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

Thanks, everybody, for joining us today for day 2 of the Citi Global TMT Conference. I'm Steve Enders, part of the software research team here. And with us this morning, we have Bill Koefoed, CFO of OneStream. Bill, thank you so much for being here.

Yes, thanks for including us.

Yes. Maybe just to start, I think you've been public about a year now, maybe a little over a year. Just what has the first year been like? And what's kind of been the learnings of the first year being public?

Yes. I mean, look, it's been what we had expected and hoped for. While the visibility of the public light is sometimes interesting. It's always important to be -- first of all, it's given us more visibility as a company. And second of all, our performance is in people's radar every day, and I think that makes us a stronger and better company and drives more rigor into the business. Our strategy, I think, is working. And we've been -- obviously, it creates liquidity for our employees, which I think has been a good thing. So I think overall, it's been great.

Okay. That's good to hear. I want to talk a little bit about 2Q. I think you had a record commercial pipe coming off of the quarter. I guess what's really resonating right now with your customers? I think you've had a ton of innovation that's come out with new products, the SensibleAI portfolio, Express and that kind of broader strategy. But I guess maybe what's resonating? How has the pipeline composition changed over the past couple of years?

Yes. You hit on a few things, so I'll try to hit them. I'd say, generally, our strategy is working. We're really pleased with where our innovation has led us. We're really excited about the AI innovation that we've made. We have obviously more coming out. But having one platform that allows you to do kind of closed consolidation planning, reporting, all one single security, one data model, like no one else has that. And so we find that to be really resonating. And then as we've built out -- we have our core and then we have what we call Agile Financial Analytics. Tom talked a little bit about it on the earnings call. But we have customers that are wanting to do more. They're wanting to do not just monthly, quarterly reporting, but daily, weekly. And some of our Agile Financial Analytics, which allows people to do more real-time analytics into their business and tap into some of the other resources that we've been able to do has -- there's been a lot of momentum toward that. Again, still super early innings on that, but there's a lot of demand for that. We have some big customers that are already using us for that. And then AI, as I mentioned, Sensible Machine Learning, which we now call SensibleAI Forecast, continues to see really great momentum. Candidly, I got a case study from a customer 2 days ago that saved $2.5 million in cost in doing their forecast. They're getting their forecast done in 1 day rather than in 1 week and then -- or I think maybe it's even 10 days. But being able to do better forecasting, better forecast accuracy. I think, again, we're in the early innings of that. We have big customers that are using us for -- we almost call it touchless forecasting. And there's a lot of really great opportunity there. And then you extend that into some of the anomaly detection that we're doing around things like account reconciliations, which I think customers are just starting to realize the benefits from. And then just agents is obviously a popular theme. We think -- you have to remember, we serve as a book of record for our customers. This is arguably the most important record for them. And so being able to have security, workflow, curated data all tied in with agents and being able to access and leverage information to allow you to do your job better, we really think that we have a unique value proposition there. And we don't see -- I love to use this term foreign agents. I don't think people want foreign agents in their financial system. They want our agents and they want our capabilities to be able to help them do their job better and access that through OneStream.

No, that's great to hear. I do want to dig into the AI opportunity, how you're thinking about that a little bit more in a bit. But before that, I do want to touch on the federal side of the house and I think get a little bit better understanding for, I guess, a, what you're seeing there versus maybe how you're thinking about the guidance for 3Q? And just kind of the assumptions you're making within that vertical specifically versus what that means for the rest of the business?

Yes. I'd say a few things about the federal government. I think you've seen some announcements from other software companies. With DOGE, they are really pushing for modernizing the government infrastructure. I think we can all agree that there's a big opportunity there. There's a lot of legacy systems, candidly, that are written in programming language that was either things that were before some of the people in this room were born or certainly when I was just starting my career. So -- and a bunch of people are retiring. And so they really want to modernize. Number two, they are -- I think the government has also been a little bit reluctant to move to the cloud. And so we still have -- we have some legacy OneStream that's on-prem at the government. And so obviously, the accounting for that, if they move to the cloud, there's obviously a bit of revenue uplift if we get that, but the accounting for that is different. So the license revenue that you've seen for us in Q3 and prior years over time will certainly go away. And then the third area is, obviously, the government is focusing on cost savings, like are you using all the consumption or everything that you've acquired. So those are the 3 things that really went into the guidance that I offered. We're still working through it with them. So I don't have anything kind of new to add. But I'd say we are fairly prudent in our guidance to make sure that under whatever the scenario is that ends up happening that our guidance will be -- we'll have them thoughtful and address those situations.

Okay. That makes sense. And if there are questions in the room, we want to make sure to get to those. So I guess, please raise your hand, and we'll make sure to get to that. I do want to ask on just the financial transformation market. And I think there's this big upgrade cycle that we keep hearing about of the on-prem ERP vendors pushing customers to the cloud. Just how do you think about how that maybe plays out from here? And how do you kind of think about the legacy replacement market and going in and capturing some of those traditional on-prem consolidation solutions?

Yes. It's -- we've been waiting for this for a few years, right? I think it's important to just, again, reflect back that the last big finance transformation cycle was pre-Y2K. So there's a lot of legacy ERP, a lot of legacy CPM that's out there that is, again, to your point, still on-prem and pretty old. It's -- we are seeing it. We're still in the early innings when we did the IPO roadshow. As you know, we assess that as a $10 billion TAM for the legacy replacement market. Certainly, we're 1.5 years into our process of being public and have addressed some of those. But we still see the opportunities being quite big, and we're chipping away at it. Part of our European success has been some of the legacy kind of business objects, which, as you know, was Cartesis and OutlookSoft. And so some of those replacements are actually happening a little bit faster than they had been in prior years. So we're benefiting from that for sure.

Okay. That's great to hear. I guess, competitive environment, SAP, Oracle, kind of where -- how are they kind of competing today with -- and how are they thinking about their kind of like go-forward approach in this space versus what OneStream is doing? And how are you kind of viewing the ability to take that versus them able to push that solution into the cloud?

Yes. The competitive environment really hasn't changed for us. We still -- Oracle still remains our largest competitor just given the big Hyperion installed base that they have. Our win rates against the big competitors hasn't changed. And so we continue to, I think, compete on a similar ground to what we had in the past. I think -- just in terms of adding on to that, obviously, Anaplan bought Fluence, I think, whatever 2 years ago now, maybe -- we don't see them very much. I think maybe once or twice. But again, back to my prior statement, they don't have a single platform. They don't have -- they're really good. I think they focus a lot on the planning side of it, but they don't think about it holistically across closed consolidation planning, reporting and analysis like we do in a single-data model and a single platform.

Okay. That makes sense. Last question for me on, I guess, the competitive side. I think we sometimes hear concerns from investors around with the push to the cloud from the ERP vendors and then consolidating finally, hopefully down onto one ERP platform instead of it being fragmented that, that, I guess, maybe limits some of the opportunity for OneStream or at least changes some of that book of record approach that you have. Just how would you kind of combat that statement? Or how does OneStream think about maybe where that thinking is wrong and that there's still a ton of opportunity for you in that situation?

Yes. I mean let me start by saying the aspiration to get on to one ERP system breaks anytime you do an acquisition, anytime you've got multiple different divisions. And so I think you want -- I think companies -- certainly big ones, I think that's clearly an aspiration, but it's also quite hard. But what I would say, even absent that, like let's assume that you're on a single ERP system. You have to remember, let's take Hyperion back because it was invented in the late '90s, where there was a decent amount of ERP consolidation. What happens is an ERP is like the electricity in your house. It's hardwired in. You made that decision when you built the house. You've decided this is how I want to run the business. Well, of a sudden, you get somebody new that says, I don't really want to look at the business by geography. I'd really like to look at it by product line or I'd like to look at it by different types of product lines. Your ERP system is not going to allow you to do that. Sure, you can download stuff, you can put it in Excel, but you end up in the same mess that you had before there was CPM. But CPM, this whole concept of a cube was always put on top of an ERP system so that you can run the business how you want to run the business. And that's the most -- I think it's a really important thing for investors to understand, which is CPM is all about -- obviously, it's reporting and planning and all those things, but it's also giving you the agility to run your business. Let's use Citi as an example, right? You have multiple different business lines. You have wealth management, you've got investment banking, you've got commercial banking. Like each one of the leaders of these businesses all want to be able to run their business how they want to run their business. They don't want somebody sitting up on top saying, "Hey, this is this is how I'm going to tell you to run the business", because that wouldn't work. And so that's really the benefit that CPM gives you and particularly as you start adding the Agile Financial Analytics and you start adding a bunch of these other capabilities on top. So yes, I feel good about our position in whoever, whether you have one ERP system or you have a dozen.

Yes. Okay. That makes a ton of sense. Maybe shifting gears a little bit. Let's go back to the AI side. I think very much the topic of, I guess, the past couple of years in software and definitely this conference. But let's talk about the SensibleAI portfolio first. Just how are you thinking about the use cases that, that can address? And maybe what is the future of OneStream and the AI strategy look like?

Yes. Well, let's go back a little bit to my comment that I made earlier. Our SensibleAI forecasting, we've got more than a couple of dozen of the world's most important companies that are using SensibleAI Forecast. These are -- again, historically, they had been spending a bunch of money on data scientists, on some arguably big projects to help them do a better job on forecasting. I mean when you're a multibillion-dollar company and your forecast is off by 1% or 2%, that extends out into hundreds of millions of dollars, if not billions at scale. And so the ROI for that is really great. As I mentioned earlier, this company that's a Fortune 500 company saved $2.5 million on just annual people spend. Their forecast is more accurate, so they're able to run their business better, and it's all being done on OneStream. And they're a historical kind of core customer as well. So you're able to take that forecast and leverage that right into your OneStream plan. And so that -- again, obviously, nobody else can do that. So we're really excited, and we continue to make innovation on that to make our models better. But I'm not aware that anybody -- like we really don't have a competitor in that space other than kind of people -- and so we feel really great about that. On the generative AI side, as I mentioned earlier, there are some areas like anomaly detection that work right in with our core business to help you basically leverage OneStream and the capabilities that we have better. And then the agents are in the early days, and I think our customers are really seeing -- the early ones are seeing some benefit from that in that they can get -- they can do the analysis, they can get access to information. But again, the thing that, as I mentioned earlier, that's super important is you want accurate results. As we all know, if you go ask AI, it's not -- the results aren't always accurate, kind of pick your favorite LLM model. But if you're going to use that for your core financials, it has to be accurate. So things like curated data, the workflow, security models, those all matter a lot. And we -- again, we feel like we have a unique capability there.

Okay. No, that's great to hear. Maybe taking it -- connecting the portfolio to the financial side for you all. How do you think about the monetization angle for those solutions? How do you think about, I guess, disclosures around the AI dynamics for your business? Just what does that look like?

Well, let me start by addressing the first part of your question, which is we have a hybrid pricing model. We have always wanted to sell how our customers want to buy. I think that's really important. I know investors have their point of view on how they want customers to buy, but it actually turns out that when our teams are engaging, we want to reduce the friction. We want to sell to them how they want to buy. In some cases, they want to buy based on a seat-based model. In some cases, they want to buy based on a consumption model, how much do I use? So that's -- an example of that is like transaction matching for us, which we have some pretty strong capabilities. They want to buy based on like a number of transactions. And so we sell based on that. In our AI forecasting, people buy based on targets. So again, it's somewhat of a consumption model. There are other things that we sell that are based on kind of a platform fee, like we have a thing called a product called -- a solution called the Power BI Connector. And so that allows customers to use Power BI, Microsoft Power BI to access OneStream data so they can leverage that in their environment. And so that tends to be more of a platform fee. So we've got, again, a hybrid model that allows us to kind of sell to a customer however they want to buy. And I think you're seeing a bit more of a shift to the consumption. We'll call it kind of prepackaged consumption as opposed to like how much electricity did I use, just pay the bill. And so far, that's actually really resonated with customers.

Okay. It's a good time to start asking about some of the pricing and packaging changes that you have gone through this year. Just I guess, what has change from the prior approach? Are there certain things that you're trying to, I guess, incentivize more on the usage or consumption side and move away from the seat-based side? Just how do you think about kind of what that changing approach is and how that maybe shifts the model from here?

Yes. I mean in addition to what I just talked about in terms of some of that, what I would say is, particularly in that area of our portfolio called Agile Financial Analytics, that tends to be one that is very consumption-driven because it's a lot of data, it's a lot of compute usage. And so part of it -- the good news is, I think some of it is we're not having to educate customers on this. There's other -- some of their other software vendors are educating them on consumption. And so it just kind of follows the trend of what other software companies -- because it's always hard to kind of do something completely different from what somebody is -- because they'll turn their head and they'll say, "Huh". But CFOs are now starting to be used to some of these models. And so we sit down with them and say, "Hey, this is what we think the consumption is going to be for this type of product or this type of consumption". Again, a lot of the data. What we're finding, particularly as we talk to some of our CFOs is they're putting so much more data in OneStream. And obviously, it's expensive for us to be able to consume that. But they're rather than putting it in Databricks or a Snowflake or something like that, they -- they're kind of keeping that in OneStream. And again, it's awesome for us, but it's also expensive for us. So we just have to like figure out how to monetize that in a way that's a win-win for us and for our customers.

Okay. To that point, I guess, what does that negotiation look like for customers? Like -- or I guess, how long does it maybe take to play out from here to go back into the base and try and make that shift?

So I've got a spreadsheet of every single one of our customers and what our -- it won't shock you. We're leveraging OneStream to do that, kind of look at profitability by customer. And it's like -- it's an honest real conversation, which is, hey, look, you're putting a lot of data in our system, and it's -- we're having to turn around and obviously pay Microsoft for that because we use Azure as our platform. And it ends up just being a pretty transparent. If you're honest with your customers and they trust you and as we've talked about before and anybody in this room who's done research on OneStream, we have very passionate customers. They love OneStream. And so we want to continue to maintain that trust. And I think that's really important and just having an honest conversation with our customers has worked out well.

Yes. Okay. That makes sense. I want to ask about CPM Express. And I guess, first, maybe just talk us through the approach of that. And I guess, what does that mean from cycle times? What that means for, I guess, ARR for those customers versus if they were taking it on the full kind of platform approach before? Just what does the CPM Express customer look like that's different than a traditional OneStream customer?

Yes. I'm sorry, you had asked about that earlier, and I didn't address that part of that question. But we're really excited about CPM Express. And just as a reminder, it's our same product, but it's just pre-configured for customers. So rather than for some of our bigger customers, which we have to go back and understand what they're using in their legacy Hyperion or business objects environment and basically kind of model that over to OneStream. These are cases where somebody typically hasn't used a legacy environment, they want best practices. So they want a pre-configured chart of accounts. They want pre-configured reports. And so we've used best practices with these customers, and we've actually seen some really good momentum, particularly here over the summer. And the price point, obviously, given that these are smaller customers than the bigger ones is going to tend to be more in the, call it, $100,000 to $150,000 range. But the big savings for a customer is the implementation costs to implement the software. So it's a faster speed to implementation, so call it 8 to 12 weeks. And so you get your results faster. If you want to do -- the other thing that we're finding is that customers will -- they can get their software in faster so then they can do add-ons faster. Again, a super small group at this point, but we're seeing some really great results there. And I think the other thing that we're just in the early innings on is we're starting to see either we're doing it or we're having partners do industry-based solutions. So call it CPM Express for state and local government, CPM Express for higher end, those things. And so we can get a faster implementation time. And some -- sorry to take another pivot, but sometimes they start with the idea that they want to do CPM Express and then they decide, "Well, I don't really want to use those pre-configured reports". And so then it ends up, you're not going to get it done in 8 to 12 weeks, but it's certainly a faster implementation time. And so we're seeing a lot of momentum and enthusiasm in that -- in this space. And again, super early days, but we're really excited about it.

Sure. I guess to the point around -- I understand it's still early, but does it change I guess, maybe the expansion opportunity within that customer? Or what are kind of, I guess, the longer term like NRR kind of impacts for an Express customer versus a traditional one?

Yes. No, it's a great question. The exciting thing is it will -- because they're getting the software in faster, the expansion opportunities are already happening faster. Again, it's a small sample size, but the big implementations that we do that can take a year or longer, what we've seen in our cohort analysis is people are consumed with doing that for some period of time. If you can get the software in, you can get people starting to see the benefits of AI, you're starting to see people be able to get the benefits of Agile Financial Analytics, those things can add value faster, which is actually partly what's exciting to our partners is that they can -- they feel like they can get more -- while obviously, 8 to 12 weeks is less time than other types of implementations that they can start to do more value-added services faster. So they're excited about that.

Interesting. I know it's still new, but does this change how you think about maybe further opportunities for Express? Like would we ever see, I guess, a SensibleAI portfolio kind of put on that notion?

I think so. I think look, our AI capabilities are relevant, whether or not it's an Express customer or a large customer, a kind of legacy replacement customer. And we've seen -- we had some examples of that, that we shared at Splash with some -- I think some of these customers are pretty small and relative to the big Fortune 500, and they're seeing great benefit from our AI capabilities.

Sure. I do want to ask about some of the changes on the sales side. I know there was some change in sales leadership earlier this year. I think Colby's role changing a bit. Just what has changed there first? And then I guess, what does that kind of enable for the, I guess, rest of the sales organization?

Yes. I mean it wasn't -- we announced that change because we're going through the proxy process. And you obviously have to disclosure Section 16 officers. But in a practical way, it really didn't change the organization. I mean, Ken Hohenstein has been our CRO. He's still our CRO. He happens to report directly to Tom now. Tim Minahan was our Chief Marketing Officer. He just happens to report to Tom now. And Craig is super focused on customer success and CPM Express. So I wouldn't say that there was a ton of change other than, again, we had to do it to some degree for regulatory reporting.

Okay. I guess on the dedicated AI sales force, I guess what does that kind of build-out look like for you all? What does that mean for -- I guess, is it more of an overlay model? Just what does that look like compared to the rest of the organization? And how is the, I guess, success of that group kind of look like as it's been built out?

They are all in and all at it. The AI team and they think about themselves kind of sales all the way through the engineering team is really energized by their capabilities and a really high-performing team. The AI -- it's an overlay for right now, and that team continues to grow at a gradual pace. I don't know that we'll have to figure out how -- at what point does it grow to and how we think about it over time. But the other important one is we started -- we announced at Splash, I think it was this last year, but a sales performance management capability, and we're starting to see some traction there. We've hired a sales rep who had experience at some of our competitors building that out. And we're really excited about the ability. I mean it's a decent -- it's a pretty good TAM on sales performance management. We've got a few customers at this point, but we see a lot of opportunity there. And so we're starting to build out that overlay capability as well.

Okay. And this is coming from the Infinity, I guess, [ Crack ] product. I think there's a partnership there. And so this is something that you're building out your own sales force for that?

Yes, they're an ISV. I mean, technically, it's written on their -- the sales are written on their paper. But the partnership between our team and their team is actually quite good. And then I would also say that their kind of parent organization is looking at other capabilities that they can build in a similar way as an ISV on OneStream because there's a few -- I don't want to go into them, but there's a few other kind of logical opportunities to go into there that continues to extend. I mean just as a reminder, like the infinitely extensible in OneStream is such a powerful because you can continue to create these new ISV capabilities on OneStream, and we're going to continue to pursue that.

That makes sense. We only have a few minutes left here. If there's any questions in the room, I want to make sure we get to those. I guess shifting gears a little bit, maybe still kind of on this AI theme, but how is OneStream leveraging AI internally? Like what are you doing? How is that kind of flowing through to margin? And where do you find kind of the efficiencies in the business from that?

Yes. I'd say there's 3 areas, and I'm going to save the best for last. But obviously, on our engineering side, they leverage LLM models to help them write code. I think we're getting somewhere, but I can't remember the exact number, but somewhere between 30% to 50% more productivity from our engineering team by leveraging some of these -- I won't use brand names, but some of these capabilities. The second area is really in our support and customer success organizations. And it's -- whether it's access to information, whether it's helping people to solve problems, we're leveraging efficiency there to help to help our -- not only to help our customers get answers faster, but obviously, there's some cost savings there. And then within our own finance organization that we'll call it the best for last, we -- I don't know, some people love to use dog food, some people use drink your own champagne, but our team uses every -- it's one of the most fun things about being in finance for a company that builds financial capabilities is we not only use the capabilities, but we get feedback into the product group to say -- and there's a woman on my team who has spoken at a bunch of our user conferences, who's been really quite an advocate as we leverage some of our capabilities. So whether it's forecasting, whether or not it's -- we're using all the -- previewing all the agents, using those, giving feedback into the product group, obviously, using it in our team to be more efficient. And then obviously, things like the anomaly detection and some of the other analysis tools that we have, we're leveraging. So it's a fun part of sitting where we sit within this company. But yes, we -- I don't -- I think I've told you before, but Pam McIntyre, who's our Senior Vice President and Corporate Controller, was a customer before she came to OneStream. And so she's been just such a good advocate for all the innovation that we're developing for finance.

Yes, it's high praise right there if you're converting customers to employees. So good to hear. I want to ask on -- I guess the other part of the question is around like how you find efficiencies, how you think about that flowing through to the bottom line versus reinvesting that? And I guess similar, how do you think about top line trying to drive growth versus the margin side of the equation?

Yes. I think we can and should do both. I'd say, obviously, AI has been part of the growth engine for us, SPM, which we've talked about. There's some new geographies that we are likely to pursue. Part of the problem when you go into a new geography is there's an investment associated with it, but I think we feel like kind of the time is right for that, and that will continue to help the top line for sure. I think on the bottom line -- and look, we've talked about this, our gross margin has kind of slowly increased. We see a big opportunity there. I mean, I think during the IPO roadshow, we've talked about the fact that over the kind of, call it, near to midterm, we want to get that number up to 80%. We're doing a lot of investment in that area to get that to push that number in that direction. We've done -- we did an 8 upgrade, which had a lot of infrastructure improvements, but there were some costs with moving people from 6 and 7 to 8. We've released 9, which has some also incremental infrastructure savings. And then we've got kind of obviously some more investment to go. But that's really our goal. And obviously, that will -- all the COGS savings will more or less drop to the bottom line. So that's our approach as we go forward.

That makes sense. I think we're out of time. But Bill, I want to thank you so much for being here and OneStream for being here. I want to thank everybody in the audience for listening in today.

Thank you.