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

Okay. Let's get started. Everybody, my name is Koji Ikeda. I'm one of the software analysts here at BofA on the tech franchise. I am super thrilled to have Bill Koefoed, CFO of OneStream here with us. Thanks so much for joining us.

Yes. Thanks for including us.

Of course. Of course.

And so we were just talking about this. OneStream went public just about a year ago. And so maybe for those in the audience and those on the webcast that are unfamiliar with OneStream since you guys are relatively new, tell us a little bit about what you guys do and what is the problems that you're solving out there?

Yes, and thank you for that. Let me start back with a predecessor company that was founded by 2 of our founders. Back in the mid-'90s, Tom Shea and Craig Colby, who are 2 of our founders, found a problem, and it was how do we move data from ERP systems up to CPM systems or Hyperion at the time? And so they -- just because it wasn't easy to migrate, so they founded a company called UpStream. And UpStream was very successful, and it was acquired by Hyperion in 2005. Interestingly enough, of the employees that were at UpStream at the time, and I think there are like 50 of them or so, I think 40 to 45 work for us today. So 20 -- literally 20 years later. While they were at Hyperion, they met Bob Powers, who was the person who built HFM for Hyperion. And of course, a year later, Oracle bought Hyperion. And so they did a bit of their time, but they were frustrated because what they really wanted to do -- and if you recall back at the same time, Oracle bought PeopleSoft and Oracle had bought Siebel. And Tom and Bob and Craig were frustrated because what they really wanted to do was they wanted to build a cloud-native single platform, close consolidation planning, reporting and analysis platform at the successor company. And that wasn't going to be the case, still hasn't been the case for them. And so the 3 of them left and founded OneStream back in 2012. They bootstrapped the company. Some of these things I realize I'm giving you a longer history, but some of these things are important just in terms of who our culture is. They bootstrapped the company and built it one customer at a time up until 2019 when they sold 50% of the company to KKR. And so it was at that time that they had their first outside investment in the company, and it was at that time that we decided I was hired shortly thereafter, and we decided to move to SaaS and continue along our journey. Just for perspective, when I joined, we're about $35 million in ARR. Today, we're over $600 million. And so it's been quite a ride over that period of time. As I mentioned, we built a single platform. You can write software on our software. So that's also a unique proposition. And so we have a Solutions Exchange that allows you to build additional applications. Account reconciliations are an area that we built applications. We actually have ISVs that are building software on our software. So a company called Infinity is building sales performance management application or they have built one on our software. And so we refer to our platform as infinitely extensible because you can keep writing new applications and continue to add new value to our platform. And of course, I'll stop for a second. That was kind of the original -- kind of originally where we were when I started. And then, of course, we can talk about AI, which is where we're investing a lot today.

Yes. Yes. I do want to talk about AI, but before that, public a year ago. And so OneStream at the public time was OneStream back then. What does OneStream look like now, which will be a good segue to AI? But how much has the business changed over the past year?

Yes. I mean we continue to execute along the same vision. We view the Hyperion and Business Objects that we'll call it the legacy replacement market as being north of $10 billion TAM. There's still an awful lot of kind of on-prem software. I mean these are literally companies that haven't -- software for companies that haven't existed in 20 years and still exists out there and is actually quite prevalent. But we think that opportunity is big. We continue to execute that. We've landed some quite significant customers over the past year, and continued obviously to grow our business, as you well know. But in addition to that, and I can go into the -- into AI, we started to invest in AI actually 6 years ago. So it wasn't new. We've really been developing purpose-built solutions as opposed to like AI for AI's sake. And so our first purpose-built solution was really around demand forecasting. And I think you all can appreciate that demand forecasting is an important problem to solve. You can either have not enough inventory to meet demand or you can have too much inventory, particularly in perishables, results in bad outcomes. And so we've been -- we started this and have really -- we launched what we call Sensible Machine Learning, we now call it SensibleAI Forecasting into the market about 2 years ago. And we've landed some pretty significant customers. We have some really awesome use cases. I believe one of our customers at our latest user conference commented that they get 25% better forecast accuracy for 75% less time. And so you can ask yourself like, Well, who's OneStream really competing against in that space because that's what investors do? And it's really around data scientists or really it's people that have been doing this work before. And so we're really helping to supercharge them, get better results, and we've had some really fantastic use cases and customer stories from that process.

I want to talk about AI in the back-office category. And so we published our annual CIO survey, not only here in the front row, drove that one.

I know.

And one of the things that she found in the data was that the back office was the most -- looking at AI as a potential investment category, we thought when we saw the data, we're like, "Oh, that's interesting." But you guys operate in the category. And so what do you think is happening in the back office that is driving what we're seeing in the survey data of AI in the back office?

Yes. I mean I think if you look at the applications of AI across the enterprise over the past, call it, a couple of years since ChatGPT was launched into the world, I mean, I'd start by saying there's been a lot of R&D efforts, like we use it within our R&D team, both Microsoft Copilot as well as ChatGPT, and it's driven 30% higher efficiency in our R&D efforts. And so as a CFO, I obviously care about R&D efficiency. And these are numbers that they're giving to me, by the way, it's not me. The second area that I think really had a lot of traction is really around kind of the support and/or training area. And I think we've been using that quite significantly. Of course, you can download all of our manuals and other product information into our support organization. And so they've been using it to help make them more efficient, make them more effective and obviously drive a better customer experience. So those are the 2 areas where we started using AI kind of within our enterprise. Of course, then you move to the back office, and there's obviously off-the-shelf ChatGPT and Copilot, which we do use. But I think for us, and we announced this at Splash, I think you were there for some of this. But there's a couple of areas that have been really important for us. One is anomaly detection. And so I make this -- I'm going to take a little bit of an aside here. We did a survey called Finance 2035, really looking at where finance was going to be 10 years from now. And one of the findings that we found is that there's a talent gap in accounting and finance. So the reason why I bring that up is because I'm going to pivot back to AI. What our view around AI is that it's really going to help allow particularly people just starting in their career to use their brain faster in their career rather than just sifting through data. And so like, as an example, our anomaly detection or we call them finance agents, are allowing our internal team to basically access information and leverage information in a faster and more efficient way using the -- I don't want to overuse the term, but like supercharging finance. And so that, I think, is -- like I love that as just as a way to help people do more value-added services kind of earlier in their career and obviously drives efficiency for a company like OneStream.

I promise not to use supercharging finance for a note title. Actually, maybe I will. I come like that.

[ Do abide, but I'm well over it. ]

So is the end market ready for AI? Like are they yearning for AI and efficiency gains? Or is this SensibleAI Forecasting strategy that you have something that you got to really evangelize out there in the end market?

I think a lot of CFOs feel burned by AI quite transparently. There's been a bunch of science projects and companies that have promised big goals that haven't delivered. Interestingly enough, for our Sensible Machine Learning or SensibleAI Forecasting product, we had to do proof of value, proof of concept for like pretty much every one of our first 1.5 years of that. They basically said, "Prove it. You come in on your nickel. And if you do a better forecast and if you can do it in less time, then we'll buy it." And so obviously, all of our -- we didn't have to go sell the software and then prove it, it was prove it and then we'll buy your software. And so that was all of our -- because they were jaded, because they felt burned. And so they feel like -- and these are our customers that are talking about the value that they're getting out of it. And so I do think that -- I think when you have -- and again, we use the term purpose-built. I think when you have use cases that have direct ROI, then I think the world is ready for AI. I think when it's a science project and you don't have clear outcomes, I think it's not as obvious.

Well, why did you guys rebrand it? It was Sensible ML before and now it's SensibleAI Forecasting.

I think we wanted to comment that the Sensible brand, we wanted to use across all of -- our SensibleAI brand, we wanted to use across all of our products. And so that was the simple reason behind it.

Okay. Okay. So how are you guys planning on selling this? Like what's the sales strategy? And I guess this is kind of going into I know one of the things that -- or one of the initiatives for the IPO was kind of branding, investing in go-to market. AI is a piece of that. And so micro question, how are you going to sell AI? Macro question, how are you guys going about your sales and marketing and attacking the opportunity now?

Yes. I mean we did talk on the earnings call that our AI business was up 50% year-over-year. Interestingly enough, for those of you who remember, we actually had a pretty -- we had a kind of large retailer in Northwest Arkansas, who we talked about during the IPO road show in Q1 of last year. So we had a bit of a tough comp in Q1. And so the fact that we grew 50% off there was we feel really good about. We didn't have anybody that was specifically focused on AI at the time. We kind of had a little bit of anybody and of course, Tom being an evangelist. We now have hired an overlay sales team for AI, which is -- which has a decent number of people. It's -- again, it's an overlay team. So they still work with the sales force -- our existing sales force, but they are specialists in the area of AI. And we have a rich pipeline in that space. We have 1,600 customers now, and we have -- like we feel great about our progress, but we still have a lot of opportunity even within our existing base. But one of the things that's actually really cool, again, I know you're at Splash and you heard from -- you were at the keynote, but one of our customers specifically bought OneStream because she was the CFO of the utility in Australia, and she talked about the fact that she needed to do demand forecasting and she bought OneStream for that and obviously "benefited" from the fact that she got our core business as well as our AI business. And so I do think that it's -- I do think that AI is actually, interestingly enough, causing some -- is a leading indicator of kind of creating some demand for us, that's bringing along our core business, which is probably not something that I would have talked to you about a year ago leading into the IPO.

Do you think more and more that AI could be a land for you guys? I know you guys do land with AI now, but is it going to be a bigger portion of your land opportunity going forward?

I think it's going to be -- look, I think in today's macro, I think people are uncertain whether they should make spending decisions or not. I think the ROI associated with our AI business will help move people further down the road in terms of buying our software because AI has such a strong ROI for our customers and will lead to landing both with AI as well as the core.

Okay. Okay. I want to maybe shift gears to CPM Express, another product that you guys have been talking a lot about over the past several quarters. And so for those that are unfamiliar, what is CPM Express? And what sort of growth unlock could that potentially drive?

Yes. So as I mentioned in this -- in the founding of the company, we really founded ourselves in the enterprise. Our first customer was a multibillion-dollar publicly traded manufacturer in Michigan. Like what a way to start, right? Like I'm going to start with a really complicated company and publicly traded. And so a number of our initial customers were all enterprise customers, and we feel really great about our opportunity to serve the enterprise. A couple of years ago, it might have even been 1.5 years ago, we kind of launched a commercial -- we separated our sales force into 2 segments. We had the enterprise segment, which is kind of $1 billion in us, and we had the commercial segment, which was $1 billion and below and kind of set off to do that. The enterprise customers tend to be a longer sales cycle. The commercial tends to be shorter and kind of less complicated, a little bit less legacy replacement, a little bit more replacement of maybe some planning applications that a customer has but nobody had kind of a full suite. We found through doing that, that people love the software, but the implementation process was more complicated than you would get if you were to buy an Adaptive or one of the competitors in the space. And that impacted our win rate. And so as Tom is known to do, he went off to try to solve that problem. And what -- it's -- CPM Express is the same product. But what we've done is we preconfigured reports, standard reports. We have standard configuration. We have a standard chart of accounts. You have a limited number of APIs that you can do, in other words, kind of ERP systems that you can ingest. And so we were able, by doing that, to really simplify the implementation time because of the best practices that we've integrated into the product. And what we found -- we just really launched this -- the CPM Express product in January. But what we found, and we had some nice -- as you recall, we had some nice customer examples. But customers are really happy. They can get up and running on our software in 8 to 12 weeks. They can do it at a predictable price both for the software as well as for the implementation. I love the slide that was behind Tom at the time he was talking about that product because it was you get the power of our platform, you can grow with OneStream as you grow. And so you're not having to go put in one piece of software and then deciding that you're too big and do another one. So you could do OneStream, so it's power and ease. And I think that's -- we've had really good receptivity in the marketplace, and we're excited about that moving forward.

You mentioned that -- and I know the answer to this, but I want to talk about it, the transcript...

[ 17 ].

Is because you get everything with CPM Express. But inside and you -- a customer adopts it, how easy is it to turn on features within there? Is it just like a flip of a switch? Or is it complicated, more integrations? I mean like walk me through how you go from a small install of CPM Express to a mega install?

Well, I mean, as I mentioned earlier, you get a preconfigured set of reports and you get a preconfigured chart of accounts, et cetera. I mean as you -- it's not flipping switches per se, it's adding more integration, which is going to require more time, more consulting. If you do M&A, you can do that within OneStream because of our -- we refer to the term as extensible dimensionality. It took me a little bit of time to log words out of my mouth. But you get that extensible dimensionality because you can start to -- if you make M&A acquisitions, you can do it with OneStream fairly easily. And so it's just -- it's not switches per se, it's just more integration and a bit more work.

Okay. Okay. Same question on CPM Express that I asked you about SensibleAI Forecasting is. How do you plan on selling it? Question number one. And then number two, from a financial metrics perspective, how do we think about what CPM Express does to kind of the core metrics, new logos, expansion, ARPUs, net revenue retention?

Yes. We -- as I mentioned at the very beginning, we do have a commercial sales force. So we've got this already set up. It's not really a new motion as much as it is, obviously giving a bit more energy to the motion that we already have. And so that team is really excited. Look, I think what you're going to see in terms of metrics, I mean, obviously, should increase the velocity of new logos. It's going to be the lower kind of landing price than clearly our enterprise businesses. But as I mentioned, these customers can -- they can grow with OneStream, they can add new products, they can add AI, to use your example. And for those of you who've listened to me in the past, I'm really -- for us, we talked about this in our call, 60% -- more than 60% of our new business was new -- of our -- the kind of net new ARR last quarter was new, new business and about 40% was expansion. We want to continue to do that. Like you'll be happy investors if we can continue to do that for a long time. And so we want to be able to do that. We'll build the houses and the hotels on the proverbial property, but getting more customers and making new happy customers is really, really important to us. And one of the metrics that you didn't mention was our gross retention, which is 98% plus, which is something that we remain incredibly passionate about.

What is the ideal customer for CPM Express? The reason why I ask is when -- oftentimes when you hear Express or some sort of finely tuned product, it feels down-market, right? But it doesn't seem like this is down-market. So walk me through who are the target customers for CPM Express?

I mean CPM Express could be an enterprise customer. I mean it's not kind of specifically targeted for a size per se. I think the profile that we would use is it's somebody who wants best practices. It's somebody who is open. It's probably not a legacy replacement business because those tend to already have a lot of their own reports and the like, if you're already using Hyperion or Business Objects or one of those. So probably somebody who's growing fast, somebody who wants best practices, somebody who doesn't have a ton of ERP systems, as I mentioned, those -- could we do it for somebody who has ERP? Yes, but it's going to take longer than 6 to 8 weeks -- or sorry, 8 to 12 weeks. That makes sense?

Yes. No, absolutely. Competition. I got to ask the competition question. You guys kind of operate in 3 pretty big categories, financial close consolidation, account recs and planning. And so how do we think about the competition? How much has it changed over the past year? Or is it just more of the same?

Yes. I mean it really -- the short answer is it hasn't changed a lot. I mean Oracle remains our largest competitor by kind of a lot. Certainly, as we look to replace some of the legacy, that also includes Business Objects, replacements which are actually kind of known as BPC or BFC by SAP. Certainly, we compete against Anaplan and planning-only implementations. And then some of the -- some of that kind of more simple planning applications we compete against, but kind of in the single-digit range.

I want to go back to something you said earlier in the conversation about platform differentiation. And I like how you categorize it as software that builds software, right? I think this is one aspect of the OneStream story that's very, very important. And so does your end market fully appreciate this capability that you have? Or are the end customers still looking at individual problem solving now and maybe missing the big picture of what OneStream can do?

It depends. I'd say the more sophisticated customers, they want a single platform. They want a single source of truth. I mean I have my Head of FP&A in the back of the room. I want my Head of FP&A and my controller to have the same source of truth for our financials. If you go talk to CFOs and you go ask them like how many times are you sitting in a room where people are arguing about numbers? And it could be the Head of FP&A arguing with your controller about whose numbers are right. I want a budget, I want actuals, and I want to be able to understand variance analysis, candidly, with our AI tools to be able to do the narrative reporting which now we can offer in there. One of the things I actually I didn't really talk about is also the Genesis blocks that we've built -- that we announced at Splash, which really allows you to use no-code, low-code configuration to be able to write reports and write applications, which is going to make that smoother and much easier. That stuff all on one platform, to your point, where you can also write software on software, there's nobody else who does that. And so we feel really -- whether or not a customer appreciates that or not, I guess, is our problem because we have to make sure and explain that. But that's clearly our value proposition.

Yes. We've heard about the platform differentiation for years talking to your partner channel. And so a good segue to the partner question. I know your partners really like OneStream. And so what does that partner channel look like over the next several years? How are you investing in it? Where does it go?

Partners are critical to us. I mean over 90% of our implementations are in some way influenced or impacted by a partner. And so they're really critical. Obviously, at Splash, we had, if not all of them there, the vast majority of them there. Particularly as you end up in the larger kind of finance transformation efforts, they tend to involve one of the GSIs. And so we're going to keep working. And I have independence conflicts with a couple of the partners just with the GSIs just because of either they have a relationship with KKR, which as you know, is our largest investor and/or our auditor, but we're working through that for sure.

Maybe the last question here is on the federal opportunity. And so lot of debate and noise on the Street about DOGE and its potential demand effects. And so you guys do sell to the Fed, have been very successful in the Fed over the years. And so how do we think about maybe from a near-term perspective of the Fed, but I think more importantly, how do we think about the Fed long term?

Yes. I mean I'd say for the long term, and we mentioned this on the call, we were certified as FedRAMP High. We're the only cloud-based CPM platform that's FedRAMP High, which means that you get to serve some of the most confidential organizations in the federal government. Fed represents about 5% to 6% of our revenue right now. There is certainly some uncertainty going into Q3, which is fiscal year-end. But what I would say is we've learned a little bit more as we go. DOGE is pushing the federal government to modernize their financial systems, and they're also pushing the federal government to move to SaaS, which I think to your point, in the long run, is going to be really good for us. We don't know what the Q3 impact of all the head count reductions and the like are going to mean. But to your point, I'm really optimistic about the federal government long term, and I feel like we've got the right product for the -- for serving them now and in the future.

Got it. Bill, we're all out of time. This has been fun. Looking forward to many more of these in the future. Thank you.

Thanks so much for inviting us. Yes.

Of course. Thanks.