Rimini Street, Inc. (RMNI) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Rimini Street's Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Dean Pohl, Director of Investor Relations. Sir, you may begin.

Thank you, Operator. I'd like to welcome everyone to Rimini Street's Second Quarter 2019 Earnings Conference Call. On the call with me today is Seth Ravin our CEO, and Thomas Sabol our CFO. Today we issued our second quarter 2019 earnings press release, which can be found on our website. 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. A copy of the press release and financial tables, including the GAAP to non-GAAP reconciliation and other supplemental financial information, can be viewed and downloaded from the Investor Relations section of our website under Investor Events. 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 our Form 10-Q for the second quarter of 2019, which was filed today, for 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. During the second quarter, we improved sales bookings 17% year-over-year, expanded sales capacity 21% year-to-date and continued to invest in sales productivity and effectiveness. We also continued to invest in new enterprise software products and services such as our Application Management Services for SAP and expanded operations in Eastern Europe, Latin America and Southeast Asia to address growing demand. For the second quarter ended June 30, 2019, we generated revenue of $68 million, a year-over-year increase of 8.5% with annualized subscription revenue of $270 million up 10% year-over-year. Gross margin for the quarter was 63.2%, up from 58.4% for the prior year's second quarter. Revenue retention rate for subscriptions, which is substantially all of our current revenue mix, remained above 90% with more than 70% of subscription revenue non-cancelable for at least 12 months on a rolling basis. We ended the quarter with 1,896 active clients representing a year-over-year net increase of 17 %. Our active client count included over 100, Fortune 500 and Fortune Global 100 companies. The quarter end employee count totaled 1,173 a year-over-year increase of approximately 9%. For the second quarter, our Global Service Delivery team closed a record 8,000 support cases, delivered more than 7,000 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, where 5.0 is rated as excellent. We also proudly announced that Rimini Street's Senior Vice President of Global Client Onboarding Nancy Lyskawa won a Gold Stevie Award for Female Executive of the Year. Investments and initiatives, our primary investment initiatives remain consistent, which are to drive accelerated revenue growth, increase the wallet share of client IT spend and grow the lifetime value of each of our clients. To further these initiatives in the second quarter, we continued to invest in global sales capacity and productivity, new product and service offerings, new geographic operations and capabilities and up-sell programs targeting existing clients. An example of a new service offering is our Application Management Service, AMS for SAP. Now, in addition to leveraging Rimini Street's support services for SAP that replaces expensive and lower value software vendor annual support, clients can Rimini Street run their SAP systems, with the turnkey solution that integrates application management and support services. Rimini Street has been successfully delivering its integrated AMS and support for SAP enterprise software to clients in North and South America. And today we announced the global availability of the services in a separate press release that could be found on our website. According to leading analysts, the global market for application management services in 2018 was between $82 billion and $90 billion and currently growing at more than 5% annually. We see this as a significant opportunity to secure additional long-term service contracts, grow revenues and increase the wallet share of clients IT spend. Competition. Competition with our primary competitors, Oracle and SAP remains fierce. Both software vendors are engaged in continuing efforts to force their licensees to upgrade and migrate from current stable software releases to the vendor's newest immature releases. Oracle is ending full support for some software releases by 2025 and SAP has declared that tens of thousands of licensees around the world using their most current popular product and release ECC 6 must migrate to their newest product, S/4HANA by 2025 in order to remain fully supported. To better understand market sentiment and plans of Oracle and SAP licensees and Rimini Street's opportunity, in the second quarter we conducted surveys of Oracle and SAP licensees across a broad range of industries. 80%of the oracle respondents stated that they are not planning to move or unsure about migrating to Oracle software-as-a-service offerings and 80% of SAP licensees stated they plan to continue running their current, customized and mature SAP systems to at least or beyond 2025. We believe the forced retirement of popular and stable releases by Oracle and SAP should create an even stronger demand environment and sales opportunity for Rimini Street's Application Management and Support Services, in the years ahead. We also had several strategic competitive wins globally during the second quarter. One such win was against Oracle at Hyundai Kia Motors in Korea, where Rimini Street became the support provider for the client's vast global Oracle database portfolio. As Mr. Lee Beom Tae, Head of Hyundai Kia's Cloud Infrastructure team noted, Rimini Street demonstrated its competitiveness by offering robust and responsive database support along with cost savings benefits, allowing Hyundai Kia to actively push forward innovation and offer greater value to their customers. Oracle litigation status and developments. As discussed in previous earning 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. And 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, during the second quarter, Rimini Street received $12.8 million-plus interest and other costs from Oracle as ordered by the US Supreme Court. This was in addition to $21.5 million Oracle was previously ordered to return to Rimini Street by the U.S Court of Appeals and paid in March of 2018. Rimini Street is currently 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 US District Court against Rimini Street on August 14, 2018. The oral arguments were presented to the US 9th Circuit Court of Appeals on July 12, 2019 and we currently expect the Court's decision by the first quarter of 2020. However, the Court's decision could be earlier or later. With respect to Rimini-2, discovery has concluded and we await the District Court's rulings on summary judgment motions. No trial date has been set and trial is not currently expected to occur until 2021 or later. Summary, we believe our continued investment in and focus on sales capacity and productivity, new products and services and global expansion is beginning to show returns in our second quarter results. We continue to expect investment returns to become more visible in billings growth in the second half of 2019, followed by accelerated revenue growth in 2020. I will now turn the call over to Tom Sabol, our CFO.

Thank you, Seth. As Seth noted, revenue from the second quarter was $68 million, a year-over-year increase of 8.5%, with annualized subscription revenue of approximately $270 million, up 10% year-over-year. For the second quarter of 2019, clients within the United States constituted 65% of total revenue, while international clients were 35%, representing aggregate year-over-year total revenue growth rates of 12% for the US and 2.5% for international. While subscription revenue was up 11% and 8% year-over-year for the US and international respectively. Note that Q2, 2018 international revenue included non-subscription consulting revenue of approximately $1.2 million, which impacts the current year-over-year comparison. Gross margin was 63.2% for the second quarter, up from 58.4% in the prior-year second quarter. While we believe that gross margin from our established services will continue to expand, this will be offset by the ramp-up of costs associated with the introduction of our newer products such as Salesforce and the global rollout of our Application Management Services for SAP, mentioned earlier by Seth. Therefore, we continue to expect our overall gross margin to be around 60% for the full-year, which is unchanged from our prior guidance. Sales and marketing expenses as a percentage of revenue was 38.8% for the second quarter, up from 36.9% for the second quarter of 2018. Sales and marketing expenses are currently expected to be up to 44% of revenue in Q3 of 2019, as we see the impact of sales rep hiring at the end of the first quarter and more fully in the second quarter along with the anticipated higher marketing spend. We still expect sales and marketing expenses to be in the range of 39% to 42% of revenue for full-year 2019. General and administrative expenses as a percentage of revenue, which excludes outside litigation costs, was 16.6% for the second quarter, unchanged year-over-year. We expect G&A expenses as a percentage of revenue to be in the range of 16% to 18% for full-year 2019, up slightly from previous guidance due in part to increased public company costs for the implementation of the new revenue and leasing accounting standards, along with increased personnel and IT system costs associated with growth and geographic expansion. Net litigation expense was $144,000 for the second quarter, on a decrease in activity and the resolution of a dispute with a legal vendor for $900,000, which reduced outside litigation costs by an additional $1.8 million. We also reduced our insurance accrual by $300,000, reflecting the impact of legal expenses related to appeal, and remaining work for Rimini-1. Gross litigation expense for the second quarter of 2019 was approximately $2.2 million before the above noted recoveries. It should be noted that are outside litigation spend is not linear and can fluctuate each quarter based on litigation activities. We expect the litigation expenses to be in the range of $2 million to $5 million per quarter during the second half of 2019 absent any significant changes. GAAP operating income was $5.2 million for the quarter compared to an operating loss of $6 million from a year ago. Non-GAAP operating income was $6.4 million for the quarter, compared to $4.2 million of non-GAAP operating income from a year ago. Net income was $4.1 million for the quarter compared to a net loss of $25.4 million from a year ago. The prior-year second quarter included $9.1 million in litigation expense compared to $144,000 in the second quarter of 2019, and also included $17.4 million in debt related cost and valuation adjustments related to our former credit facility that was terminated on July 19, 2018. Non-GAAP net income was $5.3 million for the second quarter compared to a non-GAAP net loss of $7.8 million for the prior-year second quarter. We issued an additional $3.5 million face value of Series-A preferred stock shares on June 20, 2019, adding to the original issuance of $144 million on July 19, 2018 and $6.5 million on March 7, 2019. This completes the Series-A preferred with a total issuance of $150 million. As part of the recent transaction, we also issued approximately 107,000 shares of common stock. Cash dividends on the Series-A were $3.7 million for the second quarter, while payment in kind dividends were $1.1 million, which were settled with the issuance of 1,115 shares of Series-A preferred stock to the holders on July 1, 2019. Reflecting the Series-A dividends basic and diluted net earnings per share attributable to common stockholders was a loss of $0.03 for the quarter compared to a loss of $0.43 per share from a year ago. Adjusted EBITDA was $6.5 million for the quarter, compared to $3.8 million from a year ago. Deferred revenue at quarter-end was approximately $220 million, up 10% from $200 million from the prior-year second quarter. We ended the second quarter with $50.3 million of total cash on our balance sheet. Cash flow from operations totaled $18.4 million for the second quarter and $25 million for the first half of 2019. Now, with respect to revenue guidance, we currently expect third quarter 2019 revenue to be in the range of $69 million to $70 million. And we are raising the low-end of the full-year 2019 revenue guidance from $265 million to $270 million while maintaining the high end of the range at $280 million. And with that operator, we'll now take questions.

Our first question comes from Derrick Wood with Cowen and Company. Your line is now open.

I guess, Seth a few for you. You highlighted a number of international investments in your press release, Poland, Mexico, Singapore, what's drawing you into these countries? And can you give us some rough sense as to when you think these investments could start to pay-off in terms of incremental business?

Well, I think in - good afternoon, Derrick. I think the - I think we're watching a lot of pull from the international growth, being pulled into Poland, being pulled into Southeast Asia, being pulled in to other parts of Latin America, being pulled into the Middle East. And we're not making investments that take a long time to pay-off. The investments are very incremental usually starting off with an office, sales operations, as well as some - just a few folks doing the support. So we generally have a 5, 6 person cluster that opens up a new area and we turn those pretty quickly into first deals. As you've seen that some of the announcements.

And I guess as a side note on the - follow up question on international, there's certainly been some choppiness that we've heard from other companies. You guys do a decent amount of business out there. Are you hearing anything from clients regarding macroeconomic choppiness? And then actually, I mean, if there was some economic slowdown, do you think that actually would benefit you guys?

Well, I think that we always consider ourselves a business that does well during good times, it does really well during difficult, complex, challenging or uncertain times. And I'll give you an example, I was just meeting with a client of ours in Taiwan who is expanding their contract with us because they are moving their operations. They're built there - I am sorry, their development operations back from China because of the tariff issues, cost issues. And they're using the savings from Rimini Street to help reestablish manufacturing operation back in Taiwan. So there is a real world example of how we are seeing some of the of the global challenges playing out with our clients. But they are all to the upside for us, because anytime a client is really uncertain about where to invest, one of the first things that they a focus on is how to reduce current cost. Focus on innovation and Rimini Street savings and the way that we're able to provide better services creates the investment funds for those innovations that are going to help them with competitive advantage and growth, even during turbulent times.

It sounds like rep count was around the, I guess, 75 level. How is that tracking the plan or how are you feeling about your ability to hit the mid-80s target by the end of the year and it's time to - the productivity trending well?

Yes, we are - we're actually on track, we had a net increase of 9 heads for the quarter. As we talked about in the last call, we focus a little bit less on the growth of heads and a lot more on the productivity of the individual reps. We've expanded out our Sales Effectiveness and Enablement program. We've hired a small army of folks to help us out on a global basis, to not only get our 77 or so sellers up in - selling better and more effectively, but we also have all sorts of new sales management directors, managers, DMs, they also have to learn the business and become more productive. And I think you saw in the second quarter the beginnings, as I mentioned in my prepared remarks, the beginnings of that investment starting to pay-off when you look at the bookings numbers increased and I think several other data points that include leads being, our pipelines being stronger. All of those things that you would expect as a sales team becomes better at selling when you have so many new heads that are coming online from end-to-end, from sales rep at the field level all the way to management. So, I do think we're seeing the results of all that investment start to turn in.

And Tom, I guess you've laid out some reasons why there could be some medium-term pressure on gross margins, but you keep putting up some pretty strong upside relative to expectations. Could you just drill down a little bit more? What has generated some of the upside surprise?

Yes. So we continue to have further efficiencies in our global footprint of our delivery group. And we talk about how ultimately we believe that the core know level-three businesses, ultimately could hit 65% and we just continue from revenue growth and further efficiencies continue to move to the upside. But again, as noted in my remarks, we will have some costs rolling out the SAP - ASM for SAP and Salesforce here, at least for the next couple of quarters, where we still believe kind of 60% is the right number for the full-year gross profit margin.

And then last question on - when I look at your new customer generation, you've typically had lower numbers in the first half and second numbers - higher numbers in the second half. Is this a pattern we should expect going into the second half? And I guess just how are you feeling about the shape of a new customer generation in the back part of the year?

Yes, I think Derrick, we would expect to see larger number of customers generated. The offset the that is the ASP, we do you have in terms of the mix, it's been noted with the Hyundai deal and several others that we closed in the quarter, our mix of ASPs is changing to the upside - we have more million dollar plus deals. We have more what we call sweet spot deals, which are sort of the $250,000 a year to $500,000 a year have come into the pipeline. Those are big boosters and those will offset some of the larger number of smaller ASP deals. So we need to be careful about looking at numbers. I'm not sure that that's going to be the best measure against the totals because of that changing mix. So we might not see a huge number of increase in clients, but the quality of those clients in terms of size of deal may be much larger for the business.

And our next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is now open.

Tom, just one clarification. When you say 50% gross margin for the year. You're not saying 50% per quarter. You're actually looking for a sub 60 % margin in the second half of the year, something more like 57%. And then you'll be building on that, if I heard on the last answer correctly, throughout next year as you build up volumes. Is that right?

That's correct. That is correct.

And then a follow up on the international market question. I guess what I'd like to understand is what some reasonable targets are for meaningful revenue from these different countries? Is it maybe in terms of a 1- and 3-year period? How do you think about these new geographies?

I think in terms of some of these new geographies from a financial term of meaningful against a $270 million type annual number. I think you're talking about some of these countries will add a few billion dollars to that number in a year and then they'll grow from there. I think that's very similar to the progression we've seen with many other countries that we've opened, because it takes about 12 months to really get your first few clients on-board, seeded and those become the references for your next growth. So it really does take 2 to 3 years to get to the point where - we set a total target of about 5 to 10 new clients in a new geography when we opened the first year. We look to a focus of trying to double that on an annual basis in the first few years. Those are the kinds of numbers that we work toward until you get a seeded footprint and then you can have a more accelerated growth model and we've seen that in the other geographies we've opened.

My last question is - sorry, go ahead.

Brian, I was just going to add in then the reminder that these are ratable revenue. So, as Seth said, it takes - it can take us 6 to 9 months to bring a customer on and then it takes another 12 to 15 months to recognize all the revenue. So, again, it builds up over the first couple of years, as Seth indicated.

The other question I had was, as it relates to Application Management Services. First, what's the ROI that you are speaking to toward prospective customers? And then whereas your maintenance business was easy to price 50% of Oracle, SAP or whoever the vendor is. How are you pricing Application Management Services?

Sure. You know, the Application Management Services, think of it as an expansion of the support that we're offering clients. We've been watching this part of the business for a long time and we've been looking at this $90 billion space, an adjacency to where we've been. And we worked with the application management companies for a long time. Our clients have been coming to us complaining about the value, complaining about the service they get and saying to us that one of their most trusted provider were the ones that have the expertise, because of our people with an average of 15 years of experience versus what they get what they get with application management groups, which is very inexperienced type, because there is a loss leader contract so that the SIs can be in a position to pick up other consulting work within the organization. And because they haven't focused on this business and they put these lower skilled resources with the client, there's a lot of frustration. There's terrible ratings of client satisfaction. We see this as another opportunity to take our expertise in our existing space, all of our talent and move downstream. And this is really interesting. We're today the most trusted and knowledgeable group of people because we're at the highest level of the support chain, which is the vendor replacement side. We're the ones that create fixes. We do the diagnostics, we create the updates, we do the tax legal and regulatory research and development. And we're moving downstream into an area where we normally hand these updates over to a team that applies them and they run the systems day-to-day. And now we are going to do that for a client as well. And so this has been another pull by clients into this business. And it's been very well received by clients. It increases our footprint at the client. It increases our stickiness, increases our wallet share. And these contracts are often equal to or bigger than the revenue we're already getting from a customer for just taking over the vendor support side. So in many cases you could see us double or triple the amount of money coming from that customer, invoicing them every year compared to just doing the vendor replacement support. So all of these come together to create a really robust opportunity for us to take over more of that footprint. Now, the margin profile we have - we have a plan and our plan is that we want to continue our blended gross margin rate, which we're seeing and we've talked about as aiming for about 60% this year given the investments we have to make. But in a long term, we've talked about a 65% blended service margins and we still see that's exactly where we predicted it before, because we get efficiencies when we're going both the vendor replacement support and the work of running the system. Over the next few years as these services mature, we will continue to look for efficiencies to drive cost out of that blended model, a model that nobody else can provide because of our unique capability in both the vendor replacement ad in the running of the systems. So I think all of that comes together to - consider there's no change to our overall blended margin profile.

[Operator Instructions] Our next question comes from Drew Foster with Citigroup. Your line is now open.

Seth, could you just give an update on the traction of Salesforce offering? And then can you also just remind us what some of the inhibitors are kind of holding that back from being a larger contributor today?

Again, the Salesforce AMS, right? It's our first AMS offering. The SAP AMS is our second AMS offering that we've rolled out over the last 18 months. This is a process that has included - and you've seen our press releases. We've made a couple announcements on some bigger clients that we've already started servicing on Salesforce. We always said, these were walk, jog, then run businesses and it really is - the first one for us the Salesforce. We had to learn a little bit of a different model, a cooperative model with the vendor. How do we work in AMS business into our overall infrastructure, which has always been a vendor replacement business. So, you know, a lot of it's structural. From the customer perspective, we got a lot of interest in the product, and our pipelines are continuing to grow. We're closing business and I think that - again, it'll take a while longer before - from a financial perspective, what we would consider meaningful in a business doing $270 million type of revenue a year. So I don't think there's anything holding it back. I think this is just us continuing to be very methodical. But again, I think you can look forward to additional announcements down the road and providing more information about the traction as we move down the product maturity.

And then I think in one of your prior responses, you had talked about how generally you're just seeing some larger deals come through. And I did notice the number of Fortune 500 customers that you have today ticked down a little bit from prior quarter. So we're just wondered if you could reconcile those two pieces or put some color around the attrition that you saw this quarter?

Sure. Well, some of it, of course, whether they were Fortune 500, there's a difference between deal size and size of clients, right? Some of those clients within the Fortune 500 with cycle went in and out as well as the Fortune - the Global 100. But that does not necessarily correlate to the size of the deals and the spread in the pipeline. And I think what's most important, obviously, from the revenue perspective, is whether that's spread in the pipeline and how are we seeing that develop and move through? And I do think that the two most meaningful points are. Number one, the number of million dollar plus deals that we're working within pipe, that we're closing, bringing to the table and getting done, as well as the number of those mid sweet spot deals which really add a lot of bread and butter for the sales reps in that $250,000 to $500,000 a year type numbers. So because we've seen more of that moving in the pipe, moving through the pipe and closing, I think this is where you'll see your bookings growth coming in the back half of the year as we've been talking about.

And then last one for me. In your prepared remarks, you talked about the competitive environment still being very competitive, but anything different that you're seeing from either Oracle or SAP from a tactical retention strategy standpoint?

No. Nothing that I would say is new. I think that it's a challenging time for both companies. They have predicted their future based on moving customers into these new products. The customers are not moving anywhere near or excited as much as they would have hoped on these product lines, and I think you're watching a continued push forward by the vendors getting - ratcheting it up more and more with mandatory retirement dates, pulling the plug on certain support. Really trying to push the customers because they're not going of their own volition. They're not jumping and running to adopt these new products because they're very, very expensive to adopt the new products. And the value proposition is hazy for most of these customers. They do not see the value to the two most important things that everyone of them is looking at. One, how would this investment help me with competitive advantage. And two, how is it going to drop to the bottom-line on growth? And if a project can't answer those two questions with a calculation that shows how that will help, then it's really hard to justify either one of those projects in today's fiercely competitive world. And that's where the software vendors are having challenges. And that's where Rimini Street has been able to come in and show them how to reduce costs, improve support and use that savings. Not only monetary savings, but the focus and time of their IT staff to focus on things that will drive competitive advantage and growth and not just replacing core transaction systems that are working fine. And I think this is the real crux of Rimini Street's growth and the real problem for the software vendors.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Seth Ravin for any closing remarks.

Great. Thank you, everybody, for joining us during this busy week of earnings season, I know. And we look forward to the next call and providing additional color on the business as we continue to push for bigger bookings in the second half of the year. Thanks, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program and you may all disconnect. Everyone, have a wonderful day.