Rimini Street, Inc. (NASDAQ:RMNI) Q1 2024 Earnings Call Transcript May 4, 2024

Rimini Street, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Rimini Street First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today’s conference call is being recorded. I would now like to hand the conference over to your speaker today, Dean Pohl, Vice President, Treasurer and Investor Relations. Please go ahead.

Dean Pohl: Thank you, operator. I’d like to welcome everyone to Rimini Street’s first quarter 2024 earnings conference call. On the call with me today is Seth Ravin, our CEO and President; and Michael Perica, our CFO. Today, we issued our earnings press release for the first quarter and fiscal year ended March 31, 2024, a copy of which can be found on our website under Investor Relations. A reconciliation of GAAP to non-GAAP financial measures has been provided in the tables following the financial statements in the press release. An explanation of these measures and why we believe they are meaningful is also included in the press release under the heading, About Non-GAAP Financial Measures and Certain Key Metrics. 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 filed today, for a discussion of risks that may affect our future results or stock price. Now before taking questions, we’ll begin with prepared remarks. With that, I’d like to turn the call over to Seth.

Seth Ravin: Thank you, Dean, and thank you, everyone, for joining us today. Rimini Street helps our clients achieve better business outcomes, such as significant IT operating cost savings, improved profitability, new competitive advantages and accelerated growth. We achieved these goals by significantly lowering the cost, resources and time needed to support and manage mission-critical transaction systems such as ERP, financials, HCM and CRM while also assisting clients with innovative projects that include cloud, open source, automation, workflow, data, analytics, AI, reporting, application modernization, migrations, integration, security, license management and global IT governance. To date, we believe we have already delivered over $8 billion of savings and reinvestment opportunity to thousands of clients operating in nearly 150 countries.

Rimini Street serves its growing client base with global operations across 21 countries and more than 2,100 employees. Our award-winning software support delivers an average engineer response time of less than 2 minutes, 24/7 by 365 days and earns an average client satisfaction score of 4.9 out of 5 or 5 is excellent. 2024 Q1 activity and results, although recurring revenue renewal and extension sales were in line with the first quarter plan, new client sales were more challenging. A number of new client sales deals failed to develop and close in the quarter, resulting in some deals slipping into future periods. In fact, several of the deals have already closed in the second quarter. Significant wins in the first quarter include sales from Rimini Street’s entire portfolio of solutions to leading global and regional brands across a variety of industries and geographies.

To address the challenges, we continue to focus on hiring, training and building out new solution sales capabilities globally. This includes sellers, sales management, sales support, regional marketing and senior revenue executives. In January, we held a comprehensive sales kickoff to further develop the skills of more than 400 global revenue team members. The event was a week of rigorous training on the full Rimini Street portfolio solutions and how to successfully sell Rimini Street solutions to diverse industries and help clients achieve their strategic, financial and operational goals. During the quarter, we continued the launch and rollout of our full portfolio of solutions globally, including our end-to-end ERP outsourcing solution, Rimini ONE, for Oracle and SAP products and our managed service solutions for Salesforce.

Subsequent to the quarter, we announced the hiring of a new general manager for the EMEA Theatre, Martyn Hoogakker, who joined us from Adobe with a successful career in sales and regional management and the hiring of our new Chief Revenue Officer, Steven Hershkowitz, who joined us following extensive and successful sales strategy and leadership experience with HP, Cisco and other companies. The biography of both executives can be found on our leadership web page and in press releases that can also be found on our website. Demand environment and competitive advantage, we continue to see strong demand for a proven, reliable, trusted partner for mission-critical transaction system services that could significantly reduce IT spending and allow organizations to consolidate their preferred IT service providers for streamlined vendor management, increased aggregated purchasing power and better business outcomes.

Rimini Street has the broader portfolio of solutions needed to be recognized as a key IT service partner and Rimini Street has a strong win rate on proposals. Oracle litigation update, Rimini Street in Oracle have been in litigation for more than 14 years, including cases known as Rimini ONE and Rimini II. In 2010, Oracle filed the Rimini ONE case against Rimini Street in U.S. District Court. As a result of the Rimini ONE case, the trial completed in 2015 and subsequent appeals, the U.S. courts have affirmed the third-party software support is legal. The U.S. court issued a permanent injunction known as the Rimini ONE injunction enjoining certain activities related to the manner in which Rimini provides support on certain Oracle product lines.

The Rimini ONE injunction does not prohibit Rimini from providing support to any Oracle product line. There are no current litigation activities related to Rimini ONE. Subsequent to the Rimini ONE trial, Oracle filed and prevailed on certain claims that a contempt proceeding related to the Rimini ONE injunction. Rimini paid certain fines and settled with Oracle on reimbursement of a portion of its legal fees. In 2014, Rimini filed the Rimini II case against Oracle in the U.S. District Court. Trial occurred in 2022. While Oracle prevailed on liability for its DMCA and Lanham Act, Oracle abandoned its $1.4 billion of damages claim and all non-equitable claims of prejudice on the eve of a jury trial and lost its copyright claims for a majority of product lines that issued the case, EBS, JDE and Siebel On the remaining product lines, PeopleSoft database, Oracle prevailed on certain claims but Rimini prevailed on central crosscutting legal theories that record to Oracle’s broad infringement claims spanning all Oracle product lines.

In July 2023, concurrent with the District Court’s trial rulings for Rimini II, the District Court issued a permanent injunction known as the Rimini II injunction, which amongst other things, further enjoying certain Rimini activities related solely to the manner in which Rimini provides support on certain Oracle product lines. Rimini is appealing the injunction to the Court of Appeals. As of this date, an administrative stay of the Rimini II injunction remains effective, and the Court of Appeals has not yet issued a decision on Rimini’s motion to stay the Rimini II injunction pending the resolution of Rimini’s appeal. On November 6, 2023, Oracle filed the motion for attorney’s fees a taxable cost with the U.S. District Court, requested to recover attorney’s fees and taxable costs totaling approximately $70.6 million related to the Rimini II litigation.

Rimini filed its opposition to Oracle’s motion and argues that the District Court should deny Oracle’s motion in its entirety. Rimini further argues that, should the District Court award recovery of any attorney’s fees to Oracle, such fees should not exceed $14.47 million. The matter is now under consideration for determination by the District Court. Rimini reserves all rights, including appellate rights with respect to the Rimini II litigation, including any award of attorney fees and taxable cost to Oracle. So in summary, today, there are currently three Rimini II post-trial litigation matters still before court. One, a deal of the Rimini II findings known as the merits appeal and the Rimini II injunction before the Court of Appeals.

Two, a motion to further stay the Rimini II injunction pending a decision under Rimini’s appeal of the injunction, which is also before the Court of Appeals. And three, litigation before the District Court over Oracle’s requested recovery of certain of their attorneys’ fees and costs related to the Rimini II case that is on appeal. With respect to the Rimini II merits appeal and appeal of the Rimini II injunction, all briefs have been filed and the Court of Appeals has currently set the date of June 5, 2024 to hear oral arguments. Additional information and disclosures regarding the company’s litigation with Oracle, please see our disclosures in the company’s quarterly report on Form 10-Q filed today, May 2, 2024 with the U.S. Securities and Exchange Commission.

Please also note that at this time, we are still unable to provide material additional information beyond the disclosures and statements in our press releases, filings with the SEC and court filings nor provide guidance with respect to future financial results, nor are we able to provide additional commentary related to the pending Oracle litigation and potential impacts of the Rimini II injunction because the matters are still before various cohorts and the outcomes cannot be predicted. Summary, we remain confident that we are continuing to take the right actions and making the right investments to accelerate growth, increase profitability, enhance shareholder value and bring our litigation with Oracle to a successful conclusion. However, if Rimini Street does not ultimately prevail in the litigation matters described above and in our SEC filings, it could have a material adverse impact on our business and financial results.

Now over to you, Michael.

Michael Perica: Thank you, Seth, and thank you for joining us, everyone. Q1 2024 results. Revenue for the first quarter of 2024 was $106.7 million, a year-over-year increase of 1.2%. Clients within the United States represented 50.4% while international clients represented 49.6% of total revenue for the first quarter 2024. We note that for the first quarter of 2024, our total revenue measures on a constant currency basis was negatively impacted by 0.8% due to FX movements. Annualized recurring revenue was $415.8 million for the first quarter, a year-over-year increase of 1.8%. Revenue retention rate for service subscriptions, which makes up 97.4% of our revenue, was 89%, with more than 76% of subscription revenue non-cancelable for at least 12 months.

Billings for the first quarter were $74.1 million compared to $93 million for the prior year first quarter, a decrease of 20%. Unfavorable FX movements reduced first quarter 2024 calculated billings by $3.1 million. Gross margin was 59.8% of revenue for the first quarter compared to 62.7% of revenue for the prior year first quarter. On a non-GAAP basis, which excludes stock-based compensation expense, gross margin was 60.3% of revenue for the first quarter compared to 63.1% of revenue for the prior year first quarter. Gross margin declined during the back half of 2023 and Q1 2024 as a result of continued investment in and expansion of our global engineering team needed to serve new client engagements in advance of related ratable contract revenue recognition.

As noted in previous earnings calls, we are expecting continued gross margin pressure as we scale to meet new client engagements. Simultaneously, we are also working to improve gross margin by driving efficiencies and leveraging the benefits of growing global scale. Operating expenses. While inflationary pressures in high costs are still persistent for skilled labor across all theaters, we continue to attract and retain key talent. Moreover, our margin performance in light of the pressures highlighted previously, underscores the advantage of our global footprint with centers of excellence in geographies where both the talent and value remain attractive compared to higher-priced talent markets. Sales and marketing expenses as a percentage of revenue was 36.7% of revenue for the first quarter compared to 32.7% of revenue for the prior year first quarter.

On a non-GAAP basis, which excludes stock-based compensation expense, sales and marketing expenses as a percentage of revenue was 36.3% of revenue for the first quarter compared to 32.2% of revenue for the prior year first quarter. This year’s first quarter included the cost for the 2024 sales kickoff training conference where there is not a prior year comparable, the event was held last October 2022. General and administrative expenses as a percentage of revenue, excluding outside litigation costs, was 17.2% of revenue for the first quarter compared to 17.3% of revenue for the prior year first quarter. On a non-GAAP basis, which excludes stock-based compensation expense and litigation costs, G&A was 15.7% of revenue for the first quarter compared to 16.2% of revenue for the prior year first quarter.

We are seeing a good year-over-year improvement in G&A spend due to some restructuring measures and the initial substantial investments that were required to develop and launch our expanded portfolio of solutions are largely completed. However, G&A expenses as a percentage of revenue are expected to remain elevated compared to our peers due in large part to the ongoing cost for in-house legal and compliance teams and other costs made necessary by our ongoing Oracle litigation and compliance activities. Net outside litigation expense was $2.9 million for the first quarter compared to $2.7 million for the prior year first quarter. Our non-GAAP operating margin, which excludes outside litigation spend and stock-based compensation, was 8.3% of revenue for the first quarter compared to 14.6% for the prior year first quarter.

Net income attributable to shareholders for the first quarter was $1.3 million or $0.01 per diluted share compared to the prior year first quarter of $0.06 per diluted share. On a non-GAAP basis, net income for the first quarter was $6.8 million or $0.08 per diluted share compared to the prior year first quarter of $0.12 per diluted share. Adjusted EBITDA, defined in our press release, was $10.7 million for the first quarter or 10% of revenue compared to the prior year first quarter of 15.7% of revenue. Balance sheet. We ended the first quarter March 31, 2024, with a cash balance of $129 million compared to $135 million of cash and investments for the prior year first quarter. On a cash flow basis, for the first quarter, operating cash flow increased $11.1 million compared to the prior year first quarter of $8.6 million.

FX headwinds reduced operating cash flow by $4.4 million. Deferred revenue as of March 31, 2024, was $254.3 million compared to deferred revenue of $287.4 million from the prior year first quarter. Backlog, which includes the sum of billed deferred revenue and non-cancelable future revenue, was $556.9 million as of March 31, 2024 compared to $556.1 million for the prior year first quarter. Subsequent event, on April 30, 2024, Rimini Street refinanced its outstanding term loan, of which $70.9 million was outstanding with a new five-year senior secured credit facility comprised of a $75 million term loan and a $35 million revolving line of credit at rates of SOFR plus a rate in the range of 2.75% to 3.5%. The revolving line of credit was undrawn at closing.

Capital One led to financing that includes Lenders, U.S. Bank and TD Bank. Effective April 30, 2024, the interest rate swap agreement was amended in connection with the 2024 credit facility to match the new five-year term. Business outlook. The company is continuing to suspend guidance as to future financial results until there is more clarity around impacts from current litigation activity before the U.S. federal courts in the company’s ongoing litigation with Oracle. For additional information and disclosures regarding the company’s litigation with Oracle, please see our disclosures in the company’s quarterly report on Form 10-Q filed on May 2, 2024, with the U.S. Securities and Exchange Commission. This concludes our prepared remarks.

Operator, we’ll now take questions.

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