Shares of OneStream (NASDAQ:OS) have seen a very successful public debut last week as investors like the combination of a SaaS software play which posts >30% sales growth, displays operating leverage, and is somewhat of an AI play.
While these observations are very much true, I fail to see appeal at a double-digit sales multiple, while operating leverage has been lagging, and it always remains a question of how stock-based compensation will evolve post the public offering (as these expenses tend to be higher post the public offering).
Amidst all this, I am taking a cautious approach to OneStream here, looking for more clues about sales growth and operating leverage post the offering, in combination with a stagnant or falling share price, before reconsidering this neutral stance.
The Operating System For Finance
OneStream has a vision in which it plays the role as operating system for modern finance. The company aims to create a digital finance cloud with its OneStream Solutions Exchange. This exchange includes key financial functions such as transaction matching, tax provisioning, planning, budgeting, cash flow forecasting, ESG reporting, among quite some other tasks and functions.
By automating many of these tasks, the CFO is empowered to become the critical driver of business strategy and execution. With the role of the CFO getting more important, complex and broader with the passage of time, finance departments have struggled as they traditionally tended to operate within silos.
Recognizing this opportunity, OneStream has been really developed for the CFO with three key areas of focus in mind: financial close and consolidation, financial and operational planning & analysis as well as financial and operating reporting.
As of the first quarter of this year, the company had over 1,400 customers, being attracted to the value provided by the platform, which furthermore is connected to some 90 applications to bolster connectivity between different data platforms.
Valuation & IPO Thoughts
OneStream aimed to sell 24.5 million shares in a preliminary offering range of $17-$19 per share, as solid demand made that final pricing was set at $20 per share. About 18.1 million shares were offered by the company, which hereby raised $362 million in gross proceeds, that is excluding the green shoe over-allotment option, with the remainder of the shares sold by selling shareholders.
With a total of 230 million shares outstanding post the offering, across three classes of shares, the company commanded a $4.6 billion equity valuation at the offer price. This valuation includes a pro forma net cash position of just over $400 million, for a $4.2 billion operating asset valuation.
The company has seen solid growth as revenues rose by 34% to $375 million in 2023. About 80% of these sales are generated from subscription revenues, complemented by license and professional services. The company did see solid operating leverage, with operating losses cut in half to $30 million.
Note that momentum has been very strong, with first quarter sales up 39% to $110 million, for a $440 million run rate. Moreover, first quarter operating losses narrowed to $5 million and change.
The preliminary second quarter results were some kind of mixed bag. Revenues are seen up some 35% to a midpoint of $117 million, for a near $470 million run rate. Contrary to the huge margin improvements in the first quarter, operating losses are seen up (sequentially) at a midpoint of $12 million, marking relatively little operating leverage from a $16 million and change loss this period last year.
The prevailing roughly 9 times sales multiple at the offer price increased a bit as shares quickly rose to current levels around $28 per share. At these levels, shares are valued at a $6.5 billion valuation, for a $6.1 billion enterprise valuation, equivalent to about 13 times annualised sales. This seems reasonable given the growth, but losses are real, as the question is of course always how stock-based compensation expenses will evolve post the offering.
Concluding Thoughts
For me, shares of OneStream are a relatively easy avoid. The software platform shows decent growth, with the business growing by >30% per annum, while operating losses are narrowing.
A strong balance sheet allows for the financing of these modest losses, as growth and operating leverage is what really determines the outcome of this investment story here.
Risks in this offering are plentiful outside the valuation discussion, including a dual class share structure, competition from a wide range of ERP/software companies, risks of reduced effectiveness of these software solutions, as well as reliance on third-party data centers, among others.
For me, I am not convinced that OneStream offers great services and that comes as these solutions are pretty pricey. With a revenue rate of around $470 million here and working with a current customer count of 1,400 clients, the average client generates some $300k in revenues. This is a substantial amount, as I wonder how these solutions are priced across different company size cohorts. Looking at price plans on the website, I see also much cheaper entry points for smaller businesses.
Given all this, I am perfectly happy to take a wait-and-see approach as the premium multiple seems to be driven by the AI craze, yet this is not really an AI play in my view.
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