Q1 2020 Earnings Call
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Starting at approximately five or five PM Eastern time again, thank you for your patients and please continue to standby.
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Ladies and gentlemen, thank you for standing by and walk into the <unk> first quarter 2020 earnings conference call. At this time, all participants lines Arnold listen only mode.
After the speakers presentation, there will be a question and answer session.
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Oh now like to hand, the conference over to your Speaker today, Mr. Dean Pole VP of Investor Relations. Thank you. Please go ahead Sir.
They threw operator like the welcome everyone to really streets first quarter 2020 earliest conference call.
With me today, South Raven R.C.E.O. in Stanley <unk>, our Chief Accounting Officer.
Today, we should our first quarter ended March 31st 2020 earnings press release, which can be found on her website.
Reconciliation of gap to not get financial Masters, that's been provided the tables, probably the financial statements in this press release.
Explanation of these measures and why we believe their meaningful is also included in the press release under the heading about not get financing measures and certain key metrics. It copy of the press release and financial tables, including the gap to nerve gas reconciliation and other supplemental financial information can be viewed in down.
Load it from the Investor Relations section of our website Hunter Investor.
As a reminder, today's discussion we put forward looking statements that reflect our current outlook. These forward looking statements are subject to risk then uncertainties that may cause actual results to defer materially print statements make today. We encourage you to review our most recent F.C.C. five ways, including our foreign pen queue for the first quarter.
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Discussion at the risk that may affect our future results were stock price.
For taking questions will begin to prepared remarks with that I'd like to turn the call over to stuff.
Thank you D.N. and thank you everyone for joining us today.
For the first quarter, we achieved record quarterly revenue or 78 million a year over year increase of 18.5% and matching the high end up management guidance generated 26.3 million of operating cash flow produced another quarter of net income strengthen the balance sheet with total cash.
58 million and a quarter end and expanded sales capabilities.
We remain committed to the long term goals of improving free cash flow and growing gap profitability.
Revenue retention rate for subscriptions, which makes up most of our revenue remained above 90% with more than 70% of subscription revenue noncancelable for at least 12 months at a rolling basis.
We ended the first quarter with 2077 active clients a year over year net increase of 12.1%.
Including nearly 100 Fortune 500, and global 100 companies and expanded global government representation.
Recorder and global employee Cat was 1302, a year over year increase of 17%.
Prior to the pandemic, we were making investments to meet increasing global demand for our expanded product and service portfolio.
This increased demand was reflected in our previously issued and today reaffirmed 2020 guidance for accelerated year over year revenue growth.
We are now accelerating those investments disservice additional opportunities, resulting from the covert 19 global economic slowdown.
Having already saved our clients nearly $5 billion to date, we are the right company at the right time with proven solutions that are helping organizations immediately slash I.T. operating costs save jobs stabilize operations and focus their more limited resources on strategic initiatives.
Cove in 19.
Well some transactions that were expected to close in March 2020 slip to later target closed dates due primarily to the escalation of that Kobe 19 pandemic.
Pandemic had minimum that impact on our revenue or results of operations for the first quarter.
The extent to which the Kobe 19 pandemic impacts our business going forward will depend on numerous rapidly evolving factors, which we cannot reliably predict.
Some factors may positively impact demand an opportunity for our products and services as companies and governments seek I.T. operating cost savings desire to extend the life of their existing I.T. assets achieve better product and service values and contract with a trusted I.T. partner, who can help them navigate.
Complex economic times.
Likewise, some factors may adversely impact demand an opportunity for our products and services impact our clients ability to pay for our services or pay for our services on time and impact the fees, we were able to charge clients.
For example summer Ministry prospects and clients are seeking special discounts and extended payment terms to help the navigate these challenging times.
We believe our strong balance sheet and cash position will provide us with business flexibility and the ability to take advantage of opportunities and provide us protection from downside economic risks.
In order to protect the health and wellbeing of our employees clients and the communities in which we operate.
The transition as many of our employees as possible to work at home model temporarily closed our offices worldwide limited nonessential travel transition to a no in person event marketing strategy and implemented a full remote sales model.
To achieve these operating changes weird, leveraging our existing innovative and secure global remote connectivity infrastructure.
Virtual meetings, we are leveraging our existing global web meeting infrastructure available to all employees.
I've also implemented business continuity measures and will continue to respond to the covert 19 pandemic guess circumstances dictate.
With respect to global marketing and sales transitioning to a no in person event model represents a substantive changed to our marketing strategy I'll transitioning to a fully remote sales model was not a significant transition over all for remaining street sales because historically we were already comply.
Leading on average about 70% of sales activities remotely.
To date, we do not believe the transition to a fully remote sales model as materially impacted our sales execution.
With respect to what our global client service delivery, we have hundreds of engineers and 20 countries delivering uninterrupted mission critical support services to our thousands of global clients.
Are extensive geographic workforce distribution provide skillset redundancy 24 by seven by 365 engineer availability and service resiliency that allows us to consistently meet our contractual service level commitments, even if some of our workforce were to be offline due to illness or other reason.
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To date, we do not believe the transition to a work at home model has materially impacted our global client service delivery.
During the first quarter, our global service delivery team closed over 8400 support cases across 42 countries and delivered more than 28000 tax legal and regulatory updates to clients in 33 countries.
We achieved an average client satisfaction rating a 4.8 out of 5.0 on the company's support delivery. We're a 5.0 rating is considered excellent.
As a result of the measures that we've taken in response to the Kobe 19 pandemic for fiscal 2020, we're expecting savings from reduce travel cancelled in person marketing events reduced office operating costs and potential red debate met related to office.
Measures around the World that began mid March 2020, and are expected to continue through at least May 2020.
We expect to offset somebody savings would increase spending on new marketing programs increase sales staff and capabilities as well as spending on special covert 19 compensation bonuses for lower paid employees and employers who have tested positive for the Kobe 19 virus.
Client wins product and service update.
During the first quarter, we completed nearly 100 geographically diverse sales transactions with new and existing Oracle S.A.B. in sales force clients.
The transactions covered the breath of our expanded products and services portfolio, including maintenance services application management services Advanced security solutions interoperability solutions, an expert consulting services.
Application management services, commonly known as an mass is where we run the system for the client day to day and maintenance services is where we provide technical support in required updates to an internal or M.S. team who runs the system for the client day to day.
Significant first quarter sales wins included seven figure Oracle maintenance services, and A.M.S. contracts with large global brand name clients and significant S.A.P. services contracts for S.A.P. his newest ear p. product line as for Honda.
We also had some significant first quarter sales wins in global public sector in government, where we continue building on a significant in growing list of public sector in government client in the U.S., Canada, U.K., Australia, Japan and Korea.
Wins included our first government sales transactions in Brazil, and additional government sales transactions in Canada and Israel.
Additionally, and Australia, we established a whole of government volume sourcing agreement with the Australian government and in Israel, We established a framework purchase agreement with the Israeli government that is similar to the framework agreement that we have in place in the U.K.
These government procurement agreements make it easier and more streamlined for many government agencies to procure Romine Street services without having to go through long complex procurement cycles.
In April Romine Street announced the global availability of maintenance services for S.A.P.S. for Honda.
We also announced one of our newest large s. for Honda support clients <unk> headquartered in Mexico City.
I drew uses a hybrid of S.A.P. business, Sweet seven and ask for Honda products.
Press releases for both announcements can be found on our website.
Well this expanded coverage of S.A.B. products remains street can be the support vendor of choice no matter, what S.A.P. products releases, a client wants to utilize.
For our new A.M.S. offerings for S.A.P. Oracle in sales force prospects, an existing clients continue to demonstrate growing interest and pipeline opportunities and sales continue to grow.
We believe are integrated maintenance services and M.S. is a unique invaluable competitive solution than the market that provides clients with a better model better resources and better outcomes with higher client satisfaction and significant savings of time labor and money.
We are successfully delivering are integrated maintenance and application management service solution to clients across a growing variety of industries in geography.
Further sales of A.M.S. two existing clients is proving that integrated Romine Street maintenance in A.M.S. solution is creating a unique value proposition for the client and demonstrating the new A.M.S. product line strength is across L. opportunity.
In fact, and the large A.M.S. cross L. transaction completed in the first quarter with an existing global maintenance client headquartered in Europe. The client agreed to pay Romine Street, a higher Annualised A.M.S. fee then they were paying their existing A.M.S. provider.
We're also seeing growing interest pipeline in sales for our innovative advance database security advance middle where an application security and smart proxy interoperability solutions that clients are successfully deploying and using across large server and application landscape.
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Are advanced database securities enhanced with technology from Mcaffee and there's a modern next generation database security solution that helps protect or call S.A.P.I.B.M. and Microsoft databases from known and unknown vulnerabilities.
Soffer uses virtual patching technology to block potential attack vectors and wrists, even before any attempted database attack.
According to a study from Aberdeen group virtual patching technology provides continuous security protection.
In the event ever reported vulnerability are advanced database security solution can prevent the threat from entering the application and a virtual patches typically delivered within 24 to 48 hours and it can be installed immediately.
This is in contrast, with typical vendor application patching that might take months or even years. After a threat is discovered to deliver and fully regression tests. The patch before can be applied to a production system.
Competition.
Competition with our primary support service competitors work on S.A.P. remains fears.
Software vendors are engaged in continuing efforts to force their licensees to upgrade and migrate from current stable software releases to the vendors newest immature products Oracle N.S.A.P. are planning to end full support of certain major product releases by 2030.
During previous earnings calls, we shared with you that companies are evaluating the cost benefit of the E.R.P. vendor support and ear P. refresh projects.
Many licensees do not see the value and encourage unnecessary expenses and disruptions that do not improve their competitive advantage or contribute to their growth.
In fact results from a 2019 Romine Street survey found that approximately 80% of CIO respondents are not planning to move or unsure about migrating to or color S.A.P. is new software and plan on remaining on their current systems until at least 2025 or beyond.
Today, given the added financial and economic challenges around the covert 19 pandemic, we are already seen companies prospects and existing clients, who had planned to invest in expensive new systems now reassessing, there need and timetable to move off those.
Existing stable systems, and looking for ways to reduce operating expenses to preserve cash.
For example, one of our existing clients recently informed us that they were delaying their plan new system implementation and they extended their contract with Romine Street to keep their current system running.
Gartner is estimated that remains street is captured over 80% of the global market for third party enterprise software maintenance services, and we're providing clients significant savings more robust and responsive service offering at least 50% off maintenance fees and up to 90 per.
<unk> total operating savings over time.
Gardeners recent Gardner predicts 2020 research report also notes a 50 per cent increase in client increase related to third party support during the first nine months of 2019 compared with the first nine months of 2018.
As we have previously stated we believe the hybrid I.T. environment that will integrate existing licenses, new sass licenses and cloud deployments will be the I.T. reality for much longer than expected and a majority of ear p. workloads will continue to be on premise or simply lifted and.
Shifted into the cloud for continued longterm use.
Would the covert 19 challenges we believe we will see even further extensions on use of the hybrid I.T. environment.
Oracle litigation developments.
With respect to Oracle versus <unk> that was filed in 2010 and went to trial in 2015.
Cases run its course of all appeals.
Presently court action related to this case is limited to a dispute between the parties over the scope of the permanent junction that has been in place since 2017 and Roominess streets compliance.
<unk> believes romine Street is not in compliance with the injunction <unk> believes it isn't compliance with the injunction.
The matter is currently scheduled to be fully brief to the court. This summer there is no known timeline for a court ruling.
With respect to remain the street versus Oracle filed in 2014. The case, we filed against Oracle, we are still awaiting rulings on summary judgment motion submitted by both parties in December 2018.
Trial is not currently expected do occur until 2022, but could occur earlier or later.
Summary.
We believe the first quarter 2020 was a solid quarter and we intend to continue executing are 2020 business plan focused on revenue growth discipline cash management and continued gap that profitability and we will make adjustments to the plan for opportunities are challenges.
That may develop around the covert 19 pandemic and related economic impacts.
Now over to use Stanley.
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We ended up ask what else 2000.
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Now is expected revenue guidance, we expect second quarter of 2000, and plenty of any of to be in the range of $77 million.
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Oh, Florida went out there of course.
As a reminder to ask a question you'll need a press scar than one on your telephone.
To withdraw your question press the pound key please stand by what we compiled a q. and a roster.
Our first question comes from there would would count your line is now okay.
Right. This is actually Nick Altman on behalf of Derrick Thanks for taking our questions.
Just just first one you guys mentioned that Eagles are looking to at some additional sales capacity it in the second and third quarter.
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Sure. This is <unk> you know, we're we're going to look at going to we had talked about 80 before we're going to look to take that up a little bit we're probably going to add six to eight additional head that we weren't talking about at the end of the the fiscal 2019.
Number so we'll probably end somewhere north of 80.
North of <unk>, Okay and.
That there were some things you guys were due to potentially work on short mean I'm still cycles in shortening the ramp or somebody rap. So for something that you know newer sales personal they'd be on the board and the past couple a quarter was t. to speak to levels of productivity, there and what somebody.
And just have done shortening the ramp times come to fruition.
Sure.
<unk> Yeah, we just had a call obviously for the the fiscal 2019, and we don't have a tremendous amount of of additional info to provide on that just in the short time between that calling this call. We're continuing to make those investments were continuing to believe that we can shorten that ramp time, we have rolled out a dish.
You know product training, we've rolled out additional industry components to help our folks really navigate sales a little bit faster and better and of course because of the clove at 19 opportunities that are coming our way they will get more chances to work deals faster and learn faster.
Then they have in the past.
Great Great and then just.
Lead the customer ads were a little bit lighter than the historically of Ben.
<unk>, who you know what you're seeing thus far into q. and and whether that can improve sequentially.
Sure, but you have to take a look at the A.S.P. for our deals in Q1 was higher.
Than 2019, you're probably talking in A.S.P. of around 210, 210000 versus an A.S.P. of about 168000 in the fourth quarter. So we did have bigger deals in the mix. So we we want to make sure that as we work with bigger deal is your percentages will go up and down a little bit in the net cost.
Summer ads.
Got it no. That's that's really helpful. And then just lastly, <unk> I know you guys are very well diversified.
<unk> exposure, but <unk> in relation to cope in 19, what sort of demand trend you guys seeing you know across different recalls.
You know people you know trying to <unk> you know in times of potentially you know tightening I.T. budget. So can you can you speak to some sack. There is I know you guys mentioned, some I'll look back there, but rather than the call, but any sector that or you know seeing heightened strength in relation to kill that 19.
Well I I think a lot of it wouldn't be exactly as you would expect this this is such an unusual situation. It remember you've got to management team here that had gone through the 2000 dot com melt down when we were at the Big <unk>, We've gone through the 2005 through eight last economic.
Recession, we handled our our way through that so for US. This is our this is our third big play through a major economic change, but the difference here is is every sector is affected every private company every government from a budget perspective. So I think that is what makes this particular event.
Usual and I think you're watching a pipeline build I think across all sectors Ah from manufacturers you, obviously have supply chain challenges to retailers, which of course, we're having challenges even before we got into the Cove. It 19 situation, but are now.
<unk> tremendous stress with so many stores.
Closed in in business shut down we of course, you're seeing it through the travel and leisure section for whether it's cruise lines Airlines all of them equally a and disturbed from a revenue perspective and of course, as we said public sector a lot of opportunity there so I really.
Do you think it's broad based.
Got it that's a that's really helpful. Thank you.
Sure.
Thank you.
Next question cousin, Brian Kinstlinger with Alliance Global Partners. Your line is now open.
Hi, great. Thanks for taking my question.
No I I agree enterprises aren't going to spend big Stern's to upgrade given their weekend financial condition for now and maybe for a while so.
No I I expect your attention rate screener and crew.
And then some customers are going with the cut costs naturally do some wins for you. So I guess I'm wondering why the second half 20 revenue outlook and all that much better than the first half if I use them. According to the second quarter in terms of revenue given all that's going on Tonight and I.
Like Conservative outlooks, but I guess I'm just wondering how you reconcile this second half not being that much stronger than the first huh.
But I think you have to look to the risks to Brian <unk> again, the positive side of of our business is when people need help when they want to extend the life when they're looking to cut costs. We are eight a. top level player for that purpose an I.T.
But we also have to manage downside risk you know this and I'm sure. Every every single company you talk to whether it's I.T. or otherwise is getting banged on by their customers for discounts payment terms right. It's all about cash flow.
So you know what we have to always manage here is the careful understanding that we have upside opportunities, but we have to manage the downside risk are strong cash position that gives us the flexibility to for all purposes finance some customers right. We can financing with quarterly payments for this year, where they normally.
Pre pay up front, because we have the cash to do that so our cash position plays a very strong point in how we navigate this year because we can offer some flexibility that again smaller players don't have the the the cash position to do and and I think we're gonna have to manage through bankruptcy.
He used for some of the clients, which is not unusual and we're going to see them rate you're already seen them in retail you're seeing them and travel and leisure, we're going to see more of that and well we focus in in his bankruptcies that a restructurings because we're a mission critical provider will get paid by those customers because they have to keep payroll systems and other systems.
Running a those who are going to liquidate you know present, some downside risk you know to to reserves, but overall, that's why we're gonna play conservative position because none of US know how this is going to play out how bad. This virus is gonna be how long the disruption will last so again I I look at this and.
They say we have all this upside potential we have to manage the downside risk if any economic world today, and we believe the upside outweighs. The downside you know from our perspective, but we we you know we're gonna play Conservative that's why we reaffirmed guidance I know a lot of companies have eliminated guidance completely we're real.
Affirming guidance and we're providing quarterly guidance because we have confidence in understanding our number we're confident in the size of our recurring revenue base and we talked about the fact that 70% plus of our recurring revenue stream is committed for 12 months or longer so those provide the stability and basis for us to have declared.
Ready to move forward with with a with a guidance position, but you know we're not going to step out there with with things. We just don't know at this point.
Yeah.
Suggest <unk> because I agree with you I just from right you know discounts and bankruptcies and the I know it certainly helps.
As I understand that second half of the air for sure on the G.N.A. side I. Finally, Hertz is still 16% to 18% a revenue I guess in two Q. I would expect.
That to drop given no travel pretty much for the corridor and probably know conferences that you're going to an office is closed and then gradually pick up so I guess I was surprised that they 16% to 18% is there a significant amount of hiring on the G.N.A. side right now to see a pick up there.
Well, we are we are hiring quite a few positions Ah in probably going to differentiated from some other businesses out there, but we have a lot of clients to serve we have a lot of growth to to serve out there and were you know we're in a bullish position to continue to hire and build out infrastructure support opera.
<unk> for our new product lines for the A.M.S. products.
Largest day, a mask account, we're providing over 50 fulltime engineers alone to that one account. So it's a very people heavy business on the A.M.S. side. So we're going to we're going to continue to build it out that's while you're Cogs number you know work at a a gross margin will be down a little bit net 60 to 61 G.N.A., we have a lot.
Finance costs still just moving through we've got new systems to put in place to handle the growth. We're doing a lot of conversions, we're doing a japan by cell conversion as that operation is now big enough to to warrant a contracting directly with the entity with our hundreds of customers. There. So there's a lot of accounts.
And finance cost that we're still incurring and we'll continue we're putting <unk> pro in on the revenue recognition lot of automation because of the the size of the transactions and that's why we're we're again being conservative to say sure. There's some offset in travel, but we have other other costs that are coming up as well and we talked about those offset.
Stanley did and and I think you're seeing that we're generally reducing the G.N.A. number compared to 2019 actuals and earlier, we said we would start to bring down G.N.A., we'd started to bring down sales and marketing is percentages of revenue and we're certainly doing that.
Yep, Okay, and and the M.S.I.D. I I'm not sure if I Miss It you talked about it but.
It's a long term vision and growth catalyst for the company has it become material is it five per cent of revenues at 10 per cent revenue at which I don't think so I'm. Just curious if you have any quantification her back and then.
No we're not ready to break it out yet it's it's not material enough <unk>. It's you know it's millions of dollars, but you know on on a 300 million dollar number no. We haven't we haven't hit our 10% threshold yeah on that so from that point as as as being declared material no. We're not there yet you know but.
As I mentioned the pipelines continued to grow and you know we've had a substantial unimpressive wins, but we're still you know we always talk about walking before we we run I think we're in the jogging face now we moved from walking to jogging and I think this year, we will hit our stride you know in a full run.
Great I guess, when I say, a comment the A.S.P.C.'s or one q. compared to you know go or the 168 number you gave you know that was that's great information and if you'd consider getting that every quarter I think it's really helpful for us to see how the business is training much more 700 number account. Thank you sure.
Oh God. Thank you.
Thank you I'm not showing any further questions at this time, Oh now like to trying to call back over to separating for any closing remarks.
Great. Thank you very much and.
I hope everybody stay safe thanks for getting on the call. We know this was a very busy earning season with everybody. This week and we'll see you again for the queue to number and I look forward and talking to everyone then take care of them.
Ladies and gentlemen to conclude today's conference call. Thank you for participating you may now disconnect.
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