Rimini Street, Inc. (RMNI) Q4 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to Rimini Street Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] Also as a reminder this conference call is being recorded. At this time, I'd like to turn the call over to your host to Dean Pohl. Please go ahead.

Thank you, Operator. I'd like to welcome everyone to Rimini Street's fourth quarter and fiscal year 2018 earnings conference call. On the call with me today is Seth Ravin, our CEO and Tom Sabol, our CFO. Today we issued our fourth quarter and fiscal year 2018 earnings press release which can be found on our Web site. A reconciliation of GAAP to non-GAAP financial measures has been provided in the tables following the financial statements in this press release. An explanation of these measures is also included in the press release under the heading non-GAAP financial measures. As a reminder, today's discussion will include forward-looking statements that reflect our current outlook. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We encourage you to review our most recent SEC filings including Form 10-K for the full year 2018, which was filed today for a discussion of risks that may affect our results or stock price. Before taking questions, we'll begin with prepared remarks. With that, I'd like to turn the call over to Seth.

Thank you, Dean and thank you everyone for joining us today. We ended fiscal 2018 on a high note by signing the largest client contract in company history approximately $26 million for three years of service and achieved record revenue and billings for the fourth quarter and fiscal year. Additionally, we improved our balance sheet and made significant investments in new products and services, support capabilities, geographic expansion and sales and marketing infrastructure. We continue to see growing global demand for our enterprise software support products and services. For the fourth quarter and fiscal year ended December 31, 2018, we generated revenue of $67.7 million and $252.8 million year-over-year increases of 17% and 19% respectively. Gross margin expanded for full year 2018 to 62.0% up from 61.0% for 2017. Revenue retention rate for subscriptions which is substantially all of our current revenue mix remained above 90% with approximately 77% of subscription revenue non-cancelable for at least 12 months on a rolling basis. We ended 2018 with 1802 active clients representing a year-over-year net increase of 15% from December 31, 2017. Our active client count included 101 Fortune 500 and Fortune Global 100 companies. For the full year, our global service delivery team closed a record number of support cases nearly 30,000 across 55 countries delivered nearly 50,000 tax, legal and regulatory updates and maintained an average client satisfaction rating of 4.8 out of 5.0 on the company's support delivery were 5.0 is rated as excellent. We ended 2018 with 1085 employees a year-over-year increase of approximately 17%. Investments and initiatives; during 2018, we focused on four key investment and initiative areas. Number one, balance sheet, we refinanced our credit facility to deleverage our balance sheet, improve cash flow and eliminate operating covenants from our prior credit facility. The objective was met through the refinancing which reduced our total debt obligations by $133 million to $3 million and reduced go forward financing related costs by approximately $95 million through 2021. Number two, sales and marketing, we invested in sales strategy, next generation sales messaging, sales and marketing infrastructure and sales capacity modestly ramping sales and marketing spend during the first half of the year within relax covenants and further increasing spend during the second half of 2018. Once we completed the refinancing of our credit facility and the related covenants were eliminated. In the third quarter, we launched our new business driven roadmap sales strategy and messaging supported by new marketing campaigns. The response so far has been positive based on increased attendance at conference presentations, feedback from prospective clients, pipeline development and transaction closes. Sales and marketing infrastructure investments included building our global sales and marketing leadership, operations and program execution personnel, followed by a focus in the second half of 2018 on recruiting and hiring sales execution capacity. Number three, new products and services. We invested significant capital, labor and focus into the development of new products and services some of which have been formally announced, launched and already sold to clients. Other new products and services are still in the development or charter client phase. An example of a new product that was announced in fiscal 2018 is application management services for Salesforce sales cloud and service cloud products. Examples of new products sold in fiscal 2018 include Rimini Street Analytics and Rimini Street Mobility. Number four, global infrastructure and capabilities. We invest in an expanded global infrastructure, operations and capabilities to enable additional sales. Examples of expansions include a new U.S. facility in Chicago. Additional staff in the U.S., Brazil, France, Japan, Korea, Sweden as well as a new subsidiary Rimini Street New Zealand Limited with a new personnel and an office in Auckland. Offerings and vision. Rimini Street's mission is to replace expensive ineffective enterprise software support with our more comprehensive ultra responsive and cost-effective support services. Since inception over 2,800 clients from a broad range of industries have selected Rimini Street as their trusted enterprise software support provider including over 150 of the Fortune 500 and Global 100 and we have saved them an estimated $3 billion to-date. We currently provide support for more than 20 product lines from Oracle, SAP, Microsoft, IBM and Salesforce.com. We plan to continue expanding our support coverage to additional vendors and product lines. Our services enable licensees to maximize the ROI on their existing enterprise software investments by extending operating lifespan, reducing operating costs and enabling the redeployment of financial labor and time savings to investments that will create competitive advantage and growth. As an example, I'd like to highlight one of our clients. Welch's a Massachusetts based maker of grape juice, jams and fruit related product, who switched to Rimini Street for its Oracle E-Business Suite application and Oracle Database software. By switching to Rimini Street, Welch's avoided the wasted time and expense for what they saw as an unnecessary upgrade just to continue their maintenance and support relationship with Oracle. With nearly $1 million in annual maintenance and support cost savings, Welch's was able to invest in new strategic marketing initiatives and new product development such as Welch's new Sparkling Rosé. Competition; competition with our primary competitors Oracle, and SAP remains fierce. The software vendors are attempting to retire many popular releases from full support by 2025. Release is currently in use by thousands of licensees. We believe this forced retirement of popular and stable releases creates an even stronger demand environment and sales opportunity for Rimini Street support service alternatives. We continue to see Oracle and SAP engaging in a parent's substantial discounting of annual support fees in competitive bids against Rimini Street. While Oracle and SAP's aggressive discounting has caused some Rimini Street deal losses that we otherwise believed we would have won. The pricing of the annual support services only accounts for about -third of a client's expected savings switching to Rimini Street support and even less of the total savings, if a client utilizes the full suite of Rimini Street products and services. Therefore, even if the software vendors were to match Rimini Street's discounted annual support fees, clients still receive a better overall value with the Rimini Street's business driven roadmap. Oracle litigation status and developments, as discussed in previous earnings calls, we have two different ongoing litigation matters with Oracle. Oracle's litigation against Rimini Street filed in 2010 that is in the appeal stage for a second time and that is referred to as Rimini 1. Rimini Street's litigation against Oracle filed in 2014 that is in the pre-trial stage and referred to as Rimini 2. With respect to Rimini 1 and taking into account our successful first appeal, we prevailed in 11 out of 12 claims alleged by Oracle with a jury finding only innocent infringement related to support processes no longer in use since at least July 2014. The innocent infringement finding means that Rimini Street did not know and had no reason to know that its former processes were infringing. Following its successful first appeal before the U.S. 9th Circuit Court of Appeals, Rimini Street received a refund of $21.5 million from Oracle on March 30, 2018. On March 4, 2019, the U.S. Supreme Court issued an unanimous decision ruling that Oracle must return an additional $12.8 million that Rimini Street paid to Oracle in 2016. Rimini Street is seeking an additional refund from Oracle of $28.5 million through a second appeal as well as an order vacating an injunction issued by the U.S. District Court against Rimini Street on August 15, 2018. The injunction is virtually identical to the injunction that was previously issued in 2016 and that was vacated by the Court of Appeals in January 2018. The renewed injunction does not limit any sale of service for any Oracle products or restrict service deliverables Rimini Street provides its clients, but rather defines the manner in which Rimini Street may continue to provide support services for certain Oracle product lines. However, as previously noted, compliance with the injunction increases the amount of labor required for Rimini Street to complete its support deliverables for some clients, therefore, costing the company approximately 1% to 2% of annual revenue to comply with the injunction. For that reason and others Rimini Street intends to continue pursuing its appeal of the injunction. The Court of Appeals has notified us that they may hear oral arguments during the month of July 2019. With respect to Rimini 2. In addition to other cause of action Rimini Street is seeking damages from Oracle for behavior that we believe was illegal and has materially impacted our new client sales since the second quarter of 2017. Oracle is also seeking damages from Rimini Street. Discovery has concluded and we await the District Court's ruling on summary judgment motions. Trial is not currently expected to occur until 2021 or later. In summary, we are pleased with the operational and balance sheet progress made in 2018. As we look to our key initiatives and objectives for 2019, we plan to continue making significant investments in new products and services, global infrastructure and capabilities and sales capacity. We expect the return on these investments to first appear in billings growth in the second half of 2019, and then, followed by accelerated revenue growth in 2020. I will now turn the call over to Tom Sabol, our CFO.

Thank you, Seth. Let me begin with the summary of our fiscal fourth quarter and full year 2018 results. As Seth noted, revenue for the fourth quarter was $67.7 million and full year was $252.8 million exceeding the high-end of our guidance range and year-over-year increases of 17% and 19% respectively. Q4 annualized subscription revenue was approximately $269 million up 16% year-over-year. Clients within the United States constituted 65% of total revenue for full year 2018, a growth rate of slightly above 13% year-over-year. Clients outside the United States constituted 35% of total revenue for full year 2018, a growth rate of 30% year-over-year. This has been and will continue to be an area of continued investment and expected growth for the company. Gross margin was 64.4% for the fourth quarter and 62% for full year 2018 up from 57% in the prior fourth quarter and 61% for all of 2017. The increase was due primarily to leveraging the existing infrastructure against a higher revenue base and a decrease in outside consultants in contract labor costs versus the prior year. For 2019, we expect some gross margin pressure due to complying with the injunction mentioned earlier by Seth that we expect will decrease gross margins by 1% to 2%. We also plan to increase service capacity for new products and services. With that said, we currently expect gross margin to be around 60% for all of 2019. Sales and marketing expenses as a percentage of revenue was 40.8% for the fourth quarter and 36.9% for full year 2018 up from 32.9% for the prior fourth quarter and 31.4% for all of 2017. We currently expect sales and marketing to be in the range of 40% to 43% of revenue for all of 2019. Sales and marketing expenses are currently expected to be in the range of 39% to 40% of revenue for Q1 of 2019. General and administrative expenses as a percentage of revenue which excludes outside litigation costs was 10.7% for the fourth quarter and 14.6% for full year 2018 down from 16.2% for the prior fourth quarter and 17% for full year 2017. The improvements were the result of leveraging current infrastructure against rising revenues. In addition, previously accrued sales taxes were reduced by $3.4 million for the fourth quarter and $4.9 million for the full year 2018 due to negotiated tax settlements with certain states. Excluding the sales tax accrual reversals G&A would have been 16.5% of revenue in 2018. We currently expect G&A as a percent of revenue to be in the range of 15% to 17% for 2019, but could be up to 18% in Q1 2019 due to the timing of 606 implementation and other costs. Litigation expense was $5.1 million for the fourth quarter and $31.1 million for full year 2018. This was offset by the return of $21.5 million received from Oracle on March 30, 2018 that we had paid in 2016. It should be noted that our outside litigation spend is not linear and can fluctuate each quarter based on litigation activities. We currently expect litigation expense to be in the range of $13 million to $15 million for all of 2019 due to expected reduced litigation activity compared to 2018. In addition, this should be offset by the return of $12.8 million plus interest from the U.S. Supreme Court decision on March 4, 2019, related to non-taxable expenses that were paid to Oracle in 2016. GAAP operating income was $3.6 million for the fourth quarter and $25.4 million for full year 2018 compared to operating income of $4.3 million for the prior year fourth quarter and $22 million for full year 2017. Non-GAAP operating income was $10 million for the fourth quarter and $31 million for full year 2018 compared to $5.6 million for the prior year fourth quarter and $29.8 million for full year 2017. Interest expense and other debt financing expenses were approximately $300,000 for the fourth quarter and $90.9 million for full year 2018 compared to $13.4 million for the prior year fourth quarter and $61.7 million for full year 2017. The fourth quarter was our first full quarter after paying off our former credit facility resulting in a dramatic decrease in interest and debt financing expenses. For full year 2018, the increase in financing related expenses compared to the prior year was primarily due to a non-cash write off of debt discounted issuance costs of approximately $37 million in the third quarter of 2018 relating to the termination of our former credit facility. The remaining non-operating income and expenses were approximately $500,000 of net expense for the fourth quarter and was also approximately $500,000 of net expense for full year 2018 compared to $5.8 million for the fourth quarter and $12.2 million of expense for full year 2017. Prior to the fourth quarter of 2018, a majority of the other operating income and expenses related to our former credit facility that required non-cash adjustments for embedded derivatives in redeemable warrants, which are no longer applicable. Net income was $2.3 million for the fourth quarter and a net loss of $68 million for full year 2018 compared to a net loss of $3.9 million for the prior year fourth quarter and a net loss of $53.3 million for full year 2017. The full year results are impacted materially by non-cash expenses related to our former credit facility of approximately $48 million and $26 million for all of 2018 and 2017 respectively. Non-GAAP net income was $8.7 million for the fourth quarter and a non-GAAP net loss of $8.7 million for full year 2018 compared to a non-GAAP net loss of $8.5 million for the prior year fourth quarter and a non-GAAP net loss of $32.9 million for full year 2017. As a reminder, we issued $140 million of Series A preferred stock on July 19, 2018, cash dividends on the Series A were $3.5 million for the fourth quarter and $6.4 million for full year 2018, while payment in kind dividends were $1.1 million for the fourth quarter and $1.9 million for full year 2018. Reflecting the Series A dividends, basic and diluted net income loss per share applicable to common shareholders was $0.06 for the fourth quarter and a net loss per share of a $1.28 for full year 2018 compared to a net loss per share of $0.07 for the prior year fourth quarter and a net loss per share of $1.65 for full year 2017. Adjusted EBITDA was $9.9 million for the fourth quarter and $31.3 million for full year 2018 compared to $6 million for the prior year fourth quarter and $32.1 million for full year 2017. Moving to the balance sheet, deferred revenue as of year-end 2018 was $209.3 million compared to $181.6 million as of year-end 2017, an increase of 15% year-over-year. We closed the fourth quarter with $25.2 million of cash on our balance sheet, cash flow from operations for full year 2018 was $22.4 million compared to $29.2 million for full year 2017 and our outstanding debt as of year-end 2018 was less than $3 million, which we expect to pay off in the first half of 2019. Now with respect to first quarter and full year 2019 revenue guidance. We expect first quarter of 2019 revenue to be in the range of $64.5 million to $66 million and we expect full year 2019 revenue to be in the range of $265 million to $280 million. And with that, operator, we will now take questions.

Thank you, sir. [Operator Instructions] Our first question comes from Derrick Wood. Your line is open please.

Great. Good afternoon. Looks like a solid quarter you had a growth re-acceleration, but guidance was a little below what we were thinking for the year and it calls for single-digit growth. Can you just flush out some of the factors that came to play around the outlook for 2019 on the top-line?

Sure, Derrick. Seth here. So, I mean continuing on from the conversations in the prior earnings calls, one of the biggest challenges we have has been hiring sales reps. We wanted to hit a target and you remember from the last call, we were hoping to be able to hire to 85 really accelerate in the back half of '18 with hiring. We were hoping to have 80 to 85 by year-end in terms of sales reps on the street and we're ending Q1 with probably 68. This really has downward pressure obviously in the year. I mean we've had to adjust our numbers and that's why you're seeing a little softer than we would like in terms of revenue generation. But it really is pure math on capacity. When we look at the business and you can see from you know the largest deal we've ever done, we got done in Q4. We've got some really good quality sales happening across the world, but we just are having a really challenging time finding and hiring top sales talent. The number of jobs out there for top sales reps in technology is probably an all time high. And it's competitive. So that's, when you look at the entire model and you look at where we're at, you just do the math on the capacity and that's going to bring down the amount of revenue we can generate this year even the amount of bookings, if we can't get all these people hired. That's our big challenge.

Sure. Okay. Do you have any targets for rep headcount by the end of the year and I mean I guess, it is what it is in the competitive environment, but are there things to pivot to look into other areas to beef up sales headcount or is it just kind of keep tackling at it?

Well, we've done a few things. One, we are looking to hopefully have 90 to 100 heads by year-end. The amazing part, when you look at the numbers, we hired a lot of reps, but we also lost a lot for various reasons some we took out, who weren't performing. Others, it's just really competitive everyone is taking reps from everybody. And so, we did hire well over 20 people, and then we lost a good number. So, that's why net wise, we didn't get as far as we wanted to go. Leaving out a few unfortunate debts on the sales team, which was an other factor. But when you look at the total numbers, getting to 90 to 100 by year-end, we beefed up the recruiting, we've added more people, really trying to focus and with a very concerted effort to build that pipeline of reps and get them in. And as you know, it takes about nine months to get them productive and really working and that's why you're seeing it impact the guidance for 2019.

International continue to do quite well. And clearly hiring the ROI would be good, could you look at leaning more aggressively on the international side?

Yes. Different pockets of talent in terms of us being able to hire. I think you're seeing international grow we have a lot of new territory that we haven't covered before. You're watching some of that, but what you're watching for North America, North America being the most mature and the largest segment, we hired a new General Manager for the first time, North America is being managed as a feeder. And as you've seen over the last few quarters, Rimini Street continues to evolve its global model to where we have five operating feeders with five operating GMs, who are responsible for the business. And you're watching us move that as you would expect as part of maturity at our size. We're moving to where corporate is providing strategic guidance, providing the goals, providing the training, providing the materials, and we're allowing these five operating units to get on their own feet and run as almost big subsidiaries. And so, North America being the biggest chunk of that revenue never had a General Manager overseeing North America. We added that this year when we brought in Tim DeLisle, who is a strong player from the EMC world.

Tom, a couple for you. The mix of contingent contracts and deferred, was there any big change sequentially or unlock, I guess from previous mix?

Actually, Derrick for the last two quarters we have not had any significant opt outs. So, there was really no change from Q3 to Q4 with regards to the level of contingent contracts or opt outs. We have very little of that, that impacted us back in 2017 and early 2018, after some of the issues that we had with the litigation and stuff that we had to offer those. So those have actually decreased fairly significantly over the last few quarters.

Okay. And then, I know you guys have some ebb and flow round renewal rates given kind of customer timeline profiles around the product maturity. How are you thinking about 2019 renewal rates trending versus 2018?

We consistently been above 90%. We would assume that we would continue to be somewhere in that 91% to 94%, 95% range. At this point, we don't see anything that would cause us to continue to be above 90%. Seth, could if you wanted to talk about some of stuff that we're looking to do with -- doing more upsell with some of the new products where we would ultimately hope that percentage would go up because of upselling, but I don't think [indiscernible] as of right now, we would expect it to be significantly different.

Yes. And building on that, I think, Derrick, when you look at our -- as you mentioned, the ebbs and flow of retention are different than a typical SaaS software company, even though we're subscription, because people check products and they check the math, they're moving around a lot, lot more on the volatility in the renewal rates. But, they've always sort of been bound, as you know, from sort of a -- in terms of renewal, invoicing loss between the 10% and 20% averaging out at a 15% to 16% a year, cycling out. We wouldn't expect that our range is likely to change, but what we are doing is, as Tom said, we are making our clients stickier by providing additional services, increasing our value proposition, so that we lock-in clients for more revenue on a longer-term basis and that's been our strategy. Those are the types of investments we're making. And we're also at the same time increasing our spend on global client engagement. So, the account management team is being expanded quite a bit in 2019. We brought in Anthony DeShazor to be the new Chief Client Officer to focus a 100% on clients and upsell, getting them to drive utilization of our services, which drives more value. All those things affect retention rates and they are all designed to drive down retention loss and increase retention rates and the length of lifetime for customer value.

All right. And Tom made a comment around upsell and I'm just thinking of other new products in terms of vendor platforms you work with. And I don't know, outside of Oracle and SAP, are there any other ones that would move the needle in 2019, or is it still a little farther up?

I think, you may have seen we just made an announcement, 10 minutes before the earnings release came out, EBSCO selected Rimini Street for Salesforce AMS services. Obviously, this is the first win we're announcing on Salesforce. As I mentioned to you, we would walk, before we jog, before we run. And we're going to start trickling out information on the Salesforce successes as we begin moving down this path. In terms of the real effect on the numbers, I think they could have an effect on the numbers for this year as upside, we're very conservative, as you know in our guidance, in our forecasting. If we are able to move these services as fast as we would like, I think there's upside potential for that. And that's just something we'll have to see again. Come right back to the how much capacity do we have on the ground to move product? And that's the math equation that's bottlenecking us right now.

Got it. Okay. Thanks, guys.

Thanks, Derrick.

Thank you. Our next question comes from Brian Kinstlinger from Alliance. Please go ahead.

Great. Thank you so much. Sorry, I joined a little bit late, so hopefully my questions have already been answered. But, can you talk about, with that large customer, was that fully ramped in 4Q, or has it begun ramping and it will be in the first quarter, I just trying to understand the quarterly sequential growth from this customer.

Why don't you take that, Tom, it sounds like that's more of a rev rec. How do you see that playing into the numbers question?

Yes. So, because we're ratable, and yes, Brian, we did win that customer early in the quarter. We did get the benefit of most of that in the quarter. So, it's not going to have a big upside effect between Q4 and Q1.

Great, thanks. And then last quarter, you may have touch on this again, but you talked about SAP getting more aggressive on discounting. Can you update us, has that trend continued? Is the customer base that you talk to as you're proposing? Are they talking about that and as they evaluate your service as well?

Yes. I think part of maturing a market is, you watch how things play out in competitive bidding. And the fascinating part is in the early part of our market days, we were so separated from the mainstream of customer day-to-day decisions that we weren't really part of procurement efforts. And I think what you're watching is, as we move into more and more of a mainstream position and I think this is really another proof point. We are put up, straight up against the vendors for direct fierce comp competitive bidding. And it's in that environment that we are watching the vendors raise their discounting levels over the years. And I think it's a direct result for them having to compete directly against us in a pure procurement process. Just something that we'd watched for years, for example, when Oracle and SAP are in the deal by themselves. They don't have much competitive pressure; their pricing is higher. And I think that the facts have proven out over the years that when they're up against each other, there is going to be more discounting. And now Rimini Street has reached a size and threat level. I mean, you look at the size of that deal that we did in the fourth quarter coming off of a vendor's books, that's serious money and because of that, when you enter fear into the equation for the vendors, you're watching them respond with some discounting in order to try and protect their turf. So, I think, it's just a sign of Rimini Street's growing strength and how serious we are in the market that the vendors are feeling the need to discount. They're not feeling as confident that they can win that business just because they're the vendor anymore.

Yes. And so, with SAPs mandated upgrade ahead, can you talk about your plans on the marketing and advertising side and are the specific campaigns are set to launch to attract more and more customers given this issue?

Sure. And we are already well under way, and in fact, if you look on our Web site, you'll see there's a webinar coming up talking about how to navigate 2025, Rimini Street customers don't have to worry about that data, it doesn't mean anything because we support for a minimum of 15 years guaranteed from whenever they signed a contract, but it is a substantial opportunity. If you think about the SAP world as tens of thousands of customers who are now being forced to make a decision, the status quo is no longer an option. So, for them, they've got to make a decision now between, do they go with the vendor's roadmap and embark on this extremely expensive, risky project takes a lot of resources away from all the other projects they have as a company, for what benefit against the idea of going down a business-driven roadmap of their own design in which case Rimini Street is the only real company out there that has 2,800 proven successful business-driven roadmaps over the last 14 years. So, I think it puts us in a very strong position because it's really coming down to a choice that we're presenting in front of customers, go with the vendors way or if you're going to go your own. The only safe, real route, proven route is Rimini Street. And we do have the campaigns that are all over the world already on this. We're speaking at seminars, we were just at the Gartner Seminar in Japan this week, standing room only talking about our business-driven roadmap, in fact, overflowed the room. It only held 250 people and they had to set up a second satellite room where people could watch the video feed and listen to it remotely. That's how interested people are in looking at alternatives when you're staring down the only alternative from the vendor of a massive spend and project.

And then, I know leading up to -- from that question, I know Oracle is obviously a much more mature practice for you. Can you talk about the relative growth rates maybe in the fourth quarter of SAP and Oracle for your business and then as you look to this year based on your guidance how do you see those two growth rate changing of those two businesses?

I think, we have traditionally been sort of in that 70% Oracle, 30% SAP world, not so much because Oracle is more mature. It's just, we have a lot of Oracle products, we cover right. So, it's really more of an aggregation of all of Oracle product versus SAP, but the SAP products are doing very well. I think, when you think about SAP's aggressive move to terminate the support on this massive customer group and just to give you some sense of size. In the SAP world, you're talking about tens of thousands of customers running their current platforms and then compare it to Oracle, where you may have a few thousand people soft, you may have 8,000 to 10,000 Oracle EBS, databases in the hundreds of thousands of customers. But outside of that, on the application side, it's really, we think of it as parity on the applications of sort of 50,000 versus 50,000 SAP. SAP, ASP tends to be higher, so when you really look at the dollar value of that SAP Group being forced to 2025 and Rimini Street is the best alternative, really is a huge opportunity to increase the SAP business pretty dramatically in the coming years.

You're right. So, do you think in two to three years, it's reasonable that SAP would be 40% to 50% of your business, or do you think that's getting a little ahead of it?

I think it's a little hard to say. I mean, because we're still launching and have been launching right, additional Oracle products and there's so much business. So how that mix will turn out. I think that's too hard to predict, but I do think you're going to watch growth in both the Oracle and the SAP lines.

Great. Last question I have is, you've entered some new geographies in 2018 and, can you talk about how investors should think about the time it takes to ramp a new region and the impact maybe on revenue will it take a year or two years, is it nine-month training once it opens as well, just like a new salesperson?

I think that every region is different and I'll give you an example. I mean, we've talked about how we moved into New Zealand this year. And the reason we opened geographies are two-fold. One, is it's potentially another opportunity to increase sales in that particular geography. The other reason we open up a geography is because, in order to serve the largest companies in the world, some of them are operating in 200 countries and we have to have the capability within certain countries and geographies in order to win the business of these really big global. So, there is local business and there is global business and we'll really make decisions on geographies, based on those two factors. So, sometimes we'll open an office, not necessarily expecting to -- we're going to sell a lot in that region, but it enables a tremendous amount of sales because Large Global's need to know we have people on the ground in that area to get comfortable. Right? And so those are -- that sort of the decision-making process. For those that are sales, we always think about -- I always tell people when we go into a new country, or a new geography, we love to set a goal for ourselves, hey, get five to ten new deals in the first year, right, because the first year is always tough, new geography, you have to introduce the product. You have to get an operation up and running. And then, we like to set ourselves with a reasonable growth target thereafter. And I think that historically, we've done pretty well in managing to that kind of expectation that we have deals that start to flow in. And usually in operation, not necessarily going to be profitable in itself on a basic cash in cash out basis in the first year, but we've been getting there pretty quickly in a lot of these operations that they start paying for themselves pretty fast.

Great. Thank you so much.

Sure.

Thanks Brian.

Thank you. Our next question comes from Richard Baldry from ROTH Capital. Please go ahead.

Thanks. Can you talk -- since I'm the new guy, maybe a little about any seasonality on the revenue cycle. The reason I ask is, if I look at your 4Q run rate that basically puts you in the mid-range of your guidance for 2019. Just trying to figure out if there's any seasonality, dips, ebbs and flows that sort of give us something that could come to the lower end versus the higher end because you've been in a very steady state sort of sequential growth pattern from what I see in the trailing numbers. Thanks.

You want to go ahead and take that one, Tom?

Yes. So, Richard, we really don't have that much in the way of seasonality. We've talked in the past that Oracle as of May 31 year-end and SAP has a December 31 year-end, which, of course, results in some, I don't want to say seasonality, but -- they will push for a lot of customers to sign deals. And of course, SAP, almost all of their customers have a December 31 MED. But Oracle, of course, has a chunk at the end of May, so but we really don't have a significant amount of seasonality around our business. As Seth had said in an earlier question, we're really being impacted between Q4 and Q1, because of some headcount issues with the sales organization. And then again, because our billings growth in 2017 and the first half of 2018 was not strong. Of course, that means our renewal rates are down too as well then from prior years. So that, in combination is what's causing the issue here between Q4 and Q1, but we really don't have a significant seasonality to our business from a revenue standpoint.

Okay. Then, can you talk about -- are you seeing any similarity to hiring challenges and through your core support personnel that you're seeing in the sales side or the skill sets so different that it's really, that's not a relevant comparison?

Yes. We don't see the issue on the engineer. There's a lot of engineering talent out there. And I think, the big difference with sales reps is you have to train them on how to sell this service and answer a thousand questions about it through a diligence cycle. The engineering talent is productive day one, because we're hiring them because they already know how to service the product, right. So, that's one huge difference just in time to productivity is one day and engineer can start taking calls, they just need to learn how to work with the customers the way we want them to at Rimini Street, the way we want to handle customers, our systems, our processes, our way of doing things. And that doesn't take long for them to learn. The talent is out there, the only challenges we find is, we've had to relax some of our English-speaking desires for some of our engineers around the world. For example, in Japan and Korea, really hard to hire great talent that's both bilingual and we used to like to have them speak English because that really help on global communications. But, it's one of those things now we use translators on staff, so that we can hire people for great talent who don't speak English, and that's opened up a lot more talent in some of these countries too, by getting rid of the English-speaking requirement.

And sort of moving into a position, it looks like to me that you'll have some meaningful free cash flow, put away that refinancing and sort of got the business running on a steady state? What would you think about as priorities for free cash flow? You talked about getting rid of that stuff $3 million in debt in the first half, that's not a meaningful amount, so what comes after that, are there any M&A tuck-in, things like that to look at or other areas that you'd like to push more investments in? Thanks.

Yes. So, let me, I will let Tom answer that in a second. Let me just start by saying, this is another investment year and just as we said last year, we were going to invest a good amount of money in expansion, new products and services, building out a sales infrastructure that can support a much larger revenue number, right. We're trying to get from that $0.25 billion to the next goal, which is the $0.5 billion. And through this transition means we have to build the infrastructure and we did a lot of that in 2018, but we didn't get it all done. And that's a two-year process and as we said, we're going to continue those investments into '19, we're going to spend money on it. You plus -- you watch the gross margin drop a couple of points in our guidance just because we have to comply with the injunction until and unless we can get it removed. And so, we're going to spend some money building out infrastructure resources, so from a year perspective, this is going to be a building year and we talked about it at the end of last year, that this is the year we're going to build the infrastructure, we want to see bookings increasing, so that'll be the result in the back half of this year, which will translate to accelerated revenue in 2020. So, this is really all about positioning for 2020 and later to move from that $0.25 billion to $0.5 billion a year. So, Tom, you want to add on top of that?

Yes. Richard, I'll remind you, of course, that we do have the dividend payments that we have to make as well, too. But I would just reiterate what Seth said. Our view would be is that building out the sales and marketing infrastructure and the sales reps team, the sales reps themselves and then on investment into Salesforce.com and some of the other products that we're working on. And you should also assume that there will be some other expansions well, it's not expensive we would expect to ultimately have some other geographic expansions here over that next 12 months to 18 months as well. So, I think those would be the priorities. And as Seth said, it's getting the company's infrastructure aligned to be able to handle faster growth in 2020, accelerated growth in 2020 and beyond and to get the company to a larger scale.

Great. Thanks.

Okay.

Thank you. I show no further questions in the queue at this time. I would like to turn the call back over to Seth Ravin, CEO for closing remarks.

Well, that's great. Thank you very much and I appreciate everyone bearing with us, I know it was a little longer call today. And, we really look forward to the Q1 announcements. We'll have some additional announcements we will expect on geographic expansion as well as products and services and give everyone an update on how these new products and services are rolling out into the marketplace. So, again, thanks, everybody. Appreciate the time today. Take care.

Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.