Welcome to Rimini Street's Third Quarter Fiscal Year 2017 Earnings Conference call. I will now hand the call over to Dean Pohl, Director of Investor Relations. .

Thank you, operator. I'd like to welcome everyone to Rimini Street's Third Quarter 2017 Earnings Conference Call. .

On the call with me today are Seth Ravin, our CEO; and Tom Sabol, our CFO. .

Today, we issued our third 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 tables following the financial statements in this press release. An explanation of these measures is also included under the heading Non-GAAP Financial Measures..

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 filings for a complete discussion of these factors and other risks that may affect our 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, everyone, for joining us for Rimini Street's Initial Quarterly Earnings Conference Call as a public company. .

On October 11, 2017, we began trading on NASDAQ under the ticker symbol RMNI following the completion of our merger with GP Investments Acquisition Corp.

For those of you who are new to the Rimini Street story, I will take a few minutes on this initial earnings call to familiarize you with Rimini Street's key business stats, market opportunity, strategy and business model before providing specific color on the merger with GPIAC and third quarter results..

We founded Rimini Street in 2005 to disrupt and redefine the $160 billion enterprise software support market by developing and delivering innovative, value-driven and award-winning enterprise software products and services, primarily through an annualized subscription model..

Today, Rimini Street is the leading independent software support provider for Oracle and SAP software products based on both the number of active clients supported and recognition by industry analyst firms. .

We generated net revenue of $154.7 million and $113.4 million for the 9 months ended September 30, 2017, and 2016, respectively, representing a period-over-period increase of 36% and delivered 47 consecutive quarters of revenue growth and a CAGR north of 30% since January 2014..

As of September 30, 2017, we employed approximately 900 professionals in 13 countries of operation, supported over 1,450 active clients, including 66 of the Fortune 500 and 19 of the Fortune Global 100 companies across a broad range of industries and geographies and have saved our clients over $2 billion in enterprise software support costs since inception of the company..

At $160 billion annually, enterprise software support products and services is one of the largest global IT spending categories.

We believe that licensees often view software support as a mandatory cost of doing business when running large, complex and mission-critical enterprise software systems, which results in a high attach rate and what has traditionally been a very profitable recurring revenue stream for enterprise software vendors. .

Today, Rimini Street offers more than 20 products and services that address approximately $30 billion of this $160 billion software support market.

We believe that our addressable market opportunity for enterprise software products and services is substantially larger than the products and services we currently offer and that have been adopted by our existing client base..

As a result, we believe we have the opportunity to expand our products and services offered, expand our global client base and further increase adoption of our software products and services within and across existing clients..

We are also continuously innovating our unique products and services by leveraging our proprietary knowledge, tools, technology and processes, and believe this could increase sales and adoption of our existing products and services..

Our significant market opportunity stems from our thesis, which has been backed up by more than a decade of proven global sales and growth that software vendor support is an increasingly costly model that has not evolved to offer licensees the responsiveness, quality, breadth of service or value needed.

Organizations are under increasing pressure to reduce their IT costs while also delivering improved business outcomes through the adoption and integration of emerging technologies..

Today, however, the majority of IT budget is spent on operating and maintaining existing infrastructure and systems, which limits the ability for organizations to invest in and integrate new technology and innovation needed to support growth in a highly competitive world.

We solve these business issues for our clients by offering a choice of solutions that replace or supplement the products and services offered by enterprise software vendors. We differentiate our products and services by features, service levels, service breadth, technology and pricing..

Our products and services are disrupting traditional software support service and spending models by saving clients up to 90% on total support costs and delivering more robust and responsive service.

We are helping our client optimize their spend and ROI on support and related services for existing software applications by seeking to provide more knowledgeable and experienced staff, hyperresponsive service like our 15-minute guaranteed SLA for urgent issues 24/7, better outcomes and higher satisfaction.

We are also helping our clients extend the capabilities, value and lifespan of existing software applications using specialized services and hybrid computing add-ons that modernize and future-proof existing software assets. .

In the near future, we plan to help our clients orchestrate their disparate hybrid computing portfolio of existing software applications and extended capabilities into a user-centric architecture of digital business networks along with many new applications and microservices..

We market and sell our services globally, primarily through our direct sales force. We believe our primary competitors are the enterprise software vendors whose products we service and support, including IBM, Microsoft, Oracle and SAP..

Now some comments on the merger with GPIAC. The merger transaction with GPIAC closed on October 10, 2017, and provides Rimini Street with additional growth capital to expand service offerings and capabilities in new markets and regions, and strengthens our balance sheet. Expansion could be organic or through strategic acquisitions.

We also believe that having a public company structure could accelerate our growth by facilitating additional sales opportunities. Tom Sabol will share more of the financial details with you relating to the merger transaction..

Now turning to color on the third quarter results. The quarter was another record quarter for revenue and the 47th consecutive quarter of revenue growth for Rimini Street. We continue to see strong and growing demand for our enterprise software support products and services, with distribution of sales across clients, product lines and geographies..

While the United States continues to account for the majority of our sales, our sales outside of the United States are growing as a percentage of total sales. To achieve our sales and service objectives and meet the growing needs of our prospects and client base, we continue to execute our global operating plan..

For example, we made further investments in an expanded Latin America headquarters facility in São Paulo, Brazil, formed a new wholly owned subsidiary in France, opened a new Paris office and hired our first employees in France. We also continued hiring and growing our employee base and capabilities globally..

Although competition is fierce, and we are addressing in court some behavior in the second quarter by one of our competitors that we believe was illegal and impacted some sales transactions in the second quarter and the early part of third quarter, the third quarter had strong deal flow, including many significant global wins with name brand clients across diverse industries.

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The revenue retention rate for the trailing 12 month ended September 30, 2017, was 94.5%, consistent period-over-period compared with 2016.

Also, despite significantly increased global support case volumes that have scaled as expected with growth, we delivered a strong continued consistent client satisfaction rating on our support delivery of 4.8 out of 5, where 5 is rated as excellent. .

In summary, we believe the third quarter was a solid, all-around execution..

I will now turn the call over to Tom Sabol, our CFO. .

Thanks, Seth..

Our value-add support solutions continue to resonate with both new and existing clients. For the quarter, net revenue was $53.6 million, an increase of 32% year-over-year, and annualized subscription revenue was $214.4 million, also up 32% year-over-year. .

Although our revenue was 100% subscription revenue today, we may deliver some limited consulting services around our products and services in the future..

Revenue from clients outside the United States was 32% of total revenue in the quarter and grew 44% in the quarter, faster than our overall revenue growth and has been and will continue to be an area of continued investment..

As of September 30, 2017, active client counts increased 34% from the prior year to 1,459. Gross profit percentages was 62.5% in the third quarter, up from 57.7% in the prior year, reflecting leverage on our service delivery operations driven by continued process efficiencies and economies of scale..

In our fourth quarter, consistent with prior year's fourth quarters, we expect to see increased onboarding costs due to the level of new client wins in the back half of our fiscal year, which will impact gross profits in the fourth quarter. We believe full year 2017 gross profit percentages will range between 60% and 62% of net revenues..

Sales and marketing costs were 32.1% of net revenue in the quarter, down from 46% in Q3 of the prior year. In 2017, we were limited in our ability to spend on sales and marketing due to debt covenants. .

For the fourth quarter of 2017 and 2018, we expect to modestly increase spend on sales and marketing as a percentage of revenue. We currently believe the spend for full year 2017 will range between 32% and 34% of net revenues. .

General and administrative expenses, which excludes outside litigation costs, were 16% of revenue in Q3 of 2017, down from 20.1% in Q3 of 2016. Going forward, we expect G&A to be a source of leverage in our model..

However, as a result of our move to public company operations, we will likely incur a higher professional service and additional accounting infrastructure costs over the next 2 or 3 quarters that will increase G&A as a percentage of revenue..

Litigation expense was $3.3 million in the third quarter of 2017, offset by the amortization of $3 million of insurance reimbursement credits. It should be noted that our outside litigation spend is not linear and can fluctuate based on court activities.

Accordingly, due to specific court activities and deadlines, we expect an increase in litigation costs over the next 2 quarters..

GAAP operating income improved to $7.4 million in the quarter from a loss of $4.5 million in the prior year due to higher revenue, gross profit expansion and reduced sales and marketing spend..

Non-GAAP operating income was $8.9 million in the quarter compared to a loss of $2.8 million in Q3 of 2016..

As a result of fourth quarter client onboarding costs, modestly increased sales and marketing expenses and higher litigation expenses, we expect to have lower nonoperating income for the next 2 to 3 quarters. .

Interest expense was $9.3 million in the third quarter of 2017, a significant portion of which was noncash.

Other income and expenses in the quarter included debt service costs of $2.4 million and $5.8 million of noncash warrant revaluation costs offset by a noncash gain of $1.4 million related to embedded derivatives associated with the company's credit facility.

Cash interest expenses and other debt-related cash fees were $3.2 million for the third quarter.

Cash interest and other debt-related cash fees are expected to be higher going forward since a portion of debt excess fees were converted to principal in connection with Amendment 6 to the credit facility, which I will discuss when I get to the balance sheet. .

Adjusted EBITDA for the third quarter was a positive $9.5 million compared to a negative $2.5 million in the prior year.

In 2018, we intend to focus on operating income instead of adjusted EBITDA because we believe operating income is a better measure of our business due to our negative working capital margin -- model in which we collect cash in advance of services to be provided in the future. .

We had a net loss of $9 million in the third quarter of 2017 compared to a net loss of $15.4 million in the same period of the prior year. Net -- non-GAAP net loss in the third quarter was $3.1 million compared to an $11.6 million loss in Q3 of 2016..

Upon the close of the merger with GPIAC on October 10, 2017, Rimini Street had 58.6 million common shares outstanding..

Now turning to the balance sheet and cash flow. Deferred revenue in the third quarter of 2017 was $153 million compared to $132.6 million in Q3 of 2016 but down from $170.3 million last quarter.

Deferred revenue for the quarter was impacted by contingent client contracts, over half of which have since gone to billings and some impact from competition in the second and early part of the third quarter, which we are addressing as noted by Seth earlier. .

We ended the quarter with $15.6 million of cash on our balance sheet. Cash flow from operations in the quarter was a negative $4.4 million compared to a negative $3.4 million in the prior year period. .

As a result of the merger with GPIAC and Amendment #6 to the company's credit facility, both of which closed on October 10, the company improved its liquidity position by adding $25.9 million of cash to its balance sheet after utilizing $5 million of transaction proceeds to pay down a portion of its total debt obligations. .

In addition, the company received covenant relief that provides us with more operating flexibility to invest for growth as well as improved liquidity through a reduction in future monthly principal payments.

In exchange for these lender concessions, the company converted $50 million of noninterest-bearing debt related exit fees to principal, increasing total principal to $125 million from $75 million. .

It's currently our intent to start providing quarterly and annual revenue guidance for 2018 during our 2017 fourth quarter earnings call. Today, the company is providing the following full year 2017 revenue guidance. We currently expect net revenue for 2017 to be in the range of $204 million to $210 million. .

And with that, operator, we'll now take questions. .

[Operator Instructions] Our first question comes from the line of Derrick Wood from Cowen and Company. .

Great. Congratulations on your first earnings call as a public company. .

Thank you, Derrick. .

It -- so solid numbers on revenue, gross profit, EBITDA. You had some nice reacceleration and new customer generation. You guys kind of already addressed it on the deferred revenue side, but it looks like kind of a steeper, sequential drop. And Tom, you mentioned that there may have been -- half of it's been booked to billings.

Can you talk a little bit more about the contract structure and some of the ebbs and flows that are going on there and what you've seen since quarter-end?.

Yes, Derrick. So some of our contracts include what I would call a short test period, where the customer wants to sign up and wants to do business with us but has an ability after a short period of time to determine if they would like to stay with the current vendor.

And of course, on those contracts, we don't record any revenue and don't record any deferred revenue with regards to those customers. And we had some of those at the end of Q3 that were kind of significantly higher than they had been in prior quarters.

And so that's what drove what looks like a lower billing and a lower deferred revenue number, but we've seen good traction to date with regards to those turning. And in the past, we've typically had very little, if any, in all honesty since I've been here just about 11 months, we've yet to have not one of those turn into a client.

But clearly at the end of the quarter, we had a little bit of that, that caused what appears to be a slowdown in billings and in deferred revenue more than what it really was. .

And I guess, what's the time frame with -- when they tend to -- versus initial engagement to when they may turn into book deferred? Sounds like maybe a month or 2, but maybe longer with some other contract?.

Yes. Typically 30 to -- they're typically 30 to 60 days, but we could have some outside ones that would be a little bit longer, but typically, 30 to 60 days. .

Okay. And then -- and Seth, in regards to competitive dynamics, maybe just kind of where you are today, how you feel about going into Q4 and pipeline and linearity with respect to how you're positioned competitively in close rates. .

Sure. From an overall perspective of pipeline and growth, I think you're going to watch us continue to accelerate. And as we referred to in the prepared remarks, we were -- we've been contained in our ability on sales and marketing spend because of the debt covenants that were in place.

And now that we've gotten those loosened up a bit, you're going to watch us and with moderate increase in spending as a percentage of revenue coming into the fourth quarter and into 2018.

So one of the largest drivers of growth that we're going to see coming into the next year is going to be a good hiring of additional sales reps that will start in the fourth quarter with our new capability -- expanded expense capability and you're going to watch that take effect.

As you know, our sales ramp is generally 6 to 9 months for sales reps, so you'll see that really more towards the back end of next year, we'll feel that additional sales capability kicking in. As far as win rates, I think we're seeing a pretty steady number on the win rate relative to our competition. We have plans into next year.

We continue to invest in sales effectiveness as a key driver towards increasing sales wins. But I think that as a business, we have recognized how important critical mass is in each individual market as well as for the company as a whole.

And with over 1,400 active clients, we see that it's much easier to acquire additional clients, especially large to very large global players, because of the critical mass, the 12-year history of operations and delivery, all those play very, very nicely for our win rate increases around the world. .

Great. And with the covenant relief on the sales and marketing, clearly, you're going to start investing more.

Any areas that you'd flag either geographically or product-wise or any other notable kind of go-to-market changes we should see?.

Well, I think you'll see that we're going to add the increased headcount globally. We're seeing growth in all theaters, whether it's in Europe or Latin America, Asia Pacific or North America, so we will be distributing those new head and capabilities on a global basis.

There will be some new countries that we're looking at, planning expansion for in 2018. So we continue to expand beyond the 13 countries of operation into the next year. .

Okay. And I know it's only been a month since you've been public, and it's probably too early, but just wondering if there's any -- if there's been any impact to customer conversations or engagements now that you've got public company transparency, you've improved the balance sheet.

Again, it may be too early, but just curious if you've seen anything out there. .

Well, I think, anecdotally, we have. We have in conversations.

We've certainly had that -- much better discussions with some customer prospects, who were still sitting on the fence, who I believe that we have closed business that might not have been possible if we hadn't moved forward with being public, if we hadn't gotten the upstream capability from that.

So I think, again, on one of our thesis here that making a move to being public would open up additional sales opportunities, I do believe we're already seeing anecdotal information coming in from the sales force, from deal closures since being public that have indicated that we are seeing a tailwind from it. .

Our next question comes in the line of Terry Tillman from SunTrust Robinson. .

Congrats as well on becoming a public company. I've got a wicked cold, so I'm going to try to get a couple of questions out before going to a coughing fit. First question, Seth.

Seth, the first question's for you in terms of -- you've articulated in the past, you've got 30-plus products and services, you're still only covering a smaller portion of the total addressable market.

How do we think about new products and services over, call it, like the next 12 to 24 months? What would be the kind of cadence we could see of new products and services coming out?.

Well, I think the plan that you're going to watch is an acceleration of the number of products and services that we offer coming into 2018. I think the way to start thinking about Rimini Street is going to be a change, and you're going to see this coming in 2018.

A change from 12 years where we may have been viewed early on as the 50% off guys, we may have been perceived as the people who provided a discount and a more premium service offering in exchange from a value perspective.

And I think what you're going to watch is really a focus around 3 things that I mentioned in the prepared remarks, optimization, extension and orchestration. You're going to watch us move into 3 particular categories. And if you look at our 12-year history, what we really have been is in the optimization business. We optimize people.

We optimize spending. We optimize time, and we also optimize ROI. And it's a much bigger concept than simply saving people money. We're making sure that you're spending the optimal amount of resources, time and focus and energy and money on these mission-critical transaction systems and freeing up additional funds.

And we've always told customers that they can put those funds to better use inside their organization rather than paying the excess profits that the software vendors have been taking from them in these maintenance fees and getting better outcomes.

What you're now going to see is Rimini Street is moving into the business of providing those solutions with the money and the savings and the optimization that we've been providing all these years.

And you're seeing that, for example, our first product launch into the extend capabilities, where we've announced a partnership with McAfee, where we released our new Rimini Street Advanced Database Security, which is an innovative security offering for virtual patching that covers not only the Oracle database but DB2 and SQL Server as well in the Sybase and HANA databases.

So here we are providing additional value and extending the solutions that we've had before. You're also going to see us move into a third category of orchestration, where we believe that the center of gravity is changing once again in IT. While most people think it's the cloud, we don't see it that way. Cloud is a delivery model.

It's a licensing model. It's not a focus around how it helps the business. Where we believe we're going to see a change is if you look back to the '70s, you were defined as an IT shop by the hardware platform, you're an either IBM shop or a digital shop, and then it switched to an ERP-based center of gravity. You're a SAP shop. You're an Oracle shop.

And now we believe the next phase is going to be around the user because you have so many different applications and how that usability is going to come into effect to be -- to make all these applications work. They need to be orchestrated, and you're going to watch Rimini Street offer new capabilities in this area as well.

And so Rimini Street's going to go from offering point solutions, which we've been very successful at, to now extending the life and the capabilities of those software products and orchestrating -- helping customers orchestrate all of these applications working together. So our strategy is going to expand.

The services and the products available, we intend to expand as well. And all this you're going to see rolled out, and we should be providing a lot more detail with everybody as we start the new year. .

That's a great overview. And I guess, I'm curious, it makes total sense in terms of getting into extensions, orchestration, et cetera, just expand your value prop and the stickiness and then just more opportunity with a customer.

But I'm curious how often will you be just reselling your product as opposed to potentially building something? Or would it be more of just a reseller situation like with McAfee?.

I think the answer is going to be like everybody else. We'll look at the opportunity in the marketplace, and we'll make a build by partner decision on all these different areas, whether it's security, mobile, analytics, monitoring, interoperability, integration, all these segments. We'll look at the best-of-breed that's available.

In some areas, we've already built our own tools and capabilities. In others, I think that partnering or potentially strategic acquisitions might be the best bet. So I think that we'll reserve that for each of the individual categories and solutions. .

Got it.

And in terms of international, you guys are making some headway there and the business should expand as a percentage of revenue, but could you just help me and maybe some of the folks on the call in terms of an education in terms of the international market, what is their appetite? What is their understanding of the value prop of what you do? Is there less evangelism you have to do now versus 5 or 10 years ago? What is the size of deals like? Just anything at all that would help us with what that book of business looks like, albeit it's still early days.

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Well, I think as we noted in the numbers, the fact is we have over 30% of revenue coming from outside of the United States already. So we're maturing nicely in these global operations.

There's no doubt that there's maturity that's happening in many of the markets where we're seeing bigger and bigger deals, more complex deals, we're seeing wider breadth in software that we're covering.

We're increasing our staff and capabilities, of independence in these theaters of operation, again just all part of the maturing of the global operation, in general. And I think we're absolutely seeing that there is critical mass building in these countries, which as I mentioned earlier, it's important to have critical mass overall as a company.

And then in each individual region, territory, geography, you have to reach a certain amount of critical mass for business acceleration as well. And we're certainly seeing that, whether it's Latin America and Asia Pac or Europe. All of that is coming into effect. So we are certainly benefiting from the scale that we're seeing in these regions.

And the number of customers, the more we get -- I think it's pretty straightforward. The more customers we get, the more success we get in the region, the easier it is to acquire customers. .

Okay. And then maybe just a last question, Tom, in terms of a numbers question. You talked about how the gross margin will be impacted in the fourth quarter from ramping new business and then just other costs.

And I know you're not giving guidance yet for '18, but is there anything at least at a high-level you can help us on in terms of could some of those costs continue to weigh on you through the first half of '18 or would that be something that starts snapping back right away?.

Yes. So this is typically a fourth quarter phenomenon with the company because of the number of clients that we win in the back half. So we would expect margins to come back.

And as we've talked in the past, because we have been out and active, as you know, as a private company at conferences, and we're active on the roadshow, we did talk about how we expect gross margins to expand going forward. So we -- like you said, we haven't provided guidance.

But as we have said in the past, we would expect there to be continued margin improvements, gross margin improvements and expansion, primarily due to scale but also through improved efficiencies and automation and in other things that the company is working on. .

[Operator Instructions] Our next question comes from the line of Abhey Lamba from Mizuho Securities. .

So when you look at the opportunity you have, what type of companies are you seeing the greatest attach of your solutions? And which of your products are kind of leading the charge on that?.

I think when you look at the distribution, I mean, about -- which of the product segments, manufacturing continues to lead. We have customers across just about every segment.

Because even though we service all these verticals, we don't have to be the vertical expert in the sense of -- if you were out competing on the marketplace, if you were out selling software, you would have to be a straight vertical. Our solutions are pretty horizontal.

As I say, if you're doing payroll for a doughnut shop and you're doing payroll for manufacturing, you still have hourly employees and you still have salaried employees. And so it's pretty horizontal in terms of solutions.

And so when we look out there, we look at the industries that are seeking the most amount of help from us, manufacturing is certainly at the top. As you can imagine, retail is very, very strong as well because of the fact that you've got the Amazon challenge for so many retailers, margins are very tight.

They need to find ways to increase market share. They need to increase spending around things that will allow them to compete and grow. And that's not their back-end core systems of record or transaction systems, which are mission-critical, of course, to the business, but that's not where growth takes place.

So certainly, any of these industries that are having challenges in fierce competition, we're doing very well in. .

Got it.

And as you look at your near-term opportunity, where do you think most of the growth's going to come from? Is it going to be from the new products you're going to launch? Or is it just acquiring new customers with the existing products or does it got greater penetration within existing customers? Where is the biggest opportunity? Or how would you stack, rank it?.

Well, for the first 12 years of the company, we've primarily been in the focus of logo acquisition. We have been far more focused on acquiring new clients than focusing on going deep within the existing client base.

Part of 2018 strategy, we're going to have a much bigger effort and focus on going deeper and selling a broader range of products to the existing more than 1,400 active clients as well as logo acquisition. And one of the reasons we focused on one versus the other was simply a matter of economics and also the realization.

Now if you think about it, it was much better for us to acquire 100 customer logos than to acquire 10 customers and go deep just from the critical mass focus that helps grow the business.

So you're going to watch as we mature to the next level of sales operations, a bigger focus on both existing customer upsells and cross-sells as well as new logo acquisition.

We also will be, again, launching additional optimization-based products, so there will be more product lines that we intend to launch in 2018 that we plan to support as well as the new extensions and orchestration capabilities that we plan to launch.

So I think you're going to watch a more diversified revenue stream emerging in 2018, but I think you're still going to see primarily in 2018, most of our revenue will continue to come from optimization as we build out and start maturing the extended component and getting our launch out for the orchestration component. .

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Seth Ravin for any further remarks. .

Thank you so much. And I just want to finish by thanking our colleagues around the world for all their passion and performance that got Rimini to this place and the public status, also our clients for their business and trust that made it all possible. And I thank everyone for joining us today for our first quarterly earnings call.

We look forward to our next call, and we'll review our fourth quarter and fiscal year 2017 results..

So with that, thank you, everybody, and have a great day. .

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..