OneStream IPO: Fast Growth Amid Path To Operating Breakeven (Pending:OS)

OneStream Is Producing Strong Growth

OneStream, Inc. (OS) has filed to raise $100 million in an IPO of its Class A common stock, according to an SEC S-1 registration statement.

OS provides a suite of financial software applications for corporate entities worldwide.

OneStream, Inc. is growing quickly, and operating losses are dropping on a path to breakeven.

I’ll provide an update when we learn more about the IPO.

What Does OneStream Do?

Birmingham, Michigan-based OneStream, Inc. was founded to develop a wide range of financial software and related partner ecosystems for all types of enterprise financial planning, tracking, reconciling, forecasting and reporting functionalities.

Management is headed by co-founder and CEO Thomas Shea, who has been with the firm since its inception in 2012 and was previously co-founder of UpStream Software until its acquisition by Hyperion. Before that, Mr. Shea held a senior position at Meritor.

The company’s primary offerings include the following:

• Core Finance Solutions

• OneStream Solution Exchange

• Partner Developed Applications

• Professional Services.

As of March 31, 2024, OneStream has booked fair market value investment of $282.4 million from investors, including private equity firm KKR.

The firm sells its software and services through its ‘land and expand’ direct sales and marketing efforts, as well as through partner referrals and an expanded application ecosystem.

OneStream had 1,423 clients as of March 31, 2024, across a wide range of industries. Management said that no single customer accounted for over 10% of revenue for the calendar years of 2022 and 2023.

Sales and Marketing expenses as a percentage of total revenue have fallen as revenues have increased, as the figures below indicate:

Click to enlarge

(Source – SEC.)

The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing expense, rose to 0.7x in the most recent reporting period, as shown in the table below:

Click to enlarge

(Source – SEC.)

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and operating margin equal or exceed 40%, the firm is on an attractive growth rate/operating margin trajectory.

OS’s most recent calculation was 35% as of March 31, 2024, so the firm has performed pretty well in this respect, per the table below:

Click to enlarge

(Source – SEC.)

The firm’s dollar-based net revenue retention rate as of March 31, 2024, was 118%, a good result.

What Is OneStream’s Market?

According to a 2023 market research report by Mordor Intelligence, the global market for enterprise performance management software is an estimated $7.5 billion in 2024 and is forecasted to reach nearly $11.9 billion by 2029.

This represents a forecast CAGR of 9.5% from 2024 to 2029, a reasonably strong rate of growth.

The main drivers for this expected growth are an increasing need for improved financial analytics and reporting capabilities that better enable data-driven decision-making processes.

Vendors are also integrating robotic process automation [RPA] tools to create efficiencies and “enable employees to focus more on core operations.”

The market is seeing the introduction of infrastructure performance management capabilities from forward-looking solution providers.

Also, legacy, on-premises software will likely continue to transition to the cloud, where it is possible from a regulatory standpoint to take advantage of more flexible subscription model pricing and improved capabilities.

Emerging markets will also present growing opportunities, especially in the Asia-Pacific and Latin American regions.

Major competitive or other industry participants include the following:

• Oracle (ORCL)

• SAP (SAP)

• Infor

• Anaplan

• Blackline (BL)

• Wolters Kluwer (OTCPK:WOLTF)

• Workday (WDAY)

• Xledger

• Host Analytics

• IBM (IBM)

• Unit4.

Because OneStream offers a wide variety of corporate performance management software, it doesn’t have a close, direct competitor offering the same set of functionalities.

Rather, different competitors offer different combinations of capabilities, making direct comparisons challenging.

Some competitors also offer legacy solutions, which are highly entrenched products, while other competitors provide ‘point solutions’ that are focused on one or a few functions and may perform better in that regard.

By region, North America is expected to produce the highest growth rate through 2031, with European demand forecasted to be the second largest.

OneStream’s Recent Financial Results

The company’s recent financial results can be summarized as follows:

• High growth in top-line revenue

• Increasing gross profit and variable gross margin

• Reduced operating losses

• Increasing cash flow from operations.

Below are relevant financial results derived from the firm’s registration statement:

Click to enlarge

(Source – SEC.)

As of March 31, 2024, OneStream had $141 million in cash and $265 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2024, was $45.9 million.

OneStream’s IPO Information

OneStream intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, although the final figure may be higher.

No potentially new or existing shareholders have indicated an interest in purchasing shares of the IPO, although that could change in subsequent filings.

Immediately after the IPO, OneStream will remain a “controlled company” by KKR. It will also be an “emerging growth company,” which means management can choose to disclose substantially less information to shareholders.

Management says it will use the net proceeds from the IPO as follows:

We in turn intend to cause OneStream Software LLC to use the net proceeds paid to it for the newly issued LLC Units to (1) pay the unpaid expenses of this offering and (2) for general corporate purposes, including working capital, operating expenses and capital expenditures. Additionally, we may cause OneStream Software LLC to use a portion of the net proceeds to acquire or invest in businesses, products, services or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.

(Source – SEC.)

Leadership’s presentation of the company roadshow is not yet available.

Regarding outstanding legal proceedings, management said the company is not presently the target of any legal proceedings that would have a material adverse effect on its business or financial condition.

The listed bookrunners of the IPO are Morgan Stanley, J.P. Morgan, KKR, BofA Securities, Citigroup, Guggenheim Securities, Raymond James, Scotiabank, Truist Securities, BTIG, Needham & Company, Piper Sandler, TD Cowen, Wolfe | Nomura Alliance, AmeriVet Securities, Blaylock Van, Cabrera Capital Markets, Drexel Hamilton and Loop Capital Markets.

OneStream Is Growing Quickly

OS is seeking U.S. public capital market funding for its general growth plans and working capital requirements.

The firm’s financials have generated strong and accelerating growth in topline revenue, higher gross profit, variable gross margin, reduced operating losses and growing cash flow from operations.

Free cash flow for the twelve months ended March 31, 2024, was $45.9 million, an impressive result.

Sales and Marketing expenses as a percentage of total revenue have dropped as revenue has grown; its Sales and Marketing efficiency multiple was 0.7x in the most recent reporting period.

The firm currently plans to pay no dividends on its classes of stock able to receive economic benefits. Its ability to pay future cash dividends is limited by the terms of its existing credit facility.

OS’s recent capital spending history shows it has recently spent modestly on CapEx as a percentage of its operating cash flow.

The company’s Rule of 40 results were 35%, with strong revenue growth offset by a slight negative operating margin.

Moreover, OneStream’s net dollar revenue retention rate as of March 31, 2024, was 118%, a solid result.

The net dollar retention rate calculates the growth in revenue over time from the same cohort of customers. So, a 118% result indicates the firm is executing well on its “land and expand” approach and is growing revenue efficiently with good product/market fit.

The market opportunity for enterprise financial management software is large and expected to grow at a reasonably strong rate of growth in the coming years, so the company enjoys positive growth dynamics and appears to be growing at a much faster rate than the industry, a positive signal.

Risks to the company’s outlook as a public company include intense competition and the need to upgrade systems through increased R&D spending, especially in the fast-moving area of integrating AI and machine learning capabilities.

Additionally, public SaaS company valuations have generally suffered since the end of the pandemic as many of them have produced heavy operating losses, which have been punished in a higher cost-of-capital environment.

What is different about the IPO is private equity firm KKR’s lack of paying itself a substantial dividend by adding a lot of debt to the company’s balance sheet.

This typical private equity “financial engineering” appears to be absent in OneStream’s case, making the IPO more like a traditional technology venture capital type of transaction, which I generally prefer.

So, OneStream’s path to operating breakeven may work in its favor in producing stronger demand for its IPO at a potentially higher valuation, so the IPO may see substantial institutional investor interest.

I’ll provide a final opinion when we learn management’s intentions about pricing and valuation.

Expected IPO Pricing Date: To be announced.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.