Q3 2022 Rimini Street Inc Earnings Call
And Thats the work efficiency of their it services team has been maximized with a swift response and support to issues when requested.
Oracle litigation update.
Rimini Street, and Oracle have been in litigation for more than 12 years.
While the U S courts have confirmed long ago that third party support is legal we presently have two active proceedings with Oracle.
October 21, 2020 to Oracle withdrew certain of its counter claims and all of its claims against Rimini Street and against me personally as CEO for monetary relief of any kind under any legal theory in this litigation.
Rimini Street's remaining claims and oracles remaining counterclaims seeking only equitable relief are presently scheduled to be tried in the United States Federal Court for the district of Nevada on November 29 2022.
The trial will now only be in front of a judge known as a bench trial instead of a judge and jury since there are no longer any financial damages of any kind for a jury to decide and remaining two.
Please see our disclosures in the latest 10-Q filing for additional information and disclosures regarding litigation with Oracle.
Summary.
Over the past two years, we have placed the company in a materially stronger strategic position by achieving three key goals strengthening the balance sheet through a series of key capital market transactions delivering major wins in our protracted litigation with Oracle.
And successfully launching the entire portfolio of new services and solutions.
We are now focused on sales execution and growth and we are confident that we are taking the right actions and making the right investments to reaccelerate growth and enhance shareholder value.
Now over to you Michael.
Thank you Seth.
Thank you for joining us everyone.
Q3 2022 results.
Revenue for the third quarter was a record $101 9 million a year over year increase of six 6%.
Annualized recurring revenue was $399 8 million a year over year increase of six 2% revenue retention rate for service subscriptions, which makes up 98% of our revenue was 94% with more than 80% of subscription revenue noncancelable for at least 12 months.
Months.
For the third quarter clients within the United States represented 52% of total revenue while international clients contributed 48%.
Third quarter aggregate year over year revenue growth in the United States was five 8% while growth for international clients was seven 4%. We note that our total revenue growth on a constant currency basis was negatively impacted by two 1% due to FX movements.
Billings for the third quarter were $49 7 million compared to $73 7 million year over year, a decrease of 32, 5% despite.
Despite and just with new client acquisitions and reduced deal size in the U S. Dollar terms due to FX headwinds, we achieved strong client renewal and expansion sales and growing cross sales to existing clients. This Seth noted.
In addition client advanced support services payments beyond first year fees were substantially lower year over year and that has led to difficult comparisons for billings, where such advanced payments have historically been a material component of the billings.
DSO also lengthened in the quarter.
We believe the global economic challenges at the end of low interest rates and an ability to earn increased interest income on short term fixed income investments are significant drivers of this shift by clients towards titled cash preservation.
Gross margin was 61, 5% of revenue for the third quarter compared to 65, 1% of revenue for the prior year third quarter and 62% of revenue on a non-GAAP basis, which excludes stock based compensation expense compared to non-GAAP gross margin of 65.
5% of revenue in the third quarter of last year.
Gross margin declined as we continued investing in our service delivery of resource base for both our core support offerings and expanded portfolio of solutions, we are selling and delivering globally.
The gross margin decline was also impacted by the higher cost of labor, which has been successfully offset in part by our efforts to methodically expand efficiencies and leverage through technology process control and use of lower cost labor geographies. Nonetheless.
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 <unk>, 63% to 64% of revenue on a non-GAAP basis.
Operating expenses.
Like other organizations globally, we are experiencing cost pressures due in large part to increased labor costs and inflation in all labor categories. We continue to aggressively leverage 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, 3% for the third quarter compared to 34% for the prior year third quarter.
On a non-GAAP basis, which excludes stock based compensation expense.
Sales and marketing expenses as a percentage of revenue was 34, 5% during the quarter compared to 33, 2% in the year ago period.
We remain focused on making the appropriate investments needed to capitalize on our growth opportunities and thus see full year 2022 sales and marketing expenses, including the pull forward of the 2023 sales kickoff event into 2022 to be in the range of 35% to 36% on a GAAP.
GAAP basis.
<unk> $34, one to 35, 1% on a non-GAAP standpoint up 50 basis points from prior guidance ranges.
General and administrative expenses as a percentage of revenue excluding outside litigation costs was 18, 1% for the third quarter compared to 16, 3% for the prior year third quarter.
On a non-GAAP basis.
Which excludes stock based compensation expense G&A was 17% of revenue versus 15% in the year ago period.
Outside of the onetime expenses that occurred in the period. The G&A line continues to be higher than our peers do and material part to the cost for in house legal and compliance teams and other costs made necessary by our ongoing Oracle litigation.
And our decision to continue making investments in our systems process and talent and infrastructure needed to support our growth objectives.
As such we.
We now see full year 2022, G&A expenses to be in the range of 18% to 19% on a GAAP basis and 16 five to 17, 5% on a non-GAAP standpoint up 150 basis points from our prior guidance ranges.
Net outside litigation expense was $6 2 million for the third quarter compared to $6 6 million for the prior year third quarter. This.
This year's third quarter and the prior year third quarter, both had elevated costs due in part to Oracle litigation costs and other litigation matters.
Our outside litigation spend is not linear and can fluctuate each quarter based on timing and the nature of litigation activities.
Seth noted the remaining two cases currently scheduled for trial on November 29, 2022, resulting in material litigation costs that we had expected to incur during fiscal year 2023.
Being pulled forward into fiscal year 2022, Accordingly, we expect full year 2022 outside litigation expense to now be in the mid $20 million range.
For the third quarter, the net loss attributable to shareholders was negative zero point $4 million or breakeven per diluted share compared to the prior year third quarter loss attributable to shareholders of negative $6 7 million or a loss of <unk> <unk> per diluted share.
On a non-GAAP basis, net income was $8 3 million or nine cents per diluted share versus $13 million or <unk> 15 per diluted share in the prior year third quarter.
Adjusted EBITDA was $10 million or nine 8% of revenue for the third quarter, our non-GAAP operating margin, which excludes outside litigation spend and stock based compensation remained in the double digits at 10, 5% of revenue.
Balance sheet.
We ended the third quarter with a cash balance of $119 million plus investments of $11 million, consisting of short term treasuries and agency securities totally readily available cash of $130 million compared to $103 million for the prior year third quarter.
On a cash flow basis for the third quarter operating cash flow declined $24 million and year to date, we generated $36 8 million compared to $47 8 million for year to date third quarter 2021.
In addition to the FX headwinds noted that has impacted our cash flow. We have also experienced lower advanced payments from clients, both new and existing is the overall inflationary environment is leading to a broad based shift towards aggressive cash preservation.
Deferred revenue as of September 32022 was approximately $248 million compared to $244 million for the prior year third quarter.
Backlog, which includes the sum of billed deferred revenue and noncancelable future revenue was approximately $533 million as of September 32022, compared to $553 million for the prior year third quarter.
Capital markets transactions.
During the third quarter, we repurchased 200000 common shares with a market value of approximately $992000 with an average price of $4 96.
I would also like to note that on October 10, 2022.
$14 7 million up $11 50.
Exercise price of warrants expired.
Business outlook.
We are currently providing fourth quarter of 2022 revenue guidance to be in the range of $103 million to $105 million and tightening our full year 2022 revenue guidance to be in the range of $404 million to $406 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 will be placed into the queue in the order received.
Please be prepared to ask your question when prompted.
Once again, if you have a question. Please press star one on your phone now.
And our first question comes from Brian <unk>.
Your line is open great.
Thanks, so much for taking my questions.
I didn't hear much about bookings trends, if I think back.
One year ago.
A new sales team and trouble closing deals.
And this led to a drop in your growth rate.
Can you discuss.
A high level, how bookings during the third quarter of this year compared to last year.
How does the sales force execute much better just a little bit better and then how much did delays play into work freezes that you discussed play into these trends.
Okay.
Hey, Brian Thank you very much Seth here.
So we actually executed very well on the sales side.
As pleased with the numbers the percentage close of pipeline was good.
As you know from last year, we have to hand, it to Asap. They ended it to us pretty well in the third quarter on any deal size over half a million dollars for us.
They really want all of those deals and this year. We said we would re work our messaging we would come back to the market much stronger and we did we did multimillion dollar.
Deals in the quarter, some really really nice strategic wins around the world. So that was number one was getting those deals.
Deals done we didn't get enough of them over the line, but it wasn't really losses. It was a lot of issues of delayed deals and we just didn't see the transactions closing at the rates and the numbers that we had hoped for the quarter, we had sufficient pipeline globally to make the numbers that we wanted to get out there.
Aaron do but those deals just didn't all get over the line so qualitatively.
Excellent deals around the world with Big deals brand names. We just didn't have the volume that we needed to make the numbers that we wanted to make and I do see a lot of it being macroeconomics, we were able to get some of the customers have or even delayed from Q2 over the line in Q3, but we did have a lot of Q3 that slipped it back.
One of them slipped by two hours seven figure deals slipped into Q4, just because of signature and other processing issues. While people were dealing with other matters in the company. So I think again I would say sales force executing well challenge not enough depth of pipeline to make the numbers.
Given the fact that we normally run up for Ax, we prefer a four X number on the pipeline of opportunities to close is that we need we didn't have that depth globally in all markets and that didn't allow us to close all the deals we wanted.
Great I have one follow up and then I'll get back in the queue.
Given what you've said there probably the lack of pipeline that actually executed it wasn't your fault.
We're delayed is that why.
When I look at the fourth quarter guidance. It implies I believe at the low end midpoint.
Other deceleration.
The growth compared to the last two quarters, and then should we assume that kind of the starting point for how to think about the next few quarters.
I think again visibility and I think the same thing we said at the end of Q2 visibility with all of the economic challenges and again, our customers are some of the largest in the world and the ones you hear about in the news that that are having serious supply chain shortages shipping cost parts.
FX issues all of these things there are inundated with challenges.
And I think those still represent challenges to us.
Get the deals done, but we're very well positioned with the products and services and that's why I, even mentioned on the Ams side. The fact that new bees in this area through one of the youngest players in the Ams space and we're replacing top tier.
Companies like IBM, So, we're making progress for maturing it I think the pipelines continue to grow in those areas I just don't have the full confidence of visibility about getting these deals over the line as well as we did in prior years I just think right now we don't know whether.
Something is really going to come in a particular quarter timing is much trickier.
Great. Thank you so much.
Sure. Thanks, Brian .
And our next question comes from Derrick Wood.
Your line is open.
Oh, Great Hey, guys. Thanks, it's Andrew on for Derrick.
Any.
Okay.
Maybe just walk us through kind of on the change you've seen the past couple of months it sounded like.
Okay.
Like it's improved macro wise has improved so far a little bit in Q3, you talked about some some loosening or increased movement to optimize their it spend.
Just any more color on that would be helpful.
Yes, certainly and I think the CE <unk>.
Being that.
Our broad products and services. The fact that we can now say we will not just do your support we will do your support we'll run your system will protect it will connect yet.
These are all really big things to our customers who are looking for us to take a wider scope of services off of their plate bigger wallet share for us obviously, but they want to give us more and more responsibility and I think that continues to play out and the number of unified support deals the increased <unk>.
<unk> and security the increased sales in our in our connect products, which will officially launch out here very shortly but I think overall, we think the demand environment is very good the challenge is actually execution at the customer level because they have so many different competing priorities.
We've been truly sometimes just pushed to the side with a we love. This we wanted to do it but we've got three other bigger buyers. We've got to get put out first and that is causing some delays and thats why I noticed it wasn't really that we lost deals in the third quarter, we lost them to other priorities in the quarter and so.
I think we're in a really good place I'm very very pleased with the progress we've made in sales and organization.
You know when I took over sales again last quarter I said I was going to make the sales changes necessary to put us in a position to really start to.
To accelerate growth in quarters into the 'twenty three arena.
So we're going to have to go through a little bit more transition as you know it takes a while for all of these changes to work their way through when you have a six to nine month sales cycle. So it will take probably through the fourth quarter or these items to take to take effect, but I do think the training we've done the additional work that we've done to.
Provide better skills to the sellers I think that we could see some upside to that even in the fourth quarter coming into 'twenty three.
Brad Thanks.
Stuart.
And maybe just an update on.
On the Americas specifically.
The changes you've made there how those are going in.
And when do you think.
Transition will be done by the end of the year or early next year and until we start to see that U S growth accelerated.
Assuming macro.
Somewhat stable.
Yes, taking macro out of the picture I would expect to see acceleration in North America in 'twenty, three but I expect that from all the markets globally. I think we are well positioned and if we can just make sure that we are one of the higher priorities that our customers are dealing with.
I'm pretty confident about getting these deals over the line.
Fact that we were not only moving deals north of half a million dollars, but we did one transaction alone on the SAP.
Syed where they're committed to $10 billion plus over a five year contract alone noncancelable. So we had some really good complex wins on big Global energy Telco a lot of the a lot of the key markets that we specialize in.
Alright, Okay. Thanks, guys I'll pass it on.
Sure. Thank you.
And our next question comes from Jeff Van <unk>.
Your line is open.
Hi, Jeff.
Great. Thanks, guys, Hey, so I wanted to follow up on the <unk>.
Brett here so.
Obviously dove in.
In there trying to get things aligned to where you want them.
Now that you've had a little a little more time to look at sales.
A better sense of what was working what why was sales execution.
Is it.
And then I think you just touched on but maybe just a little finer point. When do you think you can get billings growth back in that business. I think you said you'd start to see some improvement in <unk>.
<unk> in Q4, but trying to push a little further and when we can really start driving some billings growth year over year.
Well I think again, if you just follow the flow through of a normal six to nine months sales cycle, you make changes upstream. It really takes six months to push that through and if you look at all of those changes I detailed in the prepared remarks moving the.
Kickoff up to October which was amazing event for 300 people true training event for the week block and tackling we went back to figuring out hey, Here's all the products in your bag that you can sell here's why people buy them, Here's how you sell them and we did we'll place it was.
True training event, not a Powerpoint parade and I think it was just fabulous for us to be able to re ground. The global revenue team in all of these messages even our marketing team was a little sketchy on some of the products and how they fit together, so I think what I pulled in Q3.
Get everybody back to basics, let's make sure everybody is grounded in what we're selling in this big new portfolio of services. How do we think about positioning that we're not just to support provider. We are now in it services provider a boutique provider that customers want to give us more wallet share and I'll give you an.
The example.
Poor Institute of management.
It was a big <unk> four support customer for us that we brought onboard a couple of years ago.
We talk to them about a much bigger vision of running their systems, taking over and helping them redesign and refreshed their entire student administration system to meet current needs and they told US look we don't want to deal with 100 vendors anymore and we hear this a lot from companies, we cant deal with 100 <unk>.
We are going to consolidate down the number of vendors, we work with we're going to build deeper more strategic relationships with them and you guys are one of the ones that we want to do that with and we took over and that we've got big new contracts. There, we threw out of IBM and that one as well.
Fantastic when you're watching this land and expand process works. So I am very bullish about what I'm seeing on the ground. It is simply volume.
We need more transactions closed, but we're closing quality transactions per store were getting done.
And I think we're going to see it in 'twenty three I feel I feel feel very optimistic about that.
That's helpful on the.
Based on all the years experience, we look back at prior recessions.
Argument.
Higher level of service, 50% off and now much broader portfolio of products, we can sell but when that value prop is been pitched in past recessions and how long did it take for the buyers to go from sort of deer in headlights, we're in a recession too okay.
<unk> our go to them and we should move ahead on this I'm trying to I'm trying to get a sense of timing of when that actually might become a tailwind as opposed to something that's billing cycle.
Yes, I think so.
If you look back you had it right we've all been through.
One there was the dotcom meltdown.
Then 2007, eight again, a very unique environment no one knew where the bottom was right and I think it was a it was a true financial meltdown I think it took six months to nine months for people just to wrap their head around what was going on.
And we saw our best years ever I think were seven eight in terms of high yield growth.
Once once people got a footing I do think when I see the deals that got done in the third quarter. When I said at the end of Q2, I said, we're not sure whether this cycle of deer in the headlights as you called it while they are trying to re figure out this new world, they're working in and and the New plan and then start to execute on it.
I said it would go into the third quarter and I do think we saw roll through the third quarter is still for a lot of players.
Let me give you a couple of other data points. So I was just down in.
In Orlando are giving.
Giving a key note at the <unk>.
The biggest symposium of them all.
I had 1200 registrations for myself and it was the largest gartner said that they've ever had for a vendor.
It was it was an amazing I think we had $5 600 people just in the room alone and then there was it was being signed by broadcast and other rooms and things Amazing people are very focused on how to optimize the current operating budget.
Okay.
This is to get that into innovation and things that are going to move the needle.
So we are exactly placed where they need to play where they want to play and I think the interest levels show that we just did Gartner, Japan again, one of the largest they've ever seen of a vendor event in terms of participation are boots have been overwhelmed between Gartner Orlando Garth.
Japan, we're coming up to Gartner Europe in Barcelona, So I think again good indicators that the interest is super high great meetings, and I will tell you that there are millions of dollars of transactions that I would potentially expect coming out of those events alone.
Where we met and talked to people for the first time and some people are already fast tracking deals with us. So I do think my number one goal in the world.
Is recognition.
I can get our teams and our value prop and our services and solutions in front of more CIO CFO <unk> chiefs of procurement I am convinced that we would see tremendous pipeline growth that would get us to those poor ex buybacks tightened numbers that would assure some <unk>.
Strong growth numbers in 'twenty, three and beyond.
Great, Okay, and if I could sneak one last one in there Michael.
Syed you bumped up the outlook, there up 150 basis points.
I mean can you can you slice that a layer or two deeper as to what what's comprising the bulk of the change.
Compared to the thinking last quarter.
So Jeff as I highlighted in the prepared remarks, we've made conscious decision to bring on.
The incremental investments versus deferring those so we can have our structure in place. So we can reaccelerate our growth as we've highlighted there were some one time items as well, but they were various and also we highlighted that.
We are seeing and we are beefing up and have done so our compliance efforts little sooner than previously planned with regard to our compliance efforts. So a whole host of issues a conscious decision to put those in place but.
We're feeling good where we are now with regard to our investments.
Will that level be.
The persistent you gave obviously the outlook for Q4, but are looking at things that are kind of onetime in nature to get ahead of the game build infrastructure that leverages all other things and then it might fall off as we get into 'twenty three or how do you think about the G&A levels going into 'twenty three.
So I think youre characterizing it accurately there Jeff.
Yes, they are recurring expenditures, but theyre, one time ish in nature from a baseline perspective.
And I think youre looking at the outlook appropriately.
Okay Alright.
Alright, Thanks for taking my questions appreciate it.
Thank you thank you Sir.
And as a final reminder, if you do have a question. Please press star one on your phone now.
We have no further questions in queue.
Okay, great well. Thank you very much everyone and I want to thank you for joining us for the call.
Just want to remind everyone well.
We live in a more comfortable place there are many in harm's way.
Many troubled folks who really need help out there, which we're so glad that we can participate with our foundation to make a difference but always a good reminder to to think about those in need and we're there to help them and I Hope you guys. All are too so with that guys. Thank you very much and appreciate you attending the call today take care.
That concludes today's conference call. Thank you for attending.