Rimini Street, Inc. (NASDAQ:RMNI) Q3 2023 Earnings Call Transcript

Rimini Street, Inc. (NASDAQ:RMNI) Q3 2023 Earnings Call Transcript November 1, 2023

Rimini Street, Inc. beats earnings expectations. Reported EPS is $0.13, expectations were $0.11.

Operator: Good day and thank you for standing by and welcome to the Rimini Street Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Dean Pohl, Vice President, Investor Relations. Please go ahead.

Dean Pohl: Thank you, operator. I’d like to welcome everyone to Rimini Street’s third quarter 2023 earnings conference call. On the call with me today is Seth Ravin, our CEO and President; and Michael Perica, our CFO. Today, we issued our earnings press release for the third quarter ended September 30th, 2023, a copy of which can be found on our website under Investor Relations. A reconciliation of GAAP to non-GAAP financial measures has been provided in the tables following the financial statements in the 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, which is available on our website.

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 Form 10-Q filed today. For discussion of risks that may affect our future results or stock price. Now before taking questions, we’ll begin with prepared remarks. With that, I’d like to turn the call over to Seth.

Seth Ravin: Thank you, Dean and thank you, everyone for joining us today. While most IT service providers specialize in software implementation, Rimini Street instead focuses on the very specialized area of IT strategic and operational needs to run, manage, support, protect, connect, monitor, customize, configure and optimize mission-critical enterprise application, database and technology software. We have global operations with over 2,000 employees spread across 21 countries, delivering senior engineering support capabilities to clients with an average response time of less than two minutes, 24 by 7 by 365 and earned an average client satisfaction score on our support delivery and onboarding services of 4.9 out of 5, where 5 is excellent.

Today, we are the leading third-party support provider for Oracle and SAP software and to-date has served over 5,300 Fortune 500, Fortune Global 100 midmarket, public sector and other organizations across the broad range of industries. We’re also Salesforce and AWS Partners in SAS and cloud markets, respectively. We enable clients to achieve better business outcomes, such as lower operating costs, increased profits, increased investment in innovation, improved competitive advantage and accelerated growth. We believe we have delivered over $8 billion of savings and reinvestment opportunity to our clients. Operating results. For the third quarter of 2023, we continued focusing on improving sales execution across our expanded portfolio of solutions, and being able to deliver the full portfolio of solutions globally.

As our current and prospective clients learn more about the unique offerings and value of our expanded solutions portfolio, they’re responding positively and buying across the full portfolio. For the third quarter of 2023, we saw our end-to-end ERP outsourcing solution, Rimini ONE, and our solutions for SAP products continued to gain traction globally, driven in part by the current macroeconomic environment, where we believe our expanded full service portfolio is increasingly valued by prospects and clients and in part by the further maturing of our go-to market execution. To enhance and accelerate lean opportunity and pipeline development and help close more large and strategic transactions, our senior executives, including myself, continue our extensive in-person Rimini Street Client and Prospect Meetings and Attendance at third-party events and Executive Sales Meetings in the United States and globally, with hundreds of current and prospective clients.

To deliver our full solutions portfolio globally, we continue to grow our workforce and capabilities backed by innovation and technology that provides additional leverage for increased profitability with growth. Demand environment, competitive advantage. We continue to see strong demand for a proven reliable partner for mission-critical transaction system services that can allow organizations to consolidate their preferred IT service providers, our streamlined vendor management, increased aggregated purchasing power and better outcomes. Organizations today need to figure out how to deliver both revenue growth and increased profitability. And now as an end-to-end provider of mission-critical IT support products and services, Rimini Street has the broader portfolio of solutions needed to be recognized as a key IT service partner that can help clients achieve their goals from developing IT strategy and building roadmaps to plan execution.

We believe that we are well positioned to meet the current and evolving needs of organizations that faced heightened global competition in just about every industry and to help them navigate the complex macroeconomic over the coming years. Oracle litigation update. Rimini Street and Oracle have been in litigation for more than 13 years. While the US Courts have confirmed long ago that third-party software support is legal. We presently have two active proceedings with Oracle, the injunction compliance dispute and Rimini II proceedings, both of which primarily relate to the manner in which Rimini Street provides support services for certain Oracle product lines. With respect to the injunction compliance dispute, Rimini Street has been ordered by the District Court to reimburse Oracle’s reasonable attorney’s fees and costs related to the contempt matter and related appeal.

The parties are in briefing schedule now, and the District Court has not yet determined what the amount of such reasonable attorney’s fees and costs should be. Rimini Street reserves all rights to appeal any District Court orders. With respect to Rimini II, the company filed a lawsuit, Rimini Street, Inc. versus Oracle International Corp. in October 2014 in US District Court. As of the date of this report, an administrative day of the Rimini II injunction is in place, and the Court of Appeals has not yet issued a decision on our motion of stay the injunction through the appeal process. Additionally, the District Court has not yet decided on another motion that must be decided by the Court before the Appeals Court will consider the Rimini II injunction stay motion.

Rimini Street will also be filing an appeal of the District Court’s findings and injunction in Rimini II. For additional information and disclosures regarding the company’s litigation with Oracle, please see our disclosures in the company’s quarterly report on Form 10-Q filed on November 1st, 2023 with the US Securities and Exchange Commission. Please also note, that at this time, we are still unable to provide material additional information beyond the disclosures and statements in our press releases nor provide guidance with respect to future financial results, SEC filings and Court filings nor are we able to provide additional commentary related to the pending Oracle litigation impacts and potential impacts, because we are engaged in current continued analysis and court briefing and motion activity.

Summary. We remain confident that we are continuing to take the right actions and making the right investments to accelerate growth, increase profitability, enhance shareholder value and bring our litigation with Oracle through a successful conclusion. However, if Rimini Street does not ultimately prevail on various litigation matters described in our SEC filings, it could have a material impact on the business. Now, over to you, Michael.

Michael Perica: Thank you, Seth and thank you for joining us, everyone. Revenue, billings and gross margin. Revenue for the third quarter was $107.5 million, a year-over-year increase of 5.4%. Our revenue in the quarter was again negatively impacted by currency movements, having a 0.1% unfavorable impact to revenue growth in the quarter. On a year-to-date basis, negative currency impacts were 1.2%. For the quarter, clients within the United States represented 51.9% of total revenue, while international clients contributed 48.1% of total revenue. Annualized recurring revenue was $416.3 million for the third quarter, a year-over-year increase of 4.1%. Revenue retention rate for service subscriptions, which makes up 96.9% of our revenue, was 94% for the trailing 12 months with more than 77% of subscription revenue, non-cancelable for at least 12 months.

Billings for the third quarter were $60.5 million, compared to $49.7 million for the prior year third quarter, an increase of 21.7%. Gross margin was 62.7% of revenue for the third quarter, compared to 61.5% for the prior year third quarter. On a non-GAAP basis, which excludes stock-based compensation expense, and the other items detailed in our earnings press release, gross margin was 63.1% of revenue for the third quarter compared to 62% for the prior year third quarter. Continued investment in the global engineering team in advance of revenue recognition as required by many of our new offerings may negatively pressure the gross margin going forward. Operating expenses, while inflationary pressures and high costs are still persistent for skilled labor across all theaters, we continue to attract and retain key talent.

Moreover, our margin performance underscores the advantage of our global footprint with centers of excellence in geographies where both the talent and value remain attractive compared to higher-priced talent markets. Sales and marketing expenses as a percentage of revenue were 33.1% of revenue for the third quarter, compared to 35.3% for the prior year third quarter. On a non-GAAP basis, which excludes stock-based compensation expense, and the other items detailed in our earnings press release, sales and marketing expenses as a percentage of revenue was 32.4% for the third quarter, compared to 34.5% for the prior year third quarter. General and administrative expenses as a percentage of revenue, excluding outside litigation costs, were 17.1% of revenue for the third quarter, compared to 18.1% of revenue for the prior year third quarter.

On a non-GAAP basis, which excludes stock-based compensation expense, and the other items detailed in our earnings press release, G&A was 15.4% of revenue for the third quarter compared to 17% for the prior year third quarter. We are seeing a good year-over-year improvement in G&A spend due to the restructuring previously noted in past earnings calls, and the required initial substantial investments that were required to develop and launch our expanded portfolio of solutions are largely behind us. However, G&A expenses as a percentage of revenue continued to be elevated compared to our peers, due in large part to the ongoing costs for in-house legal and compliance teams and other costs made necessary by our ongoing Oracle litigation and compliance activities.

Net outside litigation expense was $2.1 million for the third quarter, compared to $6.2 million for the prior year’s third quarter. The reduction in year-over-year spend is due to decreased activity during the third quarter of 2023 compared to the prior year third quarter. Litigation expenses will vary quarter-to-quarter and year-to-year depending on current litigation activity. Our non-GAAP operating margin, which excludes outside litigation spend and stock-based compensation, improved to 15.4% of revenue for the third quarter versus 10.5% for the prior year third quarter. For the third quarter, net income attributable to shareholders was $6.8 million or $0.08 per diluted share compared to a net loss of $405,000 or $0.0 per diluted share for the prior year third quarter.

On a non-GAAP basis, net income for the third quarter was $12.1 million or $0.13 per diluted share compared to a net income of $8.3 million or $0.09 per diluted share for the prior year third quarter. Adjusted EBITDA was $18.2 million for the third quarter or 17% of revenue compared to $10 million or 9.8% of revenue for the prior year third quarter. Balance sheet. We ended the third quarter with a cash and equivalents balance of $108.2 million plus short-term investments of $19.9 million, consisting of short-term US treasuries in agency securities, bringing cash and short-term investments to $128.1 million, compared to $129.7 million on September 30th, 2022. The credit facility principal outstanding totaled $74.3 million as of September 30th, 2023.

On a cash flow basis, third quarter operating cash flow declined $8.1 million, compared to a decline of $24 million for the prior year third quarter. Deferred revenue as of September 30th, 2023, was approximately $238 million, compared to $248 million from the prior year third quarter. Backlog, which includes the sum of billed deferred revenue and non-cancelable future revenue, increased to $550 million as of September 30th, 2023, compared to $532 million for the prior year third quarter. Business outlook. The company is continuing to suspend guidance as to future financial results until there is more clarity around the impacts from current litigation activity before the US Federal Courts in the company’s ongoing litigation with Oracle. For additional information and disclosures regarding the company’s litigation with Oracle, please see our disclosures in the company’s quarterly report on Form 10-Q filed on November 1st, 2023, with the US Securities and Exchange Commission.

This concludes our prepared remarks. Operator, we’ll now take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from line of Derrick Wood from Cowen. Your line is open.

Unidentified Participant: Hey, guys. Thanks. This is [inaudible] on for Derrick. Looking at the net new clients. Of course, this was the best quarter-over-quarter [technical difficulty] in the last four quarters. Well [technical difficulty] some more color on what drove that?

Seth Ravin: Sure. This is Seth. So, we saw I think, as I mentioned in the prepared remarks, you know that the third quarter is a big quarter for us in the SAP world, due to their cycles of renewals for the maintenance side of the business. We saw a very substantial increase in business this year over a year, roughly over 60% billings increased on SAP. As you know, two years ago, you remember, we sort of fell off a cliff on SAP in the third quarter, where SAP cleaned our clock in the marketplace. We came back with better messaging, better marketing, better positioning on the services we’re offering last year, which was an improvement over the prior year. And then, we came into this particular year with a very, very strong set of messaging and services for those clients.

So that was certainly one driver. Second driver was, we actually had a substantial increase in the Salesforce business for us on the AMS, we also increased our security business, and we saw increases across professional services. So, combination of all of those drove a lot of new logo business. And I think also, you saw over the recent quarters that we were increasing our cross-sell to existing clients. But in this quarter, we were also able to rebalance a little bit and we were able to get the sales team equally focused on bringing in new logo business. And that’s just part of the evolution when you open up a whole bag of additional products. The team goes out and start selling those to the existing clients. And it’s natural that you’re going to have a little bit of fall off in new logo acquisition.

We saw this quarter we were able to bring that balance back, and you saw the new logo growth and demand very strong.

Unidentified Participant: Super helpful. Just one more from me. The US go-to market changes that you guys have made seem to be paying off a bit. It looks like US about 4% year-over-year and accelerated from last quarter. How far is that go-to market reorganization [technical difficulty]? Do you have any more changes, kind of just working through the end of the changes and seeing some dividends pay out?

Seth Ravin: I think you’re seeing North America – you see, again, we say North America, we’re really talking about US. When we’re really talking about the US, we’re seeing improvement in the US, we’re not where we want to be, we’re not at the consistent execution level that we need to. Three regions are still not executing on a consistently very strong reliable basis, that’s the US market, the EMEA market, and the ANZ market. And we’ve taken steps in all three, where we have really good quarters, we have some weaker quarters. It’s the consistency of execution that we’re focused on right now. We’re bringing in some excellent clients, new logos, we’re getting a lot of great renewals done. We’re selling the full portfolio.

So we’re making progress, literally on a global basis in all those areas. But these three particular regions just have yet to be able to deliver consistently our planned numbers. And so that’s why you see a little bit of the up and down. But, in general, we are moving in the right direction. We’re just not moving there as fast as we would like, and as consistently as we’d like in those executions.