Oneflow AB

STO:ONEF

Earnings Call Transcript 2023-Q1

[Anders Hamnes, executive]

Welcome to the Earnings Call for Oneflow First Quarter 2023. Our [ beeper ] is not working here. Sorry. Okay.

So my name is Anders Hamnes. I'm the CEO of the company. And next to me, I have Natalie Jelveh, which is our CFO.

[Natalie Jelveh, executive]

Welcome.

[Anders Hamnes, executive]

And please use the Q&A function in Zoom, then we will get back to your questions in the end of this meeting.

So first, a quick summary. The market is, at the moment, very turbulent, but we are executing according to plan. We saw early signs in the end of the third quarter, and then the recession really kicked in during the fourth quarter, and then we experienced somewhat longer sales cycles, less expansion sales and higher churn. This continued during the first quarter in the same magnitude, not more, not less than the fourth quarter. So in a normal market, this would have been a little bit better because we are [ red ] for higher sales in our company.

But considering turbulent market that we are in and the certainty we have executed very well in a way to reach our long-term objectives. So we have -- we had 52% year-over-year growth in the ARR, 52% growth. So this is actually very, very strong, and I'm super happy considering how tough it is at the moment. So this is a very good number. The ARR almost reached 100 end of Q1. And we also had a little bit lack with the currency because we lost around 600,000 due to currency expectations during the quarter.

The net new ARR was SEK 9 million for the quarter. So with the same currency exchange rates as in December, it would be 9.6. ARR to sales ratio has always been very high with Oneflow of 131%. And the retention rates have been dropping for the last 6 to 9 months, but now it seems to have stabilized. So 134 the gross and -- sorry for the gross, it's 91%. And for the net retention, it's 113%, reflecting also the market that we are in right now, of course. LTV CAC, how much we -- the lifetime value for the customer divided on the costs is close to SEK 8. So we make SEK 8 for SEK 1 we invest, also have been declining, but that is according to plan and because of -- mainly because of the costs we had in our new markets, which I will get back to in a few slides. And as you can see also on the slide here, we have included the ARR end of April.

As maybe most of you know, we send a press release in the beginning of every month with our total ARR. And the reason for that is not because we are so eager to inform the market. To be honest, it's more because we want to be very open internally and talk more about numbers internally among our employees since we work towards one common goal and not to make our employees insiders. We have decided to never put them in that position, of course, and be very open with our total ARR.

Before we go into more numbers, as always, I would like to just take opportunity and talk about 2 slides, to give you more, those that need to Oneflow, a better understanding of what we are as a company. So we are an e-contract platform. We work with contracts for all departments and the whole process, an end-to-end solution for handling contracts. And we are -- the space of e-sign vendors is very crowded. We're not an e-sign vendor. We are an e-contract vendor. So we work with the whole process. We can create contract templates in Oneflow, you can collaborate in real time, you can make changes. You have an audit trail and so on, and it's very powerful editor. You can, of course, sign and then you have post-sign feature to manage your contracts in Oneflow. So this is like all the steps in the process in one platform.

Our sales channels, we have 3 main sales channels. We have, of course, direct sales, outbound activities and also inbound activities. We call it high touch. So this is more the approach that we use for bigger accounts. And then we have partnerships in medium touch. We have different partner programs. And the last channel is self-serve. And that one comes in, I would say, 2 flavors. We have marketing driven, where marketing-generated leads to our homepage, this -- some sign up for a freemium and then some of them, again, converts to pay plan. And the second flavor here is what is called product driven. That is when somebody using Oneflow invite the counter party and they then decide this -- counter party decide to later convert to a freemium and then again to a pay plan.

So expansion, expansion, expansion. This has been a topic we talked a lot about over the last 18 months. And as some of you know, we opened up 3 new offices last year. We entered U.K. in May, and we opened up offices in France and the Netherlands in September. And every market is very unique. We have a unique playbook for every market, what works in U.K., don't work in Netherlands and vice versa. So this is super interesting challenge for us to work with. And now we have learned a lot. And sales are starting to kick in. We have had several bigger deals coming in now from these markets, which is super fun. And the development goes in line with our plan. We continue to invest in global expansion, but there is no plans for new offices this year for sure. So now the full focus is on our current teams still. 32 countries, customers in 32 countries paying. I think we have users in almost every country in the world.

So that -- the paying is from 32 countries. And we also have a small team in Sri Lanka with the developers. Just want to run quickly through the main feature release highlights for this year so far. So in Q1, we launched AI Assist, which is based on the GPT technology. So our users can now improve their contracts and get inspiration if you want a contract for whatever, you can just search for it or you can search for a clause or whatever you need. And then we're going to make very good suggestions for you. So if you need an NDA, for example, or an employment agreement in any language, you can just describe what you need and then, boom, it's there.

Integrations is one of our key focus area from the product because it is very, very important to have super strong integrations. And that's -- we have a lot of integrations, but we focus more on having deep and very good integrations. So HubSpot, we had that for years, but we are constantly making improvements to every integration, including HubSpot. And we had some major leases also in Q1 in HubSpot. Folders, one of our strength in Oneflow is that we have a very, very powerful archive. And we launched folders in the quarter, which makes the archive even more powerful. There's a lot of stuff around the folders, but I do not want to go into that in this call.

And we also launched last year a new editor which is very much more powerful than the previous one. And during the first quarter, we had more stuff to make our users be able to customize and brand the contract in better ways, like fonts and so on, a lot of stuff that we added during the quarter. In the beginning of this quarter, we even launched 2-way sync for HubSpot. And we are, at the moment, the only e-sign/e-contract vendor that offer 2-way sync for HubSpot, the only one. Super powerful. Push data back and forth between HubSpot and Oneflow. We also launched a lot of stuff on the Pipe Drive integration, which is -- we had for years as well, but still deep, deep, deep integration is very, very important for us.

So we had custom data fields also supported in this quarter. And AI Assist is -- we have extended this feature to include other parts of the system that then only contract. So now you can also use AI Assist for making e-mails and notifications and so on throughout the whole application actually. So it's -- that's a very powerful feature. During the first quarter, we lost around SEK 600,000 due to currency applications, and it's mainly the [diminishing] krona which subsided. And actually, if you include April, the currency loss so far this year is close to 900,000. So as you can see from the graph to the right, we had a quite decent growth in the beginning or in the second and the third quarter of 2021. This is also because 1 year earlier was the beginning of the pandemic. So that's maybe -- so the growth rate we had back then was maybe a little bit higher than expected in the normal market. And the growth rate that we experienced right now, which is 52% is a little bit lower than expected in a normal market. But we don't expect this to be a trend. It is a little bumpy at the moment. But we will not accept this to be -- to continue to drop like it has over the last few quarters.

One also good news is that if you look at the churn on a month-to-month basis, we believe that the worst is over and that the churn is about to find a floor. We had a few months in churns in the beginning of this quarter -- sorry, in the beginning of first quarter and also during fourth quarter. But for the last few months, we haven't been close to those levels. So it seems that we are -- the worst is behind us, which is the good news. Net new ARR, slightly below our predictions because of sales cycles getting longer, churn is higher and expansion also slower than it would have been in a normal market.

But again, it seems that churn is hitting a floor and that we're getting close to some kind of floor here. And also, the currency effect is also important to have in mind. But considering the tough market conditions, I would say that the fourth quarter and the first quarter of this year are strong evidence of solid underlying fundamentals within our company. I'm actually very impressed myself. If you knew how tough it is right out at the moment out there, it is kind of brutal. We are doing very well. And also, as I said, on the summary slide, we have started to get some deals now from our new offices outside the Nordics, which is super fun. Yes. Retention. Gross retention includes, of course, churn and downgrade but not expansion sales. And if we include expansion sales as well, then we have net retention.

So during Q4 and Q1, in absolute terms, the churn and downgrade doubled compared to the first 9 months of last year. And it's mainly smaller companies with a weak balance sheet that churned. And it's also larger companies that lay off people and they downgrade, to some extent. And again, churn has -- is lower for the last few months. So it looks like the peak months are behind us, and we're hitting the floor. So retention rates will pick up again as soon as underlying market fundamentals improve. We see -- by the way, we see no other factors than the economy causing downgrades and churn. Not, of course, some competition as always, but not more competition than before. So it's the same level as it always has been, but it is related to the market that we see the churn levels that we see at the moment.

The average ARR per paying user was 3,100, almost actually [ 3.2000. ] So it's been increasing 3 months in a row now. And we had a close to 32,000 paying users at the end of the quarter, which is up 52% one year ago. And we increased our price list quite a lot actually in the end of the third quarter. So if you look at the average price per user here, it doesn't seem like it is increasing a lot, but actually, this is the average price or the average although total ARR divided on the total customer count all time. So it will take some time before you see the effect of the price change to kick in, in these numbers. So during the fourth quarter last year, we started 2% of our new pricing to new customers.

We adjusted -- making a lot of adjustments and renegotiations. And this is an ongoing project and it goes according to plan. And as I said also in the previous interim report presentation, back then, we are very satisfied with the new price list. It seems reasonable and balanced and I'm going to say the same today. So there is no indication that we have -- that the prices are -- that we took them up too much, even though we did a quite big leap actually, but it seems balanced and reasonable. And we expect our ARR per user to continue increase going forward.

[Natalie Jelveh, executive]

Okay. Net sales. So the net sales for the first quarter ended up at SEK 21.7 million, which is great growth of 50% comparing to the same period last year. Of the SEK 21.7 million in Q1, 96% was software-related recurring revenue. The remaining 4% consists of professional services. As mentioned, our aim is always long-term profitability instead of quick wins. And we have invested a lot in our product, in our platform, which is a very intuitive platform, and it enables self-services. And this is also demonstrated in our strong ARR net sales ratio, which ended up in Q1 at a level at 131%.

Looking at our net sales outside of Sweden, it continues to grow, ending up at a percentage of 28% for Q1. And if -- what I wanted to lift here is if you compare it to the Q4 last quarter, which also was 28%, we had a onetime nonrecurring revenue in Q4, which was quite large. So if we take that away from the calculations, we would have ended up in Q4 around approximately 27% of growth. And now in Q1, we have 28%. So we continue to grow the net sales outside of Sweden. And we are seeing that continuous growth in our -- especially in our new markets as well. And that will -- our estimation is that we'll continue to grow, especially as we get more established in our new markets.

So currently, as Anders mentioned, we have paying users in 32 countries, and the aim is always to expand that and go into more users in more countries. Still very high gross margin, ending up at 94% in Q1, a slightly decrease comparing to the same period last year. Looking at the cost of service, sold expenses, it mainly, for us, contains a sales commission to partners. And that has increased as we established, of course, more strategic collaborations, which is quite important for us. So looking at that, the main cost of services that the system which it stands for is approximately 4% and the remaining is hosting. And our expectation is that we will continue to have quite high gross margin going forward.

Our EBITDA for the quarter ended up at minus SEK 17.3 million, which is corresponding to an EBITDA margin of 80%. Our goal is to have and to take a position as a global thought leader when it comes to digital contract handling. And therefore, we also have a lot of focus and a lot of investments in our product development. As mentioned previously, during Q4, we opened 3 new offices outside of the Nordics which, of course, entitles higher costs, especially in [ Chile ]. However, we are seeing increases in sales and especially more intuitive -- it will come as we become more established in those markets. Our increases in costs mainly consist of higher employee costs. We had 161 employees by the end of Q1 comparing to 101 for the same period last year. And this is, of course, an investment both in our new markets, but also, of course, the high investments that we do in our product development.

EBITDA amounted to minus 23.5%, which is corresponding to 108% in EBITDA margin. So except for the increase in costs, we also increased the depreciation, and that goes hand in hand, of course, with our investments in capitalized development work. But as planned and as always, we always aim to turn around profitability.

[Anders Hamnes, executive]

LTV is the lifetime value divided by the customer acquisition costs for the last 12 months here. So we came in around 7.6, close to SEK 8. And we had actually a small increase in the LTV in Q1 versus Q4 but the CAC went up more because of, again, the hiring and expansion into new markets. So this is actually according to plan. But now we have to turn this into another direction because we're not going to -- we're going to hire less, much less this year than we did last year and no new markets this year. So I also want to comment on this formula. So we have not included any expansion sales when we calculate the LTV. It's just flat, which is quite conservative, but I think it's good to be conservative. And the CAC is just all sales and marketing costs divided on the number of new users.

We have a very strong financial position with almost SEK 190 million in the bank by the end of the quarter. And we will, of course, invest our money wisely. So our solid balance sheet means that we have the financial strength to go full force even during the storm that we see right now. So the current recession is, of course, painful for most companies. But to us, it's also an opportunity. It might become easier to attract top talents going forward, and there also might be opportunities along the road when it comes to other companies and new markets. We'll see. We have an optimistic approach. So all this combined with a highly, highly, highly competent team and a very strong company culture.

A scalable product that's top-notch in the market space, delivering to the most demanding customers put Oneflow on a rock solid position. So in times when companies put greater focus on cost reductions, Oneflow is strongly positioned to offer a critical need to have product sold at a low cost with a high return on investment. Then to the goals. Considering the global financial situation that we all experience at the moment, we believe in a somewhat more cautious expansion approach until the economy has shown clear signs of recovery. So we decided to keep the same kind of targets, but just move it from 26% to 27%. So now our goal is an ARR of SEK 600 million by the end of 2027 and an EBIT margin of 20% in the same year.

So while the future is hard to predict for all of us, we will never, never, never jeopardize our strong financial position. We'll always be humble and strive to make sound long-term business decisions. And then we will go into the Q&A session.

[Anders Hamnes, executive]

Is it me or you, Natalie?

[Natalie Jelveh, executive]

I can read the questions. So one of the questions that we received is the new ARR target. How do you see the shape of the growth curve until 2027?

[Anders Hamnes, executive]

Yes, that's a good question. So we have not disclosed those numbers, obviously, as you know, and we don't want to do that. We can't -- we don't want to open that door. It's already complicated but this -- to be transparent because we are -- if you compare Oneflow to other companies in the space, we are pretty transparent with our numbers, but I think it's good if we are consistent here and don't open any new doors. We might open that door at some point, but then it's going to be more thought through. So -- but of course, when we communicate a target, it would -- I mean, for any company communicating a target, it would be wise to have a buffer, of course, just on a general note to that one.

[Natalie Jelveh, executive]

Another question that we see is regarding OpEx growth. So we added 50 more people in Q1. What's the plan for new hires in the rest of 2023?

[Anders Hamnes, executive]

[indiscernible]

[Natalie Jelveh, executive]

Yes, of course. I mean we do have a hiring pipe. We do have talent that's needed, special talent that's needed, and we'll continue to do those recruitments going forward. But of course, we are being cautious with our costs. We are being cautious with our spend. But there are some roles that, of course, is very necessary to hire to make sure that we reach our long-time long -- our financial goals, long-term goals, of course. So we will continue to hire. But with that said, we are being cautious.

[Anders Hamnes, executive]

Yes. So when we set our initial targets in Q1 last year, that was, of course, based on a lot of assumptions. And we have -- and the main assumption is, of course, the head count. And we have, during the last 6, 9 months sliced our headcounts projections several times. So we are, as Natalie said, going to do a few more hires this year, but far from to the same extent as before and it's more niche roles where we just need to have some cover.

So focus now is that we need to bring this company into profitability. I mean when you decide to go public, you also decide to not burn money for the next 5 years. So having made a decision that we drive -- that we would like to make this company profitable within relatively a few years. So we're not going to continue to hire like we have done in the past.

[Natalie Jelveh, executive]

Yes. Another question is regarding our international offices. So when do we expect international offices to contribute in a more tangible way.

[Anders Hamnes, executive]

Yes. Of course, tangible is a definition. I mean we -- they already did actually in Q1. We had a few really, really big deals in Q1 coming in. And you should expect that this year. So we are. I mean the teams now have been onboarded for quite some time. Of course, it takes time to build a brand. It takes time to -- for some -- it takes time to get up and roll as a sales rep. It's a new market. It's -- I mean, we have tell them first what Oneflow is before we can talk about the product when we call somebody in France, for example. So there is a little bit more friction. But still, now we expect to start closing deals, and we've already done that. So this year.

[Natalie Jelveh, executive]

We have one final question here, and it's regarding the market turbulence. Can you talk a little bit more about what gives raise to the market turbulence? And is it the same across customer groups? And how are your competitors reacting?

[Anders Hamnes, executive]

So what gives rise to this market turbulence. Do you understand that question, Natalie?

[Natalie Jelveh, executive]

I think they mean what is the cause.

[Anders Hamnes, executive]

I think that is external cause. I don't -- we don't have any turbulence in Oneflow. There are not any internal things that's like wobbling. It's all external, as we all know about, and it's the same -- and is it the same across customer groups?

Well, that's a good question. Of course, there are differences. I mean some branches are hit tougher than others, like we saw in the pandemic. I mean, the traveling and hotel business took a big beat. And now in this crisis, there are also differences within the branches that we don't want to go into. I mean, we, of course, have an ICP, ideal customer profile we follow in each market. And it's also a little bit different actually across different markets, but we don't want to open up that door and talk about our ICP. That's too detailed.

And how are your customers reacting -- sorry, your competitors reacting? I mean, the landscape, the competitive landscape is -- today is like it was 6 months ago and 12 months ago and 2 years ago. It's -- I would say it's -- the barriers to enter this space is getting higher and higher because -- so if this is some kind of competition, then the answers are all in on the floor.

I don't expect any new participants in this competition. And there is a lot of players in the field, but I would say 95% of them are very uninteresting. Easy match to be a little bit frank. So -- but there are a few that's tougher, which is good, which we like. But there are no like changes in the competition, I would say, during the last year.

[Natalie Jelveh, executive]

We got a question regarding our ARR update in April. Was there any deals pushed from April?

[Anders Hamnes, executive]

So actually, we don't comment on the monthly updates we do. We only push a very -- like the number to be able to talk about it internally. But what I can say is that, obviously, April is always -- I mean you have the [ Easter ] in April. So it's actually a 3-month -- between 2 and 3 month -- sorry, weeks in the month. But what I can say is that to get a good month, you need to have a few bigger deals in the mix.

So if you don't have any bigger deals in the mix, then it's not going to be a good month. And it is very bumpy between months in the quarter. And also typically, the first month in any quarter, I'm not talking about Q2 now, I'm talking about general, the first month is always very often a weaker month. And it's getting better and better. And the last month in the quarter is typically the best month on a general note, so to say. But it is very hard for the market to make any conclusion of a trend based on one single month. You have to look on maybe the last 3 months because it's going to be bumpy also going forward.

So I would not make too much conclusions if it's a very good or a very slow month. You have to look at the last 3 months, I would say.

[Natalie Jelveh, executive]

I think we answered all the questions.

[Anders Hamnes, executive]

Yes. But you said that the market is brutal. What do you mean by this?

Well, companies take a longer time to make a decision, so sales cycles have increased a lot. And that's why I called it brutal. We think everything is slower at the moment, much, much slower. Not like it used to be. So with the size of our company, we are definitely scaled for different growth, even though we are growing 52%. So it is actually not that bad. But still, we want more. Much more.

Okay. That was the last question. So thank you for attending, and have a wonderful Friday.

[Natalie Jelveh, executive]

Thank you. Have a good weekend.

[Anders Hamnes, executive]

Cheers. Bye.