Rimini Street, Inc. (RMNI) Q2 2021 Earnings Call Transcript

Welcome to Rimini Street Earnings Call. My name is Sylvia and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

Thank you, operator. I'd like to welcome everyone to Rimini Street's second-quarter 2021 earnings conference call. On the call with me today is Seth Ravin, our CEO; and Michael Perica, our CFO. Today we issued our second-quarter earnings press release which can be found on our website. A reconciliation of GAAP to non-GAAP financial measures has been provided in the table 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. 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 second quarter of 2021 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 for joining us today. For the second quarter, we executed well and remain on track to achieve our strategic growth plan of $1 billion in annual revenue by 2026. We achieved record revenue of $91.6 million, up 16.9% year-over-year and above the high end of our guidance range. We also ended the quarter with strong year-over-year billings growth of 44.4%, a gross margin over 62%, and an active client count that grew by 22.5%. Our revenue retention rate grew to 94%, cross-sales continued to grow as a percent of billings, and we achieved year-over-year billings growth in all three US regions. We also completed significant capital market transactions during and subsequent to the quarter that materially reduced both our cost of capital and potential dilution. Michael will further detail those transactions in his prepared remarks. From the company's inception in 2005 to date, we have signed more than 4,200 clients including 180 Fortune 500 and Fortune Global 100 companies and added a net of 95 new clients in the second quarter compared to a net add of 82 clients in the year-ago period. To date, we have saved our clients more than $5 billion. During the second quarter, our global service delivery team closed nearly 10,000 support cases and delivered more than 15,000 tax, legal, and regulatory updates across 35 countries and achieved an average client satisfaction rating of 4.9 out of 5.0 on the company's support delivery where 5.0 is excellent. Our global employee count as of June 30, 2021, was 1,556, a year-over-year increase of 15.9%. Despite continued success with the global vaccination rollout, the more infectious COVID delta variant continues to spread around the world. Hence it is clear the global pandemic is far from over and will likely continue to create both opportunities and challenges. We believe we have navigated the pandemic well to date and with the risks of the spreading COVID delta variant, we currently plan to continue with our virtual operational, marketing, and sales model through at least the end of 2021. We also continue to believe that our strong balance sheet will provide us competitive advantages in the flexibility to help prospects and clients through 2021 and beyond as needed. The full extent to which the pandemic will continue to affect our business in 2021 and beyond will depend on numerous evolving factors that we cannot reliably predict. During the second quarter, we continue to see growing global interest, pipelines, and sales across our expanded solution portfolio with more clients successfully deploying and using our support, application management, security, interoperability, monitoring, and professional services. Cross-sells are also continuing to grow as a percent of billings and we estimate the cross-sell opportunities in our existing client base currently exceed $1 billion at accretive annual revenue. We also achieved strong client renewal success in the second quarter, delivering a higher 94% revenue retention rate with many clients extending their contracts for more than one year and some agreeing to prepay more than one year of fees in advance for a small discount. We believe our strong sales execution is a result of our evolved marketing and sales strategy, regional and theatre GM leadership model now in place globally, new go-to-market team structures, and the compensation plan alignment we implemented at the start of 2021. We believe our new regional GM model in North America is delivering better sales execution in new logo acquisition, cross-sells, and renewals. With all three US regions delivering billings growth in the second quarter and nearly 5% year-over-year US revenue growth. We continue to evolve our go-to-market strategy around industries and solutions. Rimini Street serves many of the largest logos across different industries, and we believe focusing on the specific needs of each industry will allow us to further penetrate the total addressable market in each industry with the breadth of our solution portfolio. To further support accelerated global revenue growth and achieve our $1 billion annual revenue target by 2026, we continue to strengthen our leadership team with new roles and hires needed to scale the global operation. To highlight how clients are leveraging Rimini Street services globally to achieve their strategic goals across different industries, I'd like to share a few case studies from the second quarter. First, the largest agricultural producing county in the US, the county of Fresno, California switched to Rimini Street support for its Oracle database, middleware, and PeopleSoft applications, resulting in immediate annual savings of $800,000. The county also now receives faster response times and proactive guidance from Rimini Street expert engineers. This in turn has freed up the county's internal IT personnel to focus on more critical business initiatives. Robert Bash, Director of Internal Services and Chief Information Officer for the county of Fresno, stated that 'Partnering with Rimini Street has enabled us to continue advancing a cultural shift towards exploring new ways of doing business. Every dollar county department saves on internal services is money that could be spent on programs for the community. The savings have given us the financial flexibility to begin exploring what is next for our infrastructure. We're able to invest in developing a roadmap for the county all while remaining cost-neutral for our users.' Sheri Walden, Deputy Director of Information Technology for the county of Fresno, added 'Rimini Street recently helped create a legislative update for us, which, according to our PeopleSoft team, took substantially less time to implement than previous updates from Oracle. Rimini Street tailored a path specifically to our environment, so our team didn't need to waste time applying code that we didn't need like global payroll. Rimini Street is focused on the support and success of our organization, not just delivering a product. The Rimini Street team initiates meaningful conversations and is constantly probing for how we can improve our infrastructure or better focus on the unique needs of our stakeholders.' Next, leading Brazilian chemical distributor, Quantiq, switched to Rimini Street for support of its SAP S/4HANA system. By switching to Rimini Street, Quantiq significantly reduced its operating cost and plans to reallocate the savings to invest in innovation and process efficiencies across the organization, including a new customer portal, e-commerce initiatives, and implementing intelligent automation and RFID capabilities. These initiatives are considered essential projects to maintain its competitive edge and better serve its customers and partners. Jessé Gusmão, Chief Information Officer of Quantiq, stated that 'Rimini Street support for S/4HANA delighted us due to its differentiated support model. The company's 10-minute response SLA brings our IT department peace of mind knowing that our support partner is ultra-responsive and has highly experienced engineers handling any issues. We can focus our business initiatives on more efficiency and don't waste any more time having to manage IT support requests. We want to establish ourselves as a digital transformation leader in the chemical product distribution industry. Our partnership with Rimini Street will leverage our capability and capacity to be more strategic and oriented to our business and also to invest in new initiatives so that we can improve the value and quality of services provided and ensure customers see our business as reliable and innovative.' Lastly, the leading commercial aviation trade association, International Air Transport Association, otherwise known as IATA, headquartered in Montreal, switched to both Rimini Street support and application management services for its SAP system. The organization now benefits from Rimini Street's unified turnkey service solution that integrates application management and support services, enabling IATA to substantially reduce operating costs and meet new business demand expected in the post-pandemic recovery. Pascal Buchner, IT Director and Chief Information Officer for IATA stated that 'From the start of working with Rimini Street, we saw immediate improvement in our SAP application support and management. The onboarding process is quick and seamless and we now have a much better view of our tickets and dashboards. Our in-house SAP team is constantly providing positive feedback on the quality of the support from Rimini Street. We do not regret our outsourcing choice; quite the contrary and feel we can deliver even more value to internal stakeholders than before.' Rimini Street believes the total addressable market for its portfolio of solutions is more than $170 billion annually. Our global penetration rate is only about 3.5% for support services and less than 1% for application management services. We believe we have significant greenfield opportunities for our entire portfolio of solutions. Gartner, the leading industry analyst firm and a strong referral source for Rimini Street business, is currently predicting a 200% increase in the third-party software support market and expecting that the market will exceed $1 billion in 2023. Further validating the market opportunity, we recently conducted a global survey of 1,500 CFOs and financial leaders across 13 countries covering most industries. The results reveal that a majority of CFOs want to cut spending on non-essential IT investments such as vendor pressure, major ERP reimplementation, and migration projects that lack clear value or strong ROI. Furthermore, CFOs want to see their CIOs optimize existing technology investments. Many CFOs and CIOs believe that large and expensive ERP migrations and upgrades may be better avoided. Existing ERP systems can be optimized through strategies and services offered by third-party service providers like Rimini Street, enabling the CIO to free up budget and IT resources to help accelerate strategic digital transformation programs. Rimini Street remains the only provider at global scale that offers a proven turnkey, single vendor solution for running and supporting ERP software with an ultra-responsive service that supports customization, security, interoperability, and performance challenges and creates value and savings for clients. In fact, Gartner notes Rimini Street as the leading provider of third-party support for Oracle and SAP products by annual revenue and client count, implying that Rimini Street has captured over 86% of the global market. We do not believe there have been any material developments in the litigation with Oracle since our last earnings call and quarterly report on May 10, 2021. Please see our disclosures in the second quarter 10-Q filing for updated information on the Oracle litigation that has been ongoing since 2010. We believe the company continued executing well in the second quarter and we are on plan to achieve our $1 billion in annual revenue and deliver around a 20% operating margin run rate by 2026. With the foundation in place to achieve our operational and financial plans, we are focused on sales execution, disciplined cash generation and management, and bringing our litigation with Oracle to a successful conclusion. Now with that, over to you, Michael.

Thank you, Seth, and good afternoon, everyone. As Seth noted, for the second quarter, revenue was $91.6 million, a year-over-year increase of 16.9% and above our guidance range. Annualized recurring revenue was $362 million, a year-over-year increase of 16.4%. Revenue retention rate for service subscriptions, which makes up the vast majority of our revenue, grew to 94% with more than 80% of subscription revenue non-cancelable for at least 12 months on a rolling basis. We generated $22.7 million of operating cash flow and ended the quarter with more than $110 million in cash. For the second quarter, clients within the United States represented 54% of total revenue while international clients contributed 46%, representing aggregate year-over-year revenue growth rates of 4.6% for the United States and 35.5% for international clients. In the US, we saw strong results out of the East region and we are seeing good progress in the other regions. Our international strength was broad and spread across all regions. Billings for the second quarter were $107.3 million, compared to $74.3 million for the prior year second quarter, a year-over-year increase of 44.4%. Included in the current quarter billings is a significant amount of multi-year prepayments for both renewals and for new client invoicing. Typically, clients pay for service upfront for the current service year, while multi-year prepayments represent clients who pay upfront for multiple years of support and is a positive indicator of lengthening client retention measured by years of service and increasing lifetime value. Gross margin was 62.2% for the second quarter compared to 61.2% for the prior year second quarter. We continue to invest in the global service delivery capability of our new products and services, including application management services for SAP, Oracle and Salesforce, SAP S/4HANA support services, advanced security solutions and advanced technical solutions. As we have stated previously, we expect to see the benefits of efficiencies of scale in our global service delivery throughout 2021 and guiding for full-year 2021 gross margin to be in the range of 61% to 62%. Sales and marketing expenses as a percentage of revenue were 36.2% for the second quarter, compared to 34.2% for the prior year second quarter. We remain focused on making the appropriate investments needed to support our aggressive growth initiatives and expect full-year 2021 sales and marketing expenses to be in the range of 35% to 36%. General and administrative expenses as a percentage of revenue, excluding outside litigation costs, was 18% for the second quarter compared to 16.8% for the prior year second quarter. G&A spend during the first half of 2021 was higher due to primarily one-time employee restructuring expenditures and costs related to capital markets activities and certain litigation-related expenses. Although we expect lower spending during the second half of the year, we now see G&A expenses to be in the range of 16% to 17% for the full year 2021. Net outside litigation expense was $2.8 million for the second quarter compared to $2.9 million for the prior year second quarter. Our outside litigation spend is not linear and can fluctuate each quarter based on litigation activities. We expect outside litigation expense to be in the range of $15 million to $17 million for the full year 2021. Adjusted EBITDA was $9.9 million or 11% of revenue for the second quarter compared to $9.6 million or 12% of revenue for the prior year second quarter. Operating cash flow for the second quarter of 2021 was $22.7 million, compared to $17.9 million for the same prior year period. We realized a non-cash gain of $3.7 million during the second quarter relating to the $6.1 million private warrants with an exercise price of $11.5 that expire on October 10, 2022. There is no scenario or provision that would lead to a cash settlement of this non-cash liability, which now stands at $3.1 million. Therefore, at the point when the warrants are retired, we expect to realize a non-cash gain to our profit and loss statement to extinguish this liability. Please see the second quarter 10-Q filed today for further confirmation. We ended the second quarter with a cash balance of $110 million compared to $73 million for the second quarter a year ago. Backlog, which includes the sum of billed deferred revenue and non-cancelable future revenue was approximately $571 million as of June 30, 2021, up 20% from $476 million from the prior year second quarter. Finally, deferred revenue as of June 30, 2021 was approximately $266 million, up 22% from $219 million from the prior year second quarter. On April 16, 2021, we completed the buyback of $60 million base value of the Series A preferred stock plus make-whole of approximately $2.3 million reducing the Series A preferred liquidation value to approximately $87 million. The purchase shares were retired. Subsequently, on July 20, 2021, we completed the buyback of $87.8 million face value of the Series A preferred stock plus dividends payable of approximately $0.6 million, thereby redeeming and retiring all remaining Series A preferred stock. The transaction was funded by lenders Capital One and Fifth Third Bank for a total of $90 million at a rate of LIBOR plus 1.75% to 2.5%. Accordingly, go-forward annual financing costs have been reduced by $24 million compared to fiscal year 2020. Additionally, we have eliminated the potential dilution from the conversion of the preferred to common stock by 15.5 million shares during calendar year 2021. Moving forward, we will continue our methodical focus on increasing free cash flow generation and improved profitability for the benefit of shareholders while assessing possible capital return actions. We are currently providing third quarter 2021 revenue guidance to be in the range of $93.5 to $95.5 million and maintaining full-year 2021 revenue guidance in the range of $370 million to $380 million. This concludes our prepared remarks. Operator, we'll now take questions.

Thank you. We will now begin the question-and-answer session.

Great. Nice start for you guys. Thanks for taking my questions. Looks like a strong quarter. I take a look at all the numbers. You had very strong billings growth. Your new customer generation is trending nicely. You had a record net retention rate? And revenue guidance for the year, I think it sits at 13% to 16% growth. You just did 23% growth in short-term billings in the first half. What's holding you back on raising guidance, or maybe what is all the strength in Q2 numbers, mean kind of heading for 2022?

Sure, Derrick. Thank you. When we take a look at the numbers, of course, all of us are watching the COVID situation. It still has an impact around the world. We have countries that are in lockdown, Australia has gone back into lockdown. We have challenges in Taiwan, Korea, and Japan. We've been pushing through nicely on sales through COVID, but there's a lot of unknown. I think that for us to remain very conservative, because none of us really understand what the impacts will be in the back half of the year. We look at pipelines. We believe in the strength of the pipeline. Obviously, we're executing our methodical plan as we do quarter-after-quarter, not only on the balance sheet restructuring that we set out to do and achieved exactly what we wanted to get done, but also in the sales side. So from that point of view, I think it's the right thing to remain conservative and hold our guidance. If upside develops, it will allow that to flow through.

Okay. As a follow-up, you mentioned year-over-year billings growth in all three U.S. regions. It's nice to see U.S. growth having bottomed and starting to move up. On the region, sounds like the East was strong. Does this have to do with vertical presence, or what's creating this region to outperform and maybe the others to lag? How are you feeling about the progress in driving stronger growth in each of these regions in the second half?

We have been focused on restructuring North America around regional leadership, redoing the teams. We brought in new personnel across the North American region, and I think you're watching those numbers start to come back up exactly as we had planned. The execution is showing results. We're seeing it in pipelines; we're seeing it in the highest close rates that we've had in North America and globally. We're watching the sales investments we made over the last 18 months pay off. We're on the right course with the structures and execution improvements and expect to see continued results in North America. All the indicators we see, from the efficiency of the salesforce, the quality of the deals we've closed—with more million-dollar deals in the second quarter than in our history—also show that the structural changes we made are starting to pay off.

That's very helpful color. And maybe one more for Michael on the net retention rate, I think it was the highest in maybe four, five years. Can you unpack that a little bit more? I mean, was that due to how much was due to gross retention? It sounds like you guys have called out also some uptick in cross-sell. If you look at AMS, or if you look at new cloud offerings like Salesforce, or if you look at your core, is there any one theme that's seen bigger cross-sell traction?

It's a confluence of all those factors you indicated, Derrick. You're correct that it's been quite some time to see such a positive retention rate. A key component of our strategy has been to increase our relationships and sell deeper. We expected it and are working hard to ensure this continues. It's playing out with our strong retention rate, so thanks for pointing that out.

Regarding cross-sell, this was a very important point for us when we started 2021. We were doing approximately 10% of our invoicing from existing clients. We aimed to double that. We're doing better than planned and are very pleased with the early numbers. It's not just selling AMS to existing clients; we're also selling security, interoperability, and professional services. We're really starting to up-sell our expanded portfolio of solutions into our customer base. With over $1 billion of annual revenue opportunity in existing clients, we're driving higher long-term value for them.

Sounds good. Thanks for taking my questions.

Thanks, Derrick.

Thanks for taking my question. Just a lot to like here. Congrats to everybody on the team. A few questions—maybe two, maybe three quick ones here. One, on the headcount side, just catching up on where you are on sales and sales hiring. I think you had a goal of 100. Obviously, tight labor market—it’s tough to get sales down. I'm wondering what you’re thinking there. And then also on the headcount perspective, you've added a lot of people. I think you commented last quarter how you staffed out on the AMS side. But again, this quarter has gone up nicely. At what point does that headcount growth rate start to fall off meaningfully below the revenue growth rate where you really start to leverage? How do you think about that?

We're up to the low 80s in terms of sales headcount. We feel good about making our target of 100 by year-end. We're seeing the headcount come in and have taken out a few more people in terms of churn because we think we can go for higher-quality reps in some cases. We're watching the productive new reps get onboard faster. Our long-term model is to get down to about a 33% sales and marketing against revenue number, and right now, we expect to be at 36% type number. We're adding a lot of sales support as we go through the transformation from a one-product company to a full suite of solutions. This is a costly sales model, and while we know that we need to invest, I think we can scale down to 33% as desired by 2026.

On the prepaid, can you just quantify that? It's good to see people are willing to step up for multi-year commits, and you get some extra cash. Cash flow is very strong in the quarter. Maybe just quantify that if you would that would be helpful. And then secondly, on the AMS side, can you put some meat on the bones there? Just in terms of either quantity of new AMS wins pipeline? I know you've commented from time-to-time about the momentum.

We don't break out the prepaid, mainly because it is an interesting indicator of customer confidence in our service, as clients are not only willing to pay for their service year upfront but commit to potentially millions of dollars for years in advance. We've signed contracts for nine years non-cancelable which is unusual in many companies. As for AMS, we're seeing a significant acceleration in first-time customers coming to us. We are currently learning how to sell, and our proposals are becoming more competitive. Our AMS and support solutions are being welcomed across the client community, which bodes well for future revenue growth.

Got it. Great. Congrats. Real nice quarter.

Thank you.

Thanks so much for taking my questions. The accelerated rate of growth is great to see, but I want to dig into the cost of acquiring customers given the substantially higher sales and marketing and G&A costs in the first half versus the first half of last year, notwithstanding the one-time items. Are you needing to spend more on average revenue customers, maybe in North America restructuring or paying your sales professionals more, or maybe you can provide some other reasoning for what we've seen recently—a surge in SG&A both, sorry, G&A and sales and marketing?

A lot of the G&A was related to restructuring. We've had one-time restructuring costs and the capital market transactions, as you know, are not cheap. Those expenses add up. We expect lower spending during the second half of the year, but we also have to manage ongoing litigation costs and related security costs due to the nature of our operations. We know that our G&A numbers are a little higher than our peers, but as indicated, we anticipate reductions in the future based on our planned model.

Great. If you could quantify the total one-time items in G&A and separately sales and marketing. Also, as you think about the next 12 months to 18 months, Europe has been performing fantastically. Will it be a significant step-up in investment in infrastructure as you further expand in Europe, or have you laid the foundation for the most part of the growth opportunity there?

I believe we've made the majority of the investments for European expansion already, but we still have some ongoing core investments that can further drive down our gross margin. We're confident about the infrastructure change we've made, thus we're projecting that we can maintain gross margin of around 61% to 62%.

I would rather not get into specifics, but we have a 50 basis point raise in overall G&A for the year, now the 16% to 17%. We do see a drop-off in the second half of the year as the majority of these one-time expenditures are behind us.

Thank you.

Thank you.

Thank you for taking my question, and nice job on the quarter. Seth, first question for you is a follow-up to an earlier question on the North American sales rebuild. Earlier you stated that you believe revenue growth in North America was likely to reach double-digits by the end of the year. I was wondering if you're still tracking to that growth rate?

Yes, I believe we're still on track for that. I would be very pleased if we exit 2021 with a double-digit run rate for North America growth. We have seen near 5% year-over-year revenue growth coming in the second quarter.

Great. Regarding sales headcount, can you talk a little about the different types of sales reps you're hiring today compared to a year or two ago?

Sales reps are changing from being very focused on a particular product that they know well to managing a diverse portfolio of services. They have to tell a bigger story about how we can help companies with various challenges instead of just one. The complexity means we're hiring more project manager-type profiles now and those reps are thriving with this transition.

Thank you.

Thank you.

We have no further questions at this time. I will now turn the call back over to Mr. Seth Ravin, CEO for final remarks.

Great. Well, thank you again everybody for joining us. We appreciate it. We look forward to having you join us for our third-quarter call, and hope you and yours stay safe. Thank you very much everyone.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.