Earnings Call Transcript - RMNI Q2 2020

Operator, Operator

Welcome to the Rimini Street Earnings Call. My name is Adrian, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session. Please note, this conference is being recorded. I’ll now turn the call over to Dean Pohl, Vice President of Investor Relations. Dean, you may begin.

Dean Pohl, Vice President of Investor Relations

Thank you, operator. I’d like to welcome everyone to Rimini Street’s Second Quarter 2020 Earnings Conference Call. On the call with me today is Seth Ravin, our CEO; and Stanley Mbugua, our Chief Accounting Officer. Today, we issued our second quarter ended June 30, 2020 earnings press release, which can be found on our website. A reconciliation of GAAP to non-GAAP financial measures has been provided in the tables 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 under Investor Events. 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 2020 for a discussion of the risks that may affect our future results or stock price. Before I take any questions, we’ll begin with prepared remarks. With that, I’d like to turn the call over to Seth.

Seth Ravin, Chief Executive Officer

Thank you, Dean, and thank you everyone for joining us today. For the second quarter, we achieved record quarterly revenue of $78.4 million, a year-over-year increase of 12.2%, produced another quarter of net income, generated $17.9 million of operating cash flow and further strengthened the balance sheet with total cash of $73 million at quarter end. Revenue retention rate for subscriptions, which makes up most of our revenue remained above 90% with more than 70% of subscription revenue non-cancelable for at least 12 months on a rolling basis. We ended the second quarter with 2,159 active clients, a year-over-year net increase of 13.9% which included nearly 100 Fortune 500, Fortune Global 100 companies and global government representation. Our quarter-end global employee count was 1,343, a year-over-year increase of 14%. Today we issued guidance for third quarter revenue growth, raised the low-end of 2020 revenue guidance, and affirmed our commitment to the long-term goals of improving free cash flow and growing GAAP profitability. The pandemic is creating significant challenges for many organizations, and we are the right company at the right time with the right solutions to help these organizations immediately reduce IT operating costs, save jobs, stabilize operations and focus their more limited resources on strategic initiatives. During the second quarter we experienced both the opportunities and the risks of the pandemic. We signed some new opportunities attributable to the pandemic and believe the pandemic has added meaningful additional pipeline opportunity for the second half of 2020. However, we also had some Rimini Street clients enter bankruptcy and others receive special discounts and extended payment terms to help them navigate these challenging times. All in all, based on the facts and our analysis, we still believe the opportunities created by the pandemic and slowing global economy far outweigh risks, and that our strong balance sheet and cash position will provide us with business flexibility and agility to help prospects and clients with special needs while providing us protection against downside risk. As a result of the measures that we have taken in response to the pandemic, including shifting to nearly 100% remote employee, remote sales and virtual marketing models for fiscal year 2020, we are expecting savings from reduced travel, cancelled in-person marketing events, reduced office operating costs and potential rent abatements related to office closures around the world. We expect to offset some of these savings with increased investments in new marketing programs and expanded sales staff and capabilities, as well as special pandemic-related bonuses to help our lower-paid employees and employees who become infected. The full extent to which the pandemic impacts our business going forward will depend on numerous rapidly evolving factors that we cannot reliably predict. During the second quarter we completed 160 geographically diverse sales transactions with new and existing clients. I want to share and highlight a few additional significant wins. First is a win with one of the largest global energy companies headquartered in the U.S. The client moved their large, complex Oracle database and middleware landscape to Rimini Street. The client is also implementing and deploying both the Rimini Street advanced database security and Rimini Street advanced middleware and application security solutions. The client wanted a proven global expert technology support partner they could rely upon to provide the expertise and services needed to extend the life of their mission-critical Oracle infrastructure, both with support and an innovative integrated security solution. Rimini Street was the only vendor that could provide this solution. Next is a win with one of the largest global telecoms headquartered in Australia. The client had previously moved their large complex SAP software landscape to us and found our service, value and partnership to be excellent. Their experience laid the groundwork for a significant multi-million dollar expansion of our services to cover their large complex Oracle application landscape as well. Lastly is a win with one of the largest advertising conglomerates in the world headquartered in Japan. The client has been interested and watching Rimini Street’s fast-paced growth across Japan with leading companies and known brands, and decided it was time to move its vast SAP landscape to Rimini Street support. The client wants a higher-level support experience, better overall value, and get the support needed to remain on their current products and releases, and avoid an expensive migration to SAP’s S/4HANA release. During the second quarter we delivered excellent service to clients, announced even more aggressive service level guarantees and implemented artificial intelligence technology to reduce resolution times for clients and we also expanded our service offerings. During the quarter our global service delivery team closed over 8,000 support cases across 49 countries and delivered nearly 20,000 tax, legal and regulatory updates to clients in 38 countries. We achieved an average support delivery client satisfaction rating of at least 4.8 out of 5.0. Building on our current industry-leading service level guarantees at no additional cost to our clients, we announced in a press release even more aggressive service level guarantees. Our clients are now guaranteed a response to urgent cases in 10 minutes instead of 15 minutes and our response to critical cases in 15 minutes instead of 30 minutes, 24/7/365 days. Also during the second quarter we announced the development and application of our new patent pending artificial intelligence software that was developed by our global service innovation team and has sped up client case resolution by 23%. Additionally, we announced the global availability of support for SAP S/4HANA, SAP’s newest integrated ERP software offering and our new large complex S/4HANA client, Nadro, headquartered in Mexico. We have been servicing SAP products since 2008 and now providing award-winning proven premium support services to hundreds of clients running SAP Business Suite 7, S/4HANA applications and SAP HANA inside-based databases. Our pipelines for our new SAP, Oracle, and Salesforce application management services continue to grow, with second half 2020 opportunities being the largest yet. We believe our integrated software support and AMS combined offering is a unique and valuable competitive solution in the market that provides clients with a better model, better resources and better outcomes, with higher client satisfaction and significant savings of time, labor and money. We are successfully delivering our integrated maintenance and application management solution to clients across a growing variety of industries and geographies. Competition with our primary support service competitors, Oracle and SAP, remains fierce. Both software vendors are engaged in continuing efforts to force their licensees to upgrade and migrate from current stable software releases to the vendors’ newest immature products as part of expensive and low value ERP refresh projects. Given the added financial and economic challenges around the pandemic, we are seeing companies delay the move off their existing stable systems to preserve cash and focus their limited budgets on strategic investments and initiatives. Rimini Street is well positioned to compete. Recently, we have captured over 80% of the global market for third-party enterprise software maintenance services. As we have previously stated, we believe the hybrid IT environment that will integrate existing licenses, new SaaS licenses and cloud deployments will be the IT reality for much longer than expected and a majority of ERP workloads will continue to be on-premise or simply lifted and shifted into the cloud for continued long-term use. With the pandemic and resulting economic challenges, we believe we will see even further extensions of use of the hybrid IT environment. With respect to Oracle litigation developments, the court action related to this case is limited to a dispute over the permanent injunction that has been in place since 2018. The matter is currently scheduled to be fully briefed to the court this summer and we plan to aggressively defend against Oracle’s contentions. There is no known timeline for a court ruling. Summary: We believe the company executed well through the unique global challenges of the second quarter. We intend to continue executing our 2020 plan focused on revenue growth, disciplined cash management and continued GAAP net profitability, and we will make adjustments to the plan for additional opportunities or challenges that may develop around the pandemic and related economic impacts.

Stanley Mbugua, Chief Accounting Officer

Thank you, Seth. As Seth noted, for the second quarter we achieved record quarterly revenue of $78.4 million, a year-over-year increase of 12.2%. Second quarter annualized subscription revenue was $311 million, a year-over-year increase of 12%. For the first half of 2020, clients within the United States comprised 61% of total revenue, while international clients contributed 39%, representing aggregate first half of 2020 year-over-year revenue growth rates of 7.2% for the U.S. and 30.4% for international clients. International growth is led by operations in Asia Pacific. Gross margin was 61.2% for the second quarter compared to 64.2% for the second quarter of 2019 and above the high-end of our guidance range. The lower year-over-year gross margin reflects our continued investment in an expanded global capacity to deliver new Application Management Services for SAP, Oracle and Salesforce, as well as new expanded delivery capabilities for SAP S/4HANA support services, advanced security solutions, and advanced technical solutions. Therefore, we continue to expect our full-year 2020 gross margin to be in the range of 60% to 61%. Last, litigation expense was $2.9 million for the second quarter 2020 compared to $144,000 for the prior year second quarter. Our outside litigation spend is not linear and can fluctuate each quarter based on litigation activities. We continue to expect litigation expense to be in the range of $13 million to $15 million for the full year 2020. We ended the second quarter of 2020 with total cash of $73 million on our balance sheet, a 45% increase compared to $50.3 million for the prior year second quarter. Cash flow from operations was $17.9 million compared to $18.4 million for the prior year second quarter. Backlog, which includes the sum of pure deferred revenue and non-cancelable future revenue was approximately $464 million as of June 30, 2020, up 14% from $407 million as of June 30, 2019. Now with respect to revenue guidance, we are currently providing third quarter 2020 revenue guidance to be in the range of $78.5 million to $80.5 million. We are also raising the lower end of full year revenue guidance from $310 million to $314 million and currently providing full year 2020 revenue guidance to be in the range of $314 million to $320 million.

Operator, Operator

[Operator Instructions] And your first question comes from Derrick Wood with Cowen and Company. Your line is open.

James Wood, Analyst

Hey guys, nice to talk to you today. Maybe this could be both for Seth and maybe Stanley can chime in, but I wanted to just talk about the quarter a little bit, because deferred revenue growth was a little bit more deceleration than we had modeled. So just curious maybe how much of that was from the bankruptcy impacts or perhaps how much is from deals slipping and taking a little bit longer on the sales cycle. And Stanley, just curious if there was any kind of one-time opt-out clause components in deferred revenue to consider.

Seth Ravin, Chief Executive Officer

Sure, I’ll take that first, Derrick and good day. We, of course, as we talked about coming into this quarter, had certainly growing pipelines. But like everybody else, we did have some challenges of disruption in the first month or two of the quarter. It had nothing really to do with opportunity. It had everything to do with clients being in chaos, prospects being in a tumultuous period, and trying to get deals done. So there was certainly a decent number of deals that were teed up for the quarter that just didn’t get done in the quarter, and I mentioned during my prepared remarks about the increase in the build of the pipeline for Q3. Now all that being said, we did have some very, very good – in fact, some record invoicing in the quarter historically. When you take a look at our invoicing for customers who pay us a year of invoicing in advance, that number was the highest we’ve ever seen in any quarter. So we did have a good quarter and we had a lot of good pipeline build for the back half just because of that timetable. And of course we net down and we net down deferred revenue as well for things where we have opt-outs, bankruptcies, or any kind of revenue that we’re not ready to recognize, we will net it out.

Stanley Mbugua, Chief Accounting Officer

And Derrick, to add to that, to what Seth said, if you really look at our deferred revenue built into the backlog, it’s really grown year-over-year. About $219 million of the backlog was deferred revenue, which was $202 million a year ago. And to your question of whether we had any contingencies, we didn’t have many of those that we think will be released. It was really straight-line standard billings during the quarter.

James Wood, Analyst

Okay, great. I guess as you think about the pipeline in the second half, obviously you’ve given revenue guidance and we can back into Q4, but more from a bookings perspective, is that something that’s kind of what we normally see, pretty more backend loaded to Q4 or Q3? And I guess, I think you had a nice government win last quarter. Are there any government opportunities in Q3 and their fiscal year-end to speak of?

Seth Ravin, Chief Executive Officer

Yes, there are some government deals as well and opportunities in there that continue to grow as a part of our business, so yes, we do have that. I think in general the back half of the year, Derrick, in terms of pipeline, is some of the largest pipeline we’ve ever seen, and it may be reaching record levels. The risks of this pandemic and the economy are not as much about the opportunity. A company that can provide savings and extend the life of systems while people are pushing off expensive projects and managing cash, we should see upside to that in the market. The question is really around execution with a lot of these organizations. In places like Europe, if you go into France, they went home and did not set up a work-from-home structure as well as other areas that may offer more disruption. So a lot of opportunity, but challenges in deal execution exist.

James Wood, Analyst

That’s helpful, thanks. And I guess you did mention that you’re accelerating investment and you’re seeing increased demand and bigger pipelines. Anything to highlight in terms of where you’re accelerating? I mean I see more TV ads for Rimini Street, so that’s one area. Just wondering how that’s doing, and are you at the point where you are kind of accelerating sales capacity yet, or is it kind of trending at similar levels?

Seth Ravin, Chief Executive Officer

I think you’re seeing us. We mentioned last quarter that the opportunity was already growing, and now we saw COVID add to that. We are going to continue to accelerate and expand our investment in the revenue-generating engine of the business. We have made significant investments in product and service portfolio and are upsizing existing clients with major wins. I wanted to give you some sample of that, and I think that you know the combination gives us good tailwinds for growth. As you’ve seen, we’ve made marketing investments, including television advertising which is global and we also launched a brand-new website. The phone is ringing and we have the highest website volume and visits we’ve ever had. That is showing a great trend, and the marketing investments we’re making are paying off. The execution now is really about working through the COVID world and making sure that we can execute on all the opportunity out there.

James Wood, Analyst

Good, good. Last one for me, I see you guys announced a new COO. What are some of the initiatives that you’d like to see him push forward?

Seth Ravin, Chief Executive Officer

Well, I think as most people know, he took 12 direct reports from me, which is beneficial, and we’re excited to have him. Gerard has a lot of experience for Rackspace and HP. He’s taking on the field operations, which allows me to focus on many other aspects. He’s a seasoned executive in operations and will be able to spend more time and focus on field execution, working to ramp up sales reps and building out the revenue operations, focused on retention, working with our global client executives to ensure our clients are even happier, buying more. All those things are falling into Gerard’s space, as well as overseeing the SAP and Oracle product lines.

James Wood, Analyst

Very good. Thanks for the color.

Seth Ravin, Chief Executive Officer

Thank you.

Operator, Operator

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

Brian Kinstlinger, Analyst

Thank you so much. How are you?

Seth Ravin, Chief Executive Officer

Great!

Brian Kinstlinger, Analyst

So you mentioned to Derrick’s question, several contracts were queued up, but didn’t happen given the pandemic. Does that mean the customer is generally re-upped for a year with the OEM and those opportunities for those specific customers are now pushed out by a full year?

Seth Ravin, Chief Executive Officer

I would say that some of them did, but again, very unusual times with the pandemic. A lot of those deals were able to push into the third quarter without re-upping with a software vendor. Interestingly, a lot of customers decided to go self-support on an interim basis, because the reason they didn’t get the contracts done were their internal operations and they figured it would take them maybe a few more weeks, maybe another month and they decided rather than re-upping with a vendor, a good number of them just decided to go without any support and try to manage without it for a while. We’re working with them to complete contracts while being an emergency backstop.

Brian Kinstlinger, Analyst

Great, that’s helpful. And then if I look at your press release, all the new logos you win are part of APAC and then I think your comments highlighted the strongest growth rates were in Asia Pacific. Can you talk about the success you’re having there? To what do you attribute the accelerated growth rate? Is it better work-from-home infrastructure? More salespeople? Or different dynamics?

Seth Ravin, Chief Executive Officer

I think Asia Pacific has just been performing well for us, as we’ve continued to expand there. They have also coped with COVID better than a lot of parts of the world due to experiences from previous outbreaks. Deals in Taiwan where Taiwan is operating well. We’re not talking about core China but across countries such as Singapore, Malaysia, Korea, and Japan, it’s been a strong growth area. The ability to execute through global chaos has been a strong contributor to our results.

Brian Kinstlinger, Analyst

Great. And then can you highlight the demand you’re seeing for the relatively new application management service offerings? What percentage of revenue is it today? And has the pandemic hurt, helped or had no impact on this offering?

Seth Ravin, Chief Executive Officer

I think AMS is a very promising revenue stream. Clients are happy with the service. We’ve been taking a careful approach due to the extensive product line. The clients are happy with our value. We’ve seen some initial positive feedback and will provide additional information as we progress.

Brian Kinstlinger, Analyst

Great! Last question I have is on price. Clearly you’ve had to give some concessions to help struggling customers out. Assuming those customers survive and stay with you, will price be a couple of point benefit next year to growth? Will those prices come back when those customers are stabilized or will they remain lower?

Seth Ravin, Chief Executive Officer

I think we’ve been taking a prudent approach on how we’ve managed pricing for customers during these times. We want to ensure that we don’t set low benchmarks on pricing that could affect us long term. We’ve been good with helping clients without pressuring our pricing. We focus on what the customers need now rather than adjusting long-term strategies based on short-term challenges.

Brian Kinstlinger, Analyst

Great! Thanks so much for all your time.

Seth Ravin, Chief Executive Officer

Sure.

Operator, Operator

Our last question comes from Mark Schappel from Benchmark.

Mark Schappel, Analyst

Hi, good afternoon and thank you for taking my question. Seth, in your prepared remarks you mentioned the competition from SAP and Oracle remains fierce. Are you seeing discounting from these vendors above and beyond the norm as they try to keep their customers on maintenance?

Seth Ravin, Chief Executive Officer

I would say yes, and it often becomes more frantic as customers reaffirm plans to consider us. Do I see bigger discounting? It tends to be on a deal-by-deal basis, and some of the deals we took in the quarter were multi-million-dollar deals which attracted attention from these vendors with additional discounts as part of the sales process. However, we effectively help clients understand that despite any matching of our prices, we continue to offer better support.

Mark Schappel, Analyst

Great, that’s helpful. And then I realize the company continues to invest in sales capacity in particular as you go after your market opportunity. But what’s the thought on margin expansion or operating margins going forward?

Seth Ravin, Chief Executive Officer

In terms of expansion, we’ve given guidance in terms of the range. We plan to bring down sales and marketing expense to mid-30’s and G&A to 12% to 14%. We want to get back to our growth engine’s previous scale, building long-term growth while managing costs diligently.

Mark Schappel, Analyst

Great, thank you. That’s all for me.

Seth Ravin, Chief Executive Officer

Sure, thank you.

Operator, Operator

[Operator Instructions] And we have no further questions. I’ll turn the call back over to the presenters for final remarks.

Seth Ravin, Chief Executive Officer

Thank you very much, and thanks everyone for attending the call today. We look forward to our next call. Please stay safe out there. This is a dangerous constantly changing situation in the world. We look forward to another call and hopefully better times. Thank you, everybody. I appreciate the time today.

Operator, Operator

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