Earnings Call Transcript - OS Q4 2024

Operator, Operator

Welcome to the OneStream’s Fourth Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation there will be a question-and-answer session. As a reminder, today’s program is being recorded. And now, I’d like to introduce your host for today’s program. Annie Leschin, Vice President of Investor Relations and Strategic Finance. Please go ahead, ma'am.

Annie Leschin, Vice President of Investor Relations and Strategic Finance

Thank you, Operator. Good afternoon, everyone. Welcome to OneStream's fourth quarter and full year 2024 earnings conference call. Joining me on the call today is our Co-Founder and CEO, Tom Shea; and our CFO, Bill Koefoed. The press release announcing our fourth quarter and full year 2024 results issued earlier today is posted on our Investor Relations website at investor.onestream.com along with an earnings presentation. Now let me remind everyone that some of the statements on today’s call are forward-looking, including statements related to guidance for the first quarter ending March 31, 2025 and year ending December 31, 2025. Forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors. Some of these risks are described in greater detail in the documents we file with the SEC from time to time, including our quarterly report on Form 10-Q for the quarter ended September 30, 2024, which we filed with the SEC on November 7, 2024. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During our call today we will also reference certain non-GAAP financial measures. There are limitations to our non-GAAP measures, and they may not be comparable to similarly titled measures of other companies. The non-GAAP measures referenced on today’s call should not be considered in isolation from or as a substitute for their most directly comparable GAAP measures. Our management believes that our non-GAAP measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses that may not be indicative of our ongoing core operating performance. Reconciliations of our non-GAAP measures to the most directly comparable GAAP measures can be found in this afternoon’s press release and the earnings highlights presentation posted on our Investor Relations website. Before I turn it over to Tom, we just wanted to let you know that we will be attending Morgan Stanley’s Technology, Media & Telecom Conference on March 4, 2025. A live stream and replay of our presentation at the conference will be made available on our Investor Relations website. Now, I’ll turn it over to Tom.

Tom Shea, CEO

Welcome everyone and thank you for joining us today. I’m going to touch on our results, what we’re seeing in the market and provide our outlook for 2025. 2024 was a milestone year that ended with a solid fourth quarter performance with 29% year-over-year revenue growth and strong cash flow. This was a testament to the strength of the OneStream platform and our incredible innovation engine, including our Finance AI portfolio. Reflecting the significant business value we provide to our customers. Our solid finish once again demonstrates resilience in a year that presented new opportunities and challenges. A combination of events, including the U.S. election, the ongoing geopolitical climate and the sudden strength of the U.S. dollar affected our business at year end. First, macro uncertainty around tariffs, regulations, and reporting requirements impacted two of our primary markets, large multinational companies and the public sector. This caused additional deal scrutiny and pushed some deals into the new year, the vast majority of which have closed, including a significant public sector deal. Second, the significant change in foreign exchange rates also impacted some of our financial metrics in the quarter, as Bill will talk about shortly. And third, even with this, we reported solid results and are excited about the momentum of two important areas of focus, the Commercial sector and Finance AI. Overall, despite the near-term headwinds demand for OneStream remains strong and we are optimistic heading into the year and remain confident in our long-term opportunity. Let me give you some highlights from 2024, which was one of the most transformative years in OneStream’s history. We grew total revenue 31% year-over-year driven primarily by strong subscription revenue growth of 41% year-over-year. We were free cash flow positive in 2024, generating $59 million during the year while also achieving non-GAAP operating profitability. We once again reported 98% gross retention this year, reinforcing the value and stickiness of our platform, which is the bedrock of our company. Yet our strong financial results were only part of the story. We introduced 12 new innovations at our U.S. Splash User Conference in May and another three at our European Splash User Conference in September, unlocking additional utility and value for customers. Creating more on-ramps to the OneStream platform and providing more expansion opportunities in the installed base. More recently at sales kickoff in January, we rolled out our solution-based packaging that is aligned to how the market wants to buy, supporting the value the customers derive from our offerings and simplifying initial expansion sales for OneStream and our partner ecosystem. We quadrupled bookings and the number of customers using our Finance AI solution, including Sensible Machine Learning. For the third consecutive year, we were recognized as a leader in Gartner’s Magic Quadrant for Financial Planning Software and a leader in IDC’s Worldwide Office of the CFO Record to Report Vendor Assessment. And just last month, OneStream was named the Leader in Business Planning by ISG, formerly Ventana Research. Illustrating the power of our platform to support more operational processes and needs. Finally, we completed a successful IPO and secondary offering in the second half of the year. All of this speaks to the market trends that are driving the need to modernize Finance. Three trends underpin our business and further reinforce the confidence we have in OneStream’s long-term opportunity. Number one, the digital transformation of Finance. The CFO has recognized the need for a unified cloud-based platform to provide a single view of financial and operational data across the enterprise. This trend was reinforced by our Finance 2035 Initiative study, which found that more than three quarters of CEOs and CFOs are prioritizing the need for a unified single source of truth for corporate data as essential for future business success. Number two, the expanding scope of the CFO transitioning from reporting on past business results to driving real strategic value and becoming an embedded partner to the business. And number three, the growing need for applied AI and ML solutions to advance finance's impact and ability to plan faster, forecast with greater accuracy and empower every employee to make quicker, more informed decisions. These trends continue to drive our platform development and inform our new product roadmap. The breadth and depth of our platform is truly comprehensive and unique in the industry, enabling customers to unify financial and operational data and reporting on one common data model, accelerate and improve planning, forecasting and decision-making with AI solutions purpose-built for Finance and extend the platform to address new use cases as their needs evolve without adding technical debt. OneStream has a real competitive advantage allowing us to meet the data, analytics and processing needs of even the most complex environments at scale. I’m really excited about the progress that we made in 2024, which I believe was the most innovative year in our history. Our new offerings include centralized report assembly and data gathering with advanced narrative reporting, delivering rich financial data to a broader set of users with our Certified Microsoft Power BI Connector. Improvement and implementation time and project success with CPM Express. Providing customers with the ability to do ESG Reporting on the OneStream platform. Elevating and empowering sales planning with a fully integrated Sales Performance Management solution built on top of the OneStream platform. And overarching all of this is our industry-leading Finance AI solutions purpose-built for the office of the CFO. We had a positive initial reception in the market for these new offerings, which combined with our updated pricing and packaging reflect the incredible value we are delivering to customers. Let me provide some details on a couple of these important new initiatives. CPM Express is a prepackaged version of our core CPM capabilities that enable significantly faster implementation and time to value. This solution comes with pre-built functionality, predefined reports and guided configuration. It simplifies core activities and speeds up processes across Finance with customers fully up and running on core financial planning, reporting and close in six to eight weeks, all for a predictable cost. We expect CPM Express to drive new core platform customer growth globally going forward. Another area of innovation we’ve talked about is ESG. This has become a critical need for multinational organizations, particularly in Europe. These companies must account not only for their own operations, but for their entire value chains. To do this, they need accurate and complete information to align ESG Reporting with the rest of their reporting and planning. Given OneStream’s role as the core book of record, we are well positioned to help CFOs meet ESG Reporting requirements. Additionally, we plan to enhance this offering to be even more robust by launching new elements in 2025. Turning to our Finance AI portfolio, you’ve heard us talk a lot about our Sensible Machine Learning product, otherwise known as AI-Driven Forecasting. In 2024, SML offered customers the potential to revolutionize planning and forecasting, delivering significant value to early adopters, ranging from Fortune 500 manufacturers, retailers and banks to mid-sized services firms. By harnessing the power of SML, customers, on average, have reported initial forecast accuracy improvements of over 20%, while speeding forecast cycles by more than 80%. This allows customers to fundamentally rethink their planning approach, enabling them to plan at higher frequency with higher accuracy and adapt to changing market dynamics to maximize profits. Customers have reported that these outcomes have consistently outperformed custom data science projects, crediting our applied Finance AI approach and the ability to leverage our proprietary financial formulas and platform capabilities. SML’s ability to adapt to dynamic business conditions and macroeconomic factors while providing insights into their impact has established it as a transformative solution for businesses. OneStream’s AI accelerates time to value, enhances forecast accuracy and improves efficiency while offering the transparency and explainability needed for end-user trust and adoption. We believe our combined enhancements are poised to further strengthen our competitive edge and drive growth in 2025. We had a number of important wins in the fourth quarter with enterprise and commercial customers across a wide array of geographies and verticals. We added three new major banks, including a leading investment bank and financial services company. We landed our first customer in Brazil, a global multi-billion-dollar consumer products company. We had another takeaway at one of the largest legacy installations in Sweden, which is transitioning to OneStream to support its FP&A, Tax, Pillar 2 and ESG Reporting for its multi-billion-dollar global business. We currently have over 40 customers leveraging the OneStream platform for their ESG Reporting. And we have additional product enhancements coming in 2025 to offer even more value to customers. We saw continued growth in our public sector and education business, including a win with a well-known higher education institution in the Southeast. Speaking of the public sector, I’m thrilled to announce that effective January 25th, the OneStream platform has received FedRAMP High authorization, the highest level of security standards by the federal government. This significant milestone, in addition to our Department of Defense Impact Level 5 Certification, enables us to work with all levels of state, local and federal agencies, including those who handle the most sensitive, mission-critical and highly classified data. It is a long road to these certifications, requiring considerable investment, engineering and operating cycles, as well as close coordination with government agencies and officials. We continue to land many great customers, each with unique needs and drivers, both immediate and long-term. Let me just dive into a bit more detail on a few that stood out in the fourth quarter. We added a leading investment bank and financial services company to our customer list. Now, unlike other banks, they have separate financial systems for each division, severely limiting the view of their overall financials. They plan to use OneStream for consolidation of their multiple businesses in order to have a single, unified and more accurate view of the entire organization. This will unify their data across various queues and relational data storage for more accurate reporting, planning and analysis on operational and financial data at every level of the organization. We also had the first sale of our Sales Performance Management product that was built on the OneStream platform by Infinity SPM, an independent software vendor. An existing OneStream customer, Generac, is a large, acquisitive company using OneStream for consolidation, planning, profitability, and account reconciliations. The quality and visibility of the data on our single unified platform with a robust dashboard has been game-changing for Generac, saving as much as two and a half weeks for each forecast. This helps create a seamless process that allows them to do dynamic forecasting, compare scenarios, and have better visibility into how the business is doing. This success played a pivotal role in their decision to adopt and deploy Infinity’s integrated SPM as a natural extension of the platform. With SPM, they are now able to have consistent sales territory management and improve the efficiency of their incentive compensation and dispute resolution processes. We signed a multiyear deal with a large multinational manufacturer specializing in display, environmental and other technologies. Several years in the making, this customer was a long-time legacy system user that had been migrating to a global footprint. In need of a modern CPM system, the company was impressed by the depth of OneStream’s capabilities and the fact that we do so much on a single platform, including multiple solutions for tax reporting, ESG, SML, and account reconciliation. This was crucial in their ability to see the value of our platform while simultaneously reducing their technical debt. Beginning with nearly 900 users and replacing two large systems, Phase 1 will focus on consolidations, account reconciliations, and financial reporting. From there, Phase 2 looks to move on to planning and forecasting. Finally, I’d like to share how OneStream’s SML solution is transforming forecasting for a global leader in technology distribution. This customer operates across multiple countries and business lines, providing their customers with cutting-edge technologies from cloud providers and device manufacturers. Their prior forecasting process was complex, time-consuming, and often biased. They first used the OneStream platform for consolidation, close, and planning. They elected to expand with SML to ensure higher accuracy in their forecasting and to reduce their cost to serve. We helped this customer harness the power of their internal data while incorporating external drivers and leading indicators to produce a 52-week revenue forecast. With SML, they achieved over 90% forecast accuracy, which is a 15% reduction in forecast error. They reduced their effort in producing this forecast by over 75%. The data-driven precision of the SML forecast removed bias at the country level and gave management the confidence to make faster, smarter decisions across each line of business. What sets SML apart is its ability to seamlessly integrate machine learning into financial processes without introducing technical complexity. It empowers Finance teams to focus on insights and decision-making to steer the business, rather than spending countless hours wrestling with data to develop suboptimal forecasts. What I know from experience is what resonates with customers. Our 98% gross retention is at the heart of OneStream’s continued success and a key component of our growth. We enter 2025 excited about our multi-product strategy. We are bringing to market our 15 new innovations announced last year, along with our new pricing and packaging, to enable customers to derive the greatest value from our platform. We’re excited about the early demand we’ve seen for CPM Express and our infinitely extensible Solutions Exchange with applications like SPM. In addition, we continue to differentiate our Finance AI portfolio and build out new products including our AI library and GenAI. By adding these multiple levers of growth, we are effectively executing against our strategy to become the operating system for modern Finance. And finally, I want to send a heartfelt thank you to our dedicated, hard-working employees around the world for their tireless efforts in making all of this possible. Now let me turn the call over to Bill for the financials.

Bill Koefoed, CFO

Thanks Tom. Good afternoon everyone and thank you for joining today’s call. As Tom mentioned, we had a solid Q4 with both strong revenue growth and free cash flow, capping an impressive year. I’d like to start today with some commentary on our 2024 results and then dive into Q4 and end with our guidance for Q1 and 2025. Before I begin, it is important to note that 32% of our business is international and we bill most of our international customers annually in local currency and convert to U.S. dollars for revenue recognition. The sudden strengthening of the U.S. dollar by roughly 6% from September 30th to December 31st negatively impacted some of our financial growth metrics by approximately 2%. These include ARR, RPO, and Q4 billings. Let’s start with some key 2024 accomplishments. We surpassed $500 million in ARR to end the year at $568 million. We grew revenue 31% year-over year to $489 million, subscription revenue 41% to $428 million, and international revenue 38% to $155 million. We increased RPO to greater than $1 billion. We achieved non-GAAP operating profitability. And we generated $59 million of free cash flow, representing a 12% free cash flow margin. Turning to the fourth quarter, we grew total revenue 29% year-over-year to $132 million. Subscription revenue increased 35% year-over-year to $119 million, and license revenue came in at $7 million for the quarter. We continued to see strong conversions from term licenses to SaaS in the quarter and we expect that trend to continue into 2025 as we progress toward a 100% SaaS business model. Professional Services and Other revenue was $7 million in the quarter. As we continue to transition more implementations of OneStream software to our partners, we expect Professional Services to remain at a similar run-rate going forward. This quarter, international revenue grew 49% year-over-year to $46 million. We’re thrilled with the progress we’ve made with our international business, representing 32% of our total revenue in 2024. For the year, we saw over 60% of our business come from new customers and we ended the year with 1,601 total customers, up 15% year-over-year. We continue to retain and expand our base of existing customers, with a 98% gross retention rate and 113% net dollar retention rate. Billings grew to a record of $167 million in the fourth quarter, up 18% year-over-year and 24% on a trailing 12-month basis. Our 12-month cRPO was up 36% year-over-year and our total RPO increased 23% year-over-year to $1.1 billion. As noted, Q4 billings, cRPO, and RPO were negatively impacted by FX. Our Q4 non-GAAP gross margin was 70%, consistent with last year, and non-GAAP software gross margin was 76%, compared with 78% last year due to license mix versus the prior year. We continue to work to optimize our infrastructure costs and expect margin improvement over the long-term. Fourth quarter non-GAAP operating expenses increased 19% year-over-year, primarily due to higher R&D spending, as we continue innovating on our core platform and Finance AI solutions for the opportunities we see ahead. Non-GAAP operating income was $9 million or 7% operating margin in the quarter. For the full year, non-GAAP operating income was $1 million. We were non-GAAP profitable for the quarter with net income of $12 million and non-GAAP earnings per share were $0.07. For the full year, non-GAAP net income was $14 million and non-GAAP earnings per share were $0.14. Total equity-based compensation expense for the fourth quarter was $53 million and for the full year equity-based compensation expense was $316 million. For the fourth quarter, we generated $25 million of free cash flow, bringing our fiscal year 2024 free cash flow to $59 million. We ended the year with $544 million of cash and cash equivalents. In summary, we delivered on our key objectives for 2024, achieving strong top and bottom-line results while continuing to invest for the future. Customers continue to choose the OneStream platform to provide a unified view of financial and operational data with analytical, AI, and performance management capabilities. Now let me move on to guidance and review the key factors driving our outlook. We remain enthusiastic about our market opportunity and expect strong subscription revenue growth, while launching new products to the market and generating robust cash flow. Importantly, our strong 98% gross retention continues to drive compounding growth, highlighting our continued investment in customer success. As we discussed last quarter, we continued to see strong SaaS conversion rates in the fourth quarter. While this is a near-term headwind for the license component of total revenue, it is a focus for the long-term success of our company. Also, as a reminder, we expect our Professional Services revenue to be roughly flat going into 2025. We expect subscription revenue growth to outpace total revenue growth. The continued strength of the U.S. dollar, 6% higher than Q3, coupled with roughly 32% of revenue coming from our international business, which is transacted predominantly in foreign currency is impacting our outlook for 2025. With that, our guidance for fiscal year 2025 is total revenue is expected to be $583 million to $587 million, non-GAAP operating margin is expected to be minus 1% to plus 1%, non-GAAP earnings per share is expected to be between $0.01 to $0.09, equity-based compensation will be approximately $125 million to $135 million. Guidance for Q1 2025 is as follows: total revenue for Q1 is expected to be $130 million to $132 million, non-GAAP operating margin is expected to be minus 9% to minus 7%, non-GAAP earnings per share is expected to be between minus $0.04 to minus $0.02, equity-based compensation of approximately $45 million to $50 million. In closing, the strength of our core CPM business and new innovations, wrapped in more streamlined pricing and packaging, is driving new on-ramps to the OneStream platform and enabling our ability to drive efficient growth. We are pleased with our 2024 results and excited about the opportunities ahead in 2025.

Operator, Operator

Our first question comes from John DiFucci from Guggenheim Securities. Please go ahead with your question.

John DiFucci, Analyst

Hi. Thanks for taking my question. So I actually have one for Tom. Did he say limit yourself to one question and one follow-up? I want to be respectful to you guys or just one question.

Tom Shea, CEO

We said one question.

John DiFucci, Analyst

Okay. Okay. Okay. I’m going to ask Tom a question. Bill, I can ask you this later if no one asks it. Tom, listen, thanks for those examples with customers. Our field work this quarter. We do a lot of it. We picked up on improving demand for modern consolidation and planning solutions, which was really surprising to us. Like you guys have been doing well, but to hear a general statement like that from some people, especially considering the more challenged, quote, new normal that many enterprise software companies have talked about in recent quarters. I guess, can you talk to us about why that might be happening, especially in the context of other, quote, back-office applications more broadly that don’t seem to be high on many enterprise customers’ priority lists when you talk to global SIs?

Tom Shea, CEO

Sure. Thanks, John. So, I’ll start off by just providing a little bit of a foundation. I’ll answer this question with three main points. And first to cover off is our core solution, we’re at the heart of providing the capabilities that every Finance team needs. Every time you are on a call talking to a company, they have to produce, that company has to manufacture financial statements with confidence. And so we’re at the heart of that discussion. However, at the same time, when I talk to this, these are transformative decision-making processes. So when you think of large enterprises making a decision to onboard, these are systems and implementations that have to go the right way, they’re critical. But as we’ve talked about in the past, and as I mentioned in 2024 on a lot of the calls, there’s been a realization that you can’t keep kicking the can down the road. You have to keep working to simplify your ecosystem as a CFO and make sure that you have reliable data. And so all in all, for us, we look at that core and are really focused on it. That’s been the foundation of our business. And again, as we talk about forming that bedrock, that high degree of customer success and retention, 98%, that is really, really important and foundational to us and that hasn’t changed from day one. And we’re really looking at growing that core customer base and retaining it as a very, very valuable asset to our business, underpinning number two, our growth model. And when I really think about that growth model, by having that foundation and then being able to show up to those customers, and I think this gets at the heart of the question that you’re asking, is once we’ve established and helped them do the hard work that they have to do, we have the ability to leverage that durable and expanding customer base. And really, if you think about it, we’re talking about lifetime value type of customers. We’re forming relationships that exceed 10 years in many cases. So we’re really, really focused on being that partner, but also showing them that we can adapt with our Marketplace and with our Solution Exchange, and also with our evolving pricing and packaging structure to make sure that we give them more on-ramps and faster on-ramps to get more value out of the platform. So that is really, really an important message and foundation. And then ultimately showing up with, we have an AI portfolio and an AI solution. We actually have a journey for these customers and that’s the focus. But as I was saying, these are large transformative projects that we’re involved in. And we talked about CPM Express and some of the other examples that we gave. That’s about creating faster on-ramps for those customers. The one thing that I would like to say to complete this, so the third thing is that if you think about what I just mentioned, 98% gross retention plus these long-term relationships, they really equal a massive opportunity for us going forward. That’s what underpins my optimism and continuing optimism about the future for OneStream. But another piece that I don’t think that we’ve talked about enough is the amount of raw data and very important information that we are holding for these customers and that we’re, excuse me, curating and developing for these customers. So this financial information is very important. And if we play this out and we think about all the talk and chatter around AI, what’s this going to look like in five years? Customers have to have a unified platform to get the most value out of their investments and out of AI and to actually have the ability to take advantage of it. And so we really feel that we’re building an asset that will help power CFOs’ AI-Driven applications.

Bill Koefoed, CFO

Thanks, John. Operator, let’s move to the next question.

Operator, Operator

Certainly. And our next question comes from the line of Adam Hotchkiss from Goldman Sachs. Your question, please.

Adam Hotchkiss, Analyst

Great. Thanks so much for the question. Bill, you talked a little bit about near-term headwinds and I know you mentioned FX a number of times. Could you maybe delineate how much of that comment was meant as an FX comment versus some of these other non-currency headwinds we hear from software companies today, like deal closings and sales cycle elongations? I just want to understand those comments adjusting for some of the currency pieces? Thanks so much.

Bill Koefoed, CFO

Yeah. No. Thank you. About 32% of our business is international. And FX, as you know, between September and December 31st, the dollar strengthened about 6%. Candidly, it strengthened a little bit more, as you probably know, into January. But the FX impact, and I mentioned some of our financial metrics, roughly impacted that by about 2%.

Operator, Operator

Certainly. And our next question comes from the line of Chris Quintero from Morgan Stanley. Your question, please.

Chris Quintero, Analyst

Hey, Tom. Hey, Bill. Thanks for taking the questions here. I wanted to follow up on your comments around the packaging changes. Just curious, kind of more details there, what specific changes you’re making and was there any impact to NRR in the quarter and any expectations of what that can mean for NRR on a go-forward basis?

Tom Shea, CEO

Thanks, Chris. We wanted to discuss pricing, packaging, and delivery because we are implementing a multi-solution, multi-product strategy. We have introduced Sensible Machine Learning, Sales Performance Management, and ESG, and this has been a topic for us throughout 2024. It's really an evolution in our pricing rather than a complete overhaul. The goal is to create a durable, understandable package that enables customers to purchase these new solutions reliably. This approach was launched at our sales kickoff this year and is designed to efficiently bring new innovations to the market. I emphasized that 2024 is a significant year for innovation, and we were testing new products like CPM Express and SPM. These products will now be integrated into the pricing and packaging framework for 2025. This initiative has been part of a long-term strategy we've been pursuing for several years.

Bill Koefoed, CFO

Operator, next question, please.

Operator, Operator

Certainly. Our next question comes from the line of Mark Murphy from JPMorgan. Your question, please.

Mark Murphy, Analyst

Thank you very much. I’m curious, what is the rough dollar value of the business that you referenced, Tom, that was forecasted to close but pushed out of Q4? And should we be thinking something like $15 million or $20 million there? And as well, just as a part B on the same question, if the tariffs were one of the headwinds to those deals and caused them to push, why are they closing? I think you said a vast majority of those have closed in January. So why would that be? I mean, what is giving these organizations a feeling that there’s clarity now around tariffs to come in and close the business?

Tom Shea, CEO

I’ll start, and then I’ll let Bill follow up on that. So if you think about the pushes that we saw or the headwinds, I think we alluded after the last earnings call. So look, we’re cautiously optimistic about what’s happening in the market or in the geopolitical spectrum, and just in general, in terms of macroeconomic conditions. So we’re not specifically alluding to tariffs, but we’re talking about multinational businesses that see a great deal of uncertainty and governments, which is another significant market, that have uncertainty in spend. And so when you think about that, Mark, those are definite headwinds. And so, again, if you’re looking at deltas in ARR, as you’re alluding to changes in that revenue, you’re really talking about, and I’ll let Bill dive into this in a bit more depth, is you’re really looking at the difference between, there were a strong 2023 Q3 and then, I’m sorry, a weak 2023 Q3 and a strong 2023 Q4.

Bill Koefoed, CFO

There was a weak 2023 Q3.

Tom Shea, CEO

Weak 2023 Q3 and a strong 2023 Q4.

Bill Koefoed, CFO

Exactly.

Tom Shea, CEO

When you combine those two factors, it will bring that difference much closer, and you will see it match the numbers and the changes we are experiencing. This past quarter and year presented the opposite situation. As you consider this, these are genuine challenges we are facing. We are closing significant transformational deals, as evidenced by our million-dollar deals increasing by 35% this year. There is still a strong demand, and we are optimistic about our business's future, but we are definitely encountering economic challenges that we hope will improve.

Bill Koefoed, CFO

I would just add that, as Tom mentioned, it wasn’t something specific to tariffs, just general uncertainty. What we observed was that it required an additional signature, and there wasn’t the same urgency to get deals signed by our larger customers, particularly in the fourth quarter. Fortunately, we finalized those deals in January and the first week of February, including the public sector deal that Tom referenced. Thank you for the question, and I appreciate the opportunity to clarify.

Operator, Operator

Certainly. Our next question comes to the line of Koji Ikeda from Bank of America. Your question, please.

Koji Ikeda, Analyst

Thank you for taking my question. I wanted to inquire about the growth potential for 2025. When I review your key growth items, such as subscription revenue and ARR, as well as total revenue, I am particularly interested in subscription revenue and ARR. From the presentation, it seems that SaaS ARR grew by 40% in 2024 and represents 80% of total ARR. I am trying to understand the factors that could influence ARR growth and how total ARR growth might accelerate in 2025, especially considering the 23% growth expected for 2024, and whether subscription revenue could achieve high 20% growth or even 30% by the end of 2025. Thank you.

Bill Koefoed, CFO

Hey, Koji. Thanks for that. I want to start by saying that we provided guidance on total revenue and margin at a quantitative level. Regarding ARR, a significant part of our efforts has been focused on increasing net new ARR, which you accurately mentioned. Some of the growth in SaaS revenue was from conversions, and we’ve been working diligently on that. As I stated earlier, we expect subscription revenue to grow faster than total revenue, but we do not provide specific guidance on that number. We are working hard to expedite the growth of subscription revenue. So, thanks for that.

Operator, Operator

Certainly. Our next question comes to the line of Scott Berg from Needham & Company. Your question, please.

Ian Black, Analyst

Hi. This is Ian Black on for Scott Berg. How are you guys looking at the federal government opportunity this year, given both spending pressure and the FedRAMP High authorization?

Tom Shea, CEO

Thanks, Scott. So, we really look at FedRAMP as a big opportunity still for us, right? We’ve invested long-term for our FedRAMP moderate for quite some time and then recently achieving High. And because we’re an efficiency play, we really feel that we have a strong offering and right to win and continue to offer more value to the government. So, there’s certainly headwinds out there, but that does not change at all our long-term strategy and investment and the potential that we see in that market.

Bill Koefoed, CFO

Thank you. Operator, next question, please.

Operator, Operator

Certainly. Our next question comes from the line of Alex Zukin from Wolfe Research. Your question, please.

Ivan Yi, Analyst

Hey, guys. This is Ivan Yi for Alex. Thanks for taking my question. Maybe just in context of the backdrop that you’ve given around geopolitical uncertainty and the macro. Can you calibrate a little bit more on the buying environment, and more importantly, help us understand how has that been taken into account, how much conservatism has been embedded in the guidance? Thank you.

Tom Shea, CEO

I’ll start off and if Bill wants to add any commentary, he can. In terms of general buying for Q4, we didn’t experience any sudden stops, but there was a noticeable lack of urgency among large multinationals and government sectors. This may reflect some of the uncertainty that multinationals are experiencing regarding trade and their own cost structures. We primarily sell to CFOs, who tend to be sensitive buyers, so if there’s growing uncertainty in their businesses, we are likely to notice it first. I wanted to highlight this reality. Therefore, we are providing prudent guidance and remain optimistic about our product and strategy. We're focused on executing well and feel confident about the innovations and products we plan to deliver to the market this year. Ultimately, we will concentrate on our strategy and execution while also providing prudent guidance regarding factors beyond our control.

Bill Koefoed, CFO

Thank you. Operator, next question, please.

Operator, Operator

Certainly. Our next question comes from the line of Terry Tillman from Truist Securities. Your question, please?

Terry Tillman, Analyst

Yeah. Thanks, Tom, Bill and Annie. So my question relates to go-to-market, primarily the Microsoft relationship, both technologically and then go-to-market. And anybody else you could talk about from a go-to-market standpoint that seems like they’re at an inflection point in helping the business? Thank you.

Tom Shea, CEO

Thank you, Terry. I’ll take that. We continue to be a significant Microsoft customer and partner, and we are very excited about our relationship. As you've seen, we launched our Certified Power BI Connector. We see this combination as we expand from core financials and aim to sell a wider range of solutions in AI and operational analytics. The Microsoft relationship is becoming increasingly important and presents more opportunities for us, particularly with the CIO connectivity it brings. We have several joint initiatives from both marketing and technical perspectives in this partnership, and we are fully committed to this collaboration. We're pleased that Microsoft shares our enthusiasm. This foundational relationship is one we intend to leverage as a channel multiplier. Additionally, we continually invest in our core markets through our GFI initiatives and our artisan partners, who are experts in CPM. They're actively engaging, as shown by partners like Infinity SPM, who not only develop solutions on our Solutions Exchange but also serve as implementation partners. It's worth noting that as we expand our base of successful customers—an asset that benefits both us and them—we maintain a remarkable 98% gross retention rate. This retention is crucial for powering our ecosystem and creating opportunities for all involved. We're committed to supporting and enhancing all these efforts.

Bill Koefoed, CFO

Thanks, Terry. Operator, next question, please.

Operator, Operator

Certainly. Our next question comes from the line of Steve Enders from Citi. Your question, please.

Steve Enders, Analyst

Okay. Great. Thanks for taking the questions here or question here. I guess I wanted to ask on the margin side of it. It looks like that’s maybe coming in a little bit lower as well for the year. So can you just maybe help us think through maybe where incremental investments are coming from or maybe what’s being accounted for on the margin outlook?

Bill Koefoed, CFO

Thank you, Steve. I’ll address that. From a technology standpoint, we’ve been transitioning our customers from previous software versions to Version 8, which we introduced nearly two years ago. This update has led to performance enhancements and greater efficiency for our clients, though there are costs involved in the migration. Additionally, as Tom highlighted, we maintain a robust partnership with Microsoft and continue to innovate on the platform to deliver value to our customers. One significant factor we’re addressing is the substantial amount of data our customers want to store on the OneStream platform. While this presents a major opportunity, as Tom noted, it does come with some gross margin impacts. We are actively working through this. As I mentioned earlier, we see potential for improved efficiency while also leveraging the assets that provide long-term value for our customers, helping us maintain that 98% gross retention rate that Tom discussed. Great question.

Operator, Operator

Certainly. Our next question comes from the line of Brian Peterson from Raymond James. Your question, please.

Brian Peterson, Analyst

Hi, guys. Thanks for taking the question. So, Bill, maybe you could update us on the conversion of the customer base. I know that’s going pretty well. Any sense for where we are in terms of customers that are still on older versions and how we should think about that migration through 2025? Thanks, guys.

Bill Koefoed, CFO

Thank you for the question. As you requested last summer, I've included the number of customers by legacy in the slide deck, specifically on Page 7, where you can see the annual ARR by contract type. Currently, 5% of our customers are still on perpetual licenses, while 15% are using term-based licenses. In response to an earlier question about the percentage on SaaS, we are pleased to report that 80% are now on SaaS. However, we still have work to do to achieve 100% conversion, and we will focus on that over the next few years. I appreciate your inquiry and hope you find our response to your earlier question helpful.

Operator, Operator

Certainly. Our next question comes from the line of Brent Bracelin from Piper Sandler. Your question, please.

Brent Bracelin, Analyst

Thank you. Good afternoon. Bill, I appreciate the bullish commentary on commercial Finance AI products going into this year, but I wanted to double click on public sector. That seems to be an area of a little more uncertainty. What portion of revenue comes from government public sector? Can you remind us that? And are you expecting that to grow, remain flat or actually decline this year given the uncertainty? Thanks.

Bill Koefoed, CFO

Thank you for the question. We are very optimistic about the opportunities that lie ahead with being FedRAMP High. Tom mentioned that this is a significant multi-year investment we made alongside the government to achieve FedRAMP High status. There are not many companies that have attained this designation, and we believe it will unlock additional opportunities for us within the federal government. While there is some uncertainty, we believe that OneStream can enhance efficiency and effectively support overall government efficiency. As Tom noted earlier, we had a public sector win in early 2025, and we will continue to leverage the advantages of our software and our overall offering. Thank you for that question.

Operator, Operator

Certainly. Our next question comes from the line of Mark Schappel from Loop Capital Markets. Your question, please.

Mark Schappel, Analyst

Hi. Thank you for taking my question. Bill, I was wondering if you could just discuss the attach rate you’re seeing for your Sensible ML Solutions. Directionally, is it increasing, staying the same?

Bill Koefoed, CFO

I'm going to let Tom take that. He's excited to answer this one.

Tom Shea, CEO

Thank you for the question. Looking back, we launched the product over a year ago and have been pleased with its performance and progression in 2024 as we continue market validation. The statistics support this. OneStream believes that every customer should serve as a reference and that our products must deliver on their promises. As we demonstrate these use cases across various industries, we have a solid sample cycle and believe that every customer will want to utilize this product in some manner over the long term. We will continue to focus on this. I want to emphasize our commitment to gross retention. If we can delight our customers, they will remain with our product, allowing us to keep innovating and helping them improve their finance processes. Once they have mastered the core capabilities, they will likely seek to enhance their operations further using our AI products. I am very enthusiastic about the potential attach rate for that product.

Bill Koefoed, CFO

Operator, let’s go to our final question.

Operator, Operator

Certainly. Our final question for today then comes from the line of Derrick Wood from TD Cowen. Your question, please.

Jared Jungjohann, Analyst

Hi, Tom and Bill. This is Jared Jungjohann on for Derrick Wood. On legacy displacement and Greenfield Dale activity, could you provide an update on any changes you’re seeing in the market? Thank you.

Tom Shea, CEO

As we examine the situation, I want to emphasize that we are not noticing any changes in our core market. We continue to see numerous opportunities as businesses aim to streamline their operations. The examples I shared earlier highlight various products we are introducing, which typically include some form of legacy product replacement. Additionally, when discussing CPM Express, it targets new Greenfield opportunities, focusing on companies that are in the early stages of their development, primarily based on their Finance team's maturity rather than their size. These companies look to us for guidance, leveraging our experience with some of the largest businesses worldwide to provide them with a quicker path forward through a packaged solution. Importantly, while this offers a faster start on our platform, it does not require them to leave it—the software remains the same, regardless of whether they want to scale up significantly. We are excited about our continuous innovation. We aim to stay appealing to those replacing legacy systems by demonstrating the benefits of a unified data model with minimal technical debt, while also facilitating an easier entry for new customers. By easier entry, I mean helping newcomers understand how to utilize a CPM product effectively and transition onto our platform. This effort has always been a part of our long-term growth strategy.

Bill Koefoed, CFO

So that’s going to wrap up our call. I really appreciate everybody participating. We will be at the Morgan Stanley Conference in early March. So please, we hope to see you there. Please obviously reach out to them if you’d like to set up time with us and we appreciate everybody’s support of our company and hope you have a great rest of the week. Thank you.

Operator, Operator

Thank you, ladies and gentlemen, for your participation at today’s conference. This does conclude the program. You may now disconnect. Good day.