Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the remaining streets third quarter 2019 earnings Conference call.
I'm a participant mine turned in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you wanting to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker.
Today deemed Paul. Thank you. Please go ahead Sir.
Your operator I'd like to welcome everyone to remain streets third quarter 2019 earnings conference call.
On the call with me today is about three even our CEO and Tom stable our CFO .
Today, we issued our third quarter 2019 earnings press release, which can be found on our website.
A reconciliation of GAAP to non-GAAP financial measures has been provided in the table following financial statements in this press release.
Explanation of these measures and why we believe they are meaningful is also included in the press release under the heading about Nongaap financial measures and certain key metrics.
Copy of the press release and financial table, including the gap Synar, GAAP reconciliations and other supplemental financial information can be viewed and download it 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 third quarter of 2019, which was filed today.
For a discussion of 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 stuff.
Thank you Dean and thank you everyone for joining us today.
In the third quarter, we continued to see improving performance from investments made over the past 18 months global sales capacity productivity and infrastructure.
We also continued expanding our global capabilities, a new product and service offerings opening operations in Dubai to serve the Gulf region and announced the global availability of application management services for S&P.
In addition, today, we announced the global availability of application management services for Oracle database in applications.
The third quarter ended September Thirtyth 2019, we generated revenue of 69 million a year over year increase of 10.1% with annualized subscription revenue of 274 million.
Gross margin for the quarter was 62.4%.
Revenue retention rate for subscriptions, which is substantially all of our current revenue mix remained above 90% with more than 70% of subscription revenue non cancelable for at least 12 months out of rolling basis.
We ended the quarter with 2032 active clients, representing a year over year net increase of 17%.
The quarter included several notable sales wins, including leading auto manufacturer Hyundai Kia Motors, who switched to Romine Street for support and maintenance of its global database portfolio.
Our active client count included nearly 100 Fortune 500, and Fortune Global 100 companies.
For the third quarter, our global service delivery team closed over 7500 support cases delivered more than 15000 tax legal and regulatory updates and maintained an average client satisfaction rating a 4.8 out of 5.0 on the company's aboard delivery were 5.0.
Was rated is excellent.
Our strong and consistent client satisfaction was recognized with numerous awards during the quarter, including Stevie Awards for company of the year computer services and customer service team or the year.
Investments and initiatives.
Our primary investment initiatives remain consistent what's your to drive accelerated revenue growth increase our share of client I T spend and grow the lifetime value of each of our clients.
To further these initiatives in the third quarter, we continue to invest in global sales capacity in productivity, new product and service offerings, new geographic capabilities and upsell programs targeting existing clients.
As noted earlier during the third quarter, we announced the global availability of application management services for Us a pea.
And today, we announced the global availability of application management services for Oracle database in applications.
In addition to leveraging Romine Streets award winning support services for Oracle in S&P that replaces expensive and lower value softer vendor annual support where the more responsive and robust support offering.
Clients can have remaining street run their Oracle and safety systems day to day with integrated application management and support services provided by a single trusted vendor.
As an integrated service or main street can provide clients a better model better skilled resources better service outcomes higher satisfaction and save our clients time labor and money.
According to industry analysts the global market for application management services is approximately 82 billion and expected to grow more than 5% annually.
We believe Romines Street is well positioned to disrupt this large market as an adjacent software service the way we disrupted the application support industry.
We believe our integrated management support service offerings as a unique invaluable competitive offering in the market and creates a significant opportunity for us to secure additional long term subscription service contracts ROE revenues and increase the share of our clients I T spend.
Already we have achieved sales wins with our new application management services and we are delivering our integrated application management support service offerings to clients across a variety of industries.
Competition.
Competition with our primary competitors Oracle and that's safety remains fierce both software vendors are engaged in continuing efforts to forced their licensees to upgrade and migrate from current stable software releases to the vendors newest immature products.
[noise] Oracle is ending full support for some softer releases by 2025, and Sep is declared that tens of thousands of licensees around the world using their most popular current product kimberly's must migrate to their newest product by 2025 in order to remain fully supported.
[noise] data from surveys conducted by remaining street and published on our website indicate that 80% of Oracle responded stated they are not planning to move are unsure about migrating to Oracle software as a service products and 80% of S.A.P. licensees stated they plan to continue running.
Our current customized to mature as they'd be systems to at least or beyond 2025.
We believe the forced retirement of popular and stable releases by Oracle in Sep she create an even stronger demand environment and sales opportunity for remaining streets application management and support services in the years ahead.
Recent Oracle litigation developments.
On November five 2019, we filed an appeal to the U.S. Supreme Court to resolve in issue in our ongoing litigation with Oracle.
Hearing may or may not be granted.
Previously we successfully appealed to the U.S. Supreme Court on another issue relating to our litigation with Oracle and on March four 2019, the court issued a unanimous decision in our favor and ordered or called the returned 12.8 million in Nontaxable court cost plus interest.
Summary.
We believe our continued investments over the past 18 months and sales capacity and productivity new products and services and global expansion are continuing to yield improved results.
Before I turn the call over the time Sable, our CFO I want to note the Tom will be leaving us on November 15th to pursue another opportunity in the state and what she resides.
Stanley book, our previously the company's Vice President Corporate Controller was appointed group, Vice President and Chief Accounting Officer effective November five 2019.
We are actively recruiting a new chief financial officer.
I want to thank Tom first financial stewardship over the past three years, which included the successful completion of several substantial refinancing transactions and taking the company public in 2017, we wish time well in his new role.
Now over to you Tom.
Thank you Sam and I want to thank you the board and all my fellow where many street co workers for the opportunity to collaborate and assist with the growth of the company over the past three years third quarter revenue sales and marketing and general and administrative spend well all within our quarterly guidance.
This range and gross margin for the third quarter and year to date or both above our previous provided guidance ranges.
As Scott noted revenue for the third quarter was 69 million.
Year over year increase of 10% with annualized subscription revenue of approximately 274 million.
For the third quarter or 2019.
Hi, it's within the United States constituted 65% of total revenue.
International clients were 35% of total revenue.
Representing aggregate year over year total revenue growth rates of 10% for both the U.S. and international markets.
Gross margin was 62.4% for the third quarter down from 64.5% into 2018 third quarter.
Well, we believe that gross margin from our established services will continue to expand.
This will be offset by the ramp up costs associated with the introduction of our newer products such as Salesforce.
And the global rollout of our application managed services for Sep and Oracle mentioned earlier by SAP.
Therefore, we continue to expect our overall gross margins to be around 60% to 61% for the full year.
Which is consistent with our prior guidance of approximately 60%.
Sales and marketing expenses as a percentage of revenue were 38.7% for the third quarter.
35.6% for the third quarter of 2018.
Sales and marketing expenses are currently running higher than the previous Europe's period due to the impact of sales rep hiring during 2019, where we have increased capacity by over 20%.
We expect sales and marketing expenses to be in the range of 39% to 41% of revenue for full year 2019, with a high yen guidance down 1% from previous guidance.
General and administrative expenses as a percentage of revenue, which excludes outside litigation costs was 15.2% for the third quarter.
From 13.7% for the third quarter of 2018.
We expect Genie expenses as a percentage of revenue to be in the range of 16% to 18% for full year 2019.
Unchanged from previous guidance.
The higher level of spend is due in part to increased public company costs for the implementation of the new revenue and leasing accounting standards, along with increased personnel and I T system costs associated with growth and geographic expansion.
Net litigation expense for the third quarter of 2019 was 3.3 million compared to 7 million for the third quarter of 2018.
The decrease is largely due to less discovery and remained work compared to the prior year.
It should be noted that are outside litigation spend does not linear and can fluctuate each quarter based on litigation activities.
We expect litigation expense to be in the range of 2 million to 5 million for the fourth quarter 2019 absent any significant changes.
GAAP operating income was 2.5 million for the quarter, which was unchanged from Q3 2018.
non-GAAP operating income was 7.5 million for the quarter compared to 10.7 million of operating income from Q3 of 2018.
Net income was 1.7 million for the quarter compared to a net loss of 48.4 million from Q3 of 2018.
The prior years third quarter included 46.9 million and debt discount and issuance write offs payments would make whole premium.
The write off of embedded derivatives, all related to the repayment and termination of the 2016 credit facility in July 2018.
non-GAAP net income was 6.7 million for the third quarter, which was unchanged from 2018 third quarter.
Cash dividends on the series a convertible preferred were 3.9 million for the third quarter of 2019.
Well payment in calling dividends were 1.1 million, which were settled with the issuance of 1149 shares Oh series, a preferred stock to the holders on October 1st 2019.
Reflecting the series H dividends basic and diluted net earnings per share attributable to common stockholders was a loss of seven cents for the quarter compared to a loss of 85 cents per share from Q3 2018.
Adjusted EBITDA was 7.6 million for the quarter compared to 10.8 million from Q3 2018.
Deferred revenue as of September Thirtyth, 2019 was approximately 201 million.
15% from 175 million as of September Thirtyth 2018.
We ended the third quarter with 42.2 million up total cash on our balance sheet.
For the nine months ended September Thirtyth 2019.
Cash flow from operations increased to 21 million.
Appeared to 17.6 million for the nine months ended September Thirtyth 2018.
Now with respect to revenue guidance.
We are maintaining the midpoint of our full year revenue guidance of 275 million.
Well narrowing the range to 274.5 million to 275.5 million.
And guiding fourth quarter 2019 revenue to be in the range of 71.3 million to 72.3 million.
And with that operator, well now take questions.
Thank you if you would like to ask a question you will need to place star one on your telephone to withdraw your question press the pound.
Again to ask a question press star one.
Please standby, we compile the culinary roster.
And our first question comes from Derrick Wood with Cowen Your line is open.
Hi, good afternoon, everyone and good order and Tom will we'll Miss you a good luck with your next endeavor.
So I wanted to start on the really strong new customer count I think the second biggest we have we've seen on record.
And I want to drill into this little bit I got a three partner here. So first.
It sounds like this was driven by you know improved sales productivity coming online and the other factors to call out second.
Are there any particular areas of strength either by product or geography, and then third given that it didn't really moved the needle on on changing your revenue outlook for the year.
I would assume these are perhaps smaller.
Deals in nature could you just a touch on that.
Sure Derek Thank you very much and.
I think that we did to answer your your multi part so first of all as you know we've put a lot of additional feed on the street.
With the sales program, we're starting to see as we would expect as those sellers become more productive we're going to see transactions not uncommon for the new sellers to to be working on smaller mid sized transaction. We also had quite a few on the larger so well.
One of the better quarters in recent quarters of a mix of small medium and large transactions, which is always our preferred pipeline structure. So I think that was a positive that we've seen on a global basis.
I think in terms of of strength of geography, Asia Pac did very very well.
So that across Asia, all the way down through through Australia, New Zealand, so the entire Asiapac region, I, probably the strongest performing region.
Globally in the third quarter.
What's driving I think we have a lot of traction with our new marketing messages that we rolled out at the beginning of 2019.
And I think the indicators for that are not only the closed deals, but the the growing pipelines and what we're seeing in terms of increasing lead lead generation numbers. So I think we're watching it start to move its way through the pipe rowing leads more conversion into opportunities and then move.
It into close deals. So I think we're we're seeing all the things that we would want from a good marketing traction.
And that marketing message on top of it also relates to what we've been saying about the be forced retirement.
Current releases from full support that's coming for the Oracle and S&P World.
So I think that that's a that's also giving us a a boost that I think both will play out in future quarters.
Great that's great color and I guess.
I think about a couple of quarters ago, you had a bit more litigation noise in the market as this coming up less frequently on your engagements or it's always going to be part of your sale cycle and sorry for the background noise.
Okay.
No you know I think for the time being it's always there you know you look at the size of our transactions you look at the mission critical nature of our support and I think yeah. There's there's just no way during the competitive cycle that our competitors aren't going to try and raise litigation as a five day.
Adam.
In the in the sales process and it is something we pretty much still deal with that every single transaction, but obviously, we work our way through that as companies do their diligence. It's still does affect does it still does have some deals that are that it de rails the transactions.
It's unfortunate but it is just the fact of of being in litigation.
It always has been for the many many years were there I would say, though Derek it's it has less effect overall on the transactions than it did years ago that that I think is true.
Okay, and then on the I'm on the application management services.
It's probably too early but then it sounds like you've already closed deals just wanted to hit little bit more on what the initial uptake, it's bad and whether you're seeing that perhaps you know impact when rates are pipeline conversions are just conversations around selling your core offerings.
I, Yeah, I'm I'm actually very excited by it I think we've seen it you know we've we've we've closed.
Good number of deals already.
We haven't hit the material thresholds financially to talk about him as a separate product lines, yet, but I think when you look at it in fact than we only sell the a mass services to customers, who buy our core support you have to buy the support to get the I imagine, though because.
That was what we've seen happen is companies have renewed and extended their contracts on the support side just to get the am mass and mix them together in an integrated service. So the upside is not only getting new additional accretion rep do but your securing an.
And extending the long term nature of our support so the bigger solution.
Gives the customer an opportunity to stay even.
On the longer term engagement with us much deeper embedded into the customers I T Department. So I think it's been it's been very positive. It's been very well received on a global basis, and we put a lot of people in that department at just to staff up these Amazon Prime.
The next or big one clients alone we have over 30 head count dedicated to serving one of argue big clients on am mass.
And that's where you're seeing the gross margin take about a bit of a hit right now as you would expect given our size you just look at our size and our ratios.
If you're going to be adding a significant number of of heads like that you're going to take some hit on your gross margin in the short term, but the long term revenue upside is substantial.
Okay, good segue over to Tom and I know gross margin was.
Down year on year, but it was still a lot higher than what you had guided so what.
That was the same case a quarter ago, so what's been driving comp the upside and gross margin.
Yeah, so well as Jeff indicated Derek you know we are you know spending money on ramping up the amounts.
The support margins, you'll continue to improve to offset that so.
If you looked at just our support only margins those margins have continued to increase.
Quicker than we would've thought against some of that's leverage but it's also just more better efficiency I know we've talked in the past about how we're using artificial intelligence.
Would you with some of the things we're doing there to more quickly deploy and better deploy the right resources on the right.
Tickets and what the right customers and so we're seeing the benefit of of those types of things.
On the on the support side, which is why in the last couple of quarters. As you mentioned, we've Oh, yeah, we've exceeded our gross margin target.
We still believe though for the full year, we'll be in the 60% to 61% range.
Okay, you guys have a decent amount of business overseas, there's been some weakness in currencies relative to the dollar can you just talked about what the foreign currency impact was in the quarter and maybe what your assumptions are for the year.
Yeah, Yeah, we would we would say that the reason why we were at the kind of the lower end of the range part of that was clearly FX related you know, but a number of our contracts. Though are also in dollars overseas as well. So we don't think it's enough to call out Oh with regards to you know too.
Discussing the impact.
And we would we wouldn't expect it to have a significant impact.
Even in Q4 going forward.
Hi at least at this point.
Yep, Okay and last one I'm, just an update on number of reps today or end of quarter and and how you're feeling about the 80 to 85 planned by yearend.
Sure Derek we Oh, we have runs at about the high Seventys right now.
We just had some staff changes I think we're somewhere in the 70 779. So we're we're right about the 80 number.
Including normal attrition and turnover rates.
And I feel good about that number.
We have been focused as we talked about before more on sizing the hiring a little bit and getting our productivity higher with the existing wraps, we just needed to take a little bit of a hiring pause to absorb the new head count I really get them up to speed because we believe we still have a lot of on.
Tapped.
Leveraging capacity within the new hires as they ramp and you'll see that into next year that even even keeping the same number of graphs into the next few quarters because they are on ramped quotas are quota carrying capacity will still increase into next year.
Plus productivity, we think thats going to give us the kinds of numbers that we want to be able to achieve next year.
Great. That's it for me thanks, guys.
Thanks Derek.
Thank you.
As a reminder, if you would like to ask a question.
Then the one key on your Touchtone telephone.
And we have a question from Jacob Jacobs Silverman with a large global partners. Your line is open.
Oh, Yeah. This is jacobs stepping in for Brian I'm Nice quarter could you guys give us any color on the resistance, you're seeing to Oracle and Sep is you're scaling up I know you mentioned a little bit before but you go into a little more detail.
Yeah, I think you know where we're headed interesting transition point in the market where companies have who have had these big enterprise sweets from Oracle in S&P are in the middle of trying to understand the different IP paradigm.
Which is why move forward with another big monolithic next generation system that will cost a fortune.
And at the end of that multi year cycle of implementation and changeover and huge investment will my business have any additional competitive advantage or will I've spent all my time and focus changing out a backend system, that's already working at a transactional level and Miss the opera.
II study to focus my attention in areas, where I create competitive advantage and growth opportunities for the company. So theres a budgetary battle going on about choice of investments and ROI and there's also a battle about I teach structure and technology, where we're way.
Touching companies try to figure out whether they should again invested in another big monolithic system or embrace a different architecture, which is all these best of breed products, whether it's a maybe I decided to use a workday for for payroll and HR in sales force for CRM.
Even S.A.P. of course has been buying products like concur.
I read by six Successfactors. All these all these pieces of that come into effect and Oracle. The same so we're watching a different architectural model that maybe emerging of best of breed products all connected with integrators, such as a mutual soft from that of course is now.
Owned by sales force.
Or Adele booming and you're watching this.
Is it multiple products from different vendors connected by integration or a full big suite from a single vendor. So this is the turmoil that's in front of them right now and they're moving to remediate Street. Many of these customers exactly what our messages, which is no one really knows how all these pieces are going to play out in these new architecture.
And why not at least by yourself, a 15 to 20 year insurance policy move to remaining street save a fortune get better service and be able to delay those decisions from having to predict which of these models may be the better one we believe five to seven years from now.
Now you're going to have an opportunity to understand which of these models is gaining traction which one is yesterday's model. We believe some of these new products such as the S.A.P.S. for Honda platform might in fact, we the last of the dinosaurs it might be the last major monolithic.
Implementation that accompany ever does and if they wait five years, they might discover that that's a wrong direction and they don't and they get to save that money and focus on new technology. So there's a lot of that taking place in the buying cycle and the vendors from an oracle in S&P vendor perspective, they're not.
Well liked by the customers out there trying to shove these products down there throat when the companies aren't sure they need them.
You've seen the backlash to it and you've seen the fact that the that Theres a lot of resistance to changing out these major cost platforms. When the current platforms work.
Okay, Great and then for marketing expenses, so you've been seeing a decent amount of uptake from new sales reps is there any do you plan on continuing that trend of spending more and marketing and sales or do you think that's kind of hit its peak for now.
Well I think we're trying to peak it out I mean is you know we've we had that we had to play catch up.
From being held back by those covenants from our past financing that we only got the start spending money really 18 months ago. So we had to accelerate spending for the catch up purpose. Yeah, we would like to see our sales and marketing number come down a little bit into the mid thirtys.
We try to strive to GAAP profitability I try to add to bring a little more balance and I think yes. If we can if we can get another couple of good quarters in a performance improvement and the sales force is maturing of the sales force.
I think we're going to be able to start to tick down sales and marketing a little bit, but I I think were peaking.
Right about now if we get where we want to be.
Okay, great. Thanks, Thanks, again, great quarter.
Sure. Thank you.
Thank you.
And our next question comes from drew Foster with Citigroup. Your line is open.
Hey, guys. Thanks for taking the question you highlighted some strength internationally and you opened up a new office and.
Do you buy I'm just curious if you're following the same playbook. There that you cited on on recent calls where you.
Our essentially opening up a smaller office with a few reps in a couple of support people or have you been any tweaks to that model and whats healthy so far internationally.
Sure drew I think that the answer is yes, I think we've got a pretty good cookie cutter approach for most countries.
I would say the exception was it was Mexico, Mexico I think we already have over 10 people in that office a lot of lot of opportunity in Mexico with all the manufacturing down there I think Dubai, Yeah, we've put a smaller footprint there and we already serve customers in the Gulf re.
And and we're really trying to get a feel for where offices should be we already have clients in Saudi Arabia and around the Gol I'm trying to get a feel for where we should position staff to be most effective not only for selling but servicing our clients in the Gulf.
So it's still I would call. It is still in the exploratory early phase of figuring out the Gulf market. As you know I. We also served the middle East out of Israel, where we have a very large client base and operation.
So we are looking to to fill in holes and gaps.
Around the region because so many of our clients operate in 100 to 200 countries and we need to capability to service them in every time zone region and all critical languages.
Got it Okay, and then you notice or you out you mentioned that you had sort of taking your put out the gas, but on terms of hiring and focus more on building out sort of the the support functions of the sales organization.
In terms of sales enablement and maturing it right. Yeah can you can you help put some more color around just how more productive your reps have gotten as a result of those investments and.
You know where the maturity that organization stands today versus what you think it could be.
I think that you know the greater challenge it's interesting internationally I think we've we've been faster at maturing the sales force.
Outside the United States. The you asked is lagging a little bit I think it's because we we put more new reps in and on top of the new wraps, we've put new directors on top of them, but and so I think you as we talked about in prior calls a little bit of blind, leading the blind leading to more errors on the on the back.
Well field than than we would normally like to see just.
Just as everybody learns the business and when when the manager and the person underneath them. You know are new to the business. That's that leads to a lot more errors. So I think just north America's got a little more catching up to do with all of its new hires but I think the effectiveness of of what we're doing in terms of bits.
During the reps globally, because they were smaller teams had less new players added to them, we're able to absorb them a little faster and I think yeah, North America will probably require another couple of quarters to to get up to the kind of productivity level.
We've seen in the past before we added in all the new hires.
And matching up to what we're seeing in the faster movement International.
Got it that's helpful. Thanks.
Yeah.
Thank you and I'm showing no further questions I'd like to turn call back to sets for any closing remarks.
Thank you very much and thank you everyone. Appreciate the time today and I appreciate the questions look forward to our fourth quarter and full year call coming up a one just a into the next year. So with that thank you and have a good end of year for everybody. Thank you very much.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect everyone have a great day.