it kind of generative -- or sorry, sensible AI, which machine learning is part of that, but you'll continue to see us invest in AI and some of the AI capabilities that we think, again, behind our firewall, with -- again, with that book of record can be pretty compelling and you'll continue -- we talked about it a little bit at SPLASH, but you'll continue to see us invest and hopefully add more value for our customers.

No, that's great to hear. I mean I know you already have some customers up and running on this. But maybe how should we think about the further potential for that portfolio. How do you view like the pipeline and the monetization potential of that?

I mean we had -- so for those of you who haven't attended our user conference, I give a little bit of a commercial for our user conference. Our user conference isn't OneStream standing up there and talking about our products. Our user conferences really customers at our conference, and we had more than 80 presentations at our conference last May talking about how they're using OneStream. And so we had three different customers talking about their use of machine learning, talking about whether they're using it for their demand forecasting is really to help them do labor whether it's a large retailer, whether or not it's another manufacturing company, and we had some customers talk about it back in 2023 as well. For Jack, who is one of our leaders on the DataSense team, and I flew on the same plane home. And I said, Jack, you did it. You got through SPLASH and he's like, "I have more than 50 customers that reached out to me that want to see demos or see how this could be used at their company". So that was just a number of weeks ago, but there's a lot of interest in it. Like I said, the ROI is so compelling and we're -- we think that there's -- to your point, there's a good path forward on this one.

Okay. No, that's good to hear. Maybe as we think about like further investments that you're making, I mean, as CFO, you're controlling the purse strings here. So where do you see the kind of the most opportunity? And where is OneStream kind of stepping on the gas at this point?

Yes. Just to reiterate back on the AI and ML. I mean that's clearly on the R&D side, an area that we are investing in. We -- when we acquired the DataSense team, we brought on, I think, 30 engineers, and we've continued to build from there. I think that was done in May. Again, this is all disclosed -- but we're continuing to build out that team and excited about it. I would just say one more thing about the AI. We just did a joint workshop that included Microsoft, Accenture and OneStream in the Michigan area. And it was in one of these -- even bigger than this room, and it was literally standing remotely. There was -- people were so excited about, and these are some of the biggest companies in America, arguably maybe one of the several most in terms of revenue. And they had teams of people that were there trying to learn how they could better utilize this and monetize it. So certainly lots of interest. Then the second area is really, as I mentioned before, I think on the marketing side, we need to do more about building awareness. And I mentioned it on the earnings call the other night, and we're going to continue to put more money on really on the marketing side. And we'll grow sales headcount. We started to build an overlay sales team in machine learning, and we're going to continue to invest more in that to take advantage of the real opportunity that we'd see.

Right, that's great to hear. I do want to ask a little bit around kind of the core use cases that, that you support. I think people kind of understand the consolidation part of it. But maybe you can just talk about like the broad portfolio, how you think about how those use cases kind of evolve over time and kind of where you see kind of the most opportunity today?

Yes. The opportunity in core is in and of itself pretty massive. I mean we -- back to my earlier commentary, I mean, we think that there's about 20,000 companies that are still using legacy software, we're like 5% penetrated in that. Over what period of time do people transition off the legacy software, I don't know. But we had a nice win that we talked about on the earnings call, that with a large French bank that was migrating off of one of the legacy BusinessObjects platforms, and there's still a decent amount of that. And we can -- we think this -- as Tom said on the call, we think this is really a big lighthouse win there. In terms of broadening that out. Again, as I mentioned, the platform is close consolidation planning, reporting and analysis. So having that all in one area, or under one platform is really important. But extending that out into other areas of operational planning is really one of the big areas that we're going. And as I mentioned, we do have the ISV that's built sales performance management, there's a huge ecosystem of sales performance management needs. And clearly, there are some of the formerly public software companies that have a big footprint there that we -- again, they don't operate under the single platform like we do, but extending out there, I think there are some other opportunities. Certainly, I think supply chain planning has some opportunities. I think just building out operational planning. And our customers are doing it. This isn't something that like we're going into, well, we are kind of going into it because we think there's monetization opportunities, but candidly, our customers are actually pulling us in that direction. And so we're trying to take advantage of the biggest opportunities, and we'll continue to innovate there for sure.

Okay. You mentioned the legacy opportunity here. I think we've seen a shift of end of life from Hyperion in the past few years. I think SAP is kind of coming down the pipeline here in the back half of the decade. And when you're seeing that kind of dynamic happen, are those the typical reasons that customers tend to come over to OneStream? Or is there tend to be like a certain catalyst that leads to people saying like, "Hey, I need to change my systems and move over to OneStream?"

I mean, as I mentioned earlier, I think finance transformation is something that is, again, just to pause for a second. So like there's been a lot of investment over the last 20 years. There's sales force automation. Obviously, there's a huge company that's benefited from sales force automation. There's been HR automation and a huge company that has benefited from that and some like continued investment. And then obviously, on the IT side, there's been an incredible amount of innovation around building a single platform for the office of the CIO. There hasn't -- there's been a bunch of point solutions around the office of the CFO. Again, there's a bunch of legacy tools. But within any organization, finance is a big cost center, but CFOs are being asked to do more, not just to report the numbers like I'm a CPA, but the days of somebody just being a CPA and looking backwards at the historical financials, those days are over. CFOs are having to not just report the historical numbers accurately, but they're having to help a CEO look around corners. And you can't do that using legacy tools. You can't do that using kind of finance people that are just trying to work until 2:00 in the morning to get their numbers out. And candidly, as you know, we have a talent shortage in accountants because people don't want to use crappy tools and they don't want to be nonvalue added. And so I think that OneStream can -- they can bring modern tools, they help the CFO be more strategic. And I think that they can create leverage within the finance organization, so you can get more done with less.

That makes sense. I'm going to pause there. We have about 10 minutes left and see if there's -- see if there's some questions in the room here. All right. So maybe we shift gears a little bit just in terms of the broader competitive landscape and kind of like where things sit today, I guess, how are you kind of viewing win rates and maybe how those have trended? And how are you kind of viewing where the opportunities are coming from today?

Yes. I'd say a couple of things. One is the brand awareness is helping us, for sure, get more app adds, again, in early innings there. Our win rates remain really quite good. I know that number -- I know that you and a number of the research analysts as you were launching your reports, did some checks with customers and channel partners and the like. And I think one of the things we're really excited about is our 98% gross retention. Our customers really -- and it's not 98% retention just because it's hard to rip out. It's 98% retention because our customers actually really do love our product. And I think that really came through with our investors and research analysts. And I think that's actually unique. I had one investor that invested in our company 3 years ago, say they've never seen customers love financial products or financial software and that did really come through. In terms of a really big opportunity, and Tom talked about it on the call the other night, but CPM Express, I think we've been really successful with the enterprise. As I mentioned, our first customer was a multibillion-dollar public manufacturing company. But in the mid-market, we've been -- I think our software price-wise has been competitive. But we want to make it easier by using best practices and by using more streamlined implementation processes to help make the implementation be more competitive so that mid-market customers can get the same value out of OneStream that our enterprise customers can and have the implementation to be competitive. So CPM Express is one of the things that we've been investing in and would really help us to extend the number of customers that we can leverage. And it will be lower average selling -- average deal price, than certainly, it would be in the enterprise. But mid-market customers could really benefit from our software. And then transparently as they grow, they're going to -- they're not going to have to switch out from some kind of cheaper inferior product and grow with our product with OneStream. So we're definitely investing in that.

Okay. I guess with this coming out, does this maybe change some of the growth equation that we should be thinking about for what OneStream looks like moving forward, like does the expansion opportunity or maybe the net new change a little bit with this?

What I would say is the way that -- as we've talked about, we -- our average ARR per new customer has been growing over the past couple of years. What it could do, I think that will continue to -- we have over 80 customers now that are paying us over $1 million of ARR. I think as we talked about when I started, it was zero. So we've had a lot of good momentum in that space. But I think averages are always deceiving. And so what I would point out to you is, I think we'll still see growth in the enterprise part of our business. But the average, as I mentioned earlier, the average ARR per new customer on the commercial side will be significantly less than that. And I think we're just going to have to work with you guys to parse out the kind of how big is our enterprise business growing and how big is our commercial business growing, but we both think they have lots of opportunity.

Okay. I guess maybe, maybe set a little bit differently. Like you think about the customer journey and what tends to happen, like does -- what does that maybe look like? How do you think about what that means for network dimension and expansion? And is there kind of like a typical path that you see for when incremental hours begin to come in and the use cases that maybe come in with it?

Yes, I mean just, just one stat. And again, we'll see how this plays out on the mid-market side. But our kind of -- our average customer spends 1.5x the original amount of what they had spent on our software after 3 years. So again, it tends to take them a little bit of time to implement the software and use the software, but then they've kind of expanded out beyond that. But I mean in terms of expansion business, we're going to -- we launched 12 new products at SPLASH. We've got lots of innovation coming, whether it's machine learning or whether it's SPM or whether it's Power BI connectors, whether it's better user experience, whether it's other solutions that we have on the Solutions Exchange. So our way to expand, whether you're a mid-market customer or whether you're an enterprise customer continue to drive innovation, continue to drive operational planning scenarios, continue to drive machine learning that has really good ROI, as I mentioned. And I think that's going to -- whether you're small, medium or large, that's how we think we're going to expand.

Okay. I think one of the questions that we got quite often around the IPO, and today has been, how should we think about the use cases that OneStream already covers and kind of the percent of revenue coming from consolidation or maybe it's like the percent of seats or use cases. Do you have a good way to maybe frame where that kind of sits and how you're thinking about that opportunity longer term?

The core is really, really important. Obviously, it's our most important part of our business. Just one of the things that I would kind of go back to -- one of the reasons why people love our software is because we try to make it -- we try to make the buying process easy. We do have a hybrid pricing model. So we sell seats. We also sell usage. So like ML is based on usage, transaction matching is based on usage. And then we have platform fees like the Power BI connectors as an example. Again, back to your question on the core is whether you're using it for planning or whether you're using it for close and consolidation, a CFO doesn't want to have to count how many people in the controllers organization are using the software versus how many people in the planning organization. So we try to make it really easy, and we've gotten great feedback on that. The telemetry should, should help, over time, kind of what exactly are people using it for, but we want to make it easy for a CFO to buy. And again, we do have a single platform that allows you to use it however you want.

Okay. Makes sense. Makes sense. I know we really have a few minutes left here. So I just want to do a quick check of the room and see if there's any questions and make sure we get to those. Okay. I want to ask about the...

We haven't touched on it, but just past margin trajectory, a new public company and as you scale, where do you see the margin going 3 to 5 years from now?

Where do I see margins?

Margin going like 3 to 5 years from now, what's the path forward?

Yes. No, thank you for that question. We -- and again, we gave some of this in the IPO roadshow material, so I'll reiterate that, but it's a great point. I'd say a couple of things. We're focused on gross margin. we're going -- we still have a bit of license revenue, which kind of bumps it up kind of seasonally in different quarters. But overall, on the software gross margin side, we're working as I mentioned during the roadshow to get that number up with an aid in front of it. We're working with Microsoft. They have a lot of technology that we're trying to implement and make it more efficient. Again, because as we win, they win. And as I think I mentioned earlier, we have a great relationship with Microsoft. I'd just call out one thing, which is their sales team gets quota relief for selling OneStream when it goes through their MACC agreement, which is generally what it goes through their Microsoft Azure credit. And so we have a fantastic relationship there. So we're working on gross margin. Obviously, so that's software gross margin. And then overall, gross margin will continue to trend up to that because professional services won't continue to grow as a percent of revenue. On the sales and marketing side, the guidance I gave was kind of 30% to 35%. As a percent of revenue, we're -- we've built a pretty good sales team, particularly, and we will be investing more in marketing as a percent of revenue. But you'll see that one higher, and you'll see sales obviously migrating toward that 30% to 35%, as I mentioned. R&D, we're going to kind of keep in the kind of 15% to 20% range. We want to continue to innovate, and we think that's the way to win. And then G&A, while it's going to pop a little bit, it turns out that accountants and lawyers aren't free in an IPO. The investment bankers have success fees, but those guys don't. So G&A will increase a little bit here this quarter. But you should expect G&A kind of under 10% in the long run. So thinking about a Rule of 40. Obviously, we -- I've talked a lot about with Steve, the durable growth opportunities, and obviously, operating income and hopefully. Hopefully, that will be a good investment opportunity for you guys. So thank you for those of you who are investors. I appreciate it. Those of you are here. Thank you so much for coming.

All right. Well, I think that's probably a good place to leave it. We're out of time here. So, Bill, thank you so much for being here. And everyone in the room. Thank you so much as well.

Thank you.