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

Great. Thanks so much, everyone, for being here. My name is Adam Hotchkiss, I cover the emerging software space here at Goldman. Really excited to have Bill Koefoed, CFO of OneStream with us today. Thanks so much for being here.

Yes. Really excited, and thanks, everybody, for being here this morning.

Great. And I want to say congratulations on your first quarter as a public company. I know that's a big milestone in the $500 million of ARR crossing that, obviously, another one I think the first line in your prospectus talks about OneStream empowering the CFO to become a critical driver of business strategy and execution. I guess for those in the audience that are less familiar with your business, could you just walk us through what that means and what you're trying to build?

Yes. There's -- some of the companies that are here at the conference that have done a really nice job becoming the platform for functional leaders. Salesforce is obviously quite a good platform for the office of the CRO. I think Workday has done a nice job being the platform for the office of the CHRO. ServiceNow obviously, is a great platform for the office of CIO, but no one's been the platform for the office of the CFO literally ever. And so our vision is to be the platform for the office of CFO. We provide a single platform, a single code base, single security and an infinitely extensible platform that enables the CFO to close, consolidate, plan, report on their business. But as we move into operational areas, really leveraging the CFO is that single source of truth. At the end of the day, it's their numbers that have to be reported to you guys. And so we really feel like we've got a great vision. Our customers, I was at a dinner the other night that had 30 or so CFOs here in San Francisco, and we had a couple in the audience who literally -- I kind of felt like I should have sponsored the breakfast because they talked about how much they loved our software so much, and that was a nice place to be. And hopefully, we'll have 28 new customers as a result of that breakfast or that dinner.

That's great. Really appreciate that. And to just talk a little bit about your career experience. You spent time at a number of roles at software companies, HP, BCG, Microsoft. I guess, given your tenure, your expertise in the software space, why was OneStream the place for you to be?

It's -- I was lucky enough to work for some great companies and obviously, spent 10 years at Microsoft, including running the Investor Relations function for a little over 4 years. When I got a call from a recruiter, that -- the first question was how do you feel about Detroit? We're based in Michigan. And I don't know if it's first on everybody's destination of work locations, but it was -- I said, "Hey, yes, I want to learn more." And Tom and Craig had started -- had grown up there and had started their career there. They had built a predecessor company called UpStream that was ultimately sold to Hyperion and they founded OneStream. And as the recruiter told me the story and then ultimately, obviously, I talked to Tom and Craig and Jeff and Bob, it just like -- it was one of these companies, as you mentioned, I've been at some other companies, and you kind of go there and you're like, wow, this isn't kind of what I was sold when I went and talked to the company, I'm sure we've all probably had experiences like that. But this one got better. Literally, as time went on, I was like, wow, like what a great opportunity. I feel super fortunate to be along for the ride with Tom and the leadership team and the Board. And obviously, I think we talked about this with some of you as we did the roadshow, but we had 0 customers paying us over $1 million when I started. And today, we have over 80. We were around $40 million of ARR. When I started, and today, we're over $500 million, as you mentioned. It's just been a fantastic journey, and I feel really lucky and fortunate to be along for this ride.

Okay. No, that's great. Before digging into the business, I just wanted to touch on the IPO process. What was that like for you? What's the temperature in the market? And when you think about investor feedback, what were some of the key points that you had heard through the process?

I was on a panel also -- I had a busy week. I was on a panel also this week with a bunch of companies that are thinking about going public. And they asked the same question. I'm like it's super scary. And I'm not sure it helped -- I'm not sure it helped your banking franchise, but it is scary. You don't really know how you all are going to perceive us as we go through the process. Obviously, we had lots of meetings over -- we did testing the waters. Before we actually flip public, that whole process of flipping public, it's a scary one because ultimately, you're saying, hey, we're going to start this journey and you try to figure out what the pricing range is that you're going to go with. You obviously work really closely with the investment banks. We started for -- I know some of -- we were talking earlier, we started the process. It was the Monday after former President Trump was shot, so there was some uncertainty in the market. We were here in San Francisco on a Friday when we couldn't get into our hotel room because the CrowdStrike outage happened. And so we had -- we ultimately did -- we did get in and had a good night's sleep. But fortunately, we had a good flight back to Detroit. And then ultimately, when you get down to it, ringing the bell is fun, but it's really that first trade. And everything that you work for, all the meetings that we had with you, the -- looking and seeing what were the orders, who were the orders from, at what price obviously. And ultimately, I was on the floor with a trader at Nasdaq, Annie was actually over at the bankers. But when that first trade happens, it's just like this emotional exuberance like we're a public company. And so we're really excited. Obviously, the stock has traded well since pricing and then I think it's traded well since then. So -- and to your point, we had a first-round earnings release just last week. So yes. No, happy to be through it.

Yes. It's a really good segue to the first quarter. Where should investors be focused? What was most encouraging to you? And I think just to underpin that, it's really hard to grow as fast as you guys are in software in this environment. So what's happening that's allowing you to do that?

Let me answer the first part of your question first and then the second half. I think we really want to point investors to our subscription revenue growth. We do have some legacy term-licenses. Some of those -- particularly those that are with the government are kind of annually recurring term-license revenue, just given the nature of the government contracts and the like. So you'll certainly see some of that in Q3. But I think the subscription revenue growth is clearly the kind of growth engine for us. And I think I pointed that out in the script as well as in our historical results. The second half of your question, remind me what it was.

Just how are you able to grow as fast as you are in this type of environment?

That's why I always struggle with 2-part questions on earnings calls is like, remind me what the second question was. Look, as I mentioned earlier, there's been a lot of investment in other functional areas of companies. There's -- obviously, a lot has happened in the office of Salesforce automation and some of that marketing automation, HR, IT, and there's been some beneficiaries of that. There really hasn't been a lot of investment in the office of the CFO since kind of pre-Y2K. Hyperion is a company that hasn't even been a -- Hyperion software that -- for a company that hasn't been an independent company for 20 years. And so the digital transformation in the office of the CFO, and I know some sell-side analysts have written about it. I mean it's real. It will happen. I don't think it's going to happen in a quarter or a year, but there's still a lot of on-prem software. I think you guys have written about it. It's -- again, it's a fact, and we think we'll be a beneficiary of that. And that should be a long runway for us.

What's been the driver there of the slow-moving office of the CFO versus other areas of businesses?

Yes. I mean up until recently, CFOs wouldn't put their financials in the cloud. I mean it's just for security reasons, for compliance reasons, for anxiety reasons. And so I think we're just getting to the point now where CFOs are comfortable with all those getting -- all those barriers and you can't run on a 20-year-old software. CFOs are being asked to do more now. They're being asked to help CEOs look around corners, they're being asked to do things around machine learning and AI. And it's really difficult to do that with kind of on-prem 20-year-old software. I mean it is -- when I talked to the CFO of a -- I get to -- part of the fun thing about my job is I get to talk to other CFOs a lot. And I talked to the CFO of a company, and we were talking about AI and ML and the like, and she's like, "Wait, time out." She's like, "I'm running my planning function on Excel. I'm running my closing, consolidation on 20-year-old Hyperion." She is like, "I can't even think about these kind of new technologies because I'm running on 20-year-old software, like talk to me when I get this other thing done." And so I think that's going to be the first hurdle for people to get through as -- again, as we've been investing in AI and ML, as you know. And so we'll get there. Some people are further along, but we'll get there, I think, at some point with everybody.

Okay. Let's take a step back, talk about the platform a bit more in detail. You obviously tied together financial consolidation, close, planning, analytics and then you have core data integration services, which include AI, like you said. Why is it so important for a customer for all of these services to be together in one platform?

The short answer is it's a single source of truth. I mean I could stop there. Short answer is it's a single source of truth. But that matters. As a CFO, you've got a bunch of different areas of the business that you're trying to manage or look after. Even within your own function, you want your controller and your head of FP&A to have the same information. If you're using different tools, then you're going to have -- candidly, some of the planning tools that are out there don't -- you have to -- if you're a complicated business and you want to plan, you have to consolidate your plan. Otherwise, you're just going to have a bunch of like unconsolidated plans, and you're going to have to go through a consolidation effort or your plan is not going to match your actuals. And so you're going to spend a lot of time trying to figure out like how do my actuals actually interact with my plan? And if you're trying to struggle with that then you're struggling with basics. And then as you start to think across other areas of the business and you want -- as a CFO, you want your revenue plan, your sales plan to match in with your corporate plan, which kind of seems logical, you want that to be one single source of truth. And so as you think about -- we're very focused on the CFO being that source of truth, as I mentioned, because that ultimately ends up being the numbers that get reported to Wall Street. And we are the only -- literally the only platform that has all those things mapped into one single -- as you said, one single security, one single data standard, one single platform that can extend out into other areas of the business as well.

Right. And when you look at the platform and where it stands today, what you offer, is there anything your customers are asking for that you don't currently have? How do you think about just the optionality you have to broaden the platform over time beyond where you are?

Yes, back to my dinner a couple of nights ago, the CFO of a large financial services institution, even while we were in the dinner, she was like, "I want to do this, and I want to do that." And one of the most interesting things is that we have a User Conference that is annually in May, and our customers present. We do a keynote, and we do a couple of workshops. But for the most part, it's our customers presenting on how they use OneStream. And other customers go to see how their peers or other OneStream customers are using our software. And it's consistent and constant that people want to use OneStream to do everything in their area. And so there's a lot of demand. As I mentioned earlier, because we are that single platform, we have partners that are writing software on our software. Again, another really important feature of OneStream is that partners can write software on OneStream. And then one of the most exciting areas where we're evolving is having ISVs write software on our software. So we announced in May a company called InfinitySPM is writing a sales performance management or has written its sales performance management application on OneStream. And so that continues that journey, as I was talking about of having one platform, one data standard, you'll have -- they'll allow you to do territory planning, they'll allow you to do all your revenue planning, they'll allow you to do commissions. So for companies that were using CaptivateIQ, you won't need to use that, you can use OneStream to do your commissions and we think that's just the journey of how extensible we think OneStream can be.

Yes. And what does your typical customer look like?

It's hard to say. We tend to -- we have a large legacy number of customers that have come into OneStream. People that were using Hyperion, obviously, which is the history of our company, a number of people. That's about maybe 2/3 -- a little under 2/3 of our customer base who was using some form of legacy. They were using other tools as well, certainly always Excel but other tools. But we're finding a lot in the commercial side of somebody that candidly wasn't using -- they were just using Excel, or they were using a point solution. Our average customer size is generally -- has $1 billion -- at least $1 billion in revenue, not always but because we have a commercial -- and we launched a commercial business for customers that are under $1 billion a little over a year ago. So we certainly think that's a great target market for us. But for the most part, people who have complicated businesses are really our sweet spot.

And how do you think about the enterprise opportunity versus going down market? And given there are different levels of complexity, there are different selling motions, obviously, for you guys in those 2 different areas, what does the resource allocation look like? How good do you feel about those 2 different opportunities?

I mean we feel great. On the enterprise side, just as a reminder, our first customer was a multibillion-dollar manufacturer in Michigan that was a public company that was using multiple different ERP systems. When you try to -- when you build your company for one of the most complicated customers in America, you can solve most other issues. And so that was our first, it took a year to implement that company. In year 2, we had 5 more customers. And then obviously, we've expanded from there. We've done the same thing in machine learning, by the way, as we've started with complicated customers. We've done proof of value. I think for those of you who were on the roadshow, we now have the international business for one of the largest retailers, and they're doing over $100 billion of planning using our machine learning. But that's just kind of how you should think about OneStream evolving as one customer success at a time. To get back to the commercial side of our business, our software -- the mid-market customers really want to use our software. The barrier or one of the hard parts of that for them was the implementation costs, not really the software cost. And so we kind of went back and thought about it and said, how do we basically kind of build in best practices into our software so that they can implement faster. They're more interested in learning those best practices as opposed to having OneStream kind of map into their existing processes. And a little bit for those of you who've been around for a long time. It was a little bit of the kind of [ our 3 ] philosophy back in kind of pre-Y2K, as I mentioned, because there was a lot of reengineering for their software instead of configuring software for your business processes. But with CPM Express, what we've done is really shortened the implementation time, shorten the implementation cost. We refer to it as CPM Express and we're really -- for you again, who we talked to in the roadshow, Tom is particularly bullish about the opportunity in CPM Express. And we're still in the early days on that, but it's a great software matched with a bit of an easier implementation process.

Okay. Great. And what does the typical customer life cycle look like? What are you -- are you landing with any 1 typical solution? Or is it a bit all over the place? And then from an expansion motion perspective, how does that look?

As I mentioned, there's -- on the legacy side, there's call it, 20,000 companies that are still using some legacy product, whether it's Hyperion, whether it's Business Objects, which, of course, Business Objects is Cartesis, and OutlookSoft. So there's a big replacement opportunity out there. As I mentioned, it's not going to happen in a quarter or 2, but it will happen over time. Those tend to be more comprehensive, bigger projects. You've got 12 -- Hyperion was 12 different kind of modules, taking Essbase and taking all that and then migrating it onto OneStream, it tends to be a bigger project. But then back in the -- to your point, on the commercial side, we've got companies that will buy us just to do planning or they'll buy us in some cases, just to do close or consolidation. So that can be a little bit more of a kind of either/or and kind of simpler, more straightforward and more likely planning than closing, consolidation in that segment. But again, we can do both.

Okay. And I know we've talked about risk aversion in the office of the CFO. And when you pair that with something like AI, I think a lot of people wonder how much can you really do from an AI perspective that's going to be adopted in the office of the CFO, given so many people are on that gen 1.0 piece of software. So what's the strategy there? And how do you think about how you can add value?

As I mentioned, our first product in that area, and we've been investing in this for 7 years, is really what we call Sensible Machine Learning. And what Sensible Machine Learning does is it helps companies do a better job on demand forecasting. And so it maps in brilliantly with OneStream. You basically do your demand forecast, leveraging Sensible Machine Learning. It's a usage-based, target-based software that then creates your demand forecast. One of the things that we -- that's just a core principle of OneStream is just the auditability and the openness of our software. There's a word that I was struggling with, but I'll remember it. But just the openness of our software, so somebody -- transparency. Giving that ability to our customers so that they actually can see what's driving their demand forecast is a really big deal, and that's part of the success that we have because nobody -- there's no CFO who's going to sit there and go like, "Oh, like I'm going to push a button and here's what my demand forecast looks like." The results of our Sensible Machine Learning have actually been quite compelling. And we had to do what we call proof of value for our customers before they bought. So it wasn't, hey, I'm going to buy and then I'm going to use it, and then I'm going to decide whether I like it or not. We basically had to go in for all of our early customers to go do these proof of values. And the results that we were seeing were actually really quite compelling, an amazing ROI. You're a multibillion-dollar company and you're getting 15% better demand forecast, that's real money. You're either not investing in inventory that's either perishable, which is obviously worthless if you can't sell it or have to carry the capital costs, if you end up being an industry where you've created that supply and you can't sell it or vice versa, you can meet somebody's demand if you have a better demand forecast. And so the results have been really good. And we've had some companies up on stage. We've had Polaris, and we had Walmart at our last one. We had Stake Center Locating. And so some good big companies that have talked about how they're getting value out of our machine learning. So that translates next into the kind of more LLM side. Machine learning is kind of more quantitative, LLM, obviously being, by definition, large language. And so we've made some investments in those areas. We've talked about this at again, also at our Splash User Conference, but it's early days there. But one of the things that we think we'll be able to tap into is the financials of the business are really the crown jewels. You're not going to want to open your crown jewels to an open environment where you're sharing data out or you have a risk of security. And so we've got all the security, as we talked about with the platform. We've got all the security built into our platform. And so it's being able to take the large language models, leveraging that with our software, asking questions like, "Hey, show me marketing spend against revenue by geography for the last 4 years." I mean, obviously, you can do that with a 22-year-old and an Excel model. But being able to do that quickly and efficiently -- scenarios like that we think are going to be pretty compelling.

Yes. And I wanted to touch on the OneStream Solution Exchange, right? Because I think it's really interesting. We see a lot of companies leaning into the external developer community to bring value for customers. How do you think that plays into the office of the CFO? I know you have some internally developed stuff in there as well. But how do you think about those 2 things?

One of the things that's exciting about the IPO is how many people have reached out and said that they want to write software on our software. And I think there's lots of different ways to invest in that. I think from an M&A perspective, to the extent that we do M&A, I think it will look a bit like ServiceNow's. They've been really thoughtful on -- if they do M&A about replatforming it onto their single platform. We're one platform. Tom always refers to it and says, "Well, we'd have to change our name. We'd have to be TwoStream if we didn't have 1 platform." And so you'll see to the extent that we do -- that we make investments, or we do M&A, we'll replatform it onto our platform and build it in the Solutions Exchange, as you mentioned. But we're really excited. People are coming to us and asking, customers are asking, partners are asking, ISVs are asking, and I think you'll see the Solutions Exchange be a good driver for us to really build the ecosystem.

Yes. Got it. That's great. And I just wanted to touch on competition, right? Obviously, if you're running a platform with multiple different solutions, you're going to run into best-in-breed solutions across these different subsegments. So how do you think about who your true competition is? And how does that look in the RFP process?

The company that we compete against kind of by far the most is Oracle. They have the biggest installed base. Hyperion, I think, had 60% share at their peak. And so for sure, they are our biggest competition. But to your point, they don't have a single platform. They don't have a Solutions Exchange. All the things that we've been talking about, they don't have. And they have, obviously, a great ERP business. And obviously, they've invested a lot in OCI. But we don't -- we feel like we've got a much better product for the office of CFO, and we're going to continue to build on that.

Great. I wanted to touch on just the broader question of growth versus profitability. Obviously, you've been growing quite well. How should we think about working towards breakeven profitability and what the longer-term mix between those 2 dynamics looks like?

Yes. I mean I gave some long-term guidance during the roadshow. So I think over time, you should think about kind of 80%-ish gross margins. Sales and marketing in the, call it, 30% to 35% -- of revenue, these are all of revenue. Sales and marketing at 30% to 35%, R&D in the kind of high teens. G&A certainly under 10%. And so you should expect overall margins kind of in the north of 20% or better. And look, we think on a growth perspective, obviously, growth is really where we see so much opportunity, not just because it's good financially, but because it serves customer problems and builds the long-term viability and excitement for the business. And so we think that we can continue to grow north of 20% at least for the medium-term, hopefully, for the long-term. And we invest -- we launched 12 products at Splash this year. We've talked about a number of those, there's some other ones that we haven't talked about yet. But we're going to continue to invest to grow this business as fast as we can.

Yes. And I guess where do you see the office of the CFO more broadly at a high level going? I think there's been shifting ways people think about this between best-in-breed, best-in-suite and different areas folks are investing in across planning and consolidation. Are there any -- is there any 1 product or any set of products that you think are going to be the focal point over the next number of years? And where do you think OneStream fits into that broader narrative?

As I mentioned, I think there's a huge opportunity in the office of the CFO predominantly because there hasn't been that investment literally in 20 years. And I -- look, I hope a few years from now, we have 600 people in the Grand Ballroom like Jensen had this morning. But the -- I think the opportunity is huge, and there are some great companies that have built platforms for other functional leaders. And I think the office of CFO is at least as big as at least one or two of those.

Yes. A bit of a technical question just on the license-to-SaaS transition. What's the impact to revenue from that transition? And ultimately, what should the mix of the business look like SaaS versus license? Are we still going to have some license business over the long term, a small portion of the business? Or is it fully going to be switched over?

Over the long term, we'll have 0. Over the medium term, we may have a little. Over the short term, we're working hard to convert people to SaaS. The government may be a bit the laggard in terms of the transition process, we are actually making good progress there. Certainly on signing new deals with them. Again, back to earlier conversation about the office of the CFO, but they have been a little bit more reluctant to move to SaaS than some of the other kind of entities or customers, but we'll get there. And like I mentioned, I would focus on our subscription revenue more than anything and subscription revenue growth and we'll get a little bit of a tailwind from conversion. But I don't -- we're using a bit more of a carrot than a stick approach because we want people to feel like there's value in moving to SaaS as opposed to like forcing them to do it.

Got it. And we've alluded to the stickiness of the products and the platform. But how do you think about pricing power in the long term in the office of the CFO?

We've been less aggressive than some of the other software companies that are out there in terms of raising prices aggressively. I'm on a lot of CFO chats, and I'd say some of those companies aren't loved by the CFO. We can start naming names offline. But we want -- we feel like we've got a great software. We feel like we want to be able to offer people great value for the software that they use. We do -- we have typical kind of CPI price increases, but I don't think we're -- I don't think you're ever going to see us kind of be, hey, just because it would be hard to get off. We're going to raise prices a lot. That's just not our culture.

Got it. And you announced the acquisition of a company, DataSense. How should investors think about how that fits in?

DataSense is really the foundation for our Sensible Machine Learning, and they were -- to do a little bit of a commercial for those guys. They grew out of the University of Michigan, as probably a lot of you know, like Michigan is a great university, but a lot of people -- Go Blue. But a lot of people like go to Michigan and they leave, they either come here to the Bay Area or they go to New York. And so it's nice to see some folks that are graduating from Michigan that are staying in the Southeastern Michigan area and building a great software company. And I think we've got -- we had 30 or so of them at the time that we made the acquisition. We're going to continue to invest and growing the team. And we've got a lot of excitement and people that want to be part of us. And hopefully, we'll be able to recruit more folks from that university. Obviously, we recruit everywhere. But that's been an area where people have historically left the state unfortunately.

Got it. That's great. Just to close out here, I know only have a couple of minutes, but we've talked about AI, we've talked about the platform. We've talked about all of the number of products you have. When you look out over the next 5 to 10 years, what gets you the most excited about OneStream?

I don't know if there's one thing. I mean it's -- really it's like kind of what's your favorite child, right? I think we have a huge legacy business to go after. I'm really excited about the Solutions Exchange. I'm really excited about machine learning. If I had to put it in kind of those 3 buckets, I think that there's -- I think we have lots of growth engines but those are kind of the foundations for the growth engines that I think we'll tap into.

Okay. Bill, thanks so much for being with us today.

Yes. Thank you. Thanks, everybody.