OneStream Software

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 5/5

OneStream Software is a cloud-based software company that provides a unified corporate performance management (CPM) platform to large organizations, enabling them to streamline their financial and operational planning, reporting, and analytics processes.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

OneStream provides a comprehensive platform that caters to the complex financial and operational needs of large enterprises. Their platform is used by companies to manage their planning, budgeting, reporting, financial consolidation, and other business performance analytics.

Their target customers are typically large enterprises, not mid or small businesses.

  • Revenues:
    • OneStream generates revenue primarily through subscriptions to its software platform and related licenses, support, implementation, and training services.
    • Subscription and license revenue forms the vast majority of their revenues. This is a recurring revenue stream which lends stability to the business.
    • Professional Services are also a significant portion of the revenue, including implementation and training for clients.
    • License revenue and professional services are recognized over time based on the point where the service is completed or the license term ends.
  • Industry Trends:
    • The demand for integrated CPM platforms is increasing as companies look for efficient solutions to manage their complex financial operations and regulatory requirements.
    • The shift towards cloud-based software solutions is accelerating due to their scalability, accessibility, and lower upfront costs.
    • Artificial intelligence (AI) and machine learning (ML) are becoming increasingly important in business planning, budgeting, and reporting.
    • Modernization of legacy systems, data integration, and security concerns are also key industry trends.
  • Margins: Gross profit margins are very high at nearly 80% which are partially offset by high research and development costs, and sales and marketing expenses, resulting in low to negative net income in certain periods as the company is focused on growing its client base.
  • Competitive Landscape:
    • OneStream competes with established players, such as SAP and Oracle, who provide competing CPM software.
    • Many smaller players also operate in the market, specializing in certain areas of CPM.
    • The key competitive differentiators include platform features, capabilities, and ease of use, as well as the total cost of ownership and the quality of customer support.
    • Integration with other systems like ERP and CRM is also an important competitive factor.
  • Differentiation:
    • OneStream differentiates itself by providing a unified platform for various CPM processes, avoiding the need for multiple software applications.
    • Their platform supports complex consolidations and reporting needs and handles enterprise-level deployment with robust security and data governance capabilities.

They provide a single solution that replaces multiple systems for their customers, eliminating the need for their customers to have a complex network of disparate systems. * The platform also offers scalability to manage both very small companies to very large multi-national companies, and provide detailed reporting, and insights through powerful analytic tools.

  • Recent Concerns / Controversies and Problems
    • OneStream has faced a huge surge in expenses, especially research and development expenses and sales and marketing, as a result, it has not been profitable in the last several years.
    • While they have had incredible growth in revenues, the company is unable to translate it to the bottom line.
  • Management’s Stance
    • Management claims they are investing a lot now in R&D for the future which will enhance the platform and hence attract new clients, which should eventually turn into high returns, since they have a product that is a must for large businesses.
    • They expect to see a lot of value in their investments in marketing, which will provide a bigger brand presence for them and make them known more to corporations and potential clients. They claim these expenses are needed for long-term growth and profitability.

Financial Deep Dive

  • Balance Sheet Health:
    • The company has a strong balance sheet, with over $500 million in cash. Debt levels are very low, making it possible for them to weather out difficult times, and also allowing them to take advantages of new opportunities.
    • Debt to equity ratio is very low. Current ratio is above 1.
    • A healthy balance sheet allows them to take risk in pursuing aggressive growth strategies, and also make sure they can continue to operate even if market conditions become very bad.
    • Based on these factors, the balance sheet health rating is 5/5.
  • Income Statement Analysis:
    • OneStream is a fast-growing business with growing recurring revenue which indicates a good moat.
    • The company has incredibly high gross margins which implies the cost of creating the product is low and shows the scalability of the business.
    • The operating loss is reducing every year which shows they have a path toward profitability.
    • One big thing to watch for are sales and marketing expenses and research and development, both are high and can have a significant effect on earnings if the company is not able to sustain the revenue growth.
    • While the company has great topline, the company is not profitable due to increased expenses.
  • Cash Flow Statement
    • Cash from operations is positive and growing which is a good indicator for long-term sustainability.
    • The company is spending a lot of money in acquisitions, investing activities shows large expenses. This needs to be closely monitored.
    • The cash from financing activities is largely affected by debt and equity transactions, and is not tied to company’s core operations, as such is not of significant concern.

Moat Assessment

OneStream’s moat can be evaluated as follows:

  1. Intangible Assets (Brands and Patents): OneStream benefits from its established brand among CPM solutions providers. There are no patents, and no known regulatory licenses that the company benefits from, which will give the business a score of 1/3 for intangible assets.
  2. Switching Costs: The company benefits from high switching costs, as customers must often reinvest a lot of time and effort in new systems which results in stickier clients. While some solutions offer easy migration to and from their competitor’s products, this is not always true, and many clients prefer to stay with systems that have worked for them in the past, hence we rate this category as a 2/3.
  3. Network Effect: No network effect is present in this business, the more users on the system doesn’t create any extra advantages, and there are not more opportunities for growth. This is a 0/3.
  4. Cost Advantages: The business doesn’t have any apparent cost advantage that comes from distribution, production, or a unique resource. Hence this category also gets a 0/3.

Based on the above, the overall moat rating is 3/5 (1 + 2 + 0+ 0 divided by 4 = 0.75, converted to 3 /5).

Risks to Moat and Business Resilience

The following risks could erode OneStream’s moat and hamper its business:

  • Technological disruption: Fast-paced technological advancements in the business-analytics and financial software may render the platform obsolete, or a competitor may come up with a better solution using new technologies such as AI.
  • Intense competition: Increased competition from existing and new entrants in the CPM sector may lead to price pressures and reduced margins.
  • Inadequate revenue growth: High expenses in operations, marketing, sales, and R&D can potentially become unsustainable if the company is unable to generate strong revenue growth, which can affect its long-term profitability.
  • Sales Execution: The company has to rely on their sales and marketing team to capture new opportunities, any underperformance from sales team may lead to reduced or stunted growth.
  • M&A risk: The company has been acquiring new companies lately, if not handled correctly this may lead to reduced profit margins, increased expenses, and a loss of revenue from the combined entity.

Despite these risks, OneStream’s business has a few positive attributes that lend to its resilience:

  • The platform’s recurring subscription revenue model makes it stable in terms of generating a consistent income stream.
  • The integrated nature of its platform makes switching solutions difficult and costly for its customers, creating customer stickiness.
  • A proven history of performance and a good brand name allows OneStream to withstand any challenges.

Understandability Rating

The business is moderately complex because of the various modules present in the CPM platform. However, it is not very difficult to grasp how the platform works and its applications in business. An interested investor with basic finance knowledge can understand it well. As such it gets a 3/5.