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…

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…

[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.