Rimini Street, Inc. (RMNI) Q3 2021 Earnings Call Transcript

Welcome to the Rimini Street Quarterly Earnings Call. My name is Annette, and I’ll be the 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. I will now turn the call over to Dean Pohl, Vice President of Investor Relations. Mr. Pohl, you may begin.

Thank you, operator. I’d like to welcome everyone to Rimini Street’s Third 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 earnings press release for the third quarter ended September 30, 2021, a copy of which can be found on our website under Investor Relations. A reconciliation of GAAP to non-GAAP financial measures has been provided in the table following the financial statements in 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. 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 third 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 third quarter, we achieved record revenue of $95.6 million, up 15.9% year-over-year, and that’s the high end of our guidance range and achieved a strong revenue retention rate of 93%, up from 92% last year on subscription revenue. Subscription revenue accounted for 98.4% of our total revenue. More granularly, we achieved 31.4% international and 4.8% U.S. revenue growth year-over-year. We see growing demand for Rimini Street’s expanding portfolio of enterprise software support solutions as we continue building and maturing our go-to-market capability to launch, sell and deliver our full solutions portfolio to new and existing clients globally and prepare the Company for billion-dollar annual revenue operations by 2026. For the third quarter, we also expanded our gross margin, improved our cost leverage and completed significant capital market transactions 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 4,400 clients including over 180 Fortune 500 and Global 100 companies and added a net of 148 new clients in the third quarter. To date, we have saved our clients more than $5 billion. During the third quarter, our global service delivery team closed over 9,500 support cases and delivered more than 18,000 tax legal and regulatory updates across 27 countries and achieved an average client satisfaction rating of more than 4.9 out of 5.0 on the company’s support delivery and for the first time an average satisfaction rating of 4.9 out of 5.0 on the company’s client onboarding program where 5.0 is excellent. Our global employee count as of September 30, 2021, was 1,595, a year-over-year increase of 15.2%. We believe we have navigated the pandemic well to date. Despite continuing risks of COVID variance, we are taking steps to return to some office operations, attend select marketing events and increase in-person sales activity. However, despite continued success with the global vaccination rollout, the more infectious COVID Delta variant continues to create different levels of business disruption around the world. It is clear the global pandemic will likely continue to create both opportunities and challenges for businesses through 2022. The full extent to which the pandemic will continue to affect our business in the remainder of 2021 and beyond will depend on numerous evolving factors that we cannot reliably predict. During the third quarter, we closed hundreds of transactions with strategic, local and global brands across diverse industries and markets. Sales transactions spanned the wider breadth of our solutions portfolio, including support, AMS, security, interoperability, monitoring, and professional services. We also continued to see growing momentum and cross-sales to existing clients where we believe there’s over $1 billion in annual white space sales opportunity at this time. With respect to the renewal and extension of existing subscription agreements, we achieved continued success 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 small fee discounts. We continue our focus on launching, selling and supporting our expanded solutions portfolio globally, executing go-to-market activities that include significant recruiting and hiring of a broad range of leadership positions and our global marketing and sales organization that need to be filled out to drive improved sales execution and productivity. Several new leaders in revenue support organizations were announced in press releases issued over the last few days, including the Chief Technology Officer and Office of the CTO, Chief Products Officer, Theater GM, North America, Regional GM, North America East, GM, SAP Services, GM, Oracle Services, and GM, Global Professional Services. Our relatively new sales reps and sales support staff, those with less than one year of experience, are ramping up in gaining valuable experience that should benefit the company in the coming period. Today, more than half our sellers and many sales management have less than one year of experience in their roles and we still have many key sales and marketing leadership positions to fill. Like all companies today, we are competing for talent in a challenging recruiting environment. The combination of these factors has caused some lumpiness in hiring and sales execution. Our go-to-market strategy continues to evolve around an industry and solution sales model that leverages our bundled service offerings for easier client sale. This strategy is being successfully implemented by a theater and regional GM leadership model now in place globally and enabled by our new go-to-market team structures and the new integrated team compensation plans we’ve put in place earlier in 2021. Rimini Street already serves many of the largest logos across different industries. 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 expanded solution portfolio. During the third quarter, we launched services for open source databases, which are now handling a substantial and growing portion of the global database workload. Clients want to migrate some of their database workloads to open source platforms in order to optimize costs and operational flexibility. Our clients have asked us to extend our award-winning enterprise-class services to the most popular open source database platforms they want to leverage: MySQL, MariaDB, PostgreSQL, and MongoDB. These solutions are in addition to the proprietary databases we already support globally: Oracle, IBM DB2, Microsoft SQL Server, and SAP Sybase, MaxDB, and HANA. Rimini Street has already signed open source database service contracts with clients and we already have more than 400 engineers globally with database skills and experience. We also now offer database migration advisory and full migration services to help organizations smoothly and methodically re-platform their enterprise workloads across proprietary and open source database platforms. 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 third quarter. First, T-Mobile with more than $68 billion in annual revenue and over 104 million customers. T-Mobile has been leveraging Rimini Street support since 2019 for their SAP system, including support for the organization’s extensive software customizations, which were not covered under the software vendor's more expensive annual support. T-Mobile’s SAP platform, comprised of more than 200 SAP modules, is used as the system of record for key financial and operational functions, and is a critical component of T-Mobile’s supply chain portfolio—a vital part of T-Mobile’s customer experience. Since making the switch from vendor support to Rimini Street, T-Mobile has been able to avoid a costly and unnecessary enterprise software migration project and instead has been able to redirect budget and resources to focus on delivering services and technology aimed at lighting up its customers as a competitive differentiator. Erik LaValle, Senior Director of T-Mobile, Product & Technology for supply chain, stated that T-Mobile is a very complex environment. When we looked at the services we were getting from SAP versus the value and new functionality offered, it became very clear that moving to Rimini Street support offered a more compelling alternative for us. Throughout our engagement with the company, they’ve had the right team in the right place at the right time. The initial transition procedures and proven support model ensured a smooth startup. Rimini Street does a great job of balancing between tactical delivery and being a strategic partner. We have great conversations on a regular basis about the future of technology, the best way to approach our future IT roadmap, and how we can balance between our internal delivery and the services Rimini Street provides to advance our team along the technology. Rimini Street is one of our most trusted IT partners. Next, Korean Airlines, whose IT team’s main concern was the high cost and low efficiency dynamic that it was experiencing with Oracle’s maintenance and support, recently moved the remainder of its Oracle software to Rimini Street support, taking into consideration the successful partnership Korean Air had already been experiencing with Rimini Street for their Siebel software support. The IT team ultimately decided to move the rest of the Oracle enterprise software landscape now hosted on AWS in the cloud to Rimini Street and receive the same ultra-responsive seamless support they’ve been enjoying for the last two years with our initial service contract. Seongyeon Park, ERP Team Leader in Korean Air’s IT department, stated that the cost of maintaining the rest of our Oracle software and databases with the vendor still accounted for a large portion of our IT budget, but with Rimini Street’s rapid response and proactive problem-solving approach, we now have a more agile partner supporting the stable operation of our mission-critical enterprise software in the cloud, all under a single roof. This move has provided us with even more efficiencies than we were experiencing previously and it has freed up the team to focus on other more pressing business projects. Lastly, Origin Energy, a leading Australian energy company with 4.3 million customer accounts and a vast Oracle footprint that includes ERP system environments for retail customer billing, financial accounting, asset management, running on more than 100 Oracle database instances. Origin switched to Rimini Street support for its Oracle software, including E-Business Suite, Oracle Database, Fusion Middleware, and Hyperion. Cameron Adams, Head of Architecture and Database Services, stated that we identified that one of our largest database operational expenditure costs was our maintenance and support. You were attracted to the value proposition and support model offered by Rimini Street as the company gave us an avenue to materially reduce our database costs and avoid further upgrades in the future. In addition, we have been on a journey in recent years of migrating all of our application workloads to the cloud. Working with Rimini Street has helped us further simplify some of our activities, and Rimini Street has become a valuable component of our overall IT strategy. The case Rimini Street filed against Oracle in 2014 remains in the pretrial stage. Trial is currently expected to proceed in the second half of 2022 or later. With respect to the dispute, the parties are currently engaged in over a permanent injunction that has been in place since 2018. The court held a hearing in September 2021 on this order to show cause. Oracle alleges that Rimini Street has violated the injunction and should be held in contempt, and Rimini Street believes that it has been in substantial compliance with the permanent injunction. We believe that during the hearing Oracle failed to prove its claims and that the court should discharge its order to show cause. We currently expect findings by the court in the coming months. Please see our disclosure in the third quarter 10-Q filing for additional information on the Oracle litigation that has been ongoing since 2010. We continue working to complete our transformation and scaling project to support $1 billion in annual revenue operations by 2026, focusing on sales execution and productivity, exercising discipline in 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. For the third quarter, we delivered an expanded gross margin, a higher year-over-year operating income, and non-GAAP operating income and ended the quarter with more than $103 million in cash. Additionally, during the quarter, we completed significant capital market transactions. On July 20, 2021, we redeemed this remaining Series A preferred stock with a five-year term loan transaction financed by two commercial banks, Capital One and Fifth Third for $90 million at a rate of LIBOR plus 1.75% to 2.5%. The company has taken certain one-time cash and non-cash charges in the third quarter related to the closing of the financing transaction, and the go-forward annual financing costs have been reduced by $24 million compared to fiscal year 2020. As Seth noted, for the third quarter, revenue was $95.6 million, a year-over-year increase of 15.9% at the high end of our guidance range. Annualized recurring revenue was $377 million, a year-over-year increase of 15.3%. The revenue retention rate for service subscriptions, which makes up 98.4% of our revenue, was 93%, with more than 80% of subscription revenue non-cancelable for at least 12 months on a rolling basis. On a cash flow basis, while we did use cash in the period in line with our normal cycle, where cash is generated in the first half of the year and utilized in the second half of the year, we still ended the quarter with a healthy $103 million in cash. For the third quarter, clients within the United States represented 53% of total revenue, while international clients contributed 47%, representing aggregate year-over-year revenue growth rates of 4.8% for the United States and 31.4% for international clients. Billings for the third quarter were $73.7 million compared to $68.3 million for the prior year third quarter, a year-over-year increase of 7.9% that included billings growth in the U.S. and international markets. Included in the quarter billings are 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. These additional invoice amounts are positive indicators of the value being received by clients, future client retention, and lifetime value. Gross margin was 65.1% for the third quarter compared to 61.2% for the prior year third quarter. While we continue to methodically expand gross margin through our scaling initiatives, technology, and other efficiencies, we are now raising our full year gross margin guidance from 61% to 62% to be in the range of 61.5% to 62.5%. The gross margin for the third quarter was elevated in part by some delays in hiring as previously described by Seth. We plan to continue investing in the global service delivery capabilities for our new products, services, and solutions to ensure we can deliver our best-in-class offerings with unparalleled client satisfaction. As a result of the overall business climate impacting all entities globally, irrespective of industry, we are experiencing some cost pressures due to labor shortages and inflation. We are mitigating these challenges in part by broadening our hiring practices with an emphasis on recruiting more positions in lower-cost geographies. We plan to continue exploring all options available to ensure we’re able to acquire the right talent at the right cost to continue our growth trajectory. Sales and marketing expenses as a percentage of revenue were 34% for the third quarter compared to 35.4% for the prior year third quarter. The year-over-year reduction as a percentage of revenue is in part a result of the timing of certain program implementations and hiring. We remain focused on making the appropriate investments needed to support our growth initiatives and continue to 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, were 16.3% for the third quarter compared to 15.8% for the prior year third quarter, but as per our guidance, down significantly from the 18% in the previous quarter. Given that G&A spend during the first half of 2021 was higher due primarily to one-time employee restructuring expenditure costs related to capital markets activities and certain legal expenses, we see the full year closer to the high end of our guidance range of 16% to 17%. Accordingly, we expect fourth-quarter G&A spend will again continue to decline as a percentage of overall revenues sequentially from Q3 and Q2. Net outside litigation expense was $6.6 million for the third quarter compared to $3.8 million for the prior year third quarter. The increase relates to costs associated with the evidentiary hearing that Seth discussed earlier on this call. Our outside litigation spend is not linear and can fluctuate each quarter based on the timing of 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 $15.9 million or 16.7% of revenue for the third quarter. I would also like to highlight our non-GAAP operating margin, which excludes outside litigation spend of 17.3%, that underscores the significant profitability potential and substantial leverage to our operating model, such that we remain confident in our ability to achieve our long-term target of operating margins in excess of 20%. We realized a non-cash loss of $2.1 million during the third quarter relating to the $6.1 million private warrants with an exercise price of $11.50 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 $5.1 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 third quarter 10-Q filed today for more information. We ended the third quarter with a cash balance of $103 million compared to $83 million for the third quarter a year ago, up 24% year-over-year. Deferred revenue as of September 30, 2021, was approximately $244 million, up 19% from $204 million in the prior year third quarter. Backlog, which includes the sum of build deferred revenue and non-cancelable future revenue was approximately $553 million as of September 30, 2021, up 10% from $503 million from the prior year third quarter. On July 20, 2021, we completed the buyback of $87.8 million face value of 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 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 potential future capital return options. We are currently providing fourth quarter 2021 revenue guidance to be in the range of $95.8 million to $96.8 million and accordingly narrowing our full year 2021 revenue guidance to the range of $371 million to $372 million. This concludes our prepared remarks. Operator, we’ll now take questions.

Thank you. We will now begin the question-and-answer session. And our first question is from Derrick Wood. Mr. Wood, go ahead.

Thanks for taking my questions. So on guidance, just very surprised to see that the Q4 guide of nearly flat on a sequential basis, in terms of what’s historically a very strong sequential quarter and a pretty big slowdown in year-over-year growth. Seth, can you walk us through what has changed over the last three months that’s caused such a dramatic difference for Q4? In relation to that, Michael just mentioned the backlog number, which was certainly lower than I would’ve thought. Could you speak to that as well?

Sure, Derrick. And of course, with the 7.9% billings growth for the quarter, it wasn’t our top quarter in terms of field performance. I think you notice that the second quarter we had very strong billings growth, and we set a record. The third quarter had a different mix of reps out there, and as I noted, half of our reps have less than a year of experience. We know that 18 months is the fulcrum point between those who are producing more than ever and those who are still getting their feet wet and learning the business. So I think this quarter, we wound up fielding a bunch of deals with folks that were not necessarily the same proven players that were playing in the Oracle quarter in Q2; they were playing in the SAP quarter of Q3. We just didn’t deliver all the deals we wanted; millions of dollars of them slipped into the fourth quarter, which we’ve already closed billions of dollars of that business. We’re seeing that we had some other deals that were lost, and we had some errors on the field that were due to rookie mistakes and other errors due to the fact that we didn’t have enough management out there to oversee it. The combination of all these factors has caused some challenges in sales execution. We know we still have plenty of opportunities ahead.

Okay. Is it fair to say that, I guess you experienced higher sales attrition in the quarter?

Yes, part of the challenge. I mean, everyone’s facing this issue, you know that; we’ve got the great resignation as it’s been referred to. We haven’t seen a lot of voluntary resignations. We’ve been pretty aggressive about turning over sellers that are productive. I think we added a few more than we probably would have hoped, and coupled with the new hires, there’s not much they can do early on. It takes a while to learn this business. One of the unique challenges of this business is the complexity of the sale, which requires people to learn quite a bit of material to effectively position and sell our services. We need to get these people mature, and while they are learning a lot along the way, there are errors being made on the battlefield. We disclosed the second-largest transaction in the company’s history just last week, which was a fantastic transaction and it was done by sellers that have more than 18 months of experience by a management team that had more than 18 months. That’s why I mentioned it’s lumpy. We have areas where we’ve got senior people and experienced teams doing very well, and others where we’ve got a lot of rookies on the battlefield, and they’re making some errors and mistakes that we wouldn’t expect if we had a different, more mature team on that. But when you’re doing hundreds of transactions now, as part of our growth, that lumpiness is coming into effect where you’ve got differences in the teams. This was very particular to the third quarter, the amount of new people we have on the field that we’re training.

I guess my last one then, I mean, the gross margin uptick is so large, and I think the cost of goods sold was down a couple million sequentially. Michael, do you guys have enough capacity to service a pipeline, or is that going to require onboarding people to be able to service new deals that maybe you don’t currently have the capacity for?

We absolutely have the capacity. As I mentioned, we hit the highest client satisfaction in our history at a rating north of 4.9%. The clients are very happy. The numbers reflect this satisfaction haven’t even dipped to lower percentages. They are the best we’ve ever seen. From a scaling execution perspective, we can service our clients without a problem. However, it’s really challenging to get all these hires done for the growth, especially in the last couple of months. When we talked last – on the last earnings call, we were feeling pretty good about hiring, but in the last couple of months, it has been an absolute storm for everybody. We’ve got probably 20 companies out there doing recruiting on top of our own team. It’s really tough to grow when you can’t add all the people you need as quickly as you want. That has been factored into our guidance. We do have some impact and the ability to get these people fielded to deliver the size numbers and growth we know is available based on the market opportunity.

Understood. I’ll see it before. Thanks.

Our next question is from Jeff Van Rhee with Craig-Hallum. Go ahead, sir.

Sounds good, thank you. Seth, on the sales reps and the challenge to get capacity, a number of questions; where did you end in terms of reps in the field at the end of the quarter? And then two, just in terms of the gross churn, I know you’ve been making some pretty aggressive changes in the organization to feel the guys that are much more solution-sale oriented. If you look at the gross churn of the sales reps, was it concentrated in any particular geography or competitive arena, namely more reps versus Oracle or SAP or open source or whatever focus area they had? Those two questions to start.

In terms of where we are with the sales reps, the churn is less than other industry folks by comparison, but it’s a little high for us; we’re being pretty aggressive. I would say North America probably has the biggest churn, and some in Latin America, but it’s a smaller number. The true bulk of the change out of the sales team is North America. I’m sorry, what was your first part of the question? I forget.

Well, I was just asking about the ending growth count and then various churn by geography.

The ending headcount was pretty similar to Q2. By the time you account for the attrition, we did have a good number of hires, but that gives you an even more rookie team out there. So the good and the bad is, while you might have had similar numbers to Q2, you now have a bunch of rookies who aren’t even taking client calls yet. They haven’t even been certified to take a prospect call. The bulk of the change is really in North America, and we are laser-focused on increasing North America’s growth. We’ve got it at 4.8%, and while it's slightly better than last quarter in terms of year-over-year revenue growth, I really want to see us try to get that above 10% by the end of the year on a run-rate basis, which would be great. It’s challenging to get there, but we’ll see if we can.

Presumably if the deal flow was there and you just lacked seasoned sales reps; win rates were down, would you say it was down competitively again across products and geographies, but no real changes in win rates in that respect, I’m assuming overall it was down?

Overall, it was skewed a little bit towards losing more on the SAP side; simply because Q3 is our big SAP quarter detailing contracts that customers provide notice of termination by September 30. I wouldn’t read more into it; I really think we just had more of a rookie team out there, not enough sales management, and we didn’t execute as well. But this skewing happened specifically because it was the SAP core.

If I could squeeze in one last question with respect to color around pipeline growth, and maybe in conjunction with that, any implications for 2022? I know you’re not giving a formal 2022 guide, but the trajectory of growth you posted or at least guiding to differs substantially from where the street has you. Any help there would be appreciated.

First of all, we guided to having, we thought we’d have 100 heads—my target was to have 100 sales heads hired by the end of the year. I think we’re going to drop that to 90. We’re in the low 80s right now, and with a little more churn post-quarter, we will do a little more churn probably. If I can hit 90 by the end of the year, I’ll feel good. I don’t want to overpressure the leadership because we are limited on leaders while we’re still hiring more. I don’t want to pressure them to spend 90% of their time doing hiring and take their focus off the deals that are on the table to close. It’s a prudent move to let the management team focus more on health and get deals closed. The pipeline is going to be lumpy in some regions again, if you don’t have leaders driving them yet. I think we’re going to pay a bit of a price and lumpiness in sales execution, which flows down to the pipeline. Keep in mind that our commitment to the billion-dollar target of annualized revenue by 2026 is unwavering, despite some hiccups along the way. It’s clear 2022 is going to be a little more muted, and that’s pretty clear from the math, as you’re likely going to wind up with a tampered-down top line revenue number.

Great. Thanks. Close enough. Given the lower billings growth, and this was the big SAP quarter, and now you’ve got a younger sales force. You said 4Q sounds in terms of revenue like 3Q, but in my opinion, is it fair to think that the first half of next year will be like the second half of this year? You have a little bit of attrition, and you’ve got a couple of wins, including one big one, but we should be waiting till the second half of next year before we start to see that reacceleration in revenue. Is that how we should think about it?

Yes, I think you’ve reflected accurately. We did our postmortem of Q3: what went right? What went wrong? Renewals were super strong, which is most of our revenue. Excellent performance there, and cross-sales to our existing client base were also performing well. It was logo acquisition that was weaker in the third quarter in terms of where we wanted to be, but everything else is doing quite well.

Okay. One last question before I go.

Sure.

You’ve been clear over quite a bit of time about your focus on accelerating the growth in North America. You’d hope to get to 10% by the end of the year. It seems unlikely given the billings and the turnover in the sales staff. For these new reps in general, can you give us a sense of how many new reps generally make it after a year? What percentage? At what point do you know, and I guess that gets to, can we get to 10% for all of next year? Or does that seem unreasonable at this point?

I don’t think we should give up on that. I’m not walking away from it as a goal. But yes, you’re right. It’s going to be a really tough ride to try and make that happen in the fourth quarter alone. But I do want to see directional improvement.

With that, we have no further questions. I will turn the call back over to Mr. Seth Ravin for closing remarks.

Great. Well, thank you, everybody, and thank you for joining us. As we head into the holidays, please stay safe. We look forward to getting a chance to meet up with several of you on the analyst side. When we set our Analyst Day probably right after earnings after we put out the K for next year, we’re very excited about that, as it will be our first in-person meeting with analysts in quite a while. We look forward to a good day together and we’ll work with you on the calendar dates. We know it’s a busy time with a lot of other events and look forward to spending time with all of you. So please be safe, have a great holiday, and we look forward to talking to you on the next earnings call. Thank you very much, everyone.

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