Oneflow AB (publ) (ONEF) Earnings Call Transcript

Okay. It's time. Welcome to this update of the highlights from the third quarter interim report for Oneflow. My name is Anders Hamnes. I'm the CEO of the company. And next to me, we have --

Natalie Jelveh, CFO of Oneflow.

As always, please use the Q&A function in Zoom and note the chat, and we will get to your questions at the end of this presentation. First, some highlights for the quarter. ARR closed in at 179.7 million. And we also published yesterday the end-of-October numbers, which was 179.9 million. We had a currency headwind of around SEKK 700,000 in October. And year-to-date, we had a currency headwind of SEK 4.2 million. ARR had the same growth rate in Q3 as in Q2, closed in at 19% or 19.5% actually. Net new ARR, up 19% year-over-year, SEK 8.5 million in net new ARR, which is actually up 30% since Q2 this year. ARR per full-time employee, 37% growth year-over-year. Net and gross retention came in also at the same level as in Q2, 87% on gross and 97% on net. And to the maybe biggest highlight of the quarter, positive EBITDA, 16% on EBITDA, and minus 12% on EBIT. EBITDA for Q3 last year was minus 17% and last quarter, we had minus 20%. So, as always, we just like to take this opportunity and share with the new participant briefly what we do at Oneflow. We are a contract life cycle management platform. We help people in sales, procurement, legal finance, HR, all departments to manage contracts. And the full life cycle end-to-end solution, you can create flexible templates in Oneflow. You can collaborate in real time. Of course, you can approve and sign, and post-sign, you can manage contracts inside Oneflow. You can be on top of your obligations and liabilities, get notifications, filter, analyze. And we also have a lot of really powerful AI solutions, both in the pre-sign and the post-sign buckets, to help and assist our users to make better calls and to be on top of everything. And one of the great advantages with Oneflow is that you can save a lot of time compared to working with Word, PDF, or even eSign. I mean, there are a lot of eSign vendors in the market, as you know, that focus on the sign bar in the middle here, but they only solve a very small part of a much bigger problem, in our opinion. So, this year has been quite eventful for the company. We have made a lot of changes in the company, not only in headcount, but even in headcounts. And we have also made 2 very important hires this year. So, we have, I mean, we all have our sweet spot. And the phase that Oneflow is in right now, the stage that we are in right now, and also where we are heading, we needed a different kind of leaders in the top management team. So we have added 2 really, really strong profiles to the company. Markus started as a CRO, Chief Revenue Officer, in June this year. And I think it's funny just to mention that he even has a doctor's degree. That's not so common. Doctor's degree in organizational leadership. He has extensive experience within sales, marketing, strategy, leadership, specifically within B2B SaaS and B2B, actually B2B software in general. And he also spent 9 years in ProSales, a company working dedicated with research, advice, and strategy, and leadership training for companies in the B2B space. So a really, really interesting background for what we needed in our CRO profile. Christophe started quite recently, in September, also a very, very heavy track record within product and product management. He came from a role as Head of Products at Entercard, almost 6 years at Entercard. And a little funny side note is that Christophe actually worked in Oneflow some time back. He spent 2 years here from 2017 to 2019. Then it was a very small company. Christophe was the only guy in products. And so, he was a solo player, and that time, maybe the company wasn't the best fit for Christophe because his profile is more for bigger teams like we are now. So, we have kept him warm over the years because it was also kind of a big loss back then, but we are super happy to have him back in the team. So, before we dive into the numbers, just some highlights from the product. And of course, we don't list all the things we do in the product. We just mentioned some of the bigger events. Otherwise, this list would have been really long. So, in Q3, we added what we call internal notes, so we can have notes to documents in the company and, of course, collaborate with notes and so on across the team. AI summary, you can get a brief summary of the most important stuff in your contracts in a second instead of reading the whole contract. And we are constantly, constantly doing a lot of improvements in our AI insights offering. It's a really powerful feature. You can scan through all the contracts, find deviations, and so on. And before we had fixed playbooks, but now you can even customize your own playbooks. This is really, really, really powerful. Customize even severity of breach risk levels and so on, and everything you do right, process feedback, and so on, will inform our AI agent and make it more accurate and more exact. This is not based on ChatGPT. So, this has been trained on contracts for very many years, so a lot of years. So, this is really, really a product that we're really, really proud of. Data retention, of course, we are in the kind of compliance business. Contract is your goal. It's your obligations, it's your everything. So, we need to be top notch on that. And we had a lot of new rules and more flexibility when it comes to data protection that was launched during the quarter. It's very important, especially for enterprise companies. White labeling, you can now have a much stronger brand profile with the counterparties in the contract. So Oneflow is toned down, if you'd like, you can brand your mails and contracts and so on in different ways. Personal time zone and data format, we have always had this on a more kind of basic level, but now it is way more powerful. This is obviously very important for big enterprises working globally. And to us, this was kind of the thing we just needed to upgrade heavily when we opened our office in the U.S. a few weeks back. Integration is one of the kind of key features in Oneflow. We have a lot of really powerful integrations, and this is kind of an ongoing thing. We had several improvements this quarter on HubSpot Dynamics, Pipedrive and Upsales, and we even launched new integration to Lime CRM. We had an old one that was just Sunset, but now it's a new -- totally new integration to Lime and Tellent Recruitee an ATS service system. After the quarter, we made several new improvements to SuperOffice and into Lime, and we also launched what we call multiple custom e-mail domains. This is maybe also a feature for enterprises and global teams operating in different regions. So, you can send contracts from different e-mails based on what regions and so on you are active in. So, let's go into the numbers. A net new ARR closed in at SEK 8.5 million in the quarter, 19% growth year-over-year. And if you look on the graph to the right, you can see that -- or even to the left, actually, you can see that we had -- we have a nice trend this year. It's been increasing quarter-on-quarter. And even SEK 8.5 million is up around 30% since Q2 this year. Heavy currency headwind, as we said in the beginning of the deck, so SEK 4.2 million year-to-date. If we zoom in at the numbers for the third quarter, we actually had an all-time high in new ARR, an all-time high in expansion ARR, but we also have an all-time high in churn ARR. So that was why the net new was pushed a little bit down. It is still quite windy outside. It's been windy for some time now. Gross new ARR, so if you add net -- sorry, if you add new and expansion, you get gross new ARR. We had SEK 14 million in the quarter, and this was just behind the all-time high across all quarters, which was SEK 14.5 million actually. So gross new was actually quite good, but the big bully here is the churn actually. And we also had end of Q3, assigned contracts worth around SEK 6.6 million that will be recognized after the quarter. ARR almost SEK 180 million now, and this is a 19% growth year-over-year. And if we fix the currency, it would have been slightly north of 20%. We have guided the market before, and we reiterate our same guiding that we're still going to stick with a goal of reaching 30% growth again. But now we made a quite hard turn right to become profitable. If you go back a few years, we didn't expect it to be kind of this rough the right turn, but we have been selling a little bit more over the last few years than we were planning to do. So that was why we needed to just make this turn a little bit rougher. So of course, it's hard to balance becoming profitable and also to maintain the high growth base. So, our focus is now primarily to become profitable and try to grow as much as we can, but it's heavily weighted over to profitability at the moment. This is going to shift, obviously, but we'll comment more on that later. How can we see an accelerating growth again? Obviously, many factors always, but one, obviously, the external factor is the market fundamentals. At some point, that might change. We do have a lot of new features and product enhancements all the time. So, there are gaps in the product that we know about. We know the pain points. We know why we lose when we lose. We know why we win, of course. So, we have a very, I would say, really, really interesting backlog for 2026 to fix that. We have launched many really, really heavyweight AI features over the last few years. I'm not sure actually if the market recognize this in the same way as the private market does these days, to be honest. And is not some AI fluff that a lot of companies talk about these days. I mean even my toothbrush has AI on it today. So, I mean this is -- I mean, we have really invested heavily in AI over years now. So, I'm really proud of what we have to offer, what we can offer. What we experienced in the market when it comes to selling AI is that most companies are still sitting a little bit on the barge. Customers are very immature when it comes to AI. We all talk about it. We all use ChatGPT for kind of maybe polishing some e-mail or whatever, but this is not -- I mean, using AI in your work to analyze stuff and so on is still a little bit immature. But what we see now is that more and more companies actually take the step and start to experiment with AI in a different way, which is a very interesting sign for the future. And we are in a great position at Oneflow. We are not in the back seat. We are having our hands on the wheel in the front seat here. And mid and long-term, we see this is going to have a big impact for Oneflow. And of course, we do a lot of improvements in our go-to-market motion and in our product as well all the time. So, a lot of things here that's going to play together and going to bend the curve at some point. We had an ARR per FTE end of Q3 at around SEK 1.1 million, which is up almost 40% year-over-year. And in combination with an ARR growth of almost 20%. This is, in our opinion, at least quite impressive. Efficiency is about achieving more with less, and that is exactly what we're doing at the moment. And this is an important KPI, obviously, because we are an ARR company, 98% of the revenue is recurring, and we don't basically -- I mean, gross margin is 93%. So it's a very, very small COGS here. Our main cost is salary, salary, and salary. And this is why this metric should be a good indicator for when we go to break the magic line and become profitable at some point. The net and gross retention rate was stable from Q2 this year, 87% and 89%. Gross retention include churn and downgrade, and not expansion, and net retention rate includes everything, churn, downgrade, and expansion. Over the last few years, 2 years, 1.5 years, actually, we've had a quite balanced mix between downgrade and churn or when I say churn now, I mean terminations, it's around 50-50, and it's the same kind of mix now in Q3, 50-50, plus 50% downgrade and 50% terminations. I know that some companies don't report actually downgrade; that's what you should do, of course. So, it has stabilized now and the drivers for increasing the net retention rates, obviously, as we said in 2 slides ago, underlying market fundamentals, new features, new integrations, product enhancements, gaps. We have a lot of really, really interesting AI features that's ready for a market that might not be as ready yet as our features, but that's going to change soon, we think. VTM and product-wise, many, many changes. And even product packaging is something that's going to -- we believe is going to help us out here to bring the net and gross back to where we want them to be. Paying customers increased 12% year-over-year, and the average customer value up 6%, just hit the SEK 40,000 mark. And we believe that the ACV is going to continue to increase going forward. This is a very important focus area for us at the moment. Again, it's about features, deeper integrations, adding more value to customers, adding more value to customers and solving new problems to customers. And packaging is also a very important component here to increase the ACV. We do constantly renegotiate contracts with our customers. And we also have this marketplace that we launched earlier this year, where we are upselling add-ons to the plans that our customers are in. Maybe I will leave the stick to you now, Natalie.

So, we continue to increase our net sales, and that's, of course, in line with our increase in ARR growth. We have improved our net sales with 21%, ending up at SEK 43 million in Q3. And also looking from a year-to-date perspective, we can see that we have actually improved our net sales with 25%, closing at SEK 124 million year-to-date numbers compared to SEK 99 million we had the same in the same period last year. Sweden is still our strongest market when it comes to the net sales. It stands for 59% of our net sales, but we're quite strong in the Nordic. We have Norway at 14% and Finland at 10%. And then the remaining 17% comes from the rest of the world. If you look at the shares of net sales coming from regions outside of Sweden, we see that percentage steadily increasing. We ended up at 41%, which is approximately the same percentage we had last quarter. However, we do believe that this percentage will increase as we expand into other regions outside of the Nordics. The majority, almost all our net sales is connected to our software recurring revenue, which stands for 98% of our net sales, and the remaining 2% comes from professional services. As you can see, our gross margin continues to be quite high and strong at 93%. Looking at the last quarters, we are around 93%. But we do think that we do know that the gross margin will slightly decrease in upcoming periods. Now, the reason for that, if you look at the cost of service sold expenses that we have, the majority of that or the large portion of that is connected to sales commission to our partners. Now the partner channel is very important to us, of course, very strong channel we have and a very important partnership that we recently engaged to was the partnership that we have with Oneflow North America. Now, Oneflow North America is a company that is established on the North American market, and that is our way to expand in the North American market. And as you know, the North American market is a big market with great potential. And besides the partnership agreement that we have in North America, we also have 20% ownership in Oneflow North America. And I'm happy to share that we have actually closed our first deal, and many more to come from North America. We have a really strong leadership team in Oneflow North America. So, there's very good and high potentials on a rapid expansion in that market. But besides the partnership agreement and 20% ownership that we have in North America, we also have an option to buy the remaining 80% of that company. And so initially, we do believe that the gross margin will decrease because the partner commission will increase. But in a couple of years, when we make the decision to buy the remaining 80%, of course, our gross margin will increase a bit, approximately at the same level as we have today. As Anders mentioned in the beginning of the presentation, this quarter is a very big financial milestone for Oneflow. We closed EBITDA with a positive number of SEK 7.1 million. This is a really great improvement if you look at the last quarter, at minus SEK 8.5 million but also compared to where we were 1 year ago, at minus SEK 7 million. So, a really important milestone have been achieved this quarter with a positive EBITDA. Also, if you look at the year-to-date numbers for EBITDA, we closed at minus SEK 10 million, and this is to compare with last year, we have approximately at minus SEK 35 million. So, this is a 71% improvement from where we were 1 year ago. Also looking at EBIT, EBIT also, of course, improved significantly during the quarter, closing at minus SEK 5 million to compare to the minus approximately SEK 16 million we had 1 year ago. Also from a year-to-date perspective, we have improved EBIT with 27%, closing at minus SEK 45 million for 2025 year-to-date. So, a really big, big milestone for Oneflow this quarter. Also looking at the EBIT and EBITDA margin, we have an EBITDA margin that is positive, closing at plus 16%. And compare this to where we were 1 year ago, minus 17%. So, this is a really big achievement this quarter. And more to come, of course, as you know, as Andrew mentioned, our most important priority right now is to steer Oneflow towards profitability. So that's a really big focus that we have. EBIT closed at minus 12%, but our predictions is, of course, continue the work that we've done, the review in the way that we work. We have a really great organization, a strong organization, really good product and the expansion that we do in North America. All focused right now on driving Oneflow towards profitability, So stabilizing the cost base, having this strong organization, a very strong product but also continue to grow in ARR. We have not changed. We remain -- our financial goals are remaining. We do believe in an ARR growth above 30%, and this is our long-term perspective. This is the long-term financial goals that we have, but also to reach profitability with current funding. And as Anders mentioned, in the short run, we do understand that we do not have the 30% year-over-year growth when it comes to ARR. But in the long run, that is our ambition. Let's see if we've received any questions in the Q&A? Yes, a lot of questions.

So I can read this one for you, Natalie. Have we seen full effects from the personnel reorganization carried out last quarter? Or is more effects expected to be seen in Q4?

So from -- as we mentioned in the last report, the Q2 report from an accounting perspective, we do need to take into account the reorganization that we did in June, the full cost of that in our books. So that cost has already hit our books in Q2. However, from a cash flow perspective, of course, it looks a bit different because we have some costs that we still need to pay out. But we always review our organization. We always make sure that we work in the most efficient way. We always have a really, really close look at our cost base and making sure that we try to make sure that we don't have any necessary costs, of course, but that in connection to still do improvements in the product, do improvements in tech stack that we may need to continue to have growth. So looking into Q4 and Q3, of course, there will be some changes. We do changes all the time. I cannot talk about exactly how big effects will come, but we always review our organization and the cost base that we have. You emphasized profitability and cost awareness in recent years. How much has that focus to profitability been the reason for the slowdown in your growth?

Yes. So obviously, this is the kind of holy grail of the big question for us internally always. We have to -- there are 2 kind of main important KPIs that we strive for. It's growth and it's profitability or EBIT margin. And this is a balance, obviously. And at the moment, the focus is heavily on becoming profitable. And that's, of course, going to -- has made a hit on growth. I mean we would have been growing more if we didn't have to turn right so hard as we have done. So I would say that the main focus is profitability at the moment. At some point, we're going to achieve that goal. And then we're going to change our priorities. Still, we're going to have a goal of improving the EBIT margin going forward, but not at the same pace as we have seen now. It's going to be a different pace. It's going to be quarter-by-quarter, smaller improvements on the EBIT margin. And then the main focus for us will be to achieve growth here. It is much harder to achieve good growth than to be profitable. So, I know that many investors look at this Rule of 40 formula or model. And I would say that the weakness with this model is that it puts equal weight on growth and profitability. But in real life, it shouldn't be equal because it is much, much harder to grow than to be profitable. It can be profitable now bang if you want to. So, I would say that actually Bessemer Venture had a much better approach to it, I would say. They have something that Rule of X. And they -- so they weight growth 3x more than EBIT margin, which I think is a much more fair way to look at it because that reflects how harder it is to achieve growth. So, we're going to put more focus on growth than growing -- making the really fast EBIT margin improvement going forward, but we are going to improve it step by step. That's important, obviously.

So the next question is a bit linked to that. So, what type of actions and investments could you do to make once we've reached profitability to achieve growth?

Sorry, what kind of investments?

What kind of actions and investments would we make once we reach profitability to increase growth?

Yes, this is actually the question. We have a lot of -- we know exactly what we should do. But I mean, we can't, of course, expose that at this meeting, but this is not -- I mean, we always track -- we are very KPI nerdy. We track a lot of stuff. We have even a team of 3 people working with data in Oneflow. And even actually the ROs team will also focus a lot on data. So, we have a lot of people focusing on data. So, we know exactly how much -- I can give an example of an important KPI. There are many more, but one important KPI is GTM Efficiency, which measures how efficient every motion that you are. And then you can see how many months it takes for us to get payback from this investment. So, we know exactly everything we do, how efficient we are. We know the efficiency for every motion, every team, every country, everything we do. So, we know we have to double down. We know what to do less of and what to kill. So, to invest more in the motions that have a more attractive payback time is not hard for us to find. But yes, I can't be more specific than that in this meeting.

So, the next question is, is there any seasonality of quarter-to-quarter patterns in your sales or profitability that investors should be aware of? For example, Q3 is typically a more profitable quarter compared to others. Yes, there are. So, basically, Q3 is usually from an accounting perspective, lower in cost from an accounting perspective, and that is due to vacation periods because we do accrue vacation throughout the year and then release it once people go on vacation. And normally, many of us here in the Nordics go on vacation during Q3, July, and so on. And that also applies when it comes to sales numbers because the industry, especially in the Nordics, closed down for approximately 1 month, and then it's quite hard to do sales if no one is on the other side of the table. However, what we also see now, I mean, we do have sales in other regions than the Nordics, is that in other regions outside of the Nordics, the period looks a bit different. And especially now with our expansion in North America, we do believe that we will see more equal quarter-by-quarter sales numbers. So, it wouldn't have that big of an effect that it perhaps has today.

When you win or lose, follow a competitive deal, who do you usually lose to, and who do you win against, and why? This differs a lot between the different markets. Sweden, Norway, Finland, and outside Europe, I mean, it's a different playground in every market. And even within every market, there are different cohorts or segments. So, this is quite a fragmented question. And I would say that this isn't the big problem at the moment. We have quite good hit rates when we sit around the table. And we have a strong product, and we win much more than we lose when we are around the table. The problem at the moment, or not only the moment, it's been for maybe the last few years, not only for Oneflow, but for every SaaS company and even every software company is top of funnel, top of funnel. There is so much noise in the market. It is hard to get attention to get to the table. But once we are at the table, we are doing very good.