Rimini Street, Inc.

Welcome to Remini Street first quarter earnings conference call. My name is Adrienne and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touchtone phone. And now to the caller, Dean Paul, Vice President. Dean Paul, you may begin.

Thank you, Operator. I'd like to welcome everyone to Rimini Street's first quarter 2022 earnings conference call. On the call with me today is Seth Raven, our CEO, and Michael Parica, our CFO. Today, we issued our earnings press release for the first quarter ended March 31st, 2022, a copy of which can be found on our website under investor relations. A reconciliation of gap to non-gap financial measures has been provided in the tables 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 risk 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 10Q filed today for 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. Q1 2022 results. For the first quarter, we achieved record revenue of $97.9 million, up 11.4% year over year, achieved a record first quarter invoicing, and delivered a revenue retention rate of 94% on subscription revenue, up from 91% last year. We continue to fill key regional operations and sales roles, including Jeff Spicer as Chief Marketing Officer, joining from Oracle, VMware, and IBM, and Kevin Hooper as GM of America Central Region, joining from Lenovo, IBM, Oracle, and HP. Additionally, we closed some of the largest sales transactions in our history during the quarter. and remain focused on growing and maturing our global marketing and sales operations for increased new client acquisition and cross sale of new services to existing clients. Further differentiating ourselves with an extraordinary client experience, we closed more than 10,000 support cases and delivered more than 18,000 tax, legal, and regulatory updates for 33 countries. Additionally, We achieved an average client satisfaction rating on the company's support delivery and client onboarding services of 4.9 out of 5, where 5 is excellent. We believe our unique client experience and very high client satisfaction rating will drive increased loyalty, improved retention rates, and higher cross-sales over time. Since Rimini Street's inception in 2005, we've signed nearly 4,700 clients, including over 180 of the Fortune 500 and Global 100 companies, and estimate that we have saved our clients more than $6 billion that they were able to reinvest in their business. We added a net of 35 new clients for the first quarter, with active clients totaling 2,884, a year-over-year increase of 13.1%. In addition, despite the challenges with retention and recruitment in 2022 affecting many organizations globally, we were successful in expanding our global workforce by 12% year-over-year, ending the quarter with over 1,680 employees. Pandemic, geopolitical, and macroeconomic impacts. As the global pandemic and other economic and geopolitical challenges continue to impact businesses and governments, we have helped thousands of commercial and public sector organizations with operations across more than 100 countries navigate the challenges successfully, moving many beyond surviving to thriving. During the pandemic, we utilized our unique, secure, remote connectivity global infrastructure with operations in 21 countries and nearly 100% of our full-time employees working from home offices. This not only allowed us to protect the safety of our people, but also allowed us to deliver uninterrupted, mission-critical, 24-7, 365 support services to our global clients. with an industry-leading guaranteed 10-minute response time for critical issues. Today, given the added financial challenges around inflation, rising interest rates, and related impact on profits, we are seeing prospects and existing clients who had planned to invest in expensive new ERP refresh projects choosing instead to extend the life of their existing stable systems to preserve cash, and focus their limited labor and budget on strategic investments and initiatives. Demand and sales execution. Rumini Street already serves many of the largest and most recognized client logos across different industries, and we believe our continued and growing focus on the specific needs of each industry will allow us to further penetrate the TAM in each industry with the breadth of our solutions portfolio. Accordingly, we continue to see a strong opportunity for our expanding portfolio of enterprise software support solutions and continue building and maturing our go-to-market capability to launch, sell and deliver our full solutions portfolio to new and existing clients globally. During the first quarter, We closed transactions with strategic, local, and global brands across diverse industries and geographies. The Asia Pacific, EMEA, and America's East geographies led in sales results. From a product perspective, results were broadly distributed across support, AMS, security, interoperability, monitoring, and professional services. Close rates were favorable. particularly for large deals defined as annual fees over $1 million. We were pleased with sales productivity, quota attainment, and close rates in the quarter. Our clients are seeing the strong value add that our engineers bring to their IT environments and IT strategy, allowing clients to augment labor and to free up resources to pursue growth and productivity initiatives. 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. Client case studies. To highlight how clients are leveraging RiminiStreet Services globally to achieve their strategic goals across different industries, I'd like to share two case studies from the first quarter. First is BreastScreen Victoria, one of Australia's largest breast cancer screening organizations, who switched to RiminiStreet for support of its Oracle database software. By switching to RiminiStreet, Press Screen Victoria was able to liberate additional capacity within its internal IT team, negate the need to spend additional funds expanding its staff to meet increasing service demands, and significantly reduce its annual enterprise software support spend. As a result, Press Screen Victoria's IT team can now focus on more strategic initiatives, including a planned data center migration project. Darren Firth, IT Operations Manager for BreastScreen Victoria stated, having a primary support engineer based locally in Australia and available on demand takes a huge weight off our shoulders. Rimini Street is an extension of our IT team with knowledge of our IT environment that enables them to dive into an issue and address it immediately. Knowing that our local Oracle Database support team is backed by RiminiStreet engineers globally brings us additional confidence and peace of mind. Next is StaffMark Group, a large US-based leading staffing and recruiting firm. StaffMark leverages RiminiStreet to support the company's PeopleSoft system. Since making the switch to RiminiStreet, StaffMark has significantly improved the quality, responsiveness, and depth of PeopleSoft support available to its internal IT team, enabled faster tax, legal, and regulatory updates, and plans to reinvest support cost savings and focus its IT resources to execute improvements to its competitive market strategy. StaffMark is going to invest in service-offering innovation and enhancements, such as AI analysis capabilities, and automated job posting functionality for employers and job seekers. Jill Crabtree, Vice President of ERP Technology for Staffmark, stated, We run payroll daily, serving approximately 35,000 employees a week, so any issue running this critical process accurately and on time would be catastrophic. Payroll is a mission-critical process that must be bulletproof and always on. I knew from past experience that Rimini Street's claims regarding their value proposition were all real, including its ultra-responsive support from experienced PeopleSoft engineers and faster delivery of high-quality tax, legal, and regulatory updates. Rimini Street's support would assure us that we could keep our daily payroll operating smoothly in full compliance and create additional efficiencies. I had no hesitation about the positive impact this would have at StaffMark. For example, there have been numerous tax, legal, and regulatory updates related to COVID-19, and we've been able to get immediate, customized updates for those changes. The support we receive is phenomenal. Oracle Litigation Update. Rimini Street and Oracle have been in litigation for more than 12 years. While the U.S. courts have confirmed long ago that third-party software support is legal, we presently have two active proceedings with Oracle, the injunction compliance dispute and Rimini 2 proceedings, both of which relate to the manner in which Rimini Street provides support services for certain Oracle product lines. With respect to the injunction compliance dispute, Rimini Street is preparing and planning to soon file an appeal to the Ninth Circuit of the United States Court of Appeals relating to certain rulings of the U.S. District Court. We expect the appeals process could take about a year to receive a ruling, but a ruling could come earlier or later. With respect to Rimini Street v. Oracle, the case Rimini Street filed against Oracle in 2014 and is known as Rimini 2, the case remains in a pretrial stage. We currently believe it is likely that the trial will proceed in 2023, but the trial could proceed earlier or later. Please see our disclosures in the latest 10Q filing for additional information on the Oracle litigation. Summary. We continue to focus on marketing and sales execution and productivity, exercising disciplined cash generation and management, and bringing our litigation with Oracle to a successful conclusion. Now, over to you, Michael.

Thank you, Seth, and good afternoon, everyone. Q1 2022 results. Revenue for the first quarter was $97.9 million, a year-over-year increase of 11.4%. Annualized recurring revenue was $385 million, a year-over-year increase of 10.2%. Revenue rent retention rate for service subscriptions, which makes up more than 98% of our revenue, was 94%, with more than 80% of subscription revenue non-cancelable for at least 12 months. For the first quarter, clients within the United States represented 53% of total revenue, while international clients contributed 47%. first quarter aggregate year-over-year revenue growth in the United States was 9.9%, while growth for international clients was 13.1%. We note that the U.S. revenue growth has continued to improve over the last four quarters, improving from the 2021 first quarter year-over-year growth rate of less than 1% to the current year first quarter year-over-year growth rate of 9.9%. We also note that our international revenue growth was negatively impacted by the reduced flow through of revenue from the 2021 third quarter sales challenges. Billings for the first quarter were $97.7 million compared to $81 million year over year, an increase of 20.6%. New client invoicing and multi-year prepayments for both renewals and for new client invoicing were notable for the quarter. Gross margin was 62% of revenue for the first quarter compared to 61.5% of revenue for the prior year first quarter and 62.5% of revenue on a non-GAAP basis, which excludes stock-based compensation expense, compared to non-GAAP gross margin of 61.9% of revenue in the first quarter of last year. We executed well on 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 deliver our best-in-class offerings with unparalleled client satisfaction. Therefore, for full year 2022, we continue to guide gross margin to be in the range of 62.5% to 63.5% of revenue, on a GAAP basis and 63 to 64% of revenue on a non-GAAP basis. Operating expenses. Like other organizations globally, we are experiencing cost pressures due to increased labor costs and inflation. However, we have been successful at mitigating this challenge in part by broadening our hiring practices with an emphasis to recruit more positions in lower cost geographies and in part by using innovative technology. we plan to continue exploring all options available to ensure we are able to acquire the talent we need at the right cost to meet our profitability and growth targets. Sales and marketing expenses as a percentage of revenue was 32.4% for the first quarter compared to 34.6% for the prior year first quarter. On a non-GAAP basis, which excludes stock-based compensation expense, sales and marketing expenses as a percentage of revenue was 31.5% during the quarter compared to 33.7% in the year-ago period. We remain focused on making the appropriate investments needed to support our growth initiatives and thereby expect full-year 2022 sales and marketing expenses to be in the range of 34.5% to 35.5% on a GAAP basis and 34% to 35% on a non-GAAP standpoint. General and administrative expenses as a percentage of revenue, excluding outside litigation costs, was 20.4% for the first quarter compared to 18.9% for the prior year first quarter. On a non-GAAP basis, which excludes stock-based compensation expense, GNA was 18.6% of revenue versus 17.5% in the year-ago period. There were one-time employee-related expenses and software implementation costs and other various items impacting spend during the quarter. However, for the full year 2022 results, we expect the spend to fall within our guidance range. Moreover, we do note that our G&A expenses did decline nearly 6% in the second half of 2021 versus the first half of 2021 and see a similar trend this fiscal year. Current and expected 2022 spend includes the investment in information systems, cost for additional personnel to support growth, cost as a public company, cost to support our global compliance operation, and incremental professional, legal, audit, and insurance costs. Therefore, we continue to expect G&A expenses as a percentage of revenue to be within the range of 16% to 17% for the full year 2022. and 14.5% to 15.5% on a non-GAAP basis. Net outside litigation expense was $3.1 million for the first quarter compared to $4.8 million for the prior year first quarter. During the first quarter, we received an insurance recovery of $389,000 for attorney costs related to Oracle litigation. Our outside litigation spend is not linear and can fluctuate each quarter based on timing and the nature of litigation activities. Accordingly, we continue to expect outside litigation expense to be in the range of $15 to $20 million for the full year 2022. For the first quarter, Net income attributable to shareholders was $3.1 million, or $0.03 per diluted share, compared to the prior year first quarter loss attributable to shareholders of $9.8 million, or $0.13 per diluted share. On a non-GAAP basis, net income was $9.2 million, or $0.10 per diluted share, versus $8.5 million, or $0.11 per diluted share. Adjusted EBITDA was $12.9 million, or 13.2% of revenue for the first quarter. I would also like to highlight our non-GAAP operating margin, which excludes outside litigation spend and stock-based compensation, of 12.4% for the first quarter, underscoring the significant profitability potential and substantial leverage to our operating model. Accordingly, we remain confident in our ability to achieve our long-term target of operating margins in excess of 20%. Balance sheet. We ended the first quarter with a record cash balance of $158 million compared to $153 million for the prior year first quarter, which included proceeds of $57 million from an equity raise that were used to pay down our Series A preferred. On a cash flow basis, for the first quarter, we generated $45.8 million of operating cash flow, up 87% from the prior year first quarter. The increase was driven by multi-year client prepayments and healthy accounts receivable collections. Deferred revenue, as of March 31, 2022, was approximately $300 million, up 20% from $250 million for the prior year first quarter. Backlog, which includes the sum of billed deferred revenue and noncancelable future revenue, was approximately $558 million as of March 31, 2022, compared to $536 million for the prior year first quarter, impacted by the reduced flow-through of backlog from the 2021 third quarter sales challenges. Capital market transactions. Our newly authorized common stock repurchase plan that we discussed during the last earnings call was commenced during the first quarter. During the quarter, we repurchased 567,685,000 common shares with a market value of $3.2 million. The repurchased shares were retired. Going forward, we will look for additional strategic opportunities to repurchase common shares, although we reserve full discretion on repurchase decisions and whether or not to activate or deactivate the plan at any time. In addition, with the current term loan principal value of approximately $86 million and a strong cash position and a rising rate environment, we are evaluating our options, including an early prepayment of approximately $10 million for which there is no prepayment penalty. With a strong cash position and consistent operating cash flow generation model, We believe the company is able to comfortably fund growth, execute our capital return plan, and reduce debt in the interest of our shareholders. Business outlook. We are currently providing second quarter 2022 revenue guidance to be in the range of $98.5 to $99.5 million, and we are raising our full year 2022 revenue guidance to be in the range of $402 to $411 million from the previous range of $400 million to $410 million. This concludes our prepared remarks. Operator, we'll now take questions.

Thank you. We'll now begin the question and answer session. If you have a question, please press 01 on your touchtone phone. If you wish to be removed from the queue, please press 02. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 01 on your touchtone phone. One moment for questions. And our first question comes from Derek Wood of Cowden & Company. Your line is open.

Oh, great. Hey, guys. It's Andrew for Derek. Nice quarter. Maybe just to start, I think Europe is 10% to 15% of revenues. You reported an international slow a bit. Maybe just walk us through what you're seeing there and how that factors into guidance.

Sure. Good to talk to you. Thanks, Andrew. This is Seth. In terms of the number, I think what you've seen there is, again, it's flow-through because of the ratable revenue. That Q3 of last year, That is an important factor in terms of building that revenue pipeline through the year. That's what's affecting the international. We also saw about four points of FX in the quarter as well. So the combination of those are certainly impacting that number. But the business is very, very strong. In fact, I think it's the third or fourth largest deal in our history we closed inside of Asia-Pac. So we did very, very well there. EMEA is strong. The LATAM operation has been merged with the Americas, and we've seen some very, very good deals over recent quarters there as well. So we don't see an actual execution problem. This is really just flow through.

Great. And maybe you touched on it right there on LATAM, but maybe on the new Americas org structure, just any color on that? how that's going so far, what initiatives Kevin has planned, and how that can accelerate U.S. growth, continue to do that?

Sure. The Americas integration is going well. The integration we did in Europe as well, where we took the Israel and Eastern European theater, merged that in with EMEA. These have been, again, good cost-cutting moves. We're gaining efficiencies by reducing the number of theaters. and hence redundant theater management. So all part of our bringing the cost structures under a great amount of focus. And we're seeing that, obviously, in the sales and marketing number. You saw that down a little bit. We will still aim to accelerate in the back half of the year to achieve the guidance number. But our big focus, of course, is really getting the G&A number down because sales and marketing is right in line where we want to be, and we're also seeing gross margins that are strong. It's really about getting that G&A number down further in the back half of the year.

Great. And then, Seth, on the sales and marketing hiring front, maybe just talk to that in the quarter, and where did you end on the sales rep number, and how are you tracking towards the 95 to 100 target by the end of the year?

Sure. Overall, on the management side, we did really well, of course, announcing Jeff Spicer, who joined us with the background, of course, from Oracle as well. In fact, a lot of the nasty competition that you've seen from Oracle over the years on the marketing side was actually developed by Jeff Spicer. So it's great to have him now on the other side of the fence for leading the marketing charge for Rumini Street globally. And we also have done well, Kevin Hooper joining us from Lenovo to fill out the GM position of the America Central. So I think we've built out strong management during the quarter. The sales hiring, I won't say, has gone as well as we would have liked. And you guys know we've struggled. We've had some good quarters of growth there. We ended about 73, down a little bit from the 79 number in the fourth quarter and But there's some really big opportunities that we took down in the first quarter, and our ASP wound up moving from about 200 to nearly 400 in the quarter. So, again, smaller number of deals, great execution by the sales team across the board. In fact, the number of tenured reps, those we think about with 12 months and over, who have very strong attainment numbers, has remained fairly steady. So that's not where we've been losing. Where we've been losing some folks is some of the new hires haven't been completing their ramp-up, some due to the fact that we counseled them out, some due to the fact that they found it to be, I think, a little harder than they thought it would be. So I think that the challenge that we have there has really still been in the recruiting area, and we've addressed that. We brought in John Leach, who is an expert at revenue recruiting positions. And he's taken the helm of revenue recruiting just a few weeks ago, and we're expecting some great things there.

Great. That is it for me. I'll pass it on. Thanks, guys.

Great. Thank you.

And the next question is from Jeff Van Reed from Craig Callion. Your line is open.

Great, thanks. Thanks for taking my questions, guys, and phenomenal cash flow there. I got about a year's worth in a quarter, so great start to the year. I want to follow up on a few of the sales questions and then a couple other things, but on sales in particular, Seth, I know you've been very focused on recruiting for somewhat of a different skill set, right? It's not a 50% off sale anymore. You want to sell a solution, and I understand your prior point, you're not getting the heads you want, but in terms of the numbers... But in terms of the heads you have, talk to me about how you're measuring their execution on that vision. Namely, are they selling more AMS security, other things? How are you tracking your success in building a solution-selling sales team?

Well, I think the first thing we're looking at, Jeff, of course, is the overall sales number, the attainment numbers. And I think we've been absolutely consistent in the execution for our sellers that are 12 months and over. I think that part has gone very well. We've seen an average of 90% attainment in that category. So we know that our tenured sellers can sell, and they are selling more of the solution. We're seeing the increase in the cross-sell. We've been seeing those numbers for the last few quarters. So we know that they're selling more of the solution to not only existing customers but but we're seeing wider breadth of products sold out of the gate to new logos as well. So we're definitely seeing some good progress in the world of solution sell. Our bigger challenge has been really two points. One, getting the actual feet on the street and growing the sales team. Been a challenge, and as I just mentioned, we brought in John Leach. We've brought in more expertise in revenue hiring, revenue position hiring. And the second area is really marketing. Getting Jeff Spicer on the ground here in the last few weeks, we've been waiting for a new CMO, as you know, for the last year. And it took us a while to select the person that we thought could really ramp this up, who would understand this business, and Jeff does. And so we're pretty excited to have him on the ground. You're going to see our television ads back on TV all over the world. That started this last week. There's a lot of ramp-up going on. So we're really convinced that the acceleration of the business is really a formula of getting additional sales reps ramped up, hitting their 12 months and bringing that 12-month down to nine months and then eventually to six for ramping, getting marketing out there, really turning a buzz around the world. This is an unbelievable opportunity for horrible from a people point of view, war, inflation, all the economics, but fabulous from a selling environment because Rimini Street has solutions for all these customers and the challenges that they have today. So it really is now a race for us to accelerate the hiring, getting our people ramped, and getting that marketing out there so that people are understanding we're out here, they understand the solutions we have, and then getting out there and closing the business.

Yep. So following on that, you know, when you look at the overall revenue performance, I mean, certainly the billings number and some bright spots in there. And if I look at overall revenue growth, 11% in a quarter, what is that bottom? And how does the push outs in terms of being able to recruit those incremental sales heads, you know, change the timing on when that growth rate bottoms and reaccelerates? Obviously, you've got your target model, You need a 22% CAGR, I believe, to hit that. So obviously, you're expecting bigger numbers. But when do we bottom on year-over-year growth?

You know, I still think, Jeff, we're not in the consistent execution category yet. And I think we've given a lot of color on that over the last few quarters. This transition to being a multi-product company is pretty complicated on a global basis. And I think that we're making progress. I think From my perspective, we said when we started 22, this was not going to be Rimini Street's biggest growth year. We knew that. And we felt that. We put that out there. We said we still had our building and rebuilding and restructuring to complete. And then seeing the results of that execution coming to life, I really think we're going to see that acceleration on the back half of this year. But as we know, with Rattable Revenue, the back half of the year, you just don't earn it as much. And this is all baked into the guidance. So we did the beat and we did the raise. We said we were gonna get into that cadence, so we wanted to kick off the year with a beat and raise, very conservative still, and it all reflects both the opportunities in front of us with the macroeconomic challenges that create selling opportunities, also creates a little bit of risk on the back end with our existing clients, although we've had super strong renewals, as you can tell from the numbers. All this, I think, is really moving towards a more stable operation, more consistent execution coming into 23. And as we've talked about before, in order to sort of target that billion dollars by 26, we have to accelerate into 23, 24, and 25. We all know that. And so this is really about two more quarters to kind of get the house in order, really ramp the engine up, and then start to see that revenue flow increase in 23.

Got it. One last for me, then I would on the on the competitive landscape, or more more specifically sales execution, how have win rates trended, I think you touched on briefly, maybe just expand on that a little more. I know q3 was an SAP centric quarter. And, and so you kind of get these ebbs and flows and who you see mostly in a quarter, but just talk to me about win rates versus the the big players and how they've changed.

Well, I think if you first go, and we talked about in my prepared remarks that we were very pleased with the, you know, with our attainment, not only our attainment numbers, but actually the win rate on the pipeline was over 30%. So those were really good numbers, very strong numbers. So sales execution is actually good. It's now a matter of ramping volume. You'll also note there that we did, what, 35 net new deals in the quarter last which was a little less than last year but double the ASP. And we did very, very well in large deals. So from a competitive landscape, we took down some monster deals during the quarter up against Oracle, and we took down some really good SAP deals too. So I would say that across the board, we are being very, very competitive out there, and we've got great wins to show for it. This is really a volume game, and we have to increase the volume. That's where the flow-through is going to come for the acceleration on revenue.

Got it. Well, again, great job, gross margins, cash flow, a lot to like there, and looking forward to that sales progress. Thanks, guys. Thank you, Jeff.

And that concludes our question and answer session. I'll turn the call back over for final remarks.

Great. Well, thank you very much, everybody. And I really appreciate you joining us. I know how busy it is with earnings calls right now. But I also want to thank and congratulate our Rimini Street colleagues for the strong execution in the first quarter. We really kept moving and doing all through the challenges out there in the world. I also want to remind everyone that we're going to have a virtual investor day in 2022 on June 16th. We will present our vision and strategy to achieve our continued $1 billion annual run rate revenue and operating margin target, how we're going to get there along with 20% operating profits. We will issue a press release and invitation shortly for registration in the coming days. It will be a virtual event this year. And until then, I want to wish you and all of your families good continued health. And our thoughts and our charitable support are all those who are suffering in harm's way today. So thank you very much, everybody. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Speakers, stand by for your deprave.