Q2 2022 Rimini Street Inc Earnings Call
Cable systems.
Rimini Street is also helping them overcome labor challenges and focus their limited resources on strategic investments and key initiatives forward to preserve cash.
Accordingly, with both new client acquisitions and existing client cross sales, we continue to see a strong opportunity to expand our portfolio of enterprise software solutions and continued building and maturing our go to market capability to launch sell and deliver our full solutions.
Leo to new and existing clients globally.
To achieve our goals I am now dedicating the majority of my time to maturing our service offerings, delivering innovative new marketing and improving global sales execution.
I was recently meeting with prospects and clients across North America, and traveled to Japan, Malaysia, Singapore, The U K and France.
We have seen positive responses to our new TV ads and seen better than expected attendance at our St Smart client events around the world in.
In Japan. For example, we were very pleased to see nearly 150 executives attend our thought leadership event in person demonstrating the value of the discussions content and our service offerings.
By any case studies.
The highlight how clients are leveraging Rimini Street services globally to achieve their strategic goals across different industries I'd like to share two case studies from the second quarter.
Firstly state Library of Victoria, Australia's oldest library.
They entrusted Rimini Street for support of their Oracle E business and Oracle database software.
Rimini Street is also providing the library with its advanced database security and advanced application with our security solutions.
<unk> solutions and its remaining protect suite of security products.
These solutions provide an innovative approach to security that can block vulnerabilities before an attack are closed and attack vector within hours. Unlike traditional an old vendor software patch models that can take days weeks months or years to receive a patch and requires significant testing time and cost.
To implement.
Rimini Street Cyber security solutions provide the library with peace of mind that digital threats are being addressed.
Chief Financial Officer, Bradley Vice noted that his finance team are very happy with the support and security that remaining street provides which keeps their assets and their customers secure and their finance services running.
We further noted that Rimini Street worked with this team to identify and provide solutions for the risks they face and that the team enjoys the services, they're receiving pleased with Rimini Street's responsiveness and the security capability we provide.
Next this is a very fine foods based in France, who is a leading fine foods retailer with facilities in 48 countries.
Very switches Oracle JD Edwards, and our Oracle database support to Rimini Street.
With 80 application modules connected to the Oracle ecosystem, we're very processes more than 500000 batches of orders nicely.
Maintaining the system became challenging after the software vendor ended full support for this mission critical system.
But very solid solution to provide the mission critical support they needed and create more value for the organization, while simultaneously reducing costs.
So very CIO Luca five David that in addition to supporting their ERP system Rimini Street's experts provide guidance on potential changes to how they use the platform.
And that the monthly and quarterly meetings with remaining street are extremely worthwhile exactly the type of close all around support they were looking for.
He goes on to note that Rimini Street provides an efficient agile service at half the price they were previously paying the software vendor.
Given their digital transformation goals and financial constraints.
<unk> believes Rimini Street is a perfect fit for their needs.
Oracle litigation update.
Remaining street and Oracle have been in litigation for more than 12 years.
While the U S courts are confirmed long ago. The third party support is legal we presently have two active proceedings with Oracle. The injunction compliance is viewed and Rimini two proceedings, both of which relate to the manner in which remaining street provides support services for certain of our product lines Rimini.
<unk> is not prohibited from providing support or services for any oracle products.
With respect to the injunction compliance dispute Rimini Street has filed an appeal to the ninth circuit of the United States Court of appeals relating to certain rulings of the U S District Court.
We expect the appeals process to take another nine months three year to receive a ruling but a ruling could come earlier or later.
With respect to Rimini, two the case Rimini Street filed against Oracle in 2014, the case remains as a free trial stage. Currently the remaining two trial is scheduled to begin on October 31, 2022, and Las Vegas, Nevada.
Please see our disclosures in the latest 10-Q filing for additional information on Oracle litigation.
Summary.
We continue focusing on revenue reacceleration exercising disciplined cash generation and management driving shareholder value and bringing our litigation with Oracle to a successful conclusion.
Now over to you Michael.
Thank you Seth and good afternoon, everyone.
Q2 2022 results.
Revenue for the second quarter was $101 2 million a year over year increase of 10, 5%.
Annualized recurring revenue was $396 7 million a year over year increase of nine 6%.
Revenue retention rate for service subscriptions, which makes up 98% of our revenue was 95% with more than 80% of subscription revenue noncancelable for at least 12 months.
For the second quarter clients within the United States represented 53% of total revenue.
International clients contributed 47%.
Second quarter aggregate year over year revenue growth in the United States was eight 8% loan growth for international clients was 12, 5%.
We note that the U S revenue growth has continued to improve over the last four quarters, improving from the 2021 second quarter year over year growth rate of more than 2% to the current year second quarter year over year growth rate of eight eight.
<unk>.
We also note that our total revenue growth was negatively impacted by FX movements of approximately 1%.
Billings for the second quarter were $101 6 million compared to $107 3 million year over year, a decrease of five 3%.
New client invoicing was challenging as Seth noted the negative FX movements adjusted down deal size in the U S. Dollar terms, but we achieved strong client renewals and cross sales with existing clients.
Gross margin was 63, 1% of revenue for the second quarter compared to 62, 2% of revenue for the prior year's second quarter and 63, 7% of revenue on a non-GAAP basis, which excludes stock based compensation expense compared to non-GAAP gross.
62, 6% of revenue in the second quarter of last year.
We executed well on our service delivery and continue to methodically expand efficiencies and leverage through technology and process control. We expect to continue investing in the global service delivery capability and capacity for our new products services and solutions to ensure we can deliver a best in.
Class offerings with unparalleled client satisfaction.
Therefore for.
For full year 2022, we continue to guide gross margin to be in the range of $62 five to 63, 5% of revenue on a GAAP basis, and 63% to 64% of revenue on a non-GAAP basis.
Operating expenses.
Like other organizations globally, we are experiencing cost pressures due to increased labor cost inflation. However, we have been successful at mitigating this challenge in part by broadening our hiring practices with an emphasis to recruit more positions in lower cost geographies and in part by using <unk>.
Innovative technology, we continue to explore all options available to ensure we are able to acquire the talent, we need to achieve our profitability and growth targets.
Sales and marketing expenses as a percentage of revenue was 35, 8% for the second quarter compared to 36, 2% for the prior year second quarter.
On a non-GAAP basis, which excludes stock based compensation expense sales and marketing expenses as a percentage of revenue was 34, 9% during the quarter compared to 35, 2% in the year ago period.
We remain focused on making the appropriate investments needed to support our growth initiatives and we continue to expect full year 2022 sales and marketing expenses to be in the range of 34, 5% to 35, 5% on a GAAP basis.
$33 seven to 34, 7% on a non-GAAP standpoint.
General and administrative expenses as a percentage of revenue excluding outside litigation costs was 18, 6% for the second quarter compared to 18% for the prior year second quarter and also declined as expected sequentially from 24% in the first quarter.
For fiscal 2022.
On a non-GAAP basis, which excludes stock based compensation expense G&A was 16, 9% of revenue versus 16, 7% in the year ago period.
There were onetime employee related expenses and software implementation costs and other various items impacting spend during the quarter.
Moreover, we do note that our G&A expenses declined nearly 6% in the second half of 2021 versus the first half of 2021 and see a similar trend this fiscal year.
Current and expected 2022 spend includes the investment in information systems cost for additional personnel to support growth cost as a public company cost to support our global compliance operations and incremental professional legal audit and insurance costs. Therefore, we now see G&A expenses in it.
16, five to 17, 5% range up from our prior range of 16% to 17% on a GAAP basis, and 14 eight to 15, 8% on a non-GAAP basis.
Net outside litigation expense was $3 one for the second quarter compared to two eight.
$8 million for the prior year second quarter.
Our outside litigation spend is not linear and can fluctuate each quarter based on timing and the nature of litigation activities.
As Jeff noted the remaining two cases currently scheduled for a jury trial on October 31, 2022, resulting in litigation cost as we had expected to incur during fiscal year 2023 being pulled forward into fiscal year 2022, Accordingly, we expect outside litigation.
<unk> two now exceed $20 million from our prior guidance of $15 million to $20 million for the full year 2022.
We are early in our trial preparation and thus should have more clarity to provide during our Q3 call.
For the second quarter net income attributable to shareholders was 110000 or 000 cents per diluted share compared to the prior year second quarter loss attributable to shareholders of <unk>.
<unk> 8 million or a loss of <unk> <unk> per.
Our diluted share.
On a non-GAAP basis, net income was $6 4 million or <unk> <unk> per diluted share versus $8 4 million or <unk> <unk> per diluted share.
Adjusted EBITDA was 11 million or 10, 9% of revenue for the second quarter.
I would also like to highlight our non-GAAP operating margin, which excludes outside litigation spend and stock based compensation of 11, 8% for the second quarter underscoring the significant profitability potential and substantial leverage to our operating model. Accordingly, we remain confident in our ability.
<unk> to achieve our long term target of operating margins in excess of 20%.
Balance sheet.
We ended the second quarter with a record cash balance of $160 million compared to $110 million for the prior year's second quarter.
On a cash flow basis for the second quarter, we generated $15 million of operating cash flow and year to date, we generated $68 million up from $47 2 million in the prior year first half.
Deferred revenue at.
As of June 32022, with approximately $300 million up 13% from $266 million for the prior year second quarter backlog, which includes the sum of billed deferred revenue and noncancelable future revenue was approximately $551 million as of June 32.
<unk> 22, compared to $571 million for the prior year second quarter.
Capital market transactions.
During the second quarter the board of directors authorized an increase to our previously announced common stock repurchase program from up to $15 million over two years to up to $50 million over the next four years during the second quarter, we repurchased 85600 common shares with the market value.
<unk> of approximately $508000.
The repurchase shares were retired.
Going forward, we will look for additional strategic opportunities to repurchase common shares, although we reserve for discretionary repurchase decisions and whether to activate or deactivate the plan at any time.
Regarding the term loan during the second quarter prepaid $5 million of principal value with no prepayment penalty and the current term loan principal value is approximately $85 million.
With a strong cash position.
Consistent operating cash flow generation model, we believe the company is able to comfortably fund growth execute our capital return plan and reduce debt and the interest of our shareholders.
Business outlook, we are currently providing third quarter 2022 revenue guidance to be in the range of 105 to $102 5 million and we are maintaining full year 2022 revenue guidance to be in the range of $402 million to $411 million.
This concludes our prepared remarks, operator, we'll now take questions.
If you would like to ask a question. Please press star one on your telephone keypad now you'll be placed into the queue in order to receive.
Please be prepared to ask a question on Pompe drug.
Again, if you have a question. Please press star one on your phone now.
Our first question comes from Derrick Wood from Cowen <unk> Company. Please state your question.
Hey, guys, Hey, guys, it's Andrew.
Thanks, and nice quarter.
Seth we would love to hear how the Americas or changes are going so far what inning do you think we are in there.
And kind of what else is left to do there and when do you think this.
This can accelerate reaccelerate <unk> growth even faster.
Yes, great great to talk to you.
We're definitely seeing improvement and the maturing of the management structure in all of the Americas, which includes North America, and the South and Central America, We brought that all under a single umbrella.
And I think we're seeing the consistency of execution improving between the regions. I think we are seeing really some really good deals that are getting done, but I still think the macro environment is going to cause challenges.
Probably through the third quarter in the Americas, as well as globally and we've seen that the macro challenges really affecting at a global level. So I think thats still going to slow everyone down a little bit in the third quarter, but as I mentioned in the prepared remarks I expect that once these re planning side.
Those are done you're going to see us benefit on the other side of that we're involved in a lot of those discussions. The teams are involved in a lot of those discussions with many named brand clients and I think those are all very positive signs.
Great.
<unk>.
You hired 153, net new employees that looks like a record.
What drove that and how.
Our retention levels trended and where agenda on sales reps.
The retention levels are challenging as much as everybody else. So the difference is we had I think about 21% churn rate.
Unemployed and the industry average is 23% so were trending about two points less than the industry, but we were traditionally about 10%. So it's high for us.
So I still think that means we're in line with the market or a little bit better in terms of the churn we put some great programs in place like our Fabulous Fridays, which are fully paid Fridays for every Friday in July and August So people love that and I think we're doing a bunch of other programs which are employ.
<unk> really like and it's energizing them in a post pandemic world, where it's giving them some time to get their lives back together and re assimilate into society. We've also been bringing people together from around the world for meetings that they haven't had in two to three years. So the reconnecting with teammates so I.
Thank all of those things are going to help us bring down the attrition rates I also think because the market is busy in hiring freezes and laying people off that will cool things down a bit as well since our employees were busy hiring.
Yes, that's great.
And then Michael on the guidance, leaving the full year unchanged, maybe just speak to the level of conservatism in that.
And anything extra you have kind of.
Or what have you assumed as far as macro in the second half.
So Andrew I think we are certainly as Seth noted during this interim.
Period with a lot of freezing poor decisions that are happening out there we're feeling confident.
In our guidance for the full year.
Are reflecting.
That overall environment as Seth noted.
Were there any one last one were there any big deals that pushed to the to the second half.
But definitely there are deals that pushed and I think again as youre seeing in so many different company earnings delayed sales cycles lengthen sales cycles, we're certainly seeing some of that as well because as these companies.
And government organizations rejigger their plans in order to prepare for multi year potential recession different type of environment.
We're not doing anything because they're not buying anything while they finish those plans and I think based on the involvement that we have seen the kind of work that we're involved do it with clients and prospects around the world.
We feel pretty positive about the fact that we're going to benefit when they finally finished their plans we intend to be a part of them.
Great I'll pass it on thanks, guys.
Thank you.
Our next question comes from Brian <unk> from Alliance Global Partners. Please state your question.
Thanks for taking my questions.
First one maybe a little on the September quarter is.
I believe the most important quarter from a bookings perspective for your company case in point last year.
SAP and international businesses generally have seasonal maintenance renewals and we're early in the third quarter, but may be.
I'm curious if you've continued to see better win rates and these opportunities, especially as your business development team is more tenured however.
The second part of my question for that one of your comments I thought I heard.
That you are taking over the overseas international sales.
I guess given that timing I am curious what precipitated that change.
If I heard it right sure Bryan great great.
Great to talk to you again.
Two things one we made a change having to COO, where all of the Gms reported to the COO.
Our COO has exited.
And I am going to personally oversee all of the general managers. So think of me as kind of in the acting CRO role as well I wanted to step back in I talked to a lot of investors I've looked at the business and it was one of those opportunities for the founder and we've seen this story before.
Sure.
Step back in to Reaccelerate. The business. We were previously at 30% type growth company traditionally I think the opportunity and the demand is there for us to have that kind of business EBIT on a much bigger number.
And I decided I was going to step back in and take it personally to get us where I believe we need to be and complete the transition to $1 billion revenue scale by the end of this year I think it's no secret that it's taken us a little bit too long to get through this transition we should have had it done in a year.
It's been 18 months and I am determined to complete the transition by the end of 'twenty, two and leaves us in a very strong position out of the starting gate for 'twenty three.
And the second part of the question.
Three Q tracking much better than last year last year's <unk> with your more tenured sales people.
Well, we are always very backend loaded in the third quarter. So we truly are really early but I can tell you that we closed some good.
Business, even in the end of Q2.
Well as early in Q3 and those are always good signs when we close deals on that.
That early generally they're all sort of those last few weeks of the quarter just the way. It's all structured so the fact that we're seeing early closes and we've we've.
Closed several deals in the early parts of the quarter.
Take those as positive signs.
Great. One last question and then I'll get back in the queue.
You've talked I think you've been clear there is some freezes in decisions that are hurting the third quarter.
I guess, what I'm trying to understand your business is set up for essentially a 50% cut to the Oems and price so you're well set to cut cost for uncertainty.
Why is this not the time for.
Especially as.
Maintenance renewals come up for those executives to pull the trigger and move to third party maintenance and why.
Does that mean, we'll wait another year until their maintenance agreements are up for the next for the next year.
Well, it really depends and I think Brian a lot of this is driven as you know whereby this daily global macro drama.
That unfolds by the day.
And its creaking havoc on businesses I mean, theres no other way to say it when you have so many different question should I build a factory in China and am I going to have political issues with that how do I deal with eastern Europe , how do I think about energy if I'm going to build a plant inside of Europe all of these questions.
<unk> now reached wreaking havoc to the point of causing internal paralysis for a lot of companies and they are having to step back and rethink now that doesn't mean, they don't want to save money. That's why I said ultimately I expect to prevail now when you mentioned saving money right off the bat, but thats the maintenance biz.
Our Ams business is a year round business. It doesn't have the same exploration date, it could be any date or security products or professional service all of those things can be sold at any time and so yes. There is a window under which they're going to have to make a decision for those who have maintenance renewals in the third quarter.
They're going to have to make a call about whether theyre going to move forward and take advantage of better service and better savings and do the things that they wanted to invest in the business would that savings now or they could miss the window and I think that's those are the kinds of things that have left us to keep.
The current guidance for the annual revenue is because we have really strong visibility on our recurring revenue. It's these new projects like everybody else Theres, a little bit of we've got to wait and see the visibility is not nearly as good as it was months ago, and we're just going to.
Have to ride it out and see how we can move these deals forward through this environment.
Great. Thanks, so much sir.
Our next question comes from Jeff Wang Li from Craig Hallum. Please state your question.
Hi, guys. Thanks, Thanks for taking my questions. Congrats love that love that free cash flow again, so a few for me, though if I could start with maybe on the revenue front, you've got obviously, a pretty wide range and this is for either of you but.
Pretty wide range on the revenues.
To the extent you can talk through that and what would it take to hit the high end mid and low.
I understand there is variability, but we're coming into Q3, that's still a pretty wide range. Here. So how are you thinking about keeping such a wide range and what gives us high end low end.
Sure Jeff Thanks.
The range, we always narrow width down of course after the third quarter.
We'll have a much better sense in and I think the fact that we have a hugely predictable recurring revenue stream now thats a monster.
Hundreds of millions of dollars gives us a lot of stability and confidence in the range that we have.
When we talk about what would it take to hit the higher end of the range, it's going to require a good Q3 as you know we can have a great Q4, but it's not going to impact revenue that much on a ratable basis that'll tee up 23 numbers nicely, but the real revenue you set your course in the first half of year.
For the third quarter, you have to really have a good quarter to get to the high end of those numbers I mean, thats just the bottom line.
And would you say I mean from a pipe standpoint, and then I want to get to the sales transition in a second but from a pipe standpoint. The pipe is there. So it's not obviously the pipe is got to be there and already working if youre going to get it done. It this quarter. So you'd say the pipe is there it's a matter of close rates and that's that's still within reasonable to get at the high end based on the <unk>.
I think the high the high end is good there is going to require like I said.
A strong quarter I think there is there is pipeline to get mostly there and then you always in the third quarter as in any quarter. We have these blue birds that can come up traditionally some very large ones because customers come to the table late.
We've only got weeks left and we'd like to do something that is a pretty traditional occurrence for us. So we don't have to have visibility to a full pipe that would get US. There. There is there of course is a coverage model that says theres enough in the pipeline to make those numbers happen, but the reality.
<unk> is again, it's that visibility, but would this constantly changing macro drama and even the exchange rates were pretty pretty brutal on us.
Terms of so much of our revenue coming from places with with reductions against the dollar so a $1 million deal in Australia becomes 800000 Bucks. So those things certainly working against us too, but I think the pipe exists to make it happen.
It will take some really good work and some good luck in the economy and some cooperation with clients to pull it all together to get to the high end of the range.
Yes.
Fair enough and just a few other quick ones if I could on the expense growth.
Looks like you're targeting somewhere in the high single digits give or take that on the revenue growth side, but the decision to keep hammer down on head Count I think you said head count is up 18% year over year and I know you've been very aggressively adding last 12 to 24 months.
What are the puts and takes I mean, what would it take for you to get off the gas on the employees and just how do you think about the trade offs there.
I think it's really we're at a position where.
You think about the hiring a lot of it is in the gross margin area and you've seen we've gone to 63 plus percent, but we also need a lot of head count for Ams Ams is a very labor intensive business and we're probably behind.
Where we'd like to be we'd love to have another 100 heads in the service delivery organization and for professional services, we have major projects that customers want us to do that we physically havent been able to staff. So there's some challenges there for sure and.
And that's why when you think about the hiring the other thing to be careful of is don't get caught up in the FTE numbers I'm always I'm actually I was a little bit ambivalent about providing the number because.
While we grew at over 17% year over year, those heads could be in India or other countries, where they're a fraction of the cost of a U S AD or European had or in Asia Pac had and so it could be a little bit misleading that you could have increasing numbers, but they may be very very low cost employee.
So that number can be like I said, you just have to take that carefully.
Yes, Sir.
Last for me then settle on one other follow up on a comment you made.
About.
The transition lingering 18 months you want it done by the end of 'twenty two.
I know you're working on a lot of things, but whats one and two on that list. How are you going to know you've gotten there youre done I mean, what needs to happen by the end of 'twenty two.
Well the close rates were very good for our for our sales team. We're heading we've been we've been hitting about a 30% close ratio.
Excuse me on our opening pipeline numbers, which is a strong close rate that's not where the issue is we wanted to increase the total volume of deals you have got a maturing sales force. The number one issue that I have is making sure that the phone is ringing in marketing and building.
The pipe even much bigger we want to see even larger multiples of deals and backup deals. That's how you reassure yourself in an environment, where you have more flakiness in your deals for lack of a better term because of macro and whether people can make a decision and timing when you get into that.
Environment, you wanted double lock your number of deals in the pipe. So that for every deal that you have you have not just one back up but you have two backups may be three backups and Thats, how you assure that youre going to get to the numbers that you won so right now it's all about building a mass.
Pipe of business much bigger much broader than we would normally require because you have to expect we have a higher fall off rate or a deal gets extended and misses a deadline and at renewal time, that's what you have to do and that's what we're focused on making happen.
Okay, great. Thanks, guys I appreciate it sure.
At this time, we have no further questions.
Okay, well, thank you very much everybody.
Thanks for joining us on our second quarter 'twenty two earnings call and I also want to thank all of our colleagues for their efforts in the second quarter. It's been very very helpful. A lot of work went into the quarter delivering those kinds of amazing client sat numbers as well, we look forward to having everyone joining us on our next earnings call.
Paul will discuss the third quarter at 22 results and we will select fourth quarter outperformance to date commentary as well until then please.
Continuing good health and our thoughts and charitable support for those suffering in harm's way. Thank you very much everyone have a great day.
This concludes today's conference call. Thank you for attending.
The host has ended this call goodbye.