Rimini Street, Inc. (RMNI) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Rimini Street First Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Dean Pohl, VP of Investor Relations. Thank you. Please go ahead sir.

Thank you, operator. I'd like to welcome everyone to Rimini Street's First Quarter 2020 Earnings Conference Call. On the call with me today is Seth Ravin, our CEO; and Stanley Mbugua, our Chief Accounting Officer. Today, we issued our first quarter ended March 31, 2020 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 and why we believe they are meaningful is also included in the press release under the heading About Non-GAAP Financial Measures and Certain Key Metrics. 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 first quarter of 2020 for a discussion of risks that may affect our future 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 toning us today. For the first quarter, we achieved record quarterly revenue of $78 million, a year-over-year increase of 18.5% and matching the high end of management guidance generated $26.3 million of operating cash flow produced another quarter of net income, strengthened the balance sheet with total cash of $58 million at quarter end, and expanded sales capabilities. We remain committed to the long-term goals of improving free cash flow and growing GAAP profitability. Revenue retention rate for subscriptions, which makes up most of our revenue remained above 90%, with more than 70% of subscription revenue non-cancelable for at least 12 months on a rolling basis. We ended the first quarter with 2,077 active clients a year-over-year net increase of 12.1%, and which included nearly 100 Fortune 500 and Global 100 companies and expanded global government representation. Our quarter end global employee count was 1,302, a year-over-year increase of 17%. Prior to the pandemic, we were making investments to meet increasing global demand for our expanded product and service portfolio. This increased demand was reflected in our previously issued and today reaffirmed 2020 guidance for accelerated year-over-year revenue growth. We are now accelerating those investments to service additional opportunities, resulting from the COVID-19 global economic slowdown. Having already saved our clients nearly $5 billion to date, we are the right company at the right time, with proven solutions that are helping organizations immediately slash IT operating costs, save jobs, stabilize operations, and focus their more limited resources of strategic initiatives. COVID-19, while some transactions that were expected to close in March 2020, slipped to later target close dates, due primarily to the escalation of the COVID-19 pandemic. The pandemic had minimal net impact on our revenue or results of operations for the first quarter. The extent to which the COVID-19 pandemic impacts, our business going forward will depend on numerous rapidly evolving factors, which we cannot reliably predict. Some factors may positively impact demand and opportunity for our products and services, as companies and governments seek it operating cost savings desire to extend the life of their existing IT assets, achieve better product and service values and contract with a trusted IT partner, who can help them navigate complex economic times. Likewise, some factors may adversely impact demand and opportunity for our products and services, impact our clients ability to pay for our services, or pay for our services on time and impact the fees we are able to charge clients. For example, some Rimini Street prospects and clients are seeking special discounts and extended payment terms to help them navigate these challenging times. We believe our strong balance sheet and cash position will provide us with business flexibility and the agility to take advantage of opportunities and provide us protection from downside economic risks. In order to protect the health and well-being of our employees, clients and the communities in which we operate, we transitioned as many of our employees as possible to a work-at-home model, temporarily closed our offices worldwide, limited nonessential travel, transitioned to a no in-person event marketing strategy and implemented a full-remote sales model. To achieve these operating changes, we are leveraging our existing, innovative and secure global remote connectivity infrastructure. For virtual meetings, we are leveraging our existing global web meeting infrastructure available to all employees. We've also implemented business continuity measures. And will continue to respond to the COVID-19 pandemic, as circumstances dictate. With respect to global marketing and sales, transitioning to a no in-person event model represents a substantive change to our marketing strategy. While transitioning to a fully remote sales model was not a significant transition overall for Rimini Street sales, because, historically, we were already completing on average about 70% of sales activities remotely. To-date, we do not believe the transition to a fully remote sales model has materially impacted our sales execution. With respect to our global client service delivery, we have hundreds of engineers, in 20 countries delivering uninterrupted, mission-critical support services to our thousands of global clients. Our extensive geographic workforce distribution provides skill set redundancy, 24/7, by 365 engineer availability and service resiliency that allows us to consistently meet our contractual service level commitments. Even if some of our workforce were to be offline, due to illness or other reasons. To-date, we do not believe the transition to a work-at-home model, has materially impacted our global client service delivery. During the first quarter our global service delivery team, closed over 8,400 support cases, across 42 countries and delivered more than 28,000 tax legal and regulatory updates, to clients in 33 countries. We achieved an average client satisfaction rating of 4.8 out of 5.0, on the company's support delivery, where a 5.0 rating is considered excellent. As a result of the measures that we've taken in response to the COVID-19 pandemic, for fiscal 2020, we're expecting savings from reduced travel, canceled in person marketing events, reduced office operating costs, and potential rent abatement related to office closures around the world that began mid-March 2020 and are expected to continue through at least May 2020. We expect to offset some of these savings with increased spending on new marketing programs, increased sales staff and capabilities as well as spending on special COVID-19 compensation bonuses for lower paid employees, and employees who have tested positive for the COVID-19 virus. Client wins, product and service update. During the first quarter, we completed nearly 100 geographically diverse sales transactions with new and existing Oracle, SAP and Salesforce clients. The transactions covered the breadth of our expanded products and services portfolio, including maintenance services, application management services, advanced security solutions, interoperability solutions and expert consulting services. Application management services commonly known as AMS, is where we run the system for the client day-to-day and maintenance services is where we provide technical support and required updates, to an internal or AMS team, who runs the system for the client day-to-day. Significant first quarter sales wins included, 7-figure Oracle maintenance services and AMS contracts, with large global brand name clients. And significant SAP services contracts, for SAP's newest ERP product line SAP S/4HANA. We also had some significant first quarter sales wins, in global public sector and government, where we continue building on a significant and growing list of public sector and government clients, in the U.S., Canada, U.K., Australia, Japan and Korea. Wins included our first government sales transactions in Brazil, and additional government sales transactions, in Canada and Israel. Additionally, in Australia we established a whole of government volume sourcing agreement, with the Australian government. And in Israel, we established a framework purchase agreement, with the Israeli government that is similar to the framework agreement that we have in place in the U.K. These government procurement agreements make it easier and more streamlined, for many government agencies to procure Rimini Street services, without having to go through long complex procurement cycles. In April, Rimini Street announced the global availability of maintenance services for SAP S/4HANA. We also announced one of our newest large S/4HANA support clients, Nadro headquartered in Mexico City. Nadro uses a hybrid of SAP Business Suite 7 and S/4HANA products. Press releases for both announcements could be found on our website. With this expanded coverage of SAP products, Rimini Street can be the support vendor of choice no matter what SAP products and releases a client wants to utilize. For our new AMS offerings for SAP, Oracle and Salesforce prospects and existing clients continue to demonstrate growing interest and pipeline opportunities and sales continue to grow. We believe our integrated maintenance services and AMS is a unique and valuable competitive solution in the market that provides clients with a better model, better resources and better outcomes with higher client satisfaction and significant savings of time, labor and money. We are successfully delivering our integrated maintenance and application management service solution to clients across a growing variety of industries and geographies. Further sales of AMS to existing clients is proving that an integrated Rimini Street maintenance and AMS solution is creating a unique value proposition for the client and demonstrating the new AMS product line strength as a cross-sell opportunity. In fact, in a large AMS cross-sell transaction completed in the first quarter with an existing global maintenance client headquartered in Europe, the client agreed to pay Rimini Street a higher annualized AMS fee than they were paying their existing AMS provider. We are also seeing growing interest pipeline and sales for our innovative advanced database security, advanced middleware and application security and smart proxy interoperability solutions that clients are successfully deploying and using across large server and application landscapes. Our advanced database security is enhanced with technology for McAfee and is a modern next-generation database security solution that helps protect Oracle, SAP, IBM and Microsoft databases from known and unknown vulnerabilities. The software uses virtual patching technology to block potential attack vectors and risks even before any attempted database attack. According to a study from Aberdeen Group, virtual patching technology provides continuous security protection. In the event of a reported vulnerability, our advanced database security solution can prevent the threat from entering the application and a virtual patch is typically delivered within 24 to 48 hours, and it can be installed immediately. This is in contrast with typical vendor application patching that might take months or even years after a threat is discovered to deliver and fully regression test the patch, before it can be applied to a production system. Competition. Competition with our primary support service 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 products. Oracle and SAP are planning to end full support of certain major product releases by 2030. During previous earnings calls, we shared with you that companies are evaluating the cost benefit of the ERP vendor support and ERP refresh projects. Many licensees do not see the value and incurring unnecessary expenses and disruptions that do not improve their competitive advantage or contribute to their growth. In fact, results from a 2019 Rimini Street survey found that approximately 80% of CIO respondents are not planning to move or unsure about migrating to Oracle or SAP's new software and plan on remaining on their current systems until at least 2025 or beyond. Today given the added financial and economic challenges around the COVID-19 pandemic, we are already seeing companies, prospects and existing clients who had planned to invest in expensive new systems now reassessing their need and timetable to move off those existing stable systems and looking for ways to reduce operating expenses to preserve cash. For example, one of our existing clients recently informed us that they were delaying their planned new system implementation and they extended their contract with Rimini Street to keep their current system running. Gartner has estimated that Rimini Street has captured over 80% of the global market for third-party enterprise software maintenance services and we are providing clients significant savings, a more robust and responsive service offering at least 50% of maintenance fees and up to 90% total operating savings over time. Gartner's recent Gartner Predicts 2020 Research Report also notes a 50% increase in client inquiries related to third-party support during the first nine months of 2019 compared with the first nine months of 2018. As we have previously stated, we believe the hybrid IT environment that will integrate existing licenses, new SaaS licenses and cloud deployments will be the IT reality for much longer than expected. And a majority of ERP workloads will continue to be on-premise or simply lifted and shifted into the cloud for continued long-term use. With the COVID-19 challenges we believe we will see even further extensions on use of the hybrid IT environment. Oracle litigation developments. With respect to Oracle versus Rimini Street that was filed in 2010 and went to trial in 2015, the case has run its course of all appeals. Presently, court action related to this case is limited to a dispute between the parties over the scope of the permanent injunction that has been in place since 2017 and Rimini Street's compliance. Oracle believes Rimini Street is not in compliance with the injunction and Rimini Street believes it is in compliance with the injunction. The matter is currently scheduled to be fully briefed to the court this summer. There is no known time line for a court ruling. With respect to Rimini Street versus Oracle filed in 2014, the case we filed against Oracle we are still awaiting rulings on summary judgment motions submitted by both parties in December 2018. Trial is not currently expected to occur until 2022 but could occur earlier or later. Summary, we believe the first quarter 2020 was a solid quarter and we intend to continue executing our 2020 business plan focused on revenue growth disciplined cash management and continued GAAP net profitability. And we will make adjustments to the plan for opportunities or challenges that may develop around the COVID-19 pandemic and related economic impacts. Now, over to you Stanley.

Thank you, Seth. As Seth noted, for the first quarter we achieved record quarterly revenue of $78 million a year-over-year increase of 18.5% and matching the high end of management guidance. First quarter annualized subscription revenue was approximately $310 million a year-over-year increase of 17.7%. Clients within the United States comprised 61% of total revenue, while international clients were 39%, representing aggregate first quarter of 2020 year-over-year revenue growth rates of 11% for the U.S. and 32% for international clients. Gross margin was 61.3% for the first quarter compared to 63.8% for the first quarter of 2019 and at the high end of our guidance range. In the first quarter, the lower gross margin reflects our continued investment in an expanded global capacity to deliver new SAP S4/HANA support services advanced security solutions and application management services for SAP, Oracle, and Salesforce. We continue to believe that gross margin from our established support services will continue to expand and will help to partially offset the ramp-up costs of our new products and services. Therefore, we continue to expect our full year 2020 gross margin to be in the range of 60% to 61%. Sales and marketing expenses as a percentage of revenue was 36.4% for the first quarter unchanged from the prior year first quarter. To meet growing demand, we're increasing sales rep hiring and some marketing spend in Q2 and Q3 of 2020 to provide additional sales capacity leads and pipeline. Accordingly, we continue to expect sales and marketing expenses to be in the range of 37% to 39% of revenue for full year 2020. General and administrative expenses as a percentage of revenue which excludes outside litigation costs was 15.4% for the first quarter compared to 19.7% for the first quarter of 2019. G&A spend was down $1 million from the prior year first quarter while revenue increased 18.5% year-over-year. The other cost of additional employees compared to the prior year first quarter was more than offset by a reduction in travel recruiting and bad debt expense. We expect the costs of maintaining the recently updated accounting standards and planned systems implementations to put upward pressure on financial spend with a substantial amount of the increased costs mitigated by lower travel expenses in 2020. Therefore, we continue to expect G&A expense as a percentage of revenue to be in the range of 16% to 18% for the full year 2020. Litigation expense net was $3.7 million for the first quarter 2020 compared to a net benefit of $6.1 million for the prior year first quarter. The prior year included receipt of a net litigation appeal refund of $8.1 million. Our outside litigation spend is not linear and can fluctuate each quarter based on litigation activities. We continue to expect litigation expense to be in the range of $13 million to $15 million for the full year 2020. Net income was $2.5 million for the first quarter of 2020 and compared to prior first quarter net income of $10.3 million. The prior year includes a benefit of $8.1 million from a net litigation appeal refund as noted earlier. Non-GAAP net income was $7.7 million for the first quarter 2020 compared to a non-GAAP net income of $5.1 million for the prior year first quarter. Adjusted EBITDA was $9.2 million for the first quarter 2020 compared to adjusted EBITDA of $6.6 million for the prior year first quarter. Dividends on the Series A preferred was $3.9 million, while payment-in-kind dividend settled in preferred shares was $1.2 million. An accretion of the prepared store discount was $1.5 million for the first quarter of 2020. Basic and diluted net loss per share attributable to common shareholders was $0.06 for the first quarter of 2020 compared to net income per share of $0.05 for the prior year first quarter. This takes into account cash and non-cash dividend for the Series A preferred stock. Deferred revenue as of March 31, 2020 was approximately $222.7 million up 13.3% from $196.6 million as of March 31, 2019. We ended the first quarter of 2020 with total cash of $58 million on our balance sheet, a 77% increase compared to $32.7 million for the prior year first quarter. Cash flow from operations was $26.3 million compared to $6.6 million for the prior year past quarter. Backlog, which includes the sum of billed deferred revenue and non-cancelable future revenue was approximately $456 million as of March 31, 2020 up 16% from $392 million as of March 31, 2019. Now with respect to revenue guidance, we expect second quarter of 2020 revenue to be in the range of $77 million to $80 million and we maintain full year 2020 revenue to be in the range of $310 million to $320 million. And with that operator, we'll now take questions.

[Operator Instructions] Our first question comes from Derrick Wood with Cowen. Your line is now open.

Great. This is actually Nick Altmann on behalf of Derrick. Thanks for taking our questions. Just first one. You guys mentioned that -- you are looking to add some additional sales capacity in the second and third quarter. Can you give us an update as to what the sales head count stands at?

Sure. This is Seth. We're going to look at going to -- we talked about 80% before. We're going to look to take that up a little bit. We're probably going to add six to eight additional heads that we weren't talking about at the end of the fiscal 2019 number. So we'll probably end somewhere north of 80.

North of 80. Okay. And then you guys -- have mentioned in the past that there are some things you guys were doing to potentially work on shortening sales cycles and shortening the ramp time for some of these reps. So for some of the newer sales personnel that you've on-boarded in the past couple of quarters, can you just speak to levels of productivity there and what some of the initiatives on shortening the ramp times have come to fruition?

Sure. My sense is we just had a call, obviously, for the fiscal 2019. We don't have a tremendous amount of additional info to provide on that just in the short-time between that call and this call. We're continuing to make those investments. We're continuing to believe that we can shorten that ramp time. We have rolled out additional product training. We've rolled out additional industry components to help our folks really navigate sales a little bit faster and better. And of course because of the COVID-19 opportunities that are coming our way they will get more chances to work deals faster and learn faster than they have in the past.

Great. Great. And then just next. Sequentially, the customer adds were a little bit lighter than they historically have been. Can you maybe speak to what you're seeing thus far in 2Q and whether that can improve sequentially?

Sure. But you have to take a look at the -- the ASP for our deals in Q1 was higher than 2019. You're probably talking an ASP of around $210,000 versus an ASP of about $168,000 in the fourth quarter. So we did have bigger deals in the mix. So we want to make sure that as we work with bigger deals, your percentages will go up and down a little bit in the net customer adds.

Got it. No that's really helpful. And then just lastly, I know, you guys are very well diversified in terms of sector and industry exposure. But in relation to COVID-19 what, sort of, demand trends are you guys seeing across different verticals people turn to Rimini Street in times of potentially tightening IT budget. So can you speak to some sectors? And I know you guys mentioned some public sector stuff earlier on the call, but any sector that are seeing heightened strength in relation to COVID-19?

Well, I think, a lot of it would be exactly as you would expect. This is such an unusual situation. Remember, you've got a management team here that had gone through the 2000.com meltdown when we were the big ERP players. We've gone through the 2005 through 2008 last economic recession. We handled our way through that. So for us, this is our third big play through a major economic change. But the difference here is, is every sector is affected. Every private company, every government, from a budget perspective, so I think that is what makes this particular event unusual. And I think we're watching pipeline build, I think, across all sectors for manufacturers who, obviously, have supply chain challenges to retailers which, of course, were having challenges even before we got into the COVID-19 situation, but are now under tremendous stress with so many stores closed and business shut down. We of course are seeing it through the travel and leisure section for, whether its cruiselines, airlines, all of them equally disturbed from a revenue perspective. And, of course, as we said, public sector, a lot of opportunity there. So I really do think it's broad-based.

Got it. That’s really helpful. Thank you.

Thank you. Our next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is now open.

Hi. Great. Thanks for taking my question. Seth, I agree enterprises aren't going to spend big sums to upgrade, given their weakened financial condition for now and maybe for a while. So I expect your retention rate's going to improve. And then, some customers are going to look to cut costs and that should lead to some wins for you. So, I guess, I'm wondering, why the second half 2020 revenue outlook isn't all that much better than the first half. If I use the midpoint for the second quarter in terms of revenue, given all that's going on and I always like conservative outlooks, but I guess I'm just wondering, how you reconcile the second half not being that much stronger than the first half?

Well, I think, you have to look to the risks too Brian. Again, the positive side of our business is when people need help, when they want to extend the life, when they're looking to cut costs, we are a top level player for that purpose in IT. But we also have to manage downside risk. You know this and I'm sure every single company you talk to, whether it's IT or otherwise, is getting banged on by their customers for discounts, payment terms, right? It's all about cash flow. And so, what we have to always manage here is the careful understanding that we have upside opportunities, but we have to manage the downside risk. Our strong cash position that gives us the flexibility to, for all purposes, finance some customers, right? We can finance them with quarterly payments for this year, where they normally prepay upfront, because we have the cash to do that. So our cash position plays a very strong point in how we navigate this year, because we can offer some flexibility that, again, smaller players don't have the cash position to do. And I think we're going to have to manage through bankruptcies for some of the clients, which is not unusual. We're going to see them, right? You're already seeing them in retail; you're seeing them in travel and leisure. We're going to see more of that. And what we focus in is, bankruptcies that are restructurings, because we're a mission-critical provider, we'll get paid by those customers, because they have to keep payroll systems and other systems running. Those who are going to liquidate, present some downside risk to reserves. But, overall, that's why we're going to play a conservative position, because none of us know how this is going to play out, how bad this virus is going to be, how long the disruption will last. So, again, I look at this and I say we have all this upside potential. We have to manage the downside risk in the economic world today. And we believe the upside outweighs the downside, from our perspective. But we're going to play conservative, that's why we reaffirmed guidance. I know a lot of companies have eliminated guidance completely. We're reaffirming guidance and we're providing quarterly guidance, because we have confidence in understanding our number. We're confident in the size of our recurring revenue base and we talked about the fact that 70% plus of our recurring revenue stream is committed for 12 months or longer. So those provide the stability and basis for us to have the clarity to move forward with a guidance position, but we're not going to step out there with things we just don't know at this point.

Yes. And by the way, I didn't mean to suggest guidance wasn't strong because I agree with you. I just wanted -- discounts and bankruptcies and the unknowns certainly help us understand that second half of the year for sure. On the G&A side, I thought, I heard still 16% to 18% of revenue. I guess in 2Q, I would expect that to drop given no travel pretty much for the quarter and probably no conferences that you're going to and offices closed and then gradually pick up. So, I guess I was surprised at the 16% to 18%. Is there a significant amount of hiring on the G&A side right now to see a pickup there?

Well, we are hiring quite a few positions. Probably, again, a differentiator from some other businesses out there, but we have a lot of clients to serve. We have a lot of growth to serve out there. And we're in a bullish position to continue to hire and build out infrastructure, support operations for our new product lines, for the AMS products. Our largest AMS account we're providing over 50 full-time engineers alone to that one account. So, it's a very people-heavy business on the AMS side. So, we're going to continue to build it out. That's why, your COGS number -- we're going to -- our gross margin will be down a little bit in that 60% to 61%. G&A, we have a lot of finance cost still. Just moving through, we've got new systems to put in place to handle the growth. We're doing a lot of conversions. We're doing a Japan buy-sell conversion as that operation is now big enough to warrant contracting directly with the entity with our hundreds of customers there. So, there's a lot of accounting and finance costs that we're still incurring and will continue. We're putting RevPro in the revenue recognition, a lot of automation because of the size of the transactions. And that's why we're again being conservative to say, sure, there's some offset in travel, but we have other costs that are coming up as well and we talked about those offsets Stanley did. And I think, you're seeing that we're generally reducing the G&A number compared to 2019 actuals. And earlier, we said we would start to bring down G&A, we'd start to bring down sales and marketing as a percentage of the revenue and we're certainly doing that.

Yes. Okay. And on the AMS side, maybe I'm not sure if I missed it, if you talked about it, but clearly it's a long-term vision and growth catalyst for the company. Has it become material? Is it 5% of revenue? Is it 10% of revenue which I don't think so? I'm just curious if you have any quantification of that. And then the...

No. We're not ready to break it out yet. It's not material enough. It's millions of dollars, but on a $300 million number. No, we haven't hit our 10% threshold yet on that, so from that point as being declared material, no. We're not there yet. But, as I mentioned, the pipelines continue to grow and we've had substantial and impressive wins. But we're still -- we always talk about walking before we run. I think we're in the jogging phase now. We moved from walking to jogging. And I think this year, we will hit our stride in a full run.

Great. I guess lastly a comment. The ASPs for 1Q compared to the year ago or the $168,000 number you gave that's great information. And if you'd consider giving it every quarter, I think it's really helpful for us to see how the business is trending much more so than the number of accounts? Thank you.

Sure. Got it. Thank you.

Thank you. 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, very much. And listen, I hope everybody stay safe. Thanks for getting on the call. We know this was a very busy earnings season with everybody this week. And we'll see you again for the Q2 number and look forward to talking to everyone then. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.