Seth Ravin - Chief Executive Officer Stanley Mbugua - Chief Accounting Officer Dean Pohl - Vice President of Investor Relations.

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. [Operator Instructions]. 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..

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..

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. Now, over to you Stanley..

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 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.

We continue to believe that gross margin from our established support services will continue to expand and help to partially offset the ramp-up costs of our new products and services. Therefore, we continue to expect our full-year 2020 gross margin to be in the range of 60% to 61%.

Sales and marketing expenses as a percentage of revenue were 34.2% for the second quarter compared to 38.5% for the second quarter of 2019. The decrease as a percentage of revenue is due to a decrease in travel expenses and tradeshow expenses resulting from a switch to all virtual marketing and selling.

Despite lower sales and marketing expenses in the first half of 2020, we continue to expect full year 2020 sales and marketing expenses to be in the range of 37% to 39%.

General and administrative expenses as a percentage of revenue which excludes outside litigation costs was 16.8% for the second quarter compared to 15.2% for the second quarter of 2019. The added year-over-year cost as a percentage of revenue is primarily due to additional employee labor costs compared to the prior year second quarter.

In addition, we expect the cost of maintaining the recently updated accounting standards, continued internal control compliance requirements, and planned system implementations to put upward pressure on financial spend in 2020. with a substantial amount of the increased costs mitigated by lower travel expenses in 2020.

Therefore we are continuing to expect G&A expenses as a percentage of revenue to be in the range of 16% to 18% for the full year 2020. Last, litigation expense was $2.9 million for the second quarter 2020 compared to $144,000 for the prior year second quarter.

The prior year included the resolution of a legal dispute with a vendor, which reduced our outside litigation costs by $1.8 million. 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 $3.5 million for the second quarter of 2020 compared to prior year second quarter net income of $6.1 million. Non-GAAP net income was $8.1 million for the second quarter 2020 compared to non-GAAP net income of $7.3 million for the prior year second quarter.

Adjusted EBITDA was $9.6 million for the second quarter 2020 compared to adjusted EBITDA of $8.5 million for the prior year second quarter.

Dividends on the Series A Preferred was $3.9 million, while payment-in-kind dividends settled in preferred shares was $1.2 million, an accretion of the preferred stock discount was $1.6 million for the second quarter of 2020.

Basic and diluted net loss per share attributable to common shareholders was $0.05 for the second quarter of 2020 compared to breakeven net income per share for the prior year second quarter. This takes into account cash and non-cash dividends for the Series A preferred stock.

Deferred revenue as of June 30, 2020 was approximately $218.5 million, up 6.7% from $204.8 million as of June 30, 2019. 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. And with that, operator we’ll now take questions..

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

Hey guys, nice to talk to you today. Maybe this could be both for Seth and maybe Stanley can chime in, but 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..

Sure, I’ll take that first Derrick and good day. We of course, you know as we talked about it coming into this quarter, we had certainly growing pipelines. But like everybody else we did have some challenges of disruption in the first month or two of the quarter. So I think like a lot of other companies, people were swirling around.

It had nothing really to do with opportunity. It had everything to do with clients being in chaos, prospects being in chaos and trying to get deals done.

So there was certainly a decent number of deals that teed up for the quarter that just didn’t get done in the quarter, and I mentioned during my prepared remarks about the increase and 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.

Number one, 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 do – as you know with our revenue, we net down and we net down deferred revenue as well for things where we have opt outs, where we have bankruptcies, where we have any kind of revenue that we’re not ready to recognize, we will net it out, and that’s why even in the fourth quarter you remember we picked up a bunch of revenue that had been cleared out and had been ready to recognize.

So yeah, you’re always going to have those components at well..

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..

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?.

Yes, there are some 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.

And again, you know the risks of this pandemic, the risks of this economy, are not as much about the opportunity.

I think everyone can put one and one together and say that a company that can provide savings and extend the life of systems while people are pushing off expensive projects and managing cash, that clearly we should see upside to that in the market.

The question is really around execution with a lot of these organizations, and I’ll give you an example. In the U.S. we adapted to work-from-home and this idea of coming in, going back out, shuddering some businesses, there’s a lot of disruption that comes and goes, but we’re pretty good about managing it.

In places like Europe, if you go into France, when France went to home environment, they didn’t do work-at-home, they just went home. They refused to work-from-home. It was just cultural. They weren’t set up for it and so Europe has a lot more challenge with the COVID situation and it extends longer.

So a lot of opportunity, but much more challenging to get deals done. Same if you go down to Brazil. Latin America is really struggling as you know with the COVID situation. A lot of chaos, a lot of people not equipped to work from home. And that’s created a lot of problems with getting deals done.

So while the environment for demand is high, navigating some of these hotspots that have challenges with execution, that’s where you’re really at in the back half. So that’s why you always see us take a very temperate approach. Demand is strong.

Execution challenges exist on a global basis and we continue to navigate them, but you know they can cause some deal slippage. They certainly can add time to a deal and the cycles to it..

Yeah, 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..

I think you’re watching us. As we mentioned even last quarter, we think that the opportunity on top of what was already growing, because you know when we did our initial guidance for 2020, we had already come out of it – it was really a pre-COVID guidance. So we had already seen the growth that we’re turning around.

We went ahead and we talked about an accelerated growth in 2020 coming off the bottom end of that curve, starting to reaccelerate as a percent of revenue in terms of the growth side. We saw COVID add to that. We are going to continue to I think accelerate and expand our investment in the revenue generating engine of the business.

As I went through in the prepared remarks, when we’ve been making significant investment, the product and service portfolio, building out and even talking about how you see us upsizing existing clients with major wins.

I wanted to give you some sample of that and I think that you know the combination of which gives us good tailwinds for growth, and we’re going to get an investment more in sales heads, we’re going to put it in more marketing. You’ve seen the television advertising; it’s global. We also launched a brand-new website.

If you haven’t been out there, it’s a completely new platform. It goes along with our pathing for specific roles that we’re selling to. So we’re making a lot of big marketing investments to reach out. The phone is ringing and I can tell you we have the highest website volume and visits we’ve ever had, so that is showing a great trend.

The phone is ringing more than it ever has. So I think that all of that is showing that 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.

And like I said, there’s pockets of challenges and we’re going to continue to push and work through it, but we think it’s all very positive for the back half..

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?.

Well, I think as most people know, first he took 12 direct reports from me, which is a great thing and we’re excited to have him. I mean he – Gerard has – you would have seen in his bio, a lot of experience for Rackspace in HP and he’s taking on the field operations. So that’s allowing me to free up on a lot of other things.

As you can imagine, taking over that number of direct reports and is doing a very, very nice job.

He’s a seasoned executive in operations and you know he’ll be able to spend more time and focus on field execution, which is again ramping sales reps, building out the revenue operations, focused on retention, working with our global client executives to make sure that 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 and he has a lot of experience in that area. So it’s great to have him onboard. He’s making a difference already and we’re just excited to keep building out the executive team. And as you know Derrick, I mean this is all about scaling.

As Rimini Street moved from $100 million to $250 million to pushing near $300 million, as we continue our acceleration to $500 million and $1 billion, we have to add additional executives to again focus on that scaling, and that is a global scaling initiative..

Very good. Thanks for the color..

Thank you..

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

Hello Brian..

Thank you so much.

How are you?.

Great!.

So you mentioned to Derrick’s question, several contracts were keyed 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?.

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 enough, something we hadn’t seen before in terms of any kind of trend, but a lot of the 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 that it would take them maybe a few more weeks, maybe another month and they decided rather than re-up with a vendor, a good number of them just decided to go without any support and try to wing it themselves for a few weeks.

And with us out there as certainly an emergency backstop, because we’re working with them to complete contract. I think it’s a different kind of scenario where they’re working to get it done. They just needed more time to get through all the cycles for it.

So I think again, that boded well for a good number of those deals to just simply slip over the line you know into the next quarter..

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 a work-from-home infrastructure? Is it more sales people? Is it you know smaller numbers?.

I think Asia Pacific has just been a machine. And they have – you know we’ve continued to expand out there. I think also what I’d put to some of this Brian, is they have coped with COVID better than a lot of parts of the world, because they went through SARS, etc. So deals in Taiwan where Taiwan is operating well.

You know we’re not talking about core China here, but we’re talking about down in Singapore, Malaysia, across Korea where we’re very strong, Japan very strong. So I think a lot of it had to do with their ability to execute through sort of the global chaos. But it’s been an up and coming theater for us and has been leading global expansion for a while.

Now our friends in Europe of course want to challenge that. They want to grow. They have the opportunities to grow.

They’re just now trying as I mentioned, especially France and few other countries, very hobbled – where we do a lot of business traditionally, very hobbled by the fact that businesses are closed and they’re not working from home and that makes it really hard to get a lot of deals done there right now and it’s taking months to really get back to any kind of functioning normal for places like France.

So Europe has to deal with some of those challenges, but they’re coming along, they’re growing their operation. Latin America, with our new – you saw our announcement. We put a new GM in charge of Mexico and Central America. A lot of opportunity in that region as well, but hampered by COVID right now.

So again, opportunities and challenges even to get through it. So I think you’re going to continue to see APAC probably lead for a while, because things are just easier to get done over there right now.

But I think you’re going to watch the rest of the global community, which has done fairly well, pick up as they normalize through the COVID situation..

Great.

And then can you highlight the demand you’re seeing for the relatively new application management service offerings? I know you commented on it, but what percentage maybe of revenue is it today? And has the pandemic hurt, helped or had no impact, do you think on this offering?.

I think AMS is a very service revenue stream to come, and you know I’ve always talked about learning to walk before we run and I’m very conservative about these big new product introductions. They’re going well. The clients are very happy with the service.

You know they are delivering kind of value that we wanted to and we wanted to make sure that all those things worked the way we expected them to before we go in large scale execution.

And I’ve also talked before about the fact that it’s a different – it is a different sales motion than our current support and we’re still working through some of the go-to-market on a global basis as we pick up new countries and we’ve expended to new countries providing the service.

But there’s still work to be done and so we’re taking it very carefully and that’s why we’re not breaking it out yet. We’re not guiding anything. We’re going to provide additional information with press releases, with client case studies that will help everyone understand it.

But we’re still in more of a launch phase than a full production phase, because it’s a pretty extensive product line. And you’ve see that we’ve been adding people.

That’s one of the reasons gross margin primarily is down, is because we’ve added a lot of bodies into the AMS side and that will continue to suppress gross margin on a blended basis, while of course our existing support product continued to improve gross margin as an offset. But yes, we’ve got to pay our way into it for a little bit.

But I’m still very bullish on the product line and I think you’ll hear more about it from us coming up quarter-over-quarter..

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? Do those prices come back when those customers are stabilized or do you think they’ll remain a little bit lower?.

I think we’ve been taking a pretty good approach to the way we’ve handled it. What we did with our teams was we laid out just like everybody else, and I’m sure every other company you’re talking to, everyone is beating up their vendors to get them discount in this day and age, that’s just the way it is. Whether they need it or not, they are doing it.

And we set out a very rigorous program. We’ve always had a rigorous renewals and price management program, which has allowed us to manage the kind of margins of delivery that we have.

Now, when it comes to helping clients, we set out a list of priorities and we tell them, you know first let’s talk about what is the issue? Is it cash flow right now? If it is cash flow right now, maybe we give them quarterly payments for this year. But we don’t try to amend contracts for long term periods.

We really say, how can we help you right now with your current emergency situation? Do we need to delay the payment? Do we need to just give you quarterly to help with cash flow? And we work our way through it without trying to get to any kind of discount to the product, because again, this time will pass, and what we don’t want to do is set low water marks and change pricing and then find that then the economy comes back two years later, you’re set at that low water mark.

So we’re very, very good about that and so we’ll work closely to find the best matter. The other thing we do is we will work to get something in exchange for something. Our team is very good about that.

So if we’re going to give quarterly payments or we’re going to you know do something to help them through this, we will ask for something in return, often an extended contract and we have increased the extended contracts. As you know 70% is non-cancelable for at least 12 months.

We have added a lot of multiyear agreements in return for some of that help. We also will ask for case studies, we will ask for special references, things that help us sell additional customers.

So I think because of that, just because we take a little bit of hit maybe in the money or some of the cash flow, as you’ve seen you know we’re at record cash numbers because we’re very diligent on collecting cash and managing cash.

So I think the combination of what we’ve done will yield big benefits for us and I think you’re not going to see long term impact because of the help we’re giving clients today..

Great! Thanks so much for all your time..

Sure..

And your next question comes from Mark Schappel from Benchmark..

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. I was wondering if you’re seeing discounting from these vendors above and beyond the norm as they try to keep their customers on maintenance..

I would say yes. You know there’s always been, despite denial from them, there’s always been a certain amount of discount and it often gets more frantic as the customer you know reaffirms that they plan to move to us. So there’s been a long history of that, that we have had in the sales cycle.

Do I see bigger discounting? More aggressive? I think it’s on a deal-by-deal basis.

Some of the deals we took in the quarter, you know they’re multi, multi-million-dollar deals for these guys and that gets a lot of attention within the software vendor and I would say on those deals they worked very hard to try and keep them with additional discounts as part of the mix.

But obviously, you know we’re very good at helping clients understand that even if they drop their prices, even if they matched our prices on an annualized basis, because they require migrations and upgrades, they can’t get the kind of support that we’re offering, the combination of which is even for the same money, we offer a better overall return value and I think that’s key, because they have come in and occasionally they have tried to match our price exactly.

If you can imagine that, coming 50% off, and the clients say no, you know we prefer to value mix and we think we’re still getting a far better return on the investment by going to Rimini Street. So that’s all part of our sales process..

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?.

I think you know in terms of expansion, we’ve given the guidance in terms of the range. We’re going to be bringing down – overall we’re going to be bringing down sales and marketing expense as we said, sort of the midterm vision is that mid 30’s number. You know we’re bringing down G&A to that 12% to 14% type number.

I mean these are all – we know where we want to go.

We have to make some investments now and I think as you will recognize, because we had been held back so long on sales and marketing investment, just due to covenant on the prior financing that were released only in 2018 midyear, you know we’re still in the process of catching up to get the growth engine back to where it was.

And I think you go back and you look at a few years of numbers and you look prior to that, that financing where we got constrained down to 31% sales and marketing.

It takes a little while still to build up and reignite the engine and I think you’re seeing the numbers already reflecting results from that process and I think the goal here is to continue to make the investments to take advantage of the market. I mean we are over 80% of the third-party market.

We want to continue that expansion, we want to continue that growth and I think we’re doing the right thing in continuing that investment now, but long term we’ll hit the at mid-30s. So I think we’re going to have the right mix of cost and flow a lot more money to the bottom line as we’ve been committed to doing..

Great, thank you. That’s all for me..

Sure, thank you..

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

Great! Thank you very much and thanks everyone for attending the call today. Look forward to our next call. Please stay safe out there. Obviously, this is a dangerous constantly changing situation in the world and we look forward to having another call and hopefully with better times. So thank you very much everybody. I appreciate the time today..

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