Oneflow AB

STO:ONEF

Earnings Call Transcript 2023-Q2

[Operator]

You have joined the meeting as an attendee and will be muted throughout the meeting.

[Anders Hamnes, executive]

[Audio Gap]

And Interim Report for Oneflow. My name is Anders Hamnes, and next to me, we have Natalie Jelveh, which is our CFO, and I'm the CEO of the company. [Operator Instructions]

Some highlights for the quarter. We had a total ARR end of Q2 of SEK 111 million, and since we also report on a monthly basis, we ended at SEK 112 million at end of July. Growth AR year-over-year 48%, all-time high net new ARR of SEK 11.3 million in the quarter, which we are very proud of. The IRR to net sales ratio is at 132% and net and gross retention, 112% and 91%. And the LTV:CAC, we get roughly almost SEK 7 back for every SEK that we invest.

So in the end of third quarter last year, we felt the beginning of a recession. It started to become a little bit more challenging. And in the fourth quarter, and also the first half of this year, it has been more challenging. Sales cycles are longer and also see less expansion sales and somewhat higher churn. It has not been become more challenging or less during the last, I would say, 9 months, it's likely quite constant. And we are, as a company, REIT for higher sales than we see at the moment. But of course, we are super proud that we're still in this demanding market are able to set all-time high records, which we did in the second quarter, and we are executing according to plan.

First 2 slides on the company, what we do to those of you that are new to Oneflow. So we are a platform for handling contracts, all your contracts, all departments and the whole process from start to finish. And you can create very powerful templates inside Oneflow. We have an HTML editor, so you can build your own templates there. And you can, of course, invite counterparties and collaborate on contracts in real time. You can communicate and discuss the content in the cybercontract, then when you're done, you can sign of course, and then you have a lot of post-sign features.

You can archive and manage contracts inside Oneflow. And through this process, you can analyze your data, you can be notified on key events along the time line. And since we work with an open format and not PDF-based contracts, you can have very powerful integrations between Oneflow and your other systems to push data back and forth.

We have 3 sales channels. First, direct sales, outbound, inbound, the traditional way of selling high touch. And this is a model that we use mostly for larger companies and enterprises. We have different partner programs. And we also have what we call self-serve, which is no or low touch. And that comes in 2 flavors. We have self-serve, which marketing generates traffic to a home page and some of them sign up for our premium and then some of them again convert to a paid plan and then you have products driven, where the products or a user in Oneflow sends a contract to a counterparty, which at the end of the process, maybe sign up in a premium as well and at some point, converted to a paid plan. So the product is generating there the customer in the second case there.

We have, during the quarter, released a lot of really, really powerful features. Oneflow was the first contract solution to introduce 2-way a sync with HubSpot. So you can auto-populate data back and forth between Oneflow and HubSpot, which, of course, is going to reduce a lot of time. Companies today do this manually in most cases, but now you can do it automatically, and it's also going to reduce error. With Pipedrive, we have launched custom fields, very powerful feature as well. We had a release of AI Assist in the first quarter. And now in the second quarter, we have also included our AI engine on [ other ] parts of the system.

So you can now use it for when you send messages and when you send reminders and so on to get inspiration and get help with the contents. And I know that it might be a threshold for some of you to start using AI Assist because you might think can it be -- how good can it be? If you need a clause, if you need a contract in template, if you need a message, how good can it be? Can it be better than yourself running something? And I can promise you, you will be blown away. You will be blown away. It is dynamite.

And customers that start to use it is just so amazed by that feature. So give it a try, play with it and you're going to be -- that's going to change the way you work with contracts.

We launched section rules also in the second quarter, which enable users to create dynamic contract templates, which can hide/unhide content based on rules set by the user. So this means that a contract template can contain multiple set of content, but that the user only see content that is relevant to them, very powerful feature as well.

Dynamics, another important integration for us, especially in the enterprise segment. We launched 2-way sync even there in the second quarter and also dynamic mapping. And we launched a lot of features on security, which is, of course, a key priority for a company working with contracts. After the quarter and in July, we launched EID signing in several countries, the Netherlands, Belgium and the Baltic states, and we are going to launch in a lot more countries in the weeks and months to come.

So to some numbers. We did set an all-time high record in the second quarter, 11.3 million in new ARR. And considering the climate at the moment, we are, of course, very proud that we can set new records still in sales, which is a strong evidence of solid underlying fundamentals within our company and our business model. We also start to see that deals are coming in from our new offices.

We opened an office in the U.K. in May last year and in France and the Netherlands in September and more and more deals are coming in from these new companies. If you can see from the graph to the right, we have a quite clear seasonal pattern. Third quarter is always the weakest quarter. And then the second and the fourth quarter is the strongest quarters.

And we increased our ARR with SEK 1 million in July, up from SEK 800,000 last year. The pipe for the quarter is strong, and we expect third quarter to be a good quarter. But a lot of the business, of course, takes place especially in the last month of the quarter.

Total ARR end of second quarter, SEK 111 million today or end of July, SEK 112 million. The growth curve has been declining for the last quarters, and we are at 48% at the moment. And if you go back to '21, one year earlier was the beginning of the pandemic. So maybe the growth rate was a little bit higher than expected in a normal market in 2021. And today, of course, with the challenges that we see in the market, the growth rate is a little bit lower than it would have been in a normal market.

Another factor to think of is that we have invested a lot of time, money and energy in our new offices and several key players in Oneflow, senior staff, top sales performers, managers have been involved in the onboarding of our new teams. So there might as well be a small effect on that because, of course, it takes time from what they do normally. They are a little teams here in Sweden or in Norway or Finland, the focus that they have put on our new offices. So we don't expect this trend to continue. It's going to be a little bumpy.

And we have a target of reaching SEK 600 million in ARR by 2027. And to reach that, it means that we need at least 46% annual growth, and we are still as confident as we can be that we will be able to reach that mark.

Retention rates. Gross retention does, of course, include churn and downgrade, but don't include expansion sales. and net retention includes everything, downgrade, churn and expansion sales. So as you said, the macro sentiment has been a little bit challenging, especially from Q4 last year. Sales cycles getting longer, and we have a higher churn than we had before. And also, we had -- we have lower expansion sales than we had before.

So -- but still, we closed second quarter with a gross retention of 91% and net retention of 112%. And when it comes to the churn, it is mainly smaller companies with a weak balance sheet that churn and it is mainly larger companies laying off seats downgrading, that impact our churn at the moment.

What is interesting is that on a monthly basis, our churn has improved every month during the last 6 months. So if you include some decimals in the gross retention, it has actually improved every month since Feb this year, including July. So the curve, we believe that we have wiped out the weak seats and that the worse is over.

And we believe that the gross retention has seen the bottom and has now started to slowly pick up again, and we'll go back at some point to normal. Expansion will take a little bit longer, we think, to stabilize. So it will be under pressure for some time, most likely, we did, by the way, see a small improvement in July. So net potential end of July was 113.4% around that. But still, we believe it's going to take some more time for the net retention to pick up to the levels where it should be in a normal market, but that's going to happen. So we believe that both net and gross will go back to normal and gross has already started.

The average price has increased 8% over the last 12 months. And end of second quarter SEK 3,200 per user was the average price and it has also increased now for the last 4 quarters in a row. We did a quite huge price increase end of Q3 last year. And this graph here shows the average price of the total customer base all time. And it will take some time before the effect of the price change starts to kick in, in the curve as well, of course, because it's all customers. But the feedback we get from the market on our new price plan is good still.

We see it as a success, and we're going to keep that price list for at least some time and for sure, not take it down. It's not an issue about price when we negotiate and compete with the companies out there. So we believe that we have a balanced and reasonable price at the moment. And we expect the ARR per user to continue and increase going forward.

End of Q2, we had 35 -- roughly 1,000 seats, paying seats in the application, which was a growth of 37% from 1 year ago.

[Natalie Jelveh, executive]

Our net sales for the second quarter ended up at SEK 23.9 billion, which is representing a growth of 45% compared to the same period last year. 96% of the net sales consist of software-related recurring revenue and the remaining 4% consists of professional services. We continue to have a strong ARR-net sales ratio ended up at the level of 132% by the end of Q2.

Looking at the shares outside of Sweden, we continue to grow, ending up at 30% by the end of the quarter compared to 24% for the same period last year. Our expectations is that as we become more and more established in our markets, we will see growth in our sales outside of Sweden.

Currently, we have paying users in 35 countries. We continue to have a high gross margin ending up at 94% by the end of Q2. Our largest cost of service sold expenses is related to sales commission to our partners, which approximately is 3.6% of this are fixed. And this is a cost that has continued to grow in percentages in connection to us establishing several new strategic collaborations. And our expectation is that gross margin will continue to be high going forward.

Our EBITDA ended up at minus SEK 18.5 million in the end of the quarter, which is corresponding to an EBITDA margin of minus 77%. As our goal is to take the position as the global thought leader when it comes to digital contract management, we have made heavy investments in our product developments. But also we have entered new markets, 3 new offices were opened in the end of last year, which, of course, initially is connected with higher cost. However, as we become more and more established in those markets, we will see a higher growth when it comes to sales.

Our biggest cost increase is mainly connected to our employee costs. And we ended up at an average of number of employees by the end of the quarter at 164 comparing to 112, an average of 112 for the same period last year. And the increase in employees is, of course, both connected to our investment in our product development, but also, of course, our expansions in new markets.

If you look at Q2 this year comparing to the Q1, we do see a slight negative increase in our EBITDA. However, we had a large portion of the budget cost occurring in Q2 related to us doing investment in successful marketing events. We do foresee that we will have a better EBITDA for the upcoming quarter. And of course, our plan is always to turn around towards profitability.

Looking at EBIT, we ended up at minus SEK 25.4 million, which is corresponding to an EBIT margin of minus 106%. Except for the increase in cost that I just mentioned, we also have an increase in depreciation, and this is connected to us increasing our investments in development in capitalized development work. But as mentioned, our plan is to turn around towards profitability.

The LTV:CAC ratio ended up in the end of the quarter at 6.6. This basically means that for every Kroner we invest, we approximately get or almost get SEK 7 back. Looking at -- comparing Q2 to Q1, we do see a small increase when it comes to LTV. However, we also have an increase when it comes to CAC. But that is purely mostly connected to our expansions to markets. And this down trend that we see in the LTV:CAC is something that is expected and is something that is according plan, and as mentioned, is connected to our expansion to markets.

However, we do see more and more sales coming in from our new markets and become more established, and we foresee more sales and bigger deals coming in, in the future.

[Anders Hamnes, executive]

So the recession that we are in is, of course, painful for most companies, but to us, it's also an opportunity. And we strongly believe that we will come stronger out of the recession that we are in. So in times where companies put greater focus on cost reductions, Oneflow is strongly positioned to offer the critical need-to-have product sold at a low cost and with a high return on investment.

We have a highly competent team and a very, very strong culture in the company. We have a scalable product that's top notch in the market space, delivering to the most demanding customers. And we have at the moment or at the end of the quarter -- last quarter, SEK 156 million in the bank. We will invest our money wisely, and our losses will come down significantly going forward. You're going to see a clear trend break in Q3 this year.

So all this puts Oneflow on a rock-solid position. And the market that we are in is huge. Every company, every department in every country have contracts, it's huge. And it's still in it's infancy. Most companies still work with Word and PDF contracts, which is, in our world, a dinosaur way of working. This is going to change.

We also stand by our targets or financial goals, ARR of SEK 600 million by the end of 2027 and an EBIT margin of 20% for the same year. And with that, we are at the Q&A session.

[Anders Hamnes, executive]

Okay. Let's see. We have 1 question here. Can you comment on July ARR and the year-over-year growth. What does it imply?

So we had, even in July, we had a year-over-year growth of 48-point something percent. Also this year, we more or less closed down our sales operations in the Nordics. So it was a lot of contribution here from our new offices outside the Nordics, in countries like Netherlands and U.K. and France. You have different indication pattern, so to say. So we closed down harder this year than we did last year because we want the salespeople to be gone at the same time and when the customers, of course, take vacation.

So SEK 1 million in net new in July, but I mean it's by magnitude there. Mostly an interesting month of the year from a sales perspective.

How come the working capital release was lower than in Q2 last year? Will that catch up in Q3?

[Natalie Jelveh, executive]

Yes, it will. So the reason for having a lower working capital during this quarter is 2 things. First of all, as you all know, we had a really strong sale and a strong quarter. However, many of those sales were close in the end of the quarter, which basically means the starting period of those licenses is mostly after the summer, where customer requests that the starting periods will be after the summer, due to the fact that people are on vacation as you mentioned. And therefore, those deals will not be invoiced and the working capital -- would not be shown in the working capital.

So it's a combination of when we close deals, but also when the actual license period starts. And therefore, I can say we do see -- foresee that we will have a stronger working capital in Q3.

[Anders Hamnes, executive]

Between Q1 and Q2, the number of employees decreased with 4 full-time employees. Is this the level you plan to stay at for a while? Or will you start to get net on recruited again already in Q3?

So we do have a hiring pipe. It is not as big as it used to be. We -- we are at from this quarter going to show a significant change in the kind of EBITDA margin development. So it is a priority for us now to clearly show to the market that we are steering this vessel into an ocean with a warmer water. And we are very confident that we are going to achieve that and that you will also maybe believe us in a quarter or two because it's happening now.

So we can't hire in the same pace as we have done before, far from, but still, there are roles that we need, but it's going to be slow hiring pace, so to say.

Maybe this question touch the same topic here. In the CEO letter you write that Oneflow has stabilized EBIT losses and now steering towards profitability. What is your level of confidence in this? And are you expecting EBIT already in Q3 and Q4 to have improved over that in Q2?

Yes. So the answer to that is definitely yes. That -- what you have seen now is kind of the bottom of the ocean. Now it's going to go up again. Yes. Will you add something from your end, Natalie, or ?

[Natalie Jelveh, executive]

No, I would agree with your comment there. I mean we also strive towards profitability. That is something that we, I mean, look into and work towards continuously. So yes, I would agree with you.

[Anders Hamnes, executive]

How will you manage the cash flow and cash position in the journey towards profitability? What are your plans for OpEx expansion from this level?

[Natalie Jelveh, executive]

So we do -- I mean, we do review our cost size always. That is something that we have very detailed insight on and we are working towards, I mean we are working both more efficiently and working towards to lower our costs, of course. So to manage cash flow, I think that's the combination of increasing of course, our sales and using our growth in ARR, but also, of course, looking at the actual cost and the actual OpEx expansions we have. So we need both parties to work together and that is something that is on top of our minds every day, every moment.

[Anders Hamnes, executive]

I think that's the last -- you have more questions on your end?

[Natalie Jelveh, executive]

No, I think you -- we managed to go through them all.

[Anders Hamnes, executive]

Okay. So thank you for joining us today. It's been a pleasure to have you here and wish you all fantastic weekend in a few hours. So with that, to say, good bye from our end.

[Natalie Jelveh, executive]

Thank you.

[Anders Hamnes, executive]

Cheers. Happy Friday.