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Oneflow AB
STO:ONEF

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Oneflow AB
STO:ONEF
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Price: 29.8 SEK -2.61% Market Closed
Market Cap: 844.4m SEK
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Earnings Call Analysis

Summary
Q3-2023

Robust Growth Amidst Longer Sales Cycles

In a challenging environment with extended sales cycles, the company concluded the quarter with a 44% year-over-year growth in ARR, reaching SEK 116.2 million. October's ARR increased further to SEK 120.5 million with a strong sales performance, despite a slight year-over-year dip in net new ARR, which was SEK 5.4 million for the quarter, marginally lower than the previous year's SEK 5.8 million—a difference attributed to currency fluctuations. With a focus on ARR, long-term client relationships, and expanding their product suite with integrations and e-signature offerings like Freja eID now covering more of Europe, the future looks promising.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
A
Anders Hamnes
executive

My name is Anders Hamnes. I am the CEO and founder of the company. And next to me, we have Natalie Jelveh, our CFO. Please use the Q&A button in Zoom and not the chat, and we'll be back to your questions in the end of this meeting.

First, as always, some highlights of the quarter. We closed an ARR of SEK 116.2 million, a growth of 44%. It is still somewhat challenging, with sales cycles a little bit longer than it used to be, but we did, I would say, quite well. 44% growth is strong in this market. And it's a very short quarter, third quarter. Actually, I would say it's only 6 weeks with normal business, and sometimes it is a coincidence, which kind of -- where the deal is going to close, it's going to be in September, October. So we did a very, very strong October.

As most of you know, we also report on a monthly basis our ARR, and the ARR end of October was SEK 120.5 million -- sorry the ARR to sales ratio 127%. We are an ARR first company, and we have very little one-off and nonrecurring revenue. The net and gross retention was 111% and 90% end of the quarter, and we had slightly above 36,000 paying users end of Q3, up 34% year-over-year.

First, for those of you that are new to Oneflow, we always just spend two slides to give you some idea on what we are doing. So we have a platform for handling contracts, all kind of contracts, HR, procurement, sales and so on. And we do the whole process from start to finish.

You can build powerful templates inside our web editor. You can collaborate in real time with your counterparties, make changes, audit trail, listing who did, which change when and what, you can, of course, sign. And when the contract has been signed, you can do -- you can manage your contracts inside Oneflow. You can be notified on key events and you can build powerful reports and work with the data inside your contract. So the e-signing part is a very small part of what we do. Where we put our focus, our energy is in the pre-sign and post-sign stages.

We also have some AI capabilities and more to come in that space, super interesting. And since we've worked with HTML contracts, the data is alive. So you can do powerful stuff with integrations, which is not possible if you have PDF-based contracts, because PDF is a picture, picture of paper, and the data inside of PDF is dead, but with Oneflow, the data is alive. So you can do very much with the contracts when you commit to other systems.

We have three sales channels, direct sales, high touch is both outbound and inbound. Here, we focus mainly on bigger accounts. Partnerships is growing, medium touch, we have different plans for different kind of partners. Example of partners can be HubSpot and Upsales, Teamtailor, a local CRM vendor or a consulting company working dedicated with one of the big, big CRM companies, examples of typical partners.

And then the third sales channel is self-service, low touch, no touch, and that comes in two flavors. Marketing generates traffic to our homepage and some of that traffic sign up for a premium. And again, some of those again, will go for a paid plan. And the second flavor is when the product drives this traffic. So a Oneflow user sending a contract to a counterparty, that later on decides to convert to a premium, and then again, to a paid plan.

We also had a very interesting quarter when it comes to future releases. I will walk through some of the main releases that we did during the quarter. Even though we are in favor of interactive contracts, we do support PDF contracts. And some customers that are not ready to take a step into like full-blown HTML contract, still work with PDF contracts in Oneflow. And we did a huge update to that kind of module in Oneflow, so you can do more stuff with the PDF. You can highlight and search stuff inside PDF contracts.

Inline comments has been a very important feature for us. And we have been working on it for a long time. It's a huge, huge feature. And most customers wanted a feature. So now it's possible to make inline comments on the content in the contract, then you can filter on what is still open, what has been resolved and so on.

HiBob is quite a big international player in the HR space. It's a fast-growing company, and we launched an integration to HiBob in third quarter. So we can push data back and forth between Oneflow and HiBob.

Microsoft 365 integration was launched as well in the quarter. So now it's possible to actually create, send, and track contracts directly from Word and PowerPoint, for those customers that still want to work with the Office programs, for some time before they do the kind of conversion into full-blown HTML contracts, which is the future.

We did several improvements to our HubSpot integration and actually, we have heard from several of the consulting companies, international big players, even the biggest U.S.-based HubSpot consulting company, and has put themselves that Oneflow has the best e-sign/e-contract integration in the market. We have the best e-contract integration in the market, according to several big, big players in the space. We already knew that, of course, but now we have it from a lot of different shocks in the space as well.

We had some improvements towards SuperOffice integration. We also launch e-signing or more advanced e-signing in several countries like Netherlands, Belgium, Estonia, Lithuania and more countries as well. And we also launched biometric signing in Sweden. More to come. Yes, and some smaller stuff as well, we did during the quarter, like Italian language and so on.

After the end of third quarter. In October, we also launched Freja eID. So now it's possible to sign with Freja eID in the European Union, U.K. and Ukraine.

Net new ARR closed in at SEK 5.4 million for the quarter. This was a slight decline from SEK 5.8 million third quarter last year, because of currency fluctuations. So if the currency had been the same over the last 12 months, it would actually have been a slight decrease -- increase, not a decrease but increase.

In October, we had a gross new ARR of SEK 5.6 million. And this was actually slightly behind over all-time high gross new ARR of SEK 5.7 million that we made in June this year.

So some of the deals that we expected to close in the third quarter came in, in October instead. Sales cycles, as I said, is a little bit longer these days than it used to be. So we had -- we nudged the all-time high record in October this year, which is also very impressive, because the first month in the quarter, is usually the weakest, and then it gets better and better during the quarter and over all-time high, which we said in June was in the third quarter -- third month of, of course, in the second quarter.

So we did -- it looks very promising for Q4. Overall, we have a very strong pipe both in new biz and even in expansion sales. So we said that we are actually very satisfied with how it's performing at the moment, considering that it is a little bit tougher out there today than it used to be. And this climate has been like it is now for, I would say, and around a year, 12 months. We saw the shift.

If we zoom out and look at the total, we have an ARR of SEK 116.2 million end of the quarter, 44% growth, SEK 120.5 million end of October. As we've said before, if we look at the growth we had in 2021, it was also a little bit higher than maybe kind of normal because 1 year earlier, you had the start of the pandemic, which -- and then it's -- the growth was a little bit slower again. So that was why it picked up in 2021 to like 75%, 80% growth.

And -- also we have -- we opened three offices last year in London, Amsterdam and Paris, and that has taken a lot of energy from our senior staff and management during late last year. So that has, of course, also impacted somewhat the growth overall, because we have used our kind of top performers, top sales people, senior staff to train and work on our new teammates in Europe.

But still, for the 44% growth end of Q3 in this environment is very, very strong. And in October, we had a year-over-year growth of 45%. So actually, it ticked up again a little bit.

Gross and net retention, gross retention includes churn and downgrade but not expansion and net retention includes churn downgrade and expansion. So as we've said, the sales cycles are longer these days than they used to be, and shown a little bit higher and expansion a little bit lower.

We have said before in these meetings that the main reason for the churn has been smaller companies with a weak balance sheet journey, and larger companies laying off people, employees that downgrade. This is still the case, the same pattern. And also competition is constant. That's not the reason that the rates -- these rates are declining. The reason for the decline has to do with the recession.

On a monthly basis, the churn has been relatively stable during the year. And we expect both the net and gross retention to pick up again, as soon as the underlying fundamentals improve.

I would like to remind that in a normal market, historically, if you look back 1 year or 2, and more, we have been lying quite stable with a gross margin in the range, 94, 95 for a very long time, and also the net retention around 115 to 120. So this is where we expect to be when we get back to a more normalized markets. And we have a very strong expansion pipe for the fourth quarter.

ARR per user has increased now for, yes, 5 quarters. It's up 8% year-over-year. We did a price increase third quarter last year, and so we work on a lot to renegotiation and so on with all customers, and it works well. It has been received well, I would say, the new price plan. So we don't have any plans to make changes to that one to that in the near future. And we expect our ARR per user to continue and increase going forward.

36,100 paying users end of the quarter, up 34% year-over-year.

N
Natalie Jelveh
executive

Moving on to net sales. We ended up at SEK 26 million by the end of Q3, and this is representing a growth of 44% comparing to the same period last year. And the majority of our net sales is maintaining our software-related recurring revenue, which stands for 97% of the net sales, and the remaining 3% is connected to our professional services.

If you look at the net sales outside of Sweden, we ended up in Q3 at 29%. That's a growth of 4% comparing to the same period last year. And what we see is that as we become more and more established in other markets, the increase of the sales outside of Sweden is increasing, and our expectation is that it will continue to increase going forward.

High gross margin. We continue to have a high gross margin ending up in Q3 at 94%. Looking at the gross margin, our largest cost of service expenses is connected to commission to our partners. And this is a percentage that is increasing, and is increasing due to the fact that we are establishing new strategic partnerships. Gross margin, our expectation is that, that will continue to be relatively high going forward.

EBITDA ended up at minus SEK 15.2 million in the end of Q3, and this is corresponding to an EBITDA margin of minus 60%. If you look at the increase comparing to the same period last year, the increase in operating expenses is mainly explained by us establishing three new offices by the end of last year. But also, of course, we continues to invest in our product development.

And if you look at the increased cost, that is mainly related to an increase in employee cost. And if you look at the average number of employees that we had in the end of Q3, we had an average of 161 employees and comparing that to the average of 130 for the same period last year. And both these investments, investments in new markets, and investments in our product development, that is in line with the company's plan to go into new markets, but also have the best, best product out there.

One thing I want to mention regarding Q3 is that we -- during Q3, we had a onetime expense that is related to a significant investment that we did in our branding that ended up at approximately SEK 2 million that hit our numbers in Q3.

If you look at EBIT, we ended up at minus SEK 22.7 million in Q3, which is corresponding to an EBITDA margin of minus 89, and besides the increase of the costs I mentioned, both increase in new markets and increase in the product development, our depreciation have also increased, and this is connected to our increased investments in capitalized development work.

Heading towards profitability that is something that we're working towards always and that's something that we are focused on, and given the investments that we're undertaking, our primary objective right now is to enhance profitability of the company. We closely monitor our expenses and we continue to strive towards being more operational efficiency and productivity. That is something that we always focused on.

We actually managed to hit our recruitment goals, which means that we do not see that headcounts will increase in the near future. And always, of course, focus on improving the way we work, improving efficiency, improving productivity, enhancing the product. And of course, always aiming on keeping the strong sales growth.

If you look at our current cost base, we feel it's on a comfortable level, considering where we stand in our cash reserve, but also, of course, considering our expectations of sales growth. And one thing I want to mention connected to Q3 is if you look at what we had in -- what we had at cash flow from current operations, we ended up at minus 19.5.

However, we did have a onetime cost or expense related to our repayments that for an amount that previously have already been preserved for a short-term collateral and that repayment was on SEK 3.6 million, and that affected our cash flow during Q3.

I mean, as I mention previously also, we had this investment in our branding, and approximately 1.5 million of those 2 million were paid during Q3. So both those two onetime investment had a big effect on our numbers cash flow-wise looking at Q3. And if we take that away from the equation, instead of ending up at minus 19.5, we will end up somewhere between 14 and 14.5. So that's something I just want to highlight for the quarter.

A
Anders Hamnes
executive

So just to mention also about this short-term [indiscernible]. This was something that happened in the beginning of the pandemic, when [indiscernible] promised this package to all Swedish companies, and we don't get like many other companies did, and then [indiscernible] regret, I would say, and they have later on decided to -- that they wanted the money back. This was a very, very wrong decision. It's crazy to think that we did so, but that was why we had to repay this SEK 23.7 million. So this was a wrong decision by [indiscernible], but that's how it is.

So over the last, I would say, 5 to 10 years, the number of SaaS companies have exploded. There are companies for kind of [ ever thinking ] you would like. And most of these companies are suffering these days, sales are dropping, net and gross retention are coming down. But we think that our e-contract space is more resilient, because contracts has always been there and always will.

Even before CRM, we use contracts. And it is the most fundamental to business. It's a backbone in what we do. When you make hires, you buy, you sell and so on. It's all about contracts. Behind every invoice, there is a contract. And making agreements and payments will never go away and it's there to stay.

So the digital contract market is huge, and it is still in its infancy. And we are also moving away from PDF and Word-based contracts, because they have a lot of limitations -- into more interactive and web-based HTML contracts. This is the future, and this is what we do at Oneflow. It takes time, but this is the future of contracts with the data becoming more alive.

So Oneflow has a very strong position in this space. We have a need to have products sold at the low cost with a high ROI. This represents even in tough times an opportunity, when companies have to put greater focus on reducing costs.

We have a very competent team. We have a very good culture at Oneflow. This is maybe the most important, I would say, component in making a successful company that you have a very high -- very good team and a good culture. We have a product that is used by the most demanding customers, the biggest companies with the toughest kind of requirements using Oneflow. We can deliver to any company.

And we still have a strong position financially. We have SEK 123 million in the bank end of the quarter, and our losses will come down significantly going forward. So this puts us on still a solid position.

Even though we have decided to make some small adjustments, sales has been somewhat lower since the recession started than we were planning for. So we take down our ARR forecasts and also because we take down the forecast, we have to adjust our hiring plans accordingly, but we do not want to compromise profitability. That's our #1, #2 and #3 priority. So we rather want to have to change the ARR goals instead of profitability. So we still stick with the 2027 goal of 20% EBIT margin and a 2027 goal of SEK 500 million in ARR.

Then we are at the Q&A session.

A
Anders Hamnes
executive

You say that headcount will be kept at this level. For how long do you plan that, and at what impact on growth do you think it would have in the near term versus mid and long term?

We plan to keep it at this level, I would say, for some time. Before we -- from now the number 1 clarity is to reduce the EBIT losses and to become profitable and then grow on our own engine. So it will stay at this level for some time now. We're not going to increase next spring and most likely not next fall.

And we have also -- the reason we adjusted our ARR target is of course also because of the headcount reduction that we did in our plans. So we don't think actually that it's going to impact -- I mean we haven't communicated a goal for short term, so it's very hard to see to say that. It depends what you compare against. But we have a very good team in all our countries that deliver promising numbers still in a tough market. So this is going to continue.

if headcount is kept flat for a while, would that also mean that other cost, take cash OpEx items, would remain around the current level? What to expect in terms of cash flow impact from this initiative?

N
Natalie Jelveh
executive

Yes. I mean, yes, we -- our estimation is -- I mean, of course, it would I mean increase or decrease from quarter-to-quarter. I mean, as mentioned, we had this investment in branding. That has an effect on the numbers. And if we do other onetime investments that have an effect. But yes, I would say, it may -- it will consist on the same level if we do not increase headcount. So that is something that we can start using for calculating, and when we will become more a profitable company.

A
Anders Hamnes
executive

Okay. So what measures are you taking to ensure that the cash position can take you to profitability but out for capital injections?

So we -- I'm not planning to raise more cash. That would be insane in this market. We will make this without raising more cash. So if it comes to that point, I mean, are we still growing 44%, 45% in October. We have a fantastic pipe. We have a lot of exciting stuff going on. I don't see this is going to like to continue to be down and not grow as it has over the last 10, 12 months at least. We believe it's going to increase.

But with the pace that we have at the moment, and if we -- and if you also include that we are not going to add more headcount, then you can see that we are going to make it. And if sales is dropping, it's going to be tough and so on, then of course, we have to take some actions, but we are not there now. It doesn't -- I don't think it's going to happen.

How did Q3 progress over the month in terms of demand and close deals?

Well, it is a very short quarter, and most things happened during 6 weeks. And to get a decent quarter, you need to have at least one or two big deals in the mix. And sometimes a deal might fall inside the quarter, sometimes it might drop to the next quarter. So it is very hard to predict, I would say, especially third quarter, even for us, because it is so short. But overall, the quarter was weak in all months. But again, small numbers today, it looks much better.

It seems like our growth stabilized in October at 45% year-over-year. Do you see that as an end to the sliding growth trend or a temporary stabilization?

We haven't -- the only guidance we have given is the SEK 500 million for '27 target. But of course, we need to stabilize this decline, and at some point, and I think we can actually give a guidance on that. We have, of course, our internal guidance, but we haven't gone up to that.

I guess this one is for you Natalie. In the third quarter, net sales of SEK 25.6 million indicates an annual ARR level of SEK 103 million, a level you -- we are at -- a level, you were at this spring. How come most customers sign up so far in advance? Any thoughts on how to get ARR to convert to sales faster?

N
Natalie Jelveh
executive

Yes. I mean how can customers do sign -- I mean, first of all, the main goal is always to sign a customer, of course, to sign that deal, to seal that deal. And then we have situations where a customer has maybe as we know, it's a tough market, financial issues or even other -- using already other competitors and to close that deal, we come to an agreement in this negotiation to having the license period serve a bit later in the year.

And usually, it's -- when we talked about later, the usually the common thing is it perhaps 3 months. And of course, then we have situations where the signing period is now but the start period of the license is in 6 months.

I think this is something, of course, I mean, our strive is to close the deal and have the license period start as soon as possible. But then again, I mean, we want to meet our customers and meet their demands and so on. And it's a negotiation between us and the customers.

So I don't see -- it doesn't worry me, because I know this is a cash flow that will come into the company. So we can actually do your forecast as you see how the cash will look like in the upcoming future based on the license period. So yes, I think I hope that answered the question.

A
Anders Hamnes
executive

Okay. That was the last question.

N
Natalie Jelveh
executive

Great.

A
Anders Hamnes
executive

Thank you.

N
Natalie Jelveh
executive

All right.

A
Anders Hamnes
executive

So I wish you all a great weekend.

N
Natalie Jelveh
executive

Yes. Happy Friday.

A
Anders Hamnes
executive

Happy Friday. Cheers.

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