Dean Pohl – Director-Investor Relations Seth Ravin – Chief Executive Officer Tom Sabol – Chief Financial Officer.

Derrick Wood – Cowen and Company Matthew Spencer – JMP Securities.

Good day, ladies and gentlemen, and welcome to the Rimini Street First Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded.

And now, I’d like to introduce your host for today’s program, Dean Pohl, Director of Investor Relations. Please go ahead..

Thank you, operator. I’d like to welcome everyone to Rimini Street’s first quarter 2018 earnings conference call. On the call with me today is Seth Ravin, our CEO; and Tom Sabol, our CFO. Today, we issued our first quarter 2018 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..

"We have already been reaping the benefits of Rimini Street’s premium-level support for our SAP platform and have saved significant IT dollars that we redirected into more strategic initiatives within our organization.

We are delighted that Rimini Street is now offering their award-winning support model for Salesforce sales cloud and service cloud as well.

Salesforce customers who have SAP or other mission-critical ERP applications will now have the choice to bring on a high-quality, cost-effective, single-support provider across both cloud and traditionally licensed applications, which will help manage operational costs and achieve business agility." Support services for Salesforce sales cloud and service cloud are immediately available, and a press release about the new support services for Salesforce is posted on our website.

Summary.

In summary, despite having to navigate some continuing sales growth headwinds in the first quarter of 2018, we achieved solid sales and operational results, increased our investment in sales and marketing and invested in the development of several new product and service solutions launched in April and May, including support services for Salesforce sales cloud and service cloud products.

We also had favorable developments in our ongoing litigation with Oracle, including the U.S. Court of Appeals reversing and vacating certain awards in the Rimini 1 case and ordering Oracle to refund approximately $50 million, which Oracle has done.

As we continue in fiscal 2018, we plan to fuel growth and continue improving operating leverage by recruiting and hiring additional senior executive talent, further increasing sales and marketing investments, ramping up sales of new product and service offerings and expanding global service delivery capabilities.

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

Thanks, Seth. Let me begin with a summary of our fiscal Q1 2018 results. As Seth noted, revenue for the first quarter was $59.8 million, on the higher end of our guidance, and was driven by balanced growth across all geographies and represents an increase of 22% year-over-year.

Annualized subscription revenue was $239 million, up 22% year-over-year as well. Although our revenue was nearly 100% subscription based today, we expect to deliver some limited consulting services around our products and services in the future.

Revenue from clients outside of the United States constituted 34% of total revenue in the quarter and grew by 23% year-over-year. This has been and will continue to be an area of continued investment for the company. Gross profit was 60.6% in the first quarter, down from 62.6% in the prior year period.

The decrease in margin was primarily driven by increased investments for growth in global infrastructure and costs associated with tax, legal and regulatory updates for specific countries.

While we still currently expect full year 2018 gross profit to be up slightly year-over-year, we currently expect our Q2 gross profit will be in the range of 57% to 59% due to costs associated with the rollout of new products.

Also, as Seth noted, sales and marketing increased as a percentage of revenue to 33.8% in the quarter, up from 31.4% in all of fiscal 2017. We are ramping our investment in sales and marketing and are targeting spending to be in the range of 36% to 39% of revenue for fiscal 2018.

General and administrative expenses, which excludes outside litigation costs, was 18.1% of revenue in Q1 of 2018, down from 18.9% in Q1 of 2017. Going forward, we expect G&A to continue to be a source of leverage in our model.

However, as a result of now being a public company, we will incur higher professional service and additional accounting infrastructure costs over the next few quarters, which may increase G&A as a percentage of revenue in the near term.

Litigation expense was $8.9 million in the first quarter of 2018, offset by the amortization of $7.6 million of net insurance reimbursement credits, and appeal refund proceeds of $21.3 million, which excludes $200,000 of post-judgment interest.

The refund was for certain judgment awards previously paid to Oracle that were subsequently overturned or vacated by the U.S. Court of Appeals. Of the proceeds received, we made payments on April 3, 2018, of $17.9 million to reduce debt and $3.1 million was paid for related make-whole interest payments.

The remaining $450,000 is due to our insurance carrier. The debt reduction decreases our total debt obligations, excluding make-whole interest to approximately $121 million and reduces our go-forward debt service costs while freeing up additional funds to further invest in growth opportunities.

It should be noted that our outside litigation spend is not linear and can fluctuate based on court activities.

In that regard, while litigation costs are generally expected to range between $2 million and $5 million per quarter, we currently believe that our Q2 costs may exceed $8 million due to the timing of expert discovery work on the Rimini 2 litigation and the appeal and remand costs related to the Rimini 1 litigation.

GAAP operating income was $25.2 million in the quarter compared to $2.8 million for the same period last year. Non-GAAP operating income was $6.1 million in the quarter compared to $7.1 million in Q1 of 2017.

Interest expense and other debt service costs were $22 million in the first quarter of 2018 compared to $11.2 million in the same period a year ago.

The increase was driven primarily by the accrual of $3.1 million of make-whole interests discussed above and the acceleration of $7.1 million of debt service cost amortization associated with the early paydown of the credit facility from the Oracle litigation reimbursement. A significant portion of these costs and expenses are noncash.

Our credit facility cash interest expense and other related cash fees were $4.7 million for the first quarter compared to $4.1 million in the same period of the prior year. Other income, net of expenses in the quarter, totaled $800,000 as compared to $5.6 million of other net expenses in the same period a year ago.

The difference is due to the change in the carrying value of the embedded derivatives associated with our credit facility and the approximate $200,000 of post-judgment interest received as part of the Oracle litigation reimbursement.

We had net income of $3.5 million in the first quarter of 2018 compared to a net loss of $14.5 million in the same period of the prior year. Non-GAAP net loss in the first quarter of 2018 was $16.1 million compared to a $4.5 million loss in the first quarter of 2017.

Net income per share was $0.05 on 68.2 million of fully diluted shares outstanding in Q1 [Audio Dip] compared to a loss in Q1 2017 [Audio Dip] on 24.4 million fully diluted shares outstanding in Q1 2017.

Deferred revenue as of March 31, 2018, was $195.6 million compared to $165.3 million as of March 31, 2017, an increase of 18% over the prior year and compared to $181.6 million at December 31, 2017. We ended the quarter with $54.5 million of total cash on our balance sheet.

Cash flow from operations for Q1 2018 was $18.7 million compared to operating cash flow of $6.6 million in Q1 of 2017. We remain committed to further reducing our cost of capital and improving free cash flows to decrease our net debt obligations and fund growth opportunities. Now with respect to go-forward guidance.

We expect revenue to be in the range of approximately $60 million to $61 million in the second quarter of 2018. In addition, we continue to expect revenue to be in the range of approximately $250 million to $270 million in the full year ended December 31, 2018. 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. Your question please..

Great. Thanks guys. Nice to talk with you today. Seth, you cut off as you were talking about the competitive environment. Did you mention that there’s still a little friction but it’s slowly going away? Sorry, I missed your comments and would love to get a sense for how you’re feeling about addressing this heading through the rest of the year..

Sure, Derrick. I think the competitive environment is pretty fierce between us and certainly the Oracle and SAP side of the equation. Interestingly enough, as we now get into launching the Salesforce product with a partnership with Salesforce and a completely different go-to-market position where we may have a much more cooperative ecosystem.

But in the Oracle and SAP world, it’s definitely – it’s still as fierce as it ever was. And we continue to see different tactics by the competing vendors and including even some pricing discounts across the Oracle world, which are fairly new in the last year that we’re seeing across in different regions..

Okay. So I mean, we know you guys are focused on investing aggressively in sales and marketing.

Can you just walk us through how that’s tracking relative to expectations, what to expect from your new head of sales, and how you anticipate these accelerated investments to drive new customer growth throughout the year?.

Sure. I think as we’ve talked about before on these calls, we’re – we have a sales ramp that’s pretty long. It’s generally a 9-month to 12-month ramp before we see a sales rep become what we would consider to be nearly fully productive on $2 million annual quotas. We brought in Greg Symon, who started on January 8.

We began our next phase of scaling to meet the kind of growth numbers we want in the future. And I think when you look at the – the hiring plan has gone well. We’ve hired a lot of A players. We’ve increased our compensation plan to be extremely competitive for A players in the market.

So we’ve done a lot of things to make sure that we’re attractive for A players in the enterprise software space. And we’ve just finished a training class of 50 new folks that included sales reps. It included our sales development reps, inside sales reps, account management, but all of them revenue focused.

It’s our largest class ever, so we are getting the people hired. And I think as we’ve talked about in prior calls as well, we’ve got – we’re a little bit behind the curve from 2017 when we couldn’t expand out the sales force. So we’re seeing strong demand in the marketplace internationally as well as in North America.

We just don’t have enough reps to go out and work all those deals. There’s only so many reps – only so many deals a rep can work. So we’re going to have to take this year to rebuild, raising our sales and marketing spend, as you saw the 33% this time over 31% last year and then moving it up to the 36% to 39% overall for the year.

So we are filling out the sales force aggressively. We’re pumping more money back into marketing, which includes events on a global basis to drive more leads in the front end of the pipe and then having the sales reps to work the deal transactions.

So I think that you’re going to continue to see us on the lower end of our – of what would be normal Rimini Street growth, which has been traditionally in the 30% arena. With the size of numbers we have, adding this number of sales reps, I don’t think you’re really going to feel that revenue coming into play until 2019.

This is a building year and on a ratable model, as we get towards heavier sales in Q3 and Q4, is a back-end loaded model. We’re not going to get that much revenue earned off those deals, so you’re going to see it all in 2019..

I know you’ve also talked about looking at cross-selling back into the installed base.

Is that – have you seen much shift to focus more on upsell, cross-sell, or is it mostly new logo focused?.

Well, I think with the Salesforce launch, especially, you’re going to see us focus in on our existing client base as the most fertile field to start with for selling into. We already have a large demand coming from the existing force.

Some of our statistics there show that we have at least 40% of our existing client base who are also Salesforce users, which presents a strong opportunity for us. As far as revenue value for this year, because we’re already midyear, we’re launching – you’re going through inaugural customers.

Typically, when we launch a product line, we’re going to be honing that product. We’re going to be fine-tuning it as we get it out to market. And we’ve got – we’ve already started training the sales force, but they’ve got to learn how to position and sell the product.

So my sense is that I think the accretive revenue for this year from the new Salesforce product will still be fairly minimal. But I think, again, you’re going to see a lot of this pick up in 2019 as we start running with these products that we’re just getting out the door now..

Yes. And on that Salesforce announcement, it’s interesting to see such endorsement from the vendor itself to be working with you as a partner.

What are they seeing in terms of the value you bring to Salesforce?.

happier clients, more sales, more adoption of our product lines and multiple product lines that Salesforce is rolling out." So I think, in this case, you’re looking at a real win-win where Rimini Street as a net positive to the ecosystem. And everyone’s boats are floated higher if we’re successful in the marketplace..

Okay. Tom, a couple for you. When I look at the calculated billings number, it looked very strong. I come up with about 50% year-on-year growth. I’m curious if there’s some onetime items.

Could you talk to the mix on the contingent contract structure and what bearing that had on deferred revenue relative to past quarters?.

Yes. So Derrick, as we talked about on the fourth quarter call, remember, we indicated that we did have some significant opt-out activity, and we continued to have some of that this quarter as well. But the activity level is essentially half of what it was.

So we were, in the calculated billings this quarter, seeing benefit from those opt-outs in Q4, almost all of which are now behind us. There’s 1 or 2 that still have later dates, but all of those that had dates before March 31 all converted to permanent customers. So we did not lose any customers to date on those opt-outs.

So that all of those billings are also included in the calculated billing number that you calculate. So that clearly helped support that. In addition, we did have growth, as Seth indicated. We’re seeing less and less of an impact, though there still is some impact on the activities that Oracle is – continues to do with us.

But it’s becoming less and less of an impact, and so we are seeing and did see improvements in Q1 over a year ago. But again, part of that is due to the opt-outs being cleared, which is a good thing, of course, from Q4 into Q1..

Okay. And you gave guidance on gross margin of 57% to 59%.

I’m sorry, was that in Q2 or for the full year? And do you have full year guidance?.

That’s for Q2, and we still believe that for the full year, we will be up slightly as we’ve talked about over 2017. Not significantly, but we still expect to be up slightly in all of – for all of 2018. But that’s 1 quarter.

We’re rolling out the new products, training, those types of things as well as – we didn’t talk about it a lot, but we’ve added some additional countries as well. So some infrastructure, a little bit of infrastructure costs for that are putting some pressure on the margins just – we believe, just for the second quarter..

Okay.

So that – what you’re adding doesn’t change your medium-term gross margin targets?.

No, it does not..

Okay. All right guys, that’s it for me. Thank you..

Thanks, Derrick..

Thank you. [Operator Instructions] Our next question comes from the line of Pat Walravens from JMP Securities..

Hi. This is Matthew Spencer on for Pat. Thanks for taking my question.

First, could you just tell us what are the next events we should look for in the litigation with Oracle?.

Sure. Thanks for joining. This is Seth. So we are – we’re heading into the – we’re in the pre-trial phase for the trend Rimini 2 case. We don’t expect to see trial till minimum 2020, more likely 2021.

Now that we’re in the – what they consider the expert discovery phase, where our experts are writing reports and Oracle’s are writing reports, and then we exchange them and argue over them, then we’ll come the time when we’re doing motions for summary judgment and attempting to narrow the case, leading up to trial.

But all the discovery components are done, so all the evidence has been presented by both sides to each other. That closed back in March. So that’s the phase we’re in for Rimini 2. For Rimini 1, we’ve already gone through the appeal. We obviously had the favorable results.

And some of the items were sent back to the trial court to be reheard, including Oracle’s legal fees and whether we should pay them or not is back before the court. And we don’t know when that will be heard.

We have no – there’s no time limit or anything, and the judge will make his decision whether he’s going to have a hearing or whether he’ll just make a call and let us know. And we’ll know when we get notification from the court. But again, no timetable on that..

Great.

And second, could you talk a little bit more about Rimini Street Mobility? What kind of traction are you seeing there? And how important is that kind of a solution going forward?.

Well, I think when you look at all of the different solutions we’re putting out there in our extensibility packages, the whole idea here is, is that we have hundreds and hundreds and hundreds of clients who are on systems that are 5, 10 years old, some even older than that, who may have – those systems may have come out before there were strong mobility options built into the product or strong analytics built into the product, just generationally.

And they have a couple options and the option, of course, that some of the software providers would like to have is tear it out, replace it with a brand-new product in order to get that kind of feature and function.

And what we’re doing is you’re watching Rimini Street come out with products and solutions that can bolt on to these existing systems and give you easy mobility and easy analytics without ever having to change out your core infrastructure at all.

So the cost difference is tremendous, the time savings is huge, and the overall ROI is a number that can’t be beat by a software replacement project. And what we’re doing is extending the life.

And our goal at Rimini Street is to move from, say, an average 5-year lifespan with us as a client to doubling that to, say, a 10-year lifespan with a client, which, of course, means billions of dollars of additional revenue from us in the lifetime values of clients. So I think that, that is the strategy.

And then what you have on the technology side, for example, you have things like our database security.

You have some new components that we’ll be announcing in the future relative to other types of systems, whether it’s around containerization, virtualization, all sorts of different technologies that allow you to move forward with today’s technology and be at peace knowing that you don’t have to worry about what the technology of the future is.

We are future proofing it from some of the changes that may come down the line that we can give you 15, 20 years or more lifespan potentially on a product..

Great.

And third, what are the most important growth drivers for Rimini today? And maybe how would you rank hiring new salespeople versus adding new products and services, versus any other initiatives?.

I think for us right now, we have got to get the sales team size and our capacity where we need to be. As you guys know, this is a numbers game. If each of your sales rep has $2 million of capacity, even though we drive a very high attainment number, there’s only so much we can put through the pipe if we don’t have more sales reps.

So building out sales capacity is critical. All you have to do is look at our – look at the math of where we are. Why are you seeing growth at 22%-type numbers instead of seeing numbers in the 30s where we should be historically. It’s simply math as a percentage of the bigger and bigger numbers.

We have to have more sales reps and increase capacity to be able to maintain and deliver a 30%-type number. We do not have the sales force capacity to do that. So that’s a challenge for us. And so I think absolutely number one, building sales force capacity..

Great. Thank you very much for taking my questions..

Thank you, Matthew..

Thank you. [Operator Instructions] 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..

Well, great. Well, thank you very much, and I appreciate everybody joining us today. I did want to thank everyone as well as our staff, our investors and, of course, our analysts who spend the time to cover us. So we appreciate it, and we look forward to seeing everybody on our second quarter 2018 results call. Thank you very much, everybody.

Have a good day..

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