Good afternoon, ladies and gentlemen, and welcome to the Rimini Street's Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Dean Pohl, Vice President, Investor Relations. Mr. Pohl, you may begin.

Thank you, operator. I'd like to welcome everyone to Rimini Street's second quarter 2022 earnings conference call. On the call with me today is Seth Ravin, our CEO; and Michael Perica, our CFO. Today, we issued our earnings press release for the second quarter ended June 30, 2022, a copy of which can be found on our website under Investor Relations. A reconciliation of GAAP to non-GAAP financial measures has been provided in the table following the financial statements in the 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. 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 filed today for a discussion of risks that may affect our future results or stock price. Now 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. Q2 2022 results. For the second quarter, we had many positive financial and operational achievements, including strong subscription renewals and extensions, increased cross-sales of our expanded solution portfolio to existing clients and we maintained our excellent industry-leading client satisfaction rating of more than 4.9 out of 5.0 per cases in onboarding. We achieved record revenue of $101.2 million, up 10.5% year-over-year and above the high end of our guidance range. We also achieved a record revenue retention rate of 95% on subscription revenue and increased gross margin to 63.1%, up from 62.2% year-over-year. We continued to see sales growth in our newer application management services, professional services, interoperability, monitoring and security services and we believe our unique client experience, a very high client satisfaction rating will drive increased loyalty, improved retention rates and higher cross-sales to existing clients over time. However, in line with other companies, we faced global macro environment and currency exchange rate headwinds that impacted quarter results. We believe that the macro environment will ultimately benefit our business after organizations complete a replanning adjustment cycle and we're addressing it and other opportunities with changes that include my return to oversee global revenue operations to reaccelerate growth. Since Rimini Street's inception in 2005, we've signed over 4,800 clients, including over 180 Fortune 500 and Fortune Global 100 companies and estimate that we have saved our clients more than $6 billion that they were able to reinvest in their businesses. We ended the second quarter with 2,905 active clients, a year-over-year increase of 9.8%. In addition, despite the labor challenges affecting many organizations globally, we were successful in expanding our global workforce by 17.9% year-over-year, ending the quarter with over 1,834 employees. Demand and sales execution. We continue…

Thank you, Seth, and good afternoon, everyone. Q2 2022 results. Revenue for the second quarter was $101.2 million, a year-over-year increase of 10.5%. Annualized recurring revenue was $396.7 million, a year-over-year increase of 9.6%. Revenue retention rate for service subscriptions, which makes up 98% of our revenue was 95% with more than 80% of subscription revenue noncancelable for at least 12 months. For the second quarter, clients within the United States represented 53% of total revenue, while international clients contributed 27%. Second quarter aggregate year-over-year revenue growth in the United States was 8.8%, while growth for international clients was 12.5%. We note that the U.S. revenue growth has continued to improve over the last 4 quarters, improving from the 2021 second quarter year-over-year growth rate of more than 2% to the current year's second quarter year-over-year growth rate of 8.8%. We also note that our total revenue growth was negatively impacted by FX movements of approximately 1%. Billings for the second quarter were $101.6 million compared to $107.3 million year-over-year, a decrease of 5.3%. New client invoicing was challenging, as Seth noted. A negative FX movement adjusted down deal size in U.S. dollar terms, but we achieved strong client renewals and cross sales with existing clients. Gross margin was 63.1% of revenue for the second quarter compared to 62.2% of revenue for the prior year second quarter and 63.7% of revenue on a non-GAAP basis, which excludes stock-based compensation expense compared to non-GAAP gross margin of 62.6% of revenue in the second quarter of last year. We executed well in our service delivery and continue to methodically expand efficiencies and leverage through technology and process control. We expect to continue investing in the global service delivery capability and capacity for our new products, services and solutions to ensure we can…

[Operator Instructions]. Our first question comes from Derrick Wood from Cowen and Company.

It's Andrew. Nice quarter. Seth, would love to hear how the Americas org changes are going so far? What inning do you think we're in there? And kind of what else has lots to do there? And when do you think this can accelerate -- reaccelerate U.S. growth even faster?

Yes. Great to talk to you. We're definitely seeing improvement in the maturing of the management structure in all the Americas, which includes North America and the South and Central America. We brought that all under a single umbrella. And I think we're seeing the consistency of execution improving between the regions. I think we're seeing really, some really good deals that are getting done. But I still think the macro environment is going to cause challenges probably through the third quarter in the Americas as well as globally. And we've seen that the macro challenges really affecting at a global level. So, I think that's still going to slow everyone down a little bit in the third quarter. But as I mentioned in the prepared remarks, I expect that once these replanning cycles are done, you're going to see us benefit on the other side of that. We're involved in a lot of those discussions. The teams are involved in a lot of those discussions with many name brand clients. And I think those are all very positive signs.

And you hired the 153 net new employees that looks like a record. What drove that? And how have retention levels trended and where do you end on sales reps?

The retention levels are challenging as much as everybody else. The difference is we hit, I think, about 21% churn rate on employees and the industry average is 23%. So, we're trending about 2 points less than the industry, but we were traditionally about 10%. So, it's high for us. So, I still think that means we're in line with the market or a little bit better in terms of the churn. We put some great programs in place like our fabulous Fridays, which are fully paid Fridays for every Friday in July and August. So people love that. And I think we're doing a bunch of other programs, which our employees really like and it's energizing them in a post-pandemic world, where it's giving them some time to get their lives back together and reassimilate into society. We've also been bringing people together from around the world for meetings that they haven't had in 2 to 3 years, so they're reconnecting with teammates. So, I think all those things are going to help us bring down the attrition rate. I also think because the market is busy in hiring freezes and laying people off, that will cool things down a bit as well since our employees were busy hiring.

And then, Michael, on the guidance, leaving the full year unchanged, maybe just speak to the level of conservatism in that? And anything extra you've kind of, or what have you assumed as far as macro in the second half?

So Andrew, I think we are certainly, as Seth noted during this interim period with a lot of freezing for decisions that are happening out there. We're feeling confident in our guidance for the full year, but we are reflecting that overall environment as Seth noted.

Were there any -- one last one, were there any big deals that pushed to the second half?

Definitely, there are deals that pushed. And I think, again, as you're seeing in so many different company earnings, delayed sales cycles, lengthened sales cycles, we're certainly seeing some of that as well because as these companies and government organizations rejigger their plans in order to prepare for a multi-year potential recession, different type of environment, they are not doing anything because they're not buying anything while they finish those plans. And I think based on the involvement that we've seen, the kind of work that we're involved with clients and prospects around the world, we feel pretty positive about the fact that we're going to benefit when they finally finish their plans. We intend to be a part of them.

Our next question comes from Brian Kinstlinger from Alliance Global Partners.

The first one may be a little long. The September quarter is, I believe, the most important quarter from a bookings perspective for your company, case in point, last year. SAP and international businesses generally have seasonal maintenance renewals. And we're early in the third quarter, but maybe I'm curious, have you continued to see better win rates in these opportunities, especially as your business development team is more tenured? However, the second part of my question for that in one of your comments, I thought I heard that you're taking over the overseas international sales. So, I guess given that timing, I'm curious what precipitated that change if I heard it right?

Sure, Brian. Great to talk to you again. We -- 2 things. One, we made a change having the COO, where all the GMs reported to the COO. Our COO exited. And I am going to personally oversee all of the general managers. So, think of me as kind of in the acting CRO role as well. I wanted to step back in. I talked to a lot of investors. I've looked at the business and it was one of those opportunities for the founder and we've seen this story before, to step back in to reaccelerate the business. We were previously a 30% type growth company traditionally. I think the opportunity and the demand is there for us to have that kind of business even on a much bigger number. And I decided I was going to step back in and take it personally to get us where I believe we need to be and complete the transition to $1 billion revenue scale by the end of this year. I think it's no secret that it's taken us a little bit too long to get through this transition. We should have had it done in a year. It's been 18 months. And I'm determined to complete the transition by the end of '22 and leave us in a very strong position out of the starting gate for '23.

And the second part of the question, is 3Q tracking much better than last year's 3Q with your more tenured salespeople?

Well, we are always very back-end loaded in the third quarter. So, we truly are really early. But I can tell you that we closed some good SAP business even in the end of Q2 as well as early in Q3. And those are always good signs when we close deals on SAP that early. Generally, they're all sort of those last few weeks of the quarter, just the way it's all structured. So, the fact that we're seeing early closes and we've closed several deals in the early parts of the quarter, I take those as positive signs.

One last question, and then I'll get back in the queue. You've talked -- I think you've been clear there are some freezes in decisions that are hurting the third quarter. I guess what I'm trying to understand, your business is set up for essentially a 50% cut to the OEMs in price. So, you're well set to cut cost for uncertainty. Why is this not the time for -- especially as maintenance renewals come up for those executives to pull the trigger and move to third-party maintenance? And why -- I mean, does that mean we'll wait another year until their maintenance agreements are up for the next -- for the next year?

Well, it really depends. And I think, Brian, a lot of this is driven, as you know, by this daily global macro drama that unfolds by the day and it's havoc on businesses. I mean, there's no other way to say it. When you have so many different questions, should I build a factory in China? Am I going to have political issues with that? How do I deal with Eastern Europe? How do I think about energy, if I'm going to build a plant inside of Europe? All these questions are now wreaking havoc to the point of causing internal paralysis for a lot of companies and they're having to step back and rethink. Now that doesn't mean they don't want to save money. That's why I said, ultimately, I expect to prevail. Now when you mentioned saving money right off the bat, well, that's the maintenance business. Our AMS business is a year-round business. It doesn't have the same exploration data. It could be any date. Our security products, our professional service, all those things can be sold any time. And so yes, there is a window under which they're going to have to make a decision. For those who have maintenance renewals in the third quarter, they're going to have to make a call about whether they're going to move forward and take advantage of better service and better savings and do the things that they want to invest in, in the business with that savings now or they could miss the window. And I think that's -- those are the kinds of things that have left us to keep the current guidance for the annual revenue is because we have really strong visibility on our recurring revenue. It's these new projects like everybody else. There's a little bit of -- we've got to wait and see. The visibility is not nearly as good as it was months ago. And we're just going to have to ride it out and see how we can move these deals forward through this environment.

Our next question comes from Jeff Van Rhee from Craig-Hallum.

Congrats. Love that free cash flow again. So a few for me, though, if I could. Start with maybe on the revenue front, you've got obviously a pretty wide range, and this is for either of you, but a pretty wide range on the revenues. To the extent you can talk through that and what would it take to hit the high end, mid and low? I understand there's variability, but we're coming into Q3, that's still a pretty wide range here. So, how are you thinking about keeping such a wide range? And what gives us high and low end?

Sure, Jeff. Thanks. I think the range, we always narrow it down, of course, after the third quarter. We'll have a much better sense. And I think the fact that we have a hugely predictable recurring revenue stream now that's a monster at hundreds of millions of dollars gives us a lot of stability and confidence in the range that we have. When we talk about what would it take to hit the higher end of the range, it's going to require a good Q3. As you know, we can have a great Q4, but it's not going to impact revenue that much on the ratable basis. That will tee-up '23 numbers nicely. But the real revenue, you set your course in the first half of the year, the third quarter, you have to really have a good quarter to get to the high end of those numbers. I mean that's just the bottom line.

And would you say -- I mean, from a pipe standpoint and then I want to get to the sales transition in a second, but from a pipe standpoint, the pipe is there. So, it's not -- obviously, the pipe has got to be there and already working if you're going to get it done at this quarter. So, you'd say the pipe is there. It's a matter of close rates and that's still within reasonable to get at the high end based on the pipe you see?

I think the high end is going to require, like I said, a strong quarter. I think there is a pipeline to get mostly there. And then you always in the third quarter as in any quarter, we have these bluebirds that can come up traditionally, some very large ones because customers come to the table late with a -- we've only got weeks left and we'd like to do something. That is a pretty traditional occurrence for us. So we don't have to have visibility to a full pipe that would get us there. There is, of course, there is a coverage model that says there's enough in the pipeline to make those numbers happen. But the reality is, again, it's that visibility with this constantly changing macro drama and even the exchange rates were pretty brutal on us in terms of so much of our revenue coming from places with reductions against the dollar. So $1 million in Australia becomes $800,000. So, those things certainly working against us, too. But I think that the pipe exists to make it happen. It will take some really good work and some good luck in the economy and some cooperation with clients to pull it all together to get to the high end of the range.

And just a few other quick ones, if I could. On the expense growth, it looks like you're targeting somewhere in the high single-digits, give or take than on the revenue growth side. But the decision to keep hammer down on head count, I think you said headcount is up 18% year-over-year, and I know you've been very aggressively adding the last 12, 24 months. How do you -- what are the puts and takes? I mean, what would it take for you to get off the gas on the employees? And just how do you think about the trade-offs there?

I think it's really -- we're at a position where you think about the hiring, a lot of it is in the gross margin area. And you've seen we've gone to 63-plus percent, but we also need a lot of headcount for AMS. AMS is a very labor-intensive business. And we're probably behind where we'd like to be. We'd love to have another 100 heads in the service delivery organization and for professional services. We have major projects that customers want us to do that we physically haven't been able to staff. So there's some challenges there for sure. And that's why when you think about the hiring, the other thing to be careful of is don't get caught up in the FTE numbers. I'm always -- I'm actually always a little bit ambivalent about providing the number because while we grew at over 17% year-over-year, those heads could be in India or other countries where there are a fraction of the cost of a U.S. head or a European head or an Asia Pac head. And so it could be a little bit misleading that you could have increasing numbers, but they may be very, very low-cost employees. So, that number could be, like I said, you just have to take that carefully.

Last for me then, Seth, on one other -- to follow-up on a comment you made about your -- the transition lingering 18 months you want it done by the end of '22. I know you're working on a lot of things, but what's 1 and 2 on that list? How are you going to know you gotten there, you're done? I mean, what needs to happen by the end of '22?

Well, the close rates were very good for our sales team. I mean we're heading -- we've been hitting about a 30% close ratio on our opening pipeline numbers, which is a strong close rate. That's not where the issue is. We want to increase the total volume of deals. You've got a maturing sales force. The #1 issue that I have is making sure that the phone is ringing in marketing and building the pipe even much bigger. We want to see even larger multiples of deals and backup deals. That's how you reassure yourself in an environment where you have more in your deals for lack of a better term because of macro and whether people can make a decision and timing. When you get into that kind of environment, you want to double up your number of deals in the pipe so that for every deal that you have, you have not just 1 backup, but you have 2 backups, maybe 3 backups. And that's how you assure that you're going to get to the numbers that you want. So right now, it's all about building a massive pipe of business, much bigger, much broader than we would normally require because you have to expect we have a higher fall-off rate or a deal gets extended and misses a deadline and a renewal time, that's what you have to do. And that's what we're focused on making happen.

At this time, we have no further questions.

Okay. Well, thank you very much, everybody. Thanks for joining us on our second quarter '22 earnings call. And I also want to thank all of our colleagues for their efforts in the second quarter. It's been very, very helpful. A lot of work went into the quarter, delivering those kinds of amazing clients add numbers as well. We look forward to having everyone join us on our next earnings call. We'll discuss the third quarter '22 results, and we'll select fourth quarter performance to date commentary as well. Until then, please continue in good health and our thoughts and charitable support for those suffering in harm's way. Thank you very much, everyone. Have a great day.

This concludes today's conference call. Thank you for attending.