Earnings Call Transcript - RMNI Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Rimini Street First Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Mr. Dean Pohl, VP of Investor Relations. Thank you. Please go ahead, sir.

Dean Pohl, VP of Investor Relations

Thank you, operator. I'd like to welcome everyone to Rimini Street's First 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 first quarter ended March 31, 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 first quarter of 2020 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.

Seth Ravin, CEO

Thank you, Dean, and thank you everyone for joining us today. For the first quarter, we achieved record quarterly revenue of $78 million, a year-over-year increase of 18.5% and matching the high end of management guidance. We generated $26.3 million of operating cash flow, produced another quarter of net income, strengthened the balance sheet with total cash of $58 million at quarter end, and expanded sales capabilities. We remain committed to the long-term goals of improving free cash flow and growing GAAP profitability. The 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 first quarter with 2,077 active clients, a year-over-year net increase of 12.1%, which included nearly 100 Fortune 500 and Global 100 companies and expanded global government representation. Our quarter-end global employee count was 1,302, a year-over-year increase of 17%. Prior to the pandemic, we were making investments to meet increasing global demand for our expanded product and service portfolio. This increased demand was reflected in our previously issued and today reaffirmed 2020 guidance for accelerated year-over-year revenue growth. We are now accelerating those investments to service additional opportunities resulting from the COVID-19 global economic slowdown. Having already saved our clients nearly $5 billion to date, we are the right company at the right time, with proven solutions that are helping organizations immediately lower IT operating costs, save jobs, stabilize operations, and focus their more limited resources on strategic initiatives. The pandemic did cause some transactions that were expected to close in March 2020 to slip to later target close dates, primarily due to the escalation of the COVID-19 pandemic. However, the pandemic had minimal net impact on our revenue or results of operations for the first quarter. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous rapidly evolving factors, which we cannot reliably predict. Some factors may positively impact demand and opportunity for our products and services, as companies and governments seek operating cost savings and desire to extend the life of their existing IT assets. Likewise, some factors may adversely impact demand and opportunity for our products and services. For example, some Rimini Street prospects and clients are seeking special discounts and extended payment terms to help them navigate these challenging times. We believe our strong balance sheet and cash position will provide us with business flexibility and the agility to take advantage of opportunities and provide us protection from downside economic risks. In order to protect the health and well-being of our employees, clients, and the communities in which we operate, we transitioned as many of our employees as possible to a work-at-home model, temporarily closed our offices worldwide, limited nonessential travel, transitioned to a no in-person event marketing strategy, and implemented a full-remote sales model. To achieve these operating changes, we are leveraging our existing innovative and secure global remote connectivity infrastructure. For virtual meetings, we are leveraging our existing global web meeting infrastructure available to all employees. We've also implemented business continuity measures and will continue to respond to the COVID-19 pandemic as circumstances dictate. Our extensive geographic workforce distribution provides skill set redundancy, 24/7, by 365 engineer availability, and service resiliency that allows us to consistently meet our contractual service level commitments. Even if some of our workforce were to be offline, due to illness or other reasons. To date, we do not believe the transition to a remote sales model has materially impacted our sales execution. During the first quarter, our global service delivery team closed over 8,400 support cases across 42 countries and delivered more than 28,000 tax, legal, and regulatory updates to clients in 33 countries.

Stanley Mbugua, Chief Accounting Officer

Thank you, Seth. As Seth noted, for the first quarter we achieved record quarterly revenue of $78 million, a year-over-year increase of 18.5% and matching the high end of management guidance. First quarter annualized subscription revenue was approximately $310 million, a year-over-year increase of 17.7%. Clients within the United States comprised 61% of total revenue, while international clients were 39%, representing aggregate first quarter of 2020 year-over-year revenue growth rates of 11% for the U.S. and 32% for international clients. Gross margin was 61.3% for the first quarter compared to 63.8% for the first quarter of 2019 and at the high end of our guidance range. In the first quarter, the lower gross margin reflects our continued investment in an expanded global capacity to deliver new SAP S4/HANA support services, advanced security solutions, and application management services for SAP, Oracle, and Salesforce. We continue to believe that gross margin from our established support services will continue to expand and will help to partially offset the ramp-up costs of our new products and services. Sales and marketing expenses as a percentage of revenue was 36.4% for the first quarter unchanged from the prior year first quarter. General and administrative expenses as a percentage of revenue, which excludes outside litigation costs, was 15.4% for the first quarter compared to 19.7% for the first quarter of 2019. G&A spend was down $1 million from the prior year first quarter while revenue increased 18.5% year-over-year. We expect the costs of maintaining the recently updated accounting standards and planned systems implementations to put upward pressure on financial spend with a substantial amount of the increased costs mitigated by lower travel expenses in 2020. Therefore, we continue to expect G&A expense as a percentage of revenue to be in the range of 16% to 18% for the full year 2020. Litigation expense net was $3.7 million for the first quarter 2020 compared to a net benefit of $6.1 million for the prior year first 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. Net income was $2.5 million for the first quarter of 2020 compared to prior first quarter net income of $10.3 million. Deferred revenue as of March 31, 2020 was approximately $222.7 million, up 13.3% from $196.6 million as of March 31, 2019. We ended the first quarter of 2020 with total cash of $58 million on our balance sheet, a 77% increase compared to $32.7 million for the prior year first quarter. Backlog, which includes the sum of billed deferred revenue and non-cancelable future revenue was approximately $456 million as of March 31, 2020, up 16% from $392 million as of March 31, 2019. Now with respect to revenue guidance, we expect second quarter of 2020 revenue to be in the range of $77 million to $80 million, and we maintain full year 2020 revenue to be in the range of $310 million to $320 million.

Nick Altmann, Analyst

Great. This is actually Nick Altmann on behalf of Derrick. Thanks for taking our questions. Just first one. You mentioned that you're looking to add some additional sales capacity in the second and third quarter. Can you give us an update as to what the sales headcount stands at?

Seth Ravin, CEO

Sure. This is Seth. We're looking to increase our sales headcount a little bit more than we previously discussed. We're probably going to add six to eight additional heads beyond the end of the fiscal 2019 number. So we'll probably end up somewhere north of 80.

Nick Altmann, Analyst

North of 80. Okay. And then you have mentioned in the past that there were some things you were doing to potentially work on shortening sales cycles and ramp times for some of these reps. Can you just speak to levels of productivity there?

Seth Ravin, CEO

Sure. We are continuing to make those investments. We believe we can shorten that ramp time. We have rolled out additional product training and industry components to help our teams navigate sales faster and better. Because of the COVID-19 opportunities that are coming our way, they will get more chances to work deals faster and learn faster than they have in the past.

Nick Altmann, Analyst

Great. And then just next. Sequentially, the customer adds were a little bit lighter than they historically have been. Can you maybe speak to what you're seeing thus far in Q2 and whether that can improve sequentially?

Seth Ravin, CEO

The average selling price for our deals in Q1 was higher than in 2019. We had a higher average selling price of around $210,000 versus about $168,000 in the fourth quarter. We want to ensure that as we work with bigger deals, your percentages will fluctuate a little in the net customer adds.

Nick Altmann, Analyst

Got it. That's really helpful. And then just lastly, in relation to COVID-19, what sort of demand trends are you seeing across different verticals?

Seth Ravin, CEO

I think every sector is affected. Every private company and government is managing budget constraints. Thus, we are watching pipeline build across all sectors — from manufacturers facing supply chain challenges to retailers under stress with stores closed. Public sector has a lot of opportunities as well.

Brian Kinstlinger, Analyst

Hi. Great. Thanks for taking my question. Seth, I expect your retention rate to improve as enterprises aren't going to spend big sums on upgrades, given the current financial condition. So I guess my question is why the second half of 2020 revenue outlook isn't all that much better than the first half?

Seth Ravin, CEO

The positive side is that when companies need help or want to cut costs, we're a top-level player for that in IT. However, we also have to manage the downside risk. Many companies are seeking discounts or extended payment terms, which can slow revenue recognition. We have both upside opportunities and risks we must navigate. We're reaffirming guidance due to confidence in our recurring revenue base.

Brian Kinstlinger, Analyst

Yes. Understandable. I just wanted to confirm I thought I heard the G&A side remain at 16% to 18% of revenue. I am surprised at that given the travel restrictions. Is there a significant amount of G&A hiring happening right now?

Seth Ravin, CEO

Well, we are hiring quite a few positions to support growth. Our G&A costs are still significant due to new systems and accounting requirements. We're investing in infrastructure, support operations for new product lines, and a lot of finance costs due to new systems implementation. So, while travel expenses are down, costs elsewhere are rising.

Nick Altmann, Analyst

On the AMS side, has it become material? 5% of revenue? 10% of revenue?

Seth Ravin, CEO

No, it's not material enough yet. It's in the millions, but not at our 10% threshold. The pipelines continue to grow, and we've had substantial wins. I think we're in the jogging phase now, and this year we will hit our stride.

Nick Altmann, Analyst

The ASPs for 1Q compared to last year are great information, and if you'd consider giving it every quarter, I think it's really helpful for us to see how the business is trending much more so than the number of accounts?

Seth Ravin, CEO

Sure. Got it. Thank you.

Operator, Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Seth Ravin for any closing remarks.

Seth Ravin, CEO

Great. Thank you very much. I hope everybody stays safe. Thanks for getting on the call. We know this was a very busy earnings season. We'll see you again for the Q2 number and look forward to talking to everyone then. Take care.

Operator, Operator

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