Rimini Street, Inc. (NASDAQ:RMNI) Q4 2023 Earnings Call Transcript
Rimini Street, Inc. (NASDAQ:RMNI) Q4 2023 Earnings Call Transcript March 2, 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 Rimini Street Fourth Quarter 2023 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 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 fourth quarter and fiscal year 2023 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 fourth quarter and fiscal year ended December 31, 2023, 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-K 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. Since its founding 19 years ago, Rimini Street has grown and evolved into a different kind of full IT services company focused on the needs and goals of our clients. Other IT service companies are focused on getting their clients to spend as much as possible on projects that maximize sales of their software services and hardware vendor partners and meet their own financial objectives. Instead, Rimini Street works as a trusted partner to its clients and has no partnerships with other IT vendors that compromise or influence its independence and advice, counsel and recommendations provided to clients. We only have technology partnerships that we use to provide our clients value, leverage and access to what we believe are strong solution opportunities.
Rimini Street is focused on developing a Rimini Smart Path roadmap and ROI-driven analysis of options and strategic recommendations to clients on the best allocation of limited IT budget, people and time resources to help them achieve their strategic financial and operational goals. When other IT firms say no, Rimini works to say yes, we will get you there. We help our clients achieve better business outcomes such as accelerated growth, lowered operating costs, increased investment in innovation and improved competitive advantage. We believe we have already delivered over $8 billion of savings and reinvestment opportunity to our clients. Not only is Rimini Street a global leader in its deep technical capabilities to run, manage, support, protect, connect, monitor, customize, configure and optimize mission-critical enterprise application, database and technology software, but Rimini is also growing technical and business capabilities to assist clients with innovation projects that include cloud, open source products, automation, workflow, data, analytics, AI, reporting, application modernization, license management, migrations, integration, security and global IT governance.
To-date, we've served over 5,500 Fortune 500, Fortune Global 100, mid-market and public sector organizations in nearly 150 countries and have global operations with over 2,100 employees across 21 countries. We have an average engineer response time of less than two minutes, 24 by 7 by 365 and earn an average client satisfaction score on our support delivery and onboarding services of 4.9 out of 5, where 5 is excellent. Q4 and fiscal year 2023 results: For the fourth quarter and full year 2023, we continued focusing on improving sales execution across our expanded portfolio of solutions and being able to deliver the full portfolio of solutions globally. As our current and prospective clients learn more about the unique offerings and value of our expanded solutions portfolio, they are responding positively and buying across the full portfolio.
Accordingly, to meet the increased demand, we have substantially increased our seller count and sales capacity coming into 2024. Throughout 2023, we saw our end-to-end ERP outsourcing solution Rimini I solutions for SAP products and Salesforce AMS solution continue to gain sales traction globally. To enhance and accelerate lead, opportunity and pipeline development and help pose more large and strategic transactions for Rimini Street, our senior executives, including myself, continued our extensive in-person Rimini Street client and prospect meetings and attendance of third-party events and executive sales meetings in the United States and globally with many current and prospective clients. To deliver our full solutions portfolio globally, we continue to grow our workforce and expand our capabilities backed by innovation and technology that provides additional leverage for increased capacity, profitability and revenue growth.
Demand environment and competitive advantage: We continue to see strong demand for a proven, reliable, trusted partner for mission-critical transaction system services that can allow organizations to consolidate their preferred IT service providers for streamlined vendor management, increased aggregated purchasing power and better business outcomes. Organizations today need to figure out how to deliver both revenue growth and increased profitability. And now as an end-to-end provider of mission-critical IT support, products and services, Rimini Street has the broader portfolio of solutions needed to be recognized as a key IT service partner that can help enable our clients to lower operating costs and achieve their goals from developing IT strategy and building roadmaps through plan execution.
Expanded software products support, introducing Rimini Custom: This week, Rimini Street officially launched its Rimini Custom Solution. This program allows organizations to request custom support solutions for a broader set of enterprise software that they are using beyond Rimini Street's current supported product list. Whether the client goal is to consolidate IT landscape support or managed services under a single trusted partner, extend the operating life of the software product or release or just obtained better and more responsive support, we believe Rimini Custom is an exciting new solution. The Rimini Custom service is now available to clients and new prospects. Rimini Street will work to say yes and present a proposal for any Rimini Custom client request that meets license, supportability and resourcing analysis.
With our new Rimini Custom offering, we believe that we are even better positioned to meet the current and evolving IT service needs of private and public sector organization in the years ahead. Oracle litigation update: Rimini Street and Oracle have been in litigation for more than 14 years, including cases known as Rimini I and Rimini II. In 2010, Oracle filed the Rimini I case against Rimini Street in U.S. District Court. As a result of the Rimini I case with trial completed in 2015 and subsequent appeals, the U.S. court has affirmed that third-party software support is legal. The U.S. court issued a permanent injunction known as the Rimini I injunction enjoining certain activities related to the manner in which Rimini provides support on certain Oracle product lines.
The Rimini I injunction does not prohibit Rimini from providing support to any Oracle product line. There are no current litigation activities related to Rimini I. Subsequent to the Rimini I trial, Oracle filed and prevailed on certain claims and a content proceeding related to the Rimini I injunction. Rimini Street was fined and paid US$530,000 and settled and paid Oracle's attorney's fees and costs for US$9.7 million. 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 claims with no damages award, 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 issue in the case, EBS, JDE and Siebel.
On the remaining product lines, PeopleSoft and Database, Oracle prevailed on the migration process, the use of certain rewrite files and the use of certain automated tools, but Rimini prevailed on central crosscutting legal theories that were core at Oracle's broad infringement claims banning all Oracle product lines, such as confirming Rimini write-down and reuse its own know-how and that Oracle's licenses permit a third party like Rimini to perform updates or fixes to the same extent as the licensee. Today, there are currently three Rimini II post-trial litigation matters. One, appeal of the Rimini II findings and the Rimini II injunction before the Court of Appeals, known as the Merits Appeal. Two, a motion to further stay the Rimini II injunction pending Rimini's Merits Appeal also before the Court of Appeals.
And three, litigation over Oracle's requested recovery of their attorney's fees and costs related to Rimini II before the U.S. District Court. 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, among other things, further enjoys Rimini's activities related solely to the manner in which Rimini provides support on certain Oracle product lines, which Rimini Street sought to reverse. As of this date, an administrative stay of the Rimini II Injunction is in place and the Court of Appeals has not yet issued a decision on our motion to stay the Rimini II Injunction through the appeals process. With respect to the Rimini II Merits Appeal, the Court of Appeals will hear the appeal on an expedited basis, which will include the appeal of the Rimini II Injunction.
Rimini's opening brief for the Rimini II Merits Appeal is due March 4, 2024, and Oracle's answering brief is due April 3, 2024. Rimini's optional reply brief is due within 21 days after service of Oracle's answering brief. The Court of Appeals has currently set the date of June 5, 2024, to hear oral arguments. On November 6, 2023, Oracle filed a motion for attorney's fees and taxable cost with the U.S. District Court, requesting attorneys' fees and taxable costs totaling approximately US$70.6 million related to the Rimini II litigation. On February 20, 2024, Rimini filed its opposition to Oracle's November 6, 2023, motion for attorneys' fees and taxable costs in the Rimini II litigation. In the opposition, Rimini argues that the District Court should deny Oracle's motion in its entirety.
Rimini further argues that, should the District Court award any attorney's fees to Oracle, such fees should not exceed US$14.47 million. Oracle's reply to Rimini's opposition is due by March 15, 2024, after which the matter will be taken 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 attorneys' fees and taxable cost to Oracle. For additional information and disclosures regarding the company's litigation with Oracle, please see our disclosures in the company's annual report on Form 10-K filed today, February 28, 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 courts 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. Q4 and fiscal 2023 results: Revenue for the fourth quarter and the full year 2023 was $112.1 million and $431.5 million, respectively, a year-over-year increase of 3.2% and 5.3%, respectively. Clients within the United States represented 51% while international clients represented 49% of total revenue for both the fourth quarter and full year 2023. Annualized recurring revenue was $432.3 million for the fourth quarter, a year-over-year increase of 2.9%. Revenue retention rate for service subscriptions, which makes up 96.4% of our revenue, was 90% with more than 79% of subscription revenue non-cancelable for at least 12 months. We note that for the full year 2023, our total revenue measures, on a constant currency basis, was negatively impacted by 0.6% due to FX movements.
The decline in our revenue retention rate for the year ended December 31, 2023, was due to attrition during the fourth quarter as certain clients did not renew specific subscriptions, however, in some cases, maintained or added subscriptions for other products. Our net billings during the fourth quarter of 2023 was flat to the comparable period of 2022 because record fourth quarter new client invoicing was able to offset fourth quarter retention losses. Billings for the fourth quarter were $160.7 million compared to $160.4 million for the prior year fourth quarter. For the full year 2023, billings increased 2.3% to $418.5 million. Gross margin was 61% of revenue for the fourth quarter and 62.3% for full year 2023 compared to 64.5% of revenue for the prior year fourth quarter and 62.8% for prior year 2022.
On a non-GAAP basis, which excludes stock-based compensation expense, gross margin was 61.5% of revenue for the fourth quarter and 62.8% for full year 2023 compared to 64.9% of revenue for the prior year fourth quarter and 63.3% for prior year 2022. Gross margin declined during the back half of 2023 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 and 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 31.2% of revenue for the fourth quarter and 33% for full year 2023 compared to 36.1% of revenue for the prior year fourth quarter and 34.9% for prior year 2022. On a non-GAAP basis, which excludes stock-based compensation expense, sales and marketing expenses as a percentage of revenue was 30.5% of revenue for the fourth quarter and 32.3% for full year 2023 compared to 35.4% of revenue for the prior year fourth quarter and 34.1% for prior year 2022.
General and administrative expenses as a percentage of revenue, excluding outside litigation costs, was 15.7% of revenue for the fourth quarter and 16.9% for full year 2023 compared to 16.7% of revenue for the prior year fourth quarter and 18.4% for prior year 2022. On a non-GAAP basis, which excludes stock-based compensation expense and litigation costs, G&A was 13.8% of revenue for the fourth quarter and 15.1% for full year 2023 compared to 15.6% of revenue for the prior year fourth quarter and 17% for prior year 2022. 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, which includes the Oracle settlement previously referenced, was $4.3 million for the fourth quarter and was $9.8 million for the full year 2023 compared to $12.8 million for the prior year fourth quarter and $25.3 million for prior year 2022. This year's fourth quarter included an accounting charge of $2.7 million related to the $9.7 million Oracle cash settlement that Seth discussed earlier related to the Rimini I Injunction content matter. Litigation expenses will vary quarter-to-quarter and year-to-year, depending on current litigation activity.
Our non-GAAP operating margin, which excludes outside litigation spend and stock-based compensation was 17.2% of revenue for the fourth quarter and 15.3% for full year 2023. Net income attributable to shareholders for the fourth quarter was $9.4 million or $0.10 per diluted share. And for the full year 2023 was $26.1 million or $0.29 per diluted share. On a non-GAAP basis, net income for the fourth quarter was $17.1 million or $0.19 per diluted share, and for the full year 2023 was $48.4 million or $0.54 per diluted share. Adjusted EBITDA, defined in our press release, was $21.3 million for the fourth quarter or 19% of revenue, and for full year 2023 was $71.9 million or 16.7% of revenue. Balance sheet: We ended the fiscal year with a cash balance of $115.4 million, plus investments of $9.8 million, consisting of short-term treasuries and U.S. government agency securities, bringing readily available cash to $125.2 million compared to $129.1 million for the prior fiscal year-end.
During 2023, we reduced the principal balance on our term loan from $78.3 million to $72.6 million, resulting in a year-end net cash position of $52.6 million. On a cash flow basis, for the fourth quarter, operating cash flow declined $1.1 million. And for the full year 2023, we generated $12.5 million compared to a decline of $1.9 million for the prior year fourth quarter and a positive $34.9 million for full year 2022. The year-over-year variance is due primarily to large non-recurring payments made during the first quarter to our outside litigation counsel relating to the fourth quarter 2022 Rimini II trial with Oracle and overhead restructuring charges, and during the fourth quarter, as noted, we paid $9.7 million to settle the content matter.
In addition, throughout 2023, we experienced lower client multiyear prepayments and related collections compared to the prior year 2022 as clients retain cash in the higher rate environment for their own short-term investment opportunities and the preservation of cash. Lastly, FX headwinds, as noted, also impacted cash flow. Deferred revenue as of December 31, 2023, was approximately $287 million compared to $300 million from the prior year fourth quarter. Backlog, which includes the sum of billed deferred revenue and non-comparable future revenue was approximately $607 million as of December 31, 2023, compared to $578 million for the prior year fourth quarter. 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 annual report on Form 10-K filed on February 28, 2024 with the U.S. Securities and Exchange Commission. This concludes our prepared remarks. Operator, we'll now take questions.
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