Motley Fool Hidden Gems Investing - Apple’s “Glowtime” Event, AI Ambitions

Episode Date: September 9, 2024

Big tech takes center stage with Apple’s annual iPhone event and Google’s latest anti-trust case. What do they say about where tech’s been and where it’s going?  (00:21) Jason Moser and Dylan Lewis discuss: - Apple’s “Glowtime” product event, what to expect for the iPhone line and the company’s AI ambitions. - The latest anti-trust case against Google and why Meta and Apple should probably be paying attention. - Big Lots’ bankruptcy and why the discount retailer has struggled at a time when customers are looking for value. (14:46) OneStream is an operating system for CFOs. Its CEO, Tom Shea, joined Ricky Mulvey for a conversation about the problems that its software solves for, its AI use case, and what's behind the company's 36% year-over-year revenue growth. Companies discussed: AAPL, GOOG, GOOGL, META, BIG, WMT, TGT, DG, OS Host: Dylan Lewis Guests: Jason Moser, Ricky Muley, Tom Shea Producer: Mary Long Engineers: Tim Sparks, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Dylan Lewis. This week, big tech takes center stage for good and bad reasons. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst, Jason Moser. Jason, thanks for joining me. Jason Moser. Yes, sir. Thanks for having me. We got a fun one today. We got Google catching a little bit more regulator attention. We've got a look at a fresh IPO coming up later in the show. And we've got a preview of this week's Apple event. Why don't we kick off there? We're taping ahead of the annual iPhone event. This year, it has been called Glow Time. What do you think of that branding there?

It's an interesting one. I'm not really sure exactly what to make of it, but I like that they're always trying to tweak it a little bit, make it unique and a little bit different. So, hey, listen, Apple is one of the more important companies in not only our universe, but really, I would say, the universe. So, hey, listen, innovation is innovation, right? I love seeing a little pageantry from them. This time around, we are expecting to see an update to their iPhone line. The company's expected to launch its iPhone 16, also show off its newest Apple Watch.

Probably also going to be seeing some AI updates related to Apple intelligence. What are you zooming in on here? What are you focused on with this Apple event? Well, I think it's safe to say Apple is still very much a phone company. Obviously, they do a lot of things very well, but the phone is really the lion's share of the business still. That, I think, is what more people are going to be focused on, and rightly so. In a lot of this, it really starts to boil down to that AI narrative. We've been talking about artificial intelligence over the last several quarters and how companies are approaching that idea.

And with Apple, we were talking about it earlier this morning with some colleagues, and Apple has always been, they've never wanted to be first. That's not ever been really the goal for Apple, to be first. They just want to be best. And Tim Cook says that all the time. I'm kind of paraphrasing, but really, that's almost a direct quote. He says it often. We don't want to be first, we just want to be best.

And so, with Apple, it's not surprising to see that they aren't necessarily spending quite as heavily, or at least not explicitly so, on those AI initiatives as other companies like Microsoft and Alphabet and whatnot. But I think that we will start to see how AI, and in this case, it's really, I guess, Apple Intelligence, right? We're going to see how that starts to whittle its way into their ecosystem. The phone is the most obvious gateway for that, because that's where most people get their exposure with Apple.

To me, it marks, potentially, one of the more compelling reasons for folks to consider upgrading to the new phone, and even maybe a little bit sooner than they might have otherwise. To your point on Apple's approach to product development, we have already seen them delay some AI features with the new phones. I think Genmoji, some of the more generative imaging elements being pushed out. I know, what a name. Talk about glow time. Genmoji's in another camp there.

But we've already seen them delay some of those to later in the year, possibly even until 2025. We're also contending with the narrative of a super cycle, the idea that there are going to be upgrades within this phone that are going to lure a lot of people who are holding those iPhone 12s or 13s into upgrading to the 16. Do you think we need to temper some of our expectations a little bit? Yeah, I think probably so. It's really easy to forget how great these phones have become. Going all the way back to the very first iPhone to where we are now, we have, in our family,

we all have XIVs. It's still a tremendous device. We don't have any intention of upgrading whatsoever. It's not because it's not exciting to think about what Apple has coming down the pike. But frankly, the phones that we have are just really still very good. They do everything that we want them to do, and then more. The only thing that we would argue as a family, I think, is that the battery starts to lose its luster after a little while. That's one of the things they continue to talk about. It's like, hey, every upgrade cycle, let's say the camera's a little bit better, hopefully the battery lasts a little bit longer. I think the

battery is going to be an interesting question mark, just because when you start introducing these new AI sorts of ideas into the phone, into the operating system, obviously, it's going to suck up more power. We want to see that they are going to be able to last. I think that's going to be the concern with a lot of folks. It'll be noteworthy to see how they approach pricing from this perspective. But I think, generally speaking, AI right now, we talk a lot about it and a lot about the potential. We don't really know exactly how it's going to impact all of our lives. We're seeing some ideas, but those are still a lot of ideas. A lot of that's still in theory. I think it'll take a little time for us to really understand how AI, generally speaking,

not just in regard to Apple, but generally speaking, how it's going to impact our lives, but then furthermore, how Apple is going to introduce it into its ecosystem, into its devices, and really compel folks to want to upgrade. Then, I just have to say, you mentioned the word supercycle. Let's not forget, Dylan, it's almost 2025. We're not that far away. We're going to to start hearing more and more about 6G here in the coming years, right? Right around 2030 is when you're going to start seeing that 6G rollout. And so then we want to make sure these phones not only have the hardware to support all of these artificial intelligence aspirations, but they're also going to have to have the hardware to support this upgrade to a 6G ecosystem and then beyond

that to 7G and whatnot. So I definitely think it's always worth tempering expectations. Let's be hopeful, let's be optimistic, but let's not get too far ahead of ourselves. I'm inclined to agree with you there, Jason, because I think so much of the upselling factor for Apple phones for a very long time has been the form factor and the hardware capabilities of the phone. What we are focusing much more on now is the software and what is under the hood with the phone. And I think that's a much tougher value prop to get across to the average user. Oh, there's just no question. I wouldn't be surprised if 2025 winds up being a bigger upgrade year,

because we start seeing the phones in people's hands, people having a much better sense of the app and the developer ecosystem with AI and some of the capabilities there. All right, sticking with the world of big tech, Google Parent Alphabet has another antitrust case on its hands. Jason, the story we've been following for such a long time over the last couple of months has been their search business. This new case for them is focused on their ad tech business, largely used by publishers online. The specter of regulation and antitrust has been creeping up for a while now. Where does this new one sit for you? Well, this is one that focuses, like you said, on the ad business. In particular,

it focuses on their ad manager part of the business, which is just one part of their greater ad tech business. Based on a financial statement they actually provided to the court, in 2020, the ad manager part of the business made an operating profit of $368 million on revenue booked of $7.4 billion. Now, $368 million with an M, if you look at the 2020 numbers for Alphabet, the company in all brought in over $41 billion in operating profit alone. So, bigger picture, this isn't that big of a deal when it comes to Alphabet's business. But I think what it could be, it could be a signal, it could be a sign of things to come. Because this isn't just about ad manager. This is something that, if Justice is actually

able to come through with a win here, and the remedy is that they need to figure out a way to split off ad managers, sell it, do whatever, well, now you start looking at, OK, maybe they start going after other things, like that DoubleClick acquisition they made not all that long ago, which is a big part of their business, for sure. It also starts to bring in a question going forward. How do they view their acquisition strategy under this idea that every single acquisition they make, no matter how large or small, is really going to be put on the microscope? I like the way you zoomed in on the price of that acquisition. I have seen estimates that DoubleClick was one of the largest, most

high ROI acquisitions in big tech history, which is interesting, because $3 billion acquisition price, I've seen the value of that estimated at about $150 billion. A big part of that, I think, is strategically, if you look at the overall market for ad-selling tools online, Google owns about 90% of it, as the government winds up defining it. It's no real surprise there, But I think the financials understate the strategic piece of this for Google and its business. Well, yeah. I'm of two minds with this. I absolutely am never going to hammer the company for making a smart acquisition. They made a great acquisition. They did the same thing with YouTube.

Meta did the same thing with Instagram back in the day. You have to give credit where credit's due. You also have to keep in mind, when companies of this size make those acquisitions, no matter how large or small, it doesn't matter, that scale, that size really gives an advantage, because they can push that stuff out to such a large audience in such a quick fashion. It becomes very difficult to compete. Now, Google is going to sit there and say, hey, listen, we make great investments, they're paying off, and the reason why we're doing so well is because we offer the best stuff. And that may be the case. We just have to wait and see.

The attention is on Google right now, but it almost sounds like you're saying, Jason, Meta may be being put on notice here. Apple may be being put on notice here as well. No question about it. If this thing plays out in Justice's favor, you can guarantee that they will continue that pursuit of those other big tech companies. Meta stands out as one for sure. Apple, absolutely. Bringing us home here with the news roundup, we have a retail bankruptcy to check in on. Big Lots announcing its bankruptcy and sale to private equity business Nexus Capital. This is not exactly a name that we follow a ton here, Jason, but what do you think it

says about the state of retail right now? Yeah, it's not one we follow, but it plays in that same sandbox of some companies that we really do follow a little bit more closely, companies like Wayfair, Walmart, I think TJ Maxx or TGX companies. It's not terribly surprising. You ever been to a Big Lots, Dylan? No, I haven't. No? I think I have once or twice. I've definitely been at least once. I remember it was not the most pleasant experience in the world. It reminded me a little bit of a Bed Bath & Beyond, in the sense that you go in there,

it's just this massive place with all of this stuff, but I couldn't figure out how to find any of it. I didn't know what I wanted, where it was. It was a very confusing experience. But they always touted the value there. That's what Big Lots did so well for so long. But the company has absolutely suffered from an environment where higher interest rates have really impacted a slower housing market. We saw a lot of demand that was pulled forward over the last few years that has waned. If you look at their revenue, revenue for this company peaked at $6.2 billion in 2021. It's just continued to come down since then. They play a really difficult market when you consider the competitors they're going up against.

It just got to the point where they really couldn't support the business in its current state. This bankruptcy filing, it's going to give them a chance to continue, but they're going to have to do so in a much leaner fashion. I'm going to put myself in the listener's shoes for a second. This is a business that is focused on discount retail and providing value for folks. We've talked so much over the last couple of weeks and months about how that is a very resonant idea for consumers right now. Help me parse this out. Why is a business like this struggling in this environment, where we see some of the other players, like a Walmart,

doing very well? We're kicking this idea around earlier. It's a great question. I think the idea behind that is, a lot of what's going on with Big Lots right now, this rhymes with what we've seen from the dollar stores over the last couple of weeks. We juxtapose that with something like a Walmart, for example. Walmart has benefited from the trade down consumer. The consumer is making a pretty decent living, but they're starting to focus more and more on value. They're trading down and going to something like a Walmart, focusing a little bit more on value, trying to save a little money here and there. The problem is, there's not really a trade down from something like a Big Lots

or a dollar store. That's where this stands. We've seen the Walmarts and the Targets benefit from the trade-down consumer, but then we've seen the dollar stores, the big lots and whatnot really suffer because they've lost that consumer. The consumer is too pressed at this point, and they don't necessarily see that same benefit. There's not a trade-down consumer that's going from a Walmart to a Big Lots or a TJ Maxx or whatnot, because Walmart and Target and all of these large retailers benefit from so much scale, and they can continue to offer so much compelling value. Jason Moser, thanks for joining me today. Thank you. coming up on the show few tech companies are going public in 2024 but my colleague ricky

mulvey caught up with the leader of one that just did one stream is an operating system for cfos its ceo tom shea joined us for a conversation about the problems that its software solves for the financial leaders of public companies its ai use case and what's behind the company's 36% year-over-year revenue growth. This is the first time we've talked about OneStream on the show. And this is one of those software products that most of our listeners have not fiddled with, touched, that kind of thing, because it's for the office of the CEO. So to set the table, what are the migraine-level problems that your operating system solves for the office of the CFO? Maybe using a lot of point solutions

right now. The main idea is that when we created this platform, you have many different moving parts in the office of the CFO. It's a complex ecosystem of people, processes, and systems. So if you think, and it's only getting worse year over year. So the true migraine level headaches is if you think a headache is that a CEO or a CFO, you're expected to be publishing a single version of the truth. Now, imagine that complex ecosystem and dealing with how do you pull all that together while somebody is telling you to do it faster, do it better, and get it right every single time. Our entire thesis for this company was about rationalizing and creating a single system that could help CFOs still have the flexibility to be a partner to the business and be agile,

but also have that sanctity, that proof that they can easily publish a single solution or a single set of numbers by reducing the number of moving parts that they have or point solutions. We often associate a CFO with just publishing the numbers, maybe giving some commentary on an earnings call. You have a background in corporate finance before starting this company in 2010. How have you seen the job of the CFO change throughout your career? What is being asked of that job that wasn't asked in the decades before? I often think back on that. When I was coming up and thinking I wanted to be a CFO, really, you were a bit more, first and foremost, you were a corporate cop,

is the way that I was doing it. You know, it was sort of the controllership, the idea here that you were the one that was going to come around and slap somebody in the hand if they did something wrong. It was always a strategic position. You're always involved in M&A, and you're always involved in finance. But it was definitely more of a corporate cop mentality when I was coming up in corporate finance. Whereas, over time, because of all the uncertainty, all of the variation that we've seen in the economy, pandemic, you name it, you've had to be much more quick reaction, a quick reaction force as a finance team. Meaning, you still have to get the job done, but you need to go sit down with the sales team and double-check and work and be a partner

analytically on the sales forecast. Or you need to sit down with HR and really think heavily about you know, your hiring plans and calibrate the business much more quickly. Talking about the company, you talk about how AI is helping CFOs with the problems that they're facing today. A lot of it is reporting and providing data. So specifically, what is AI and machine learning doing for that job in 2024? So, you know, I always feel like I have to start off with AI and make sure we're all talking about the same thing because there's so many different interpretations of what we're getting right now with AI. And if you think of the CFO, kind of think of the conversation where you're just having,

they're very interested in fact-based conversations or interactions with these technologies. And you have to be able to prove it, be transparent. So as we think about AI and the role within the office of the CFO, it's really, really focused on a couple of different things. It has to be transparent, has to be auditable, and it has to be repeatable. Meaning those interactions, a CFO, if I just go and say, here's a better forecast, and here's what I think this forecast means to you, the first thing is prove it. Show me why. Just because you show me a lower error metric with your machine learning forecast, and you've interpreted that with a large language model, prove it to me why that is happening. So, at the heart of our approach and what we think

we're really, really focused on the CFO and making sure that we're providing the applied solutions that they want, is making sure that we deliver that transparency. The same way we do when we're publishing financial statements. You have to be able to audit it. You have to be able to verify it. But you still have to be able to provide agility. So, I think at the heart of it, focusing on AI and what it means to the CFO, is it definitely means efficiency. We can deliver faster forecasts, better forecasts, and at a higher frequency, more cycle times, so that those key people can analyze it rather than wrangle the data. So my rougher understanding of AI is that it's very good at understanding what's going on.

It's more difficult with predictive measures. So how then do you prove that you're making better predictions on things like sales growth with the AI piece of your business? So you really have to take the AI definition here and we need to divide it in half because we have what we call our sensible AI portfolio product suite. There's the quantitative side of AI, which is machine learning, which we've been working on for about a decade and really bringing that forward, you pair that because, to your point, generative AI, large language models, they're focused on text. They're focused on inferencing based on understanding of human language.

When you're talking about the office of the CFO or planning or predicting or time series prediction, you're talking more about the quantitative aspects. Now, it's hard to say where they stop and start because machine learning is used in large language, you know, it's all there, but we are fusing those two together. So what you really see is we give very deep understanding of the features and the feature impact that you would have when you've trained a series of machine learning models to run a prediction. So that if you see a result, you could say, wow, for my organic bananas that I sold at my grocery store in the South in a rural store, this sales promotion seemed to be driving the sales number

much better. And this one was actually pulling it down. Weather pulled it down, as an example. Because just because I showed you, here's the forecast, the next thing that a business analyst says is, well, my intuition is telling me something different. Why did you come up with that? So that's what we mean by how you help. Now, on the generative AI side, helping to analyze that, it's the same thing. Just like you and I are talking right now, and I can see your face, and I'm hoping that I'm interpreting how this conversation is going. We want that same sort of interaction with a generative AI model. You want to know, is it embellishing? Is it being factual? Did it read facts from a rag model? All these pieces need to come together to help us get

leverage on that. For many of the retail investors who are listening to the show, they like kicking the tires on a product before they invest in it. This is a little bit more difficult with your software platform. But if we're looking at an earnings report, are there any signs? How can we tell that one stream is being used versus a bunch of the point solutions? Is that possible from where we sit? Well, the main way that some of the indicators that you would get if you were listening to a CFO or a controller, you wouldn't necessarily see it in the published numbers because we're all going to take... If a set of financial statements exits one stream and goes through Edgar into the SEC, we all end up going through Edgar. So, there's nothing that's going

to differentiate you there. What you'll see with one-stream customers is most are indicating faster times to close, meaning getting their numbers out faster. So, you might start off by thinking about when do they report their numbers? How fast can they actually give you consolidated results that are reliable after the end of a quarter? Our customers are doing that in the shortest number of days possible because they're not having to cross validate 20 different systems. They can, they can believe the outcomes. So it's a shorter reporting time of when the quarter ended to the date of like an earnings call. Exactly. Cause if you think, I mean, that would be one way of thinking about those types of, of, you know, every single finance team, when the month closes or the

quarter closes or the year closes, there's sort of a starting gun goes off. And all of a sudden, And all these people, sometimes thousands that are big customers, have to do the right thing at the right time to basically manufacture the financial statements, the variance of those financial statements to your plans, your forecasts, your budgets, to give you your guidance, to give you all the things that you're looking at. It's a really complicated process to do that. And that has to be done quickly. So that's just one type of indicator that you would see. But also, you know, much more digitally forward organizations. They're able to be more analytical with one stream because they're not spending that time having to go and chase

and wrangle and validate all the data. They can spend more time analyzing it. Uh, I want to talk about your first quarter, but to start there, you IPO in 2024, you went through a traditional process. You didn't do a SPAC. You went to the bankers, you got a price. You didn't start at $10 and have a shell company that you put yourself into. Why 2024? Why a traditional IPO? We are really proud of the trajectory that we put this company on from the very beginning. And to kind of start with a little bit of that history to get to that why, we bootstrapped this company. This was my second company, bootstrapped that from the very beginning, never took outside funding, then did the same thing here until we were fortunate to

bring on a partner of KKR, thinking about how can we help grow this company to the right level scale to become, we always felt the idea was big enough to become a publicly traded company. And so, 2024, it really was the culmination. We set a goal for ourselves and said, hey, when we hit $100 million in revenue, we think we better get a financial partner that can help us understand how to be a little bit more educated and astute in interacting with capital markets. Then we said, okay, when we get close to $500 million in ARR, we feel like we're ready. We're scaled and we're ready. So, the long answer as to why 2024, we really felt that we had achieved those objectives that we set for ourselves a long time ago. And we had managed ourselves in a

responsible way that we had the profile that could be accepted in this traditional. Because the bar's gotten a lot higher for companies to follow a traditional path. And even the size and scale expected by Wall Street to go public is a lot higher. So, all those things together, we were fortunate that we built towards those and gave ourselves every opportunity to make that happen in 2024. Let's get into the earnings a little bit. You cut your operating loss and you had revenue growth of 36% from the previous year. A lot of that's coming from subscription revenue, which was $103 million for the quarter. The subscription revenue up more than 40% year over year. Where is this growth coming from? Is it expanding with existing customers? Are you

signing a bunch of new companies and government contracts onto your software? Where's that coming from? The growth for us, it's a good mix of new logos, as we like to say, and expansion. We typically are a business that's expanding in excess of 60% new logo growth for our sales in any given quarter. It's been around that 60%, 65%. We're really excited about that because we want to capture as many new logos and get them on our platform because we're really, really focused on pleasing those customers and giving ourselves to expand. It's a mix of both. And, again, I'd say we're still heavily weighted towards capturing new logos, but, again, with the whole goal of selling and offering unique solutions like machine learning and artificial

intelligence to help those customers become even more sophisticated in their planning capabilities. And while you're cutting your operating losses, you're not making an operating profit. What's the story for investors listening where OneStream is profitable consistently on an operating basis? Yeah. So we feel, as I mentioned a couple of, uh, you know, a couple of minutes ago, we really are more comfortable in running as a profitable company bootstrapped this company for years. So that means we, we grew it from positive operating cashflow and profitability. That's a

natural state for us. We just found ourselves in, in, you know, the 2020, 2021, where there was just, there was so much growth and we really invested in the business to make sure that we gave the right shape to our infrastructure in terms of all the people, processes, and systems. What you're seeing right now is us getting leverage on it. It's not anything miraculous. We're not starving the business. We feel that we're on a great track. It's not something that we are concerned about. Investors should, I think, given our history, feel really comfortable that we understand how to run a profitable business. For the retail investors listening to this conversation, what are the metrics, the storylines you want them to watch as they

follow your company in the quarters ahead? For sure. What I like to talk about on all the earnings calls is talking about some of the marquee wins. You're really seeing and hearing that the average customer that we're selling is replacing between two and six-point solutions when we come in and sell. You're really seeing that momentum. When we say we want to be the operating system for modern finance. The proof is in the fact that we are coming in and eliminating the non-value-added work or technical debt, as many will call it, in the business. I think that's a great indicator as we continue to see more and more adoption of the platform. In so many ways, there are three elements to our platform that I think everyone should

kind of, we call it, it's uniquely unified. From the very beginning, we knew we had to be able to to do actual reporting, financial planning, and also be operationally relevant, help the CFO engage outside of those core elements. However, it has to be infinitely extensible. And so what do we mean by that? At the end of the day, like right now, the hot topic is ESG or many other topics. There's always a new statutory pressure on the office of the CFO. If we don't solve it for them within the confines of our platform, just like on your smartphone, I can turn on my sprinkler system right now on my smartphone. I didn't think I would be doing that, controlling those different elements of my life from that smartphone years ago. It's the same thing for

the CFO. There's always a new need. How can we deploy new solutions within our platform without creating technical debt, giving them value under the same security model, the same unified data model, but solving that additional problem? And then again, infusing that all with AI. That is really the opportunity here. And I think as you hear me talking about it and as a retail investor, that's why we're so excited about the business. And I think that, again, underscores why we were able to IPO this year when others might have shied away. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear.

I'm Dylan Lewis. Thank you for listening. We'll be back tomorrow.