Rimini Street, Inc. (NASDAQ:RMNI) Q4 2022 Earnings Call Transcript
Rimini Street, Inc. (NASDAQ:RMNI) Q4 2022 Earnings Call Transcript March 1, 2023
Operator: Good afternoon ladies and gentlemen, and welcome to the Rimini Street Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. I will now turn the call over to Dean Pohl, Vice President of Investor Relations. Mr. Paul, you may begin.
Dean Pohl: Thank you, operator. I would like to welcome everyone to Rimini Street fourth quarter and fiscal year 2022 earnings conference call. On the call with me today is Seth Ravin, our CEO; and Michael Perica, our CFO. Today, we issued our earnings press release for the fourth quarter and fiscal year ended December 31st, 2022, 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 table 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-K filed today, for a discussion of risks that may affect our future results or stock price. Now before taking questions, we will begin with prepared remarks. With that, I would like to turn the call over to Seth.
Seth Ravin: Thank you, Dean, and thank you everyone for joining us today. A bout Rimini Street. Rimini Street is a global provider of end-to-end enterprise software support products and services. The company offers a comprehensive family of unified solutions to run, manage, support, customize, configure, connect, protect, monitor, and optimize client enterprise application database and technology software platforms. We founded Rimini Street in 2005 to disrupt and redefine the enterprise software support market by developing and delivering innovative new solutions that filled the then unmet need in the enterprise software market. We became and remained the leading independent software support provider for Oracle and SAP products based both on the number of active client supported and recognition by industry analyst firms.
Over the years has our reputation for technical capability, value, innovation, responsiveness, and trusted reliability grew. Clients and prospects began asking us to expand the scope of our support product and service offerings to meet other current and evolving needs and opportunities related to their enterprise software. We also heard from prospects and clients that their goals include reducing the number of IT vendors to more manageable numbers from a governance perspective with a desire to select vendors who can provide a wider scope of IT services and become true trusted partners. To meet the needs of our clients and prospects and to service what we believe is a significantly expanded addressable market opportunity, we designed, developed and are now delivering a new expanded solutions portfolio for a wider array of enterprise software and new solutions for application management, security interoperability, observability and consulting.
We also now offer an integrated package of our services as Rimini one, a unique end-to-end turnkey outsourcing option for Oracle and SAP landscapes designed to optimize our client's existing technologies with a minimum 15 extended years of operating lifespan and enable our clients to focus their IT talent and budget on potentially higher value innovative projects that will support competitive advantage and growth. Q4 in fiscal year 2022 results, we believe the growing adoption of Rimini Street's expanded end-to-end enterprise software solutions is providing organizations the support products and services needed to meet their current and evolving needs around their enterprise software systems and delivering even more industry leading value ROI and engineering capability.
We believe this was reflected in our record fourth quarter and full year revenue that exceeded guidance, multi-million dollar sales wins in diverse industries, strong subscription renewals and extensions, increased cross sales of our expanded portfolio solutions to existing clients and achievement of a 6% growth in our client base year-over-year to 3020 active clients. During the quarter, we continue to make investments and execute activities we believe will improve the effectiveness of our global marketing and sales execution as the pandemic era challenges continue to diminish and our sales opportunities and pipelines increase. We believe these investments and activities will lead to reacceleration of revenue growth and increased profitability over time.
We also continued scaling up our global marketing and sales campaigns to reach a wider target of prospective clients who we believe can greatly benefit from our support products and services. Since our inception in 2005, we've signed and served over 5,000 clients, including more than 180 Fortune 500 and Fortune Global 100 companies. An estimate that we have helped our clients save more than $7 billion that they were able to add to cash or reinvest in their strategic priorities. Demand environment, organizations today need to figure out how to deliver both revenue growth and increased profitability. With our expanded portfolio of enterprise software support products and services, we now believe that any global organization with annual revenue or an operating budget of at least $200 million is very likely to have one or more opportunities for Rimini Street solutions.
This is a significantly larger universe of prospective clients than Rimini Street historically targeted. As I previously noted in my 2022 earnings calls, the global macroeconomic environment forced organizations to re-plan, re-budget and reprioritize their IT strategy operations and staffing models. Clients and prospects needed to adjust their plans and strategies for a slower growth, higher cost environment that was going to likely last for years instead of months as originally thought post pandemic, the re-planning process froze and delayed IT and IT service procurement decisions and impacted 2022 sales for many technology companies including Rimini Street. However, in the fourth quarter, we began seeing clients and prospects complete their re-planning and REBUDGETING projects and moved forward with delayed IT and IT service procurements.
Rimini Street benefited with completion of substantial contracting activity. We believe that Rimini Street is well positioned to meet the current and evolving needs of global organizations attempting to navigate the macro environment over the coming years. Surveys confirmed that we are seeing in buyer behavior needs and our opportunity. For example, Gartner recently cut their projection of 2023 global IT spend in half, and in a sponsored survey that can be found on our website, it was found that a substantial number of IT leaders feel pressure from their board of directors to show increased return on it spend, finding that a significant portion of the IT budget is allocated towards enterprise application software, which does not generate a meaningful increased return to the business.
The survey confirms CIOs and CTOs are reviewing the total cost of ownership associated with their purchase and operation of enterprise applications. Even more telling a majority of the IT leaders surveyed seek to reduce the total cost of ownership for existing mature enterprise software by switching to third party support programs with almost half of participants looking to outsource support and maintenance services to free up their IT teams to work on more strategic, innovation focused projects in exact alignment with Rimini Street's vision and expanded portfolio of solutions. Sales execution; Fourth quarter sales deals included large support transaction wins against both SAP and Oracle. Significant AMS wins against IBM and other providers and sales across the full portfolio of solutions including security, interoperability, observability and professional services.
Close rates on quarter opening pipe were healthy with strong close rates on proposals that continued to exceed 50% large deal execution was also healthy. Closing five deals with annual fees over $1million, an increase from the fourth quarter year-over-year, as I detailed on previous earnings calls since June of 2022, I have reallocated and dedicated a majority of my time to improving global marketing and sales execution, maturing our service offerings and delivering innovative new marketing campaigns to a wider target buyer profile in order to build bigger pipelines globally. We continued implementation of our successful cross sales strategies to guide and focus our hunter sellers on new client acquisitions to assure we have balance between new client sales and cross sales.
As our go-to-market strategy matures for growth in both opportunities, we continue to make changes that improve global marketing of our broader service offerings. Ramped up a stronger global demand generation engine to accelerate pipeline growth and equipped our more than 300 global revenue team members with a greater set of lead and opportunity development and closing skills to reach even more clients and prospects. Our senior executives, including myself, continue our heavy travel to participate in a growing number of successful in-person Rimini Street and third party events and executive sales meetings with hundreds of current and prospective clients and collaborated with regional Rimini street management teams to set and hone the strategy for accelerated sales growth of our full portfolio of solutions.
Oracle litigation update; Rimini Street and Oracle have been in litigation for more than 12 years. While the US courts have confirmed long ago that third party software support is legal. We presently have two active proceedings with Oracle, the injunction compliance dispute and Rimini two proceedings, both of which relate to the manner in which Rimini Street provides support services for certain Oracle product lines. Rimini Street is not prohibited from providing support or services for any Oracle products. With respect to the injunction compliance dispute, Rimini Street filed an appeal in 2022 to the Ninth Circuit of the United States Court of Appeals relating to certain rulings of the U.S District Court. Oral arguments on the appeal were held in San Francisco on February 6th, 2023, and the matter remains pending before the Court of Appeals.
We believe we could have a ruling on the appeal in the second or third quarter of 2023, but the ruling could come earlier or later. With respect to Rimini II, two, the case Rimini Street filed against Oracle in 2014 and Oracle filed counterclaim on October 21st, 2022. Just days before the jury trial was set to begin, Oracle withdrew certain of its counterclaim 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 in Oracle's remaining counterclaim seeking only equitable relief were tried before the court as a bench judge only trial that began November 29, 2022, and ended December 15, 2022. The parties submitted their proposed findings of fact and conclusions of law to the district court on February 23, 2023, and the matter remains pending before the district court.
We believe we could have a court verdict in the second or third quarter of 2023, but the verdict could come earlier or later. Please see our disclosures in the latest 10-K 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 to a series of key capital market transactions, delivering major wins in our protracted litigation with Oracle and successfully designing, developing, and launching an entire portfolio of new IT support product and service solutions. We remain confident that we are continuing to take the right actions and making the right investments to re-accelerate growth, increase profitability, and enhance shareholder value.
Now, over to you Michael.
Photo by Danial Igdery on Unsplash
Michael Perica: Thank you Seth, and thank you for joining us everyone. Q4 in fiscal 2022 results, we were pleased with our improved Q4 performance and quarterly sequential billings growth in gross margin as well as maintaining a strong revenue retention rate on subscription revenue. Revenue for the fourth quarter and the full year 2022 was a record $108.6 million and $409.7 million respectively, a year-over-year increase of 9.4% for both periods. Clients within the United States represented 51.3% and 52.6% of total revenue for the fourth quarter in full year 2022 respectively. All international clients contributed 48.7% and 47.4% of total revenue for the fourth quarter and full year 2022 respectively. Annualized recurring revenue was $420 million for the fourth quarter, a year-over-year increase of 6.9% revenue retention rate for service subscriptions, which makes up 98% of our revenue was 92% with more than 80% of subscription revenue, non-cancelable for at least 12 months.
We note that for the full year 2022, our total revenue measures on a constant currency basis was negatively impacted by 1.5% due to FX movements. Billings for the fourth quarter were $160.4 million compared to $155.9 million for the prior year, fourth quarter, an increase of 2.9% year-over-year, and a substantial improvement from the prior quarters decline of 32.5%. As evidenced by the rebound in billings during the fourth quarter, we were pleased with our strong client renewal and expanding sales to existing and new clients. As Seth noted for the full year 2022 billings declined 2% year-over-year to $409.3 million. DSOs improved in the fourth quarter to 72 days a quarter-end compared to 83 days for the prior year, year-end 2021. This is a marked improvement from what we experienced during the first three quarters of 2022, where DSOs were lengthening.
We believe the improvement underscores our strong client commitments to our offerings and thus experienced earlier than normal collections during our largest billings quarter of the year. Gross margin was 64.5% of revenue for the fourth quarter and 62.8% for full year 2022 compared to 65.1% of revenue for the prior year, fourth quarter, and 63.6% for prior year 2021. We do note the gross margin approved 300 basis points quarter over quarter and was in-line with our guidance reflecting our conscious decision in Q3 to ramp resources and talent that would allow for leverage in the fourth quarter. On a non-GAAP basis, which excludes stock based compensation expense gross margin with 64.9% of revenue for the fourth quarter and 63.3% for full year 2022 compared to 65.5% of revenue for the prior year, fourth quarter in 63.9% for prior year 2021, the full year gross margin decline as a result of 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.
Looking forward for full year 2023, we expect gross margin to be in the range of 61% to 62% of revenue on a GAAP basis and 61.6 to 62.6% of revenue on a non-GAAP basis. Operating expenses like other organizations globally, we are experiencing cost pressures due in large part to increase labor costs and inflation in all labor categories. To address this, during the first quarter of 2023, we implemented a restructuring with a reduction in forced offset, the increased costs, allowing us to maintain profitability and freeing up funds to target needed to drive growth. These initiatives, excluding the one-time charges, will result in approximately $15 million of annualized savings, sales, and marketing expenses as a percentage of revenue was 36.1% of revenue for the fourth quarter and 34.9% for full year 2022 compared to 32.7% of revenue for the prior year, fourth quarter, and 34.3% for prior year 2021 on a non-GAAP basis, which excludes stock based compensation expense, sales and marketing expenses as a percentage of revenue was 35.4% of revenue for the fourth quarter and 34.1% for full year 2022 compared to 32% of revenue for the prior year, fourth quarter, and 33.5% for prior year 2021.
We focused on making the appropriate investments needed to capitalize, honor our growth opportunities and thus see full year 2023 sales and marketing expenses to be in the range of 34.5% to 35.5% on a GAAP basis, and 33.5% to 34.5% on a non-GAAP basis. General and administrative expenses as a percentage of revenue excluding outside litigation costs was 16.7% of revenue for the fourth quarter and 18.4% for full year 2022 compared to 15.6% of revenue for the prior year, fourth quarter, and 17.1% for prior year 2021 on a non-GAAP basis, which excludes stock based compensation expense, G&A was 15.6% of revenue for the fourth quarter and 17% for full year 2022 compared to 14% of revenue for the prior year, fourth quarter, and 15.7% for prior year 2021.
Outside of the onetime expenses that occurred in the period, the G&A line continues to be higher our peers due in material part to the cost for in-house legal and compliance teams and other costs necessary made by our ongoing Oracle litigation and our conscious decision throughout 2022 to continue making investment in the systems, process and talent infrastructure needed to support our long-term growth objectives. Nonetheless, given that the majority of this investment is behind us and our aforementioned restructuring efforts, we see full year 2023 G&A expenses declining as a percentage of revenue and thus to be in the range of 17% to 18% on a GAAP basis and 15.4% to 16.4% on a non-GAAP basis. Net outside litigation expense was $12.8 million for the fourth quarter and was $25.3 million for the full year 2022.
This year's fourth quarter and full year 2022 had elevated costs due primarily to Oracle litigation costs from the Rimini II trial completed during December 2022. We had expected the trial to occur during fiscal year 2023 and we were required to move these costs into 2022. Accordingly, for full year 2023, we expect outside litigation expense to moderate to the $10 million level. Earnings for the fourth quarter and the full year 2022 were impacted by the elevated litigation expense and during the fourth quarter we also incurred lease impairment charges of $3 million and reorganization charges of $2.5 million. For the fourth quarter, the net loss attributable to shareholders was $5.3 million or negative $0.06 per diluted share and for the full year 2022 was a loss of $2.5 million or $0.03 negative per diluted share.
On a non-GAAP basis, net income for the fourth quarter was $15.3 million, while positive $0.17 per diluted share, and for the full year 2022 was $39.2 million or positive $0.44 per diluted share. Adjusted EBITDA was $18.3 million for the fourth quarter or 17% of revenue. And for the full year 2022 was $52.3 million or 13% of revenue compared to $19.3 million for the prior year fourth quarter and $55.8 million for the full year 2021. Our non-GAAP operating margin, which excludes outside litigation spend and stock-based compensation remained in the double digits at 14% of revenue for the fourth quarter and 12% for the full year 2022. Balance sheet; We ended the fiscal year with a cash balance of $109 million, plus investments of $20 million, consisting of short-term treasuries and agency securities, bringing readily available cash to $129 million compared to $120 million for the prior fiscal year end.
On a cash flow basis, for the fourth quarter, operating cash flow declined $1.9 million, and year-to-date, we generated $34.9 million compared to $19.1 million for the prior year fourth quarter and $56.9 million full year 2021. In addition to the FX headwinds noted that has impacted our cash flow, we have also experienced lower advanced payments for clients, both new and existing, as the overall inflationary environment is leading to a broad-based shift towards clients retaining cash for their own short-term investment opportunities and the presentation of cash. Deferred revenue as of December 31, 2022, was approximately $300 million, unchanged from the prior year fourth quarter. Backlog, which includes the sum of billed deferred revenue and non-cancelable future revenue, was approximately $578 million as of December 31, 2022 compared to $593 million for the prior year fourth quarter.
Capital Markets transactions. During fiscal year 2022, we repurchased $4.7 million of our outstanding common stock with an average price of $5.56 per share and we reduced the principal balance on our term loan from $88 million to $78 million through amortization payments of $4.5 million and a voluntary principal payment of $5 million, resulting in a year-end net cash position of $51 million. Also relating to the term loan, during May of 2022, we swapped a floating rate of the term loan to a fixed rate of $40 million of a loan, and we are further offsetting debt service costs by investing excess cash at favorable short-term fixed income rates. In addition, we amended our credit facility in February 2023 to convert the loan reference interest rate from LIBOR to SOFR and amended the definition of consolidated EBITDA to provide an add-back of certain costs and legal fees.
These actions reflect the strong support of our credit partners. Lastly, I would also like to note that on October 10, 2022, all 14.7 of the $11.50 exercise price warrants expired. Business outlook. We are currently providing first quarter 2023 revenue guidance to be in the range of $101 million to $103 million, full year 2023 revenue guidance to be in the range of $420 million to $430 million and full year 2023 adjusted EBITDA guidance to be in the range of $52 million to $58 million. This concludes our prepared remarks. Operator, we'll now take questions.
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