Rimini Street, Inc.

Ladies and gentlemen, this is your operator speaking. Today's conference is scheduled to begin momentarily. Until that time, your lines will remain on music hold. We thank you for your patience. Good

afternoon,

ladies and gentlemen, and welcome to the Rimini Street Q2 2024 earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, July 31, 2024. I would now like to turn the conference over to Dean Pohl, VP, Treasurer, and Investor Relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to Rimini Street Q2 2024 earnings conference call. On the call with me today is Seth Raven, our CEO and president, and Michael Perica, our CFO. Today we issued our earnings press release for the second quarter ended June 30, 2024, a copy of which can be found on our website under Investor Relations. A reconciliation of GAAP and non-GAAP 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 risks and uncertainties that may cause actual results to differ materially from statements made today. We encourage you to review our most recent SEC filing, including our Form 10Q file 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. Rimini Street helps our clients achieve better business outcomes, such as significant IT operating cost savings, improved profitability, new competitive advantages, and accelerated growth. We've achieved these goals by significantly lowering the costs, resources, and time needed to support and manage mission-critical transaction systems, such as ERP, financials, HCM, and CRM, while also assisting clients with innovation projects that include cloud, open source,

automation, workflow, data, analytics, AI

reporting, application modernization, migrations, integrations, security, license management, and global IT governance. To date, we believe we have already delivered over $8 billion of savings and reinvestment opportunity to thousands of clients operating in nearly 150 countries. Rimini Street serves as clients of more than 2,100 employees working in 21 countries in two large lab operations in India and Brazil. Our award-winning software support delivers an average engineer response time of less than 24 by 7 by 365, and earns an average client satisfaction score of 4.9 out of 5, where 5 is excellent. We continue to see strong demand for a proven, reliable, trusted partner for mission-critical transaction system services that can significantly reduce IT spending and allow organizations to consolidate their preferred IT service providers for streamlined vendor management, increased aggregated purchasing power, and better business outcomes. Competitively, we have the broad portfolio of solutions, top engineering talent, proven systems, methodologies, service models, and patented technology needed to win as a key IT service partner globally. We have won deals competing against major technology players such as Oracle, SAP,

IBM, and BXE. 2024 Q2 activity and results. The

second quarter was a mixed quarter of successes and shortfalls in sales. While we achieved strong contract volumes, including $8 million or greater transactions in the quarter, we had many smaller transactions that ultimately reduced our ASP for the quarter. The sales challenges were geographically centered around North America, Northern Europe, Japan, and Australia. In the second quarter, we responded to the unique and timely opportunity to deliver a comprehensive service offering for VMware. We launched the general availability of Romini Support, Romini Protect, and Romini Consult for VMware products. We were able to leverage our existing proven enterprise software support model and have already signed VMware service contracts and have begun providing mission-critical service to clients. We made several changes to executive management and revenue generation, including the hiring of Steve Hershkowitz as Chief Revenue Officer, Martin Hougucker as Peter GM for EMEA, and Andrew Manners as Regional GM for ANZ. We are continuing to hire globally as needed across marketing, lead generation, pre-sales, sales, and client success teams to get the right service fielded to meet our sales growth targets. Billings for the second quarter increased .9% year over year. The positive billing result was achieved primarily with deals that closed across our portfolio of solutions, various industries, and geographies. However, the year over year decrease in quarterly revenue, annual recurring revenue, and revenue retention rate are primarily due to flow through from the non-renewal of certain large client contracts that were previously noted in a prior quarterly report and related to specific client services delivered and

projects completed specifically. In order to drive increased profitability, streamline operations,

and assure we have the right skill sets required to sell and service our larger product portfolio globally, we began a reorganization and cost reduction program in the second quarter, targeting $35 million in aggregate savings. We continue to aggressively hire for needed skill sets and capabilities that enable our business and growth plan. Additionally, after careful consideration, we've decided to wind down our offering of services for Oracle PeopleSoft products. This includes our Remini support, Remini Manage, and Remini Consult Services. As we provide services for Oracle PeopleSoft products to clients globally, the wind down process is expected to take place over several phases and will likely take a year longer before

we're able to cease providing all PeopleSoft services. Oracle Litigation Update. Remini Street and Oracle

have been in litigation for more than 14 years, including cases known as Remini 1 and Remini 2. With respect to Remini 1, which was filed by Oracle against Remini Street in 2010, litigation has run its course and there are no current litigation activities related to Remini 1. However, there is a Remini 1 litigation permanent injunction that remains in effect. With respect to Remini 2, which was filed by Remini Street against Oracle in 2014, there are currently three post-trial litigation matters still before a court. One, appeal of the Remini 2 findings, otherwise known as the Merits Appeal, and the Remini 2 injunction before the Court of Appeals. Two, a motion to further stay the Remini 2 injunction pending a decision on Remini's appeal of the injunction, which is also before the Court of Appeals. And three, litigation before the District Court of where Oracle's request to recovery of certain of their attorney's fees and costs related to Remini 2 case that is on appeal. With respect to the Remini 2 Merits Appeal and appeal of the Remini 2 injunction, briefings were submitted prior to oral arguments and oral arguments were made before the Court of Appeals on June 5, 2024. The court's decision is pending. For additional information and disclosures regarding the company's litigation with Oracle, please see our disclosures in the company's quarterly report on Form 10Q filed today, July 31, 2024, with the U.S. Securities and Exchange Commission. Please also note that at this time, we are still unable to provide material additional information beyond the disclosures and statements in our press releases, filings with the SEC, and court filings, nor provide guidance with respect to future financial results, nor are we able to provide additional commentary related to the pending Oracle litigation and potential impacts of the Remini 2 injunction because the matters are still before various courts

and the outcomes cannot be predicted. Summary. While the Court has delivered mixed results,

we

remain

confident that we are continuing to take the right actions and making the right investments to accelerate the return to growth and profitability, enhance shareholder value, and bring our litigation with Oracle to a successful conclusion. However, if Remini Street does not adequately reorganize its operations to reduce costs or does not ultimately prevail in the post-trial litigation matters summarized above and detailed in our SEC filings, it could have a material adverse impact on our business and financial results.

Now, over to you, Michael. Thank you, Seth, and thank you for joining us, everyone. Due to

2024 results, revenue for the second quarter 2024 was $103.1 million, a -over-year increase of 3.1%. Clients within the United States represented 50%, while international clients represented 50% of total revenue for the second quarter of 2024. We note that for the second quarter of 2024, our total revenue measures on a constant currency basis was negatively impacted by .3% due to FX movements. Annualized recurring revenue was $399.4 million for the second quarter, a -over-year decrease of 2.6%. Revenue retention rate for service subscriptions, which makes up .8% of our revenue, was 88%, with approximately 74% of subscription revenue noncancellable for at least 12 months. Billings for the second quarter were $111.6 million compared to $104.4 million for the prior year second quarter, an increase of 6.9%. Unfavorable FX movements reduced second quarter 2024 calculated billings by $2.9 million. Gross margin was .1% of revenue for the second quarter compared to .0% of revenue for the prior year second quarter. On a non-GAAP basis, which excludes stock-based compensation expense, gross margin was .5% of revenue for the second quarter compared to .5% of revenue for the prior second quarter. Gross margin declined during the second half of 2023 and the first half of 2024, in part, as a result of continued investments in and expansion of our global engineering team needed to serve new client engagements in advance of related, ratable contract revenue recognition. As noted in previous earning calls, we are expecting continued gross margin pressure as we scale to meet new client engagements. Simultaneously, we are working to improve gross margin by driving efficiencies and leveraging the benefits of growing global scale. Operating expenses. As Seth noted, we implemented a reorganization plan to reduce the net operating costs by $35 million on an annualized basis, of which approximately $15 million occurred during the second quarter, with another $20 million targeted for the third quarter. For the second quarter, we incurred a reorganization charge of $3.2 million. While inflationary pressures and high costs are still persistent for skilled labor across all theaters, we continue to attract and retain key talent. Moreover, our margin performance, in light of the pressures highlighted previously, underscores the advantage of our global footprint with centers of excellence in geographies for both talent and value remain attractive compared to higher priced talent markets. Sales and marketing expenses as a percentage of revenue was .2% of revenue for the second quarter compared to 35% of revenue for the prior year second quarter. On a non-gap basis, which excludes stock-based compensation expense, sales and marketing expenses as a percentage of revenue was .7% the second quarter compared to .3% of revenue for the prior year second quarter. General administrative expenses as a percentage of revenue, excluding outside litigation costs, was .9% of revenue for the second quarter compared to .7% of revenue for the prior year second quarter. On a non-gap basis, which excludes stock-based compensation expense and litigation costs, GNA was .6% of revenue for the second quarter compared to .2% of revenue for the prior year second quarter. We are addressing the -over-year increase as part of the restructuring program mentioned earlier. However, GNA expenses as a percentage of revenue are expected to remain elevated compared to our peers due in large part to the ongoing costs for in-house legal and compliance teams and other costs made necessary by our ongoing Oracle litigation and compliance activities. Net outside litigation expense was 1.6 million for the second quarter compared to 0.6 million for the prior year second quarter. Our non-gap operating margin, which excludes outside litigation spend and stock-based compensation expense, was .2% of revenue for the second quarter compared to .0% for the prior year second quarter. The net loss attributable to shareholders for the second quarter was 1.1 million or negative one cent per diluted share compared to the prior year second quarter net income of five cents per diluted share. On a non-gap basis, net income for the second quarter was 6.1 million or seven cents per diluted share compared to the prior year second quarter of ten cents per diluted share. Adjusted EBITDA, defined in our press release, was 8.8 million for the second quarter or .5% of revenue compared to the prior year second quarter of .8% of revenue. Balance Sheets. We ended the second quarter June 30th, 2024 with a cash balance and short-term investments of 134.2 million compared to 140.7 million of cash and short-term investments for the prior year second quarter. On a cash flow basis, for the second quarter operating cash flow increased 6.3 million compared to the prior year second quarter increase of 13.1 million. FX headwinds reduced operating cash flow by 3.1 million. Deferred Revenue. As of June 30th, 2024, was 262.8 million compared to deferred revenue of 285.3 million from the prior year second quarter. Backlog, which includes the sum of billed deferred revenue and non-cancellable future revenue, was 556.7 million as of June 30th, 2024 compared to 565.1 million for the prior year second quarter. SF noted, we have decided to wind down our offering of services for Oracle PeopleSoft products. Revenue related to providing services for PeopleSoft products accounted for approximately 36.1 million or 8% of fiscal year 2023 revenue and 16.6 million or 8% of first half 2024 revenue respectively. Business Outlook. The company is continuing to suspend guidance as to future financial results until there is more clarity around impacts from current litigation activity before the US federal courts in the company's ongoing litigation with Oracle. For additional information and disclosures regarding the company's litigation with Oracle, please see our disclosures in the company's quarterly report on Form 10Q filed on July 31st 2024 with the US Securities and Exchange Commission. This concludes our

prepared remarks. Operator, we'll now take questions.

Thank you. Ladies and gentlemen,

we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One

moment please for your first question. Your first question comes from Brian Kinslinger

with Alliance Global Partners. Please go ahead.

Great. Thanks so much for taking my questions. My first question is if you could talk about what was behind the decision to exit the People's Sob Support business.

Sure, Brian. As we noted in the statement, we did look at several factors. We looked at financial factors. We looked at legal factors. And as you know, this product line over time has reduced in size dramatically for us. It used to be the majority of our business and today it's 8%. And when you look at the 8% and you look at the revenue and you look at the margins associated with it, you look at legal costs associated and around the product line, at the end of the day, we took a look at those factors and decided that we would be better at winding down the business and focusing our efforts elsewhere and our capital elsewhere.

Well, I know you can't comment on legal. You did mention the legal related to it. I think it's clear to People's Soft piece is the one place Oracle has been successful. So are there any thoughts to changes in legal expense going forward related to this?

Well, I think you could probably take a look and say that if you look over the last Romini 2 case, look over Romini 1, you look over the last 14 years of litigation, the majority focus including injunctions and compliance challenges have been related to People's Soft. And just for clarity, the battle over People's Soft has primarily been related to original People's Soft license agreements that were written before Oracle acquired People's Soft back in 2005. And we had been challenging back and forth with Oracle and the courts over language in those agreements, which specifically stated according to Oracle and the courts that the product had to be run and used on Oracle, I'm sorry, on the client's own computer systems. And so that was a difference between that and all the other license agreements that you've seen in the Oracle world, especially their native products. And so that has been a continuing battle for 14 years. And again, you get down to 8% of revenue. Those equations start to change about what's it value of continuing the product line versus again, focusing our efforts elsewhere. In terms of expectations of reduced legal and compliance costs, I think those are potentially fair assumptions that could come with that.

Great. The retention rate has dropped in each of the last quarters. We hit, I think, a low since I've looked back many years of 88%. What are the factors that you attribute this to?

Well, I think you had a couple of things. One, we talked in previous conference calls about some reduction and rotation of some of the product lines that we are supporting today. You're starting to see more revenue that is outside of subscription in our consulting business as that continues to grow. And I also think, again, we have this flow through from Q4 and Q1, where we had some large contracts come to an end. And some of those coming to an end was not just because a customer rolled off a product that was unexpected. Some of it was that they were short-term contracts that were very large and we completed them successfully. But the net result was still that they rolled off of what you saw, the recurring revenue streams. And we're watching that flow through from Q4, Q1, and naturally into Q2. Those take several quarters to flow through. So I believe that's a primary component you're seeing there.

Great. Last question I have is you began your script, Seth, with you continue to see strong demand for proven and trusted partners. And I assume you're talking about third-party support services. Can you reconcile that with the bookings over the last few years that have led to decelerated growth in the first quarter we've seen -over-year declines for remaining?

Sure. Well, as I noted, the billings number had increased for Q2 -over-year. The numbers that you saw flowing through on the revenue, the quarterly revenue, again, related to those larger contracts that we saw, which shouldn't be confused with the overall health of the business. We have had, as you well know, several years of transformation from being a third-party support provider of replacement services just for Oracle and SAP to expanding that service dramatically in terms of the products covered, even VMware in the last quarter. On top of that, we added in our AMS service, an entirely large new business line. We added in expansions to the security product line, to our Connect and product line of interoperability tools. We added new observability capabilities, and we've built out an entire consulting business over the last few years. And we're talking on a global basis serving customers in over 150 countries. So I would tell you that we probably underestimated the amount of time and efforts it would take to bring all of that to market, bring that all to market across the world in all these different countries, the personnel and the time it takes to get them trained up to change the way we sell, from just selling a replacement of maintenance at 50% off to being out there selling large projects that go beyond just that maintenance. And that required a different skill set even amongst the So it has been a transformational project over the last few years. And of course, the numbers still aren't bearing out yet all the green shoots that we see from this business. But we are closing excellent contracts from a qualitative standpoint around the world. Again, we have too many small deals, as I mentioned in the prepared remarks. We need to see those ASPs crawl back up again. We also need to see that customers are buying in larger and larger contract volumes where we're seeing more products in those mixes. And we're already starting to see that more and more around the world. And we would expect that that will show up in future

financials.

Okay, thank you.

Thank you.

Your

next question comes from Derek Wood with TD Cowan. Please go ahead.

Great. Thanks, guys. This is cool on for Derek. I'll just start with the on PeopleSoft again. So if 8% of revenue is going to kind of bleed out of the model, is part of this headcount restructuring restructuring that you're doing? Is this due to, you know, kind of cutting costs along the PeopleSoft business, you know, either in support or sales team and G&A? I mean, you know, just more info, that would be helpful.

Sure, we would expect that this 8% would transition over time. As we mentioned, we do have quite a few clients all around the world that are under contract. And so it's going to take a while to work through all of that, just from an organizational perspective. But the cost reductions that we're trying to do, and very much in line with what you're seeing around the world, I think you're watching another wave of 10% cuts, we're looking at similar types of numbers. Most of it is to streamline operations and take cost out of the equation, which makes sense when you're focused on profit. And I think we've been very clear that while we're waiting for the top line to turn and to begin the growth cycle back up, we are very focused on delivering bottom line results for shareholders. We believe in the rule of 40, as you well know, we do have a ways to code to get there. But we do see that as a guiding light for us. And if we're going to be light on top line growth, then we expect that we should be pushing that to the bottom line. And cost reductions

are a clear way to get there.

Got it. And then you mentioned that you're going to focus capital elsewhere. What other areas of the business do you think can kind of show dividends if you shift resources from people fall into other spots or maybe?

Well, we have other product lines which are generating even on the support side of the house, we have other product lines, whether they're Oracle product lines, SAP product lines, VMware, others that are showing higher gross margins return, then we're on the PeopleSoft side, which has a very heavy fixed cost component to it, due to the tax, legal and regulatory costs and the way that those have to be developed. And so when you look at those numbers, it tells you that if we were spending that money, instead of marketing and selling PeopleSoft, we were selling other products with higher gross margins. Obviously, we would lift the overall blended gross margin rate, as well as drive additional profits

to the bottom line. Yeah, sure. And then just

one more here. Some of the flow through on larger contracts that came to an end that are weighing down on revenue growth and then retention as well. So this is the third quarter in a row that you've called it out. I mean, do you have any visibility in the lens, these are going to kind of dry up or is this something that can kind of go on for a while? Just a little more clarity on what we can expect going forward through the rest of the year would be helpful.

Sure, cool. So the deals that we keep pointing out from Q4 and Q1, because they are flow through, we're not seeing and you noticed we didn't say that there were big deals that were lost in renewals in the second quarter. That is because those were Q4, Q1 deals that were noting causing the biggest impact there. So we're not seeing this as a systemic issue. These were specific contracts that had specific end dates or were specific projects that were completed. And I would say of those deals, I think that very little of them were really surprises. They were really understood to be rolling off contracts that we had visibility to. So again, from that point of view, we were a little bit hampered over the last few quarters, as you know. We haven't provided guidance since the court ruling in Romini 2 last July. And that had left us in a position where we weren't going to provide guidance on some of the things that we may have seen for that very reason. And so that's why they

seem to be surprises, but they weren't necessarily surprises to us. Great. I'll see you at the floor.

Thanks.

Thank

you. Your next question comes from Brian Kinslinger with Alliance Global Partners.

Please the December quarter, you peaked at 112 million of quarterly revenue. We're down about 9 million on a quarterly basis from that peak. So that implies about $36 million of annual revenue. So maybe you could quantify how much the contracts that ended represented on an annual run rate. I think that will help us understand the health of the underlying business if we excluded that.

Yeah, Brian, I think that you're talking about the number you're speaking to. If you look at it, my guess is somewhere in the 20 to 25 million of those big contracts combined in Q4 and Q1. So a good substantial amount of that number on an annualized basis would have been related to those larger contracts that had rolled off.

Got it. And was it, not to beat the dead horse here, but is it a couple of contracts like two or three? Are we talking like 10 or 11? I'm just trying to understand. Oh,

no. No, we're talking a handful at most. Yeah, we're talking four or five.

Okay. And then you highlighted a $35 million number you're targeting, I think, in cost cuts. First, is that right? And then second, will that be offset? Whatever you are able to achieve, will that be offset by hiring? As you said, you have some key positions you're looking to hire still.

Well, I think like most people in their 10% cut, I think you're watching on an industry-wide basis. My guess is seven to 8% is going to be direct to the bottom line, cost cutting and streamlining. But everybody's overcutting two or 3% because they're doing skills rotation. As you know, there's a massive amount of AI hiring, for example, in skill sets, where people are rotating out older skill sets that are more in the rearview mirror, replacing them and re-skilling. We saw this with cloud. We've seen this with other technologies when they come real hot into the market. And we're seeing the same on AI. Remini Street's no different. We are overshooting what we'd like to do in terms of cost cutting for streamlining to make room for some new skill sets that we need in order to grow the business. For example, we found that the level of requirement for enterprise architects in our business is extremely high. We do very well when we bring enterprise architects in with customers to help them not only solve the immediate issues of maintenance costs or overall costs within their IT organization, but helping them figure out the roadmap going forward. A part of it will get you their program. And so we're deploying regional CTOs around the world. Those are expensive heads, so you have to pay for them somehow. So you're watching us reduce sales and marketing costs, reducing number of sellers, replacing them with CTOs, changing the mix of people on the field in order to give us a better sales capability for larger, more complex contracts. That's the kind of work we're doing. Okay.

The last question I have is the 3.2 million in restructuring charges. How much does that represent in cuts that you've already made on an annualized expense basis?

Michael, you want to take that one?

Sure, Ken. Brian, how are you this afternoon? So the answer is they have not, you have not experienced those in Q2 on the P&L. More of the effect will be felt starting in Q3. As we noted, the remaining component will occur in large in Q3 with the greater effect overall to the P&L starting in Q4 this year, just as a matter of timing.

No, right. I'm sorry. I'm not asking on timing. You already did some restructuring for the 3.2 million. I assume that severance or some other charges.

Those

actions, how much did those, before we go forward looking, I mean, you'll announce it next quarter too, but those 3.2 million in restructuring charges, how much does that already take out of the business on an annualized basis whenever it starts?

Well, I understand. Apologies, Brian. That is on a $15 million annualized run rate of cost reductions such that our target is remaining $20 million in the current quarter. Got it. Okay.

Thank you so much.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call back over to Seth Ravine for closing remarks.

Great. Thank you very much. Again, I'm going to thank everyone for joining us on the quarterly call. We, of course, will look forward to seeing you again as we move to the third quarter call coming in the next few months. Until then, again, please be safe about those in harm's way. We live in a complex world. Ravine is a global company doing business in every continent. We're very aware of the challenges that even some of our own people face today. Our thoughts are with them, of course, and wishing everybody well. Thank you very much and be healthy. Thanks all.

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