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Rimini Street, Inc. (RMNI -1.21%)
Q1 2019 Earnings Call
May. 9, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Rimini Street First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Dean Pohl, Director of Investor Relations. Sir, you may begin.
Dean Pohl -- Director of Investor Relations
Thank you, operator. I'd like to welcome everyone to Rimini Street's First Quarter 2019 Earnings Conference Call. On the call with me today is Seth Ravin, our CEO; and Tom Sabol, our CFO. Today, we issued our first quarter 2019 earnings press release, which can be found on our website. A reconciliation of GAAP to non-GAAP financial measures has been provided in the tables following the financial statements in this press release. An explanation of these measures is also included in the press release under the heading, Non-GAAP Financial Measures.
A copy of the press release and financial tables, including the GAAP to non-GAAP reconciliation and other supplemental financial information can be viewed and downloaded from the Investor Relations section of our website under Investor Events. 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 Form 10-Q for the first quarter of 2019, which was filed today for a discussion of risks that may affect our results or stock price.
Before taking questions, we'll begin with prepared remarks.
With that, I'd like to turn the call over to Seth.
Seth Ravin -- Chief Executive Officer and Chairman
Thank you, Dean, and thank you, everyone for joining us today. During the first quarter, we made meaningful progress expanding sales capacity, improving our global service delivery model and launching and selling Salesforce.com and other new support services that increase our total addressable market. Additionally, in March, we prevailed against Oracle in the U.S. Supreme Court for the unanimous decision.
Oracle was ordered to return $12.8 million, plus interest and other costs to Rimini Street, which they paid in April. For the first quarter ended March 31, 2019, we generated revenue of $66.3 million, a year-over-year increase of 11%, with annualized subscription revenue of $265 million, up 11% year-over-year. Gross margin expanded during the quarter to 64.0%, up from 60.6% for the prior year's first quarter. Revenue retention rate for subscriptions, which is substantially all of our current revenue mix remained above 90%, with more than 70% of subscription revenue, non-cancelable for at least 12 months on a rolling basis.
We ended the quarter with 1,852 active clients, representing a year-over-year net increase of 17%. Our active client count included over 100 Fortune 500 and Fortune Global 100 companies. For the first quarter, our global service delivery team closed a record number of support cases nearly 8,000, delivered more than 20,000 tax, legal and regulatory updates and maintained an average client satisfaction rating of 4.8 out of 5.0, on the company's support delivery, where 5.0 is rated as excellent. We ended the quarter with 1,114 employees, a year-over-year increase of approximately 13%.
Investments and initiatives. Rimini Street products and services enable licensees to maximize the ROI on their existing enterprise software investments, by extending operating life span for guaranteed minimum of 15 years. After switching to Rimini Street support, clients can significantly reduced daily operating costs and reinvest financial, labor and time savings to fuel innovation, competitive advantage and growth. Our primary investment initiatives for revenue growth acceleration, include expanded global sales capacity and productivity and expanded wallet share of client IT spend and growing the lifetime value of each client.
Accordingly, we have increased our Global Sales representative count to 75 as of today, a meaningful increase from the 62 that we reported as of year-end 2018. We've also made changes to sales leadership and plan to continue making additional investments in global sales enablement and effectiveness, leadership, staff, systems and processes to better train new and existing sales reps, shorten training ramp times and increase sales quota productivity.
In the first quarter, we continued investing in an expanded portfolio of new support products and services, that we believe will enable Rimini Street to win a larger wallet share of client IT budget. By expanding our breadth of services, Rimini Street not only can increase its total revenue for each client, we will become even more integral to the long-term IT operations of a client with a longer client engagement and an increased lifetime value.
EBSCO Industries, a global holding company is an early successful example of our strategy. EBSCO has been successfully leveraging Rimini Street support for its SAP system since 2015, and elected to expand the Rimini Street support service scope to include our new support services for Salesforce. Bryan Bee, Vice President, Enterprise IT Systems for EBSCO stated that they were looking to optimize their systems and where possible offer leverage shared services either at a better cost, speed or quality than any of their business units could provide individually.
When they heard that Rimini Street could provide its premium level support services for EBSCO Salesforce system, in addition to the high quality support they were already receiving for their mission-critical SAP system, they were excited by the opportunity to unify their services. He further noted that leveraging Rimini Street services for Salesforce was a logical next step.
Competition. Competition with our primary competitors, Oracle and SAP remains fierce. Both software vendors are engaged in massive efforts to force their licensees to upgrade and migrate from current, stable software releases to the vendors' newest immature release. For example, SAP has declared that tens of thousands of licensees around the world using their most popular current product ECC 6, must migrate to their newest product S/4 HANA by 2025, a very expensive reimplementation project that could take the licensee years to complete.
We believe this forced retirement of popular and stable releases by Oracle and SAP, creates an even stronger demand environment and sales opportunity for Rimini Street support service alternatives.
Oracle litigation status and developments. As discussed in previous earnings calls, we have 2 different ongoing litigation matters with Oracle. Oracle's litigation against Rimini Street filed in 2010, that is in the appeal stage for a second time and that is referred to as Rimini 1. And Rimini Street's litigation against Oracle filed in 2014, that is in the pre-trial stage and referred to as Rimini 2. With respect to Rimini 1, and as I noted earlier, Rimini Street recently prevailed in the U.S. Supreme Court against Oracle. And Oracle was ordered to return $12.8 million, plus interest and other costs. Oracle paid Rimini Street in April.
This was in addition to $21.5 million, Oracle was previously ordered to return to Rimini Street by the U.S. Ninth Circuit Court of Appeals and paid in March of 2018. Rimini Street is currently seeking an additional refund from Oracle of $28.5 million through a second appeal to the U.S. Ninth Circuit Court of Appeals as well as an order vacating an injunction issued by the U.S. District Court against Rimini Street on August 15, 2018. The U.S. Ninth Circuit Court of Appeals has notified us that it will hear oral arguments for the appeal on July 12, 2019.
With respect to Rimini 2, in addition to other causes of action, Rimini Street is seeking damages from Oracle for behavior that we believe was illegal and has materially impacted our new client sales, since the second quarter of 2017. Oracle is also seeking damages from Rimini Street. Discovery has concluded and we await the District Court's ruling on summary, judgement motions. Trial is not currently expected to occur until 2021 or later.
Summary. We are focused on executing our plan to increase sales capacity and productivity, launch and sell new products and services, and expand our global infrastructure and service delivery capabilities. We continue to expect the return on these investments to first appear in billings growth in the second half of 2019, followed by accelerated revenue growth in 2020.
I will now turn the call over to Tom Sabol, our CFO.
Thomas Sabol -- Chief Financial Officer and Senior Vice President
Thank you, Seth. As Seth noted, revenue for the first quarter was $66.3 million, a year-over-year increase of 11%, with annualized subscription revenue of approximately $265 million. Clients within the United States, constituted 65% of total revenue and international clients made up the remaining 35% for the first quarter and represented aggregate revenue growth rates year-over-year of 8% for the U.S. and 15% internationally. Gross margin was 64% for the first quarter, up from 60.6% in the prior year's first quarter. The increase was due
primarily to leveraging the existing infrastructure against a higher revenue base and other efficiency improvements.
We expect some gross margin pressure from planned increases in service capacity and from the introduction and ramp-up costs for new products and services. We continue to expect gross margins to be around 60% for all of 2019. Sales and marketing expenses as a percentage of revenue was 35.3% for the first quarter, up from 33.8% for the first quarter of 2018. Sales and marketing expenses are currently expected to be up to 43% of revenue in Q2 of 2019, as we accelerated sales rep hiring in Q1 along with anticipated higher marketing spend.
We now expect sales and marketing expenses to be in the range of 39% to 42% of revenue for all of 2019, a slight reduction from previous guidance. General and administrative expenses as a percentage of revenue, which excludes outside litigation costs was 18.8% for the first quarter, up slightly from 18.1% for the first quarter of 2018. We continue to expect G&A as a percentage of revenue to be in the range of 15% to 17% for all of 2019.
Litigation expense was $2 million for the first quarter. This was offset by the return of $12.8 million from Oracle, on April 5, 2019 for the non-taxable costs that we had previously paid to Oracle in 2016, and was subsequently overturned by the U.S. Supreme Court on March 4, 2019. Other proceeds received, we accrued $4.6 million for the current estimated insurance carrier reimbursement.
The net impact for GAAP purposes of all outside litigation costs, net of recoveries was a net benefit of $6.1 million for Q1 2019, compared to a net benefit of $20 million for the first quarter of 2018, which consisted of litigation expense of $8.9 million offset by a previous Oracle litigation reimbursement of $21.3 million and insurance recoveries of $7.6 million.
It should be noted that our outside litigation spend is not linear and can fluctuate each quarter based on litigation activities. We continue to expect litigation expense, before the effect of any recoveries from Oracle to be in the range of $13 million to $15 million for 2019, due to current expected reduced litigation activity compared to 2018, absent any significant changes.
GAAP operating income was $12.7 million for the quarter compared to operating income of $25.2 million from a year ago. Non-GAAP operating income was $7.8 million for the first quarter compared to $6.1 million for the prior year first quarter. Net income was $11.8 million for the first quarter compared to net income of $3.5 million for the prior year first quarter. Non-GAAP net income was $6.7 million for the first quarter compared to a non-GAAP net loss of $16.3 million for the prior year first quarter.
We issued an additional $6.5 million face value of Series A preferred stock shares on March 7, 2019, adding to the original issuance of $140 million on July 19, 2018. As part of the transaction, we also issued approximately 220,000 shares of common stock. Cash dividends on the Series A were $3.6 million for the first quarter, while payment in kind dividends were $1.1 million, which were settled with the issuance of 1,062 shares of Series A preferred stock to the holders on April 1, 2019.
Reflecting the Series A dividends, basic and diluted net earnings per share, attributable to common stockholders was $0.07 a share for the quarter compared to $0.06 per share from a year ago. Adjusted EBITDA was $8.1 million for the quarter compared to $6.7 million from a year ago. Deferred revenue at quarter end was approximately $209 million, up 7% from approximately $196 million at March 31, 2018.
We ended the first quarter with $32.7 million of total cash on our balance sheet, cash flow from operations of $6.6 million for the quarter and our outstanding debt was $1.2 million at quarter end, which will be paid off in the second quarter of 2019.
Now with respect to revenue guidance. We currently expect second quarter 2019 revenue to be in the range of $66.5 million to $67.5 million, and we maintain our full year 2019 revenue guidance to be in the range of $265 million to $280 million.
And with that operator, we'll now take questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Derrick Wood with Cowen and Company.
Derrick Wood -- Cowen and Company -- Analyst
Seth, you had a nice year-over-year increase in new customers, I think that's the first time you had acceleration in new customer generation in a few quarters. What would you call out that helped drive that strength, anything around sales productivity or sales cycles, anything you'd highlight?
Seth Ravin -- Chief Executive Officer and Chairman
I think again, Derrick, as we talked about in the prior calls, this is all about sales execution, building up the team getting back to where we wanted to after 2 years of not being able to hire, getting people ramped up. And I think you look and you saw the number of hires that we did on the sales side.
We did much better in getting the hiring done, during the Q1 in April time period, we're now just a few heads short of our target, which will complete out expected in May. So I think you're watching just the maturing of the team and their ability to close more deals successfully and increasing their close rate capability.
Derrick Wood -- Cowen and Company -- Analyst
Okay. And it does seem like you're getting better traction as you mentioned with hiring, and the last couple of quarters, you've mentioned, it's been a tough environment. What do you think you're doing better and on boarding and should we still think about getting to 90 to 100 reps, by the end of the year?
Seth Ravin -- Chief Executive Officer and Chairman
I think number one, we've got a better profile, the engine for recruiting has been working very, very well through the Q1 and into the April time period and currently and continuing. So I think, it's still a tough hiring environment out there, no doubt, given the number of reps that people are trying to hire across technology. But again, I think we're being much more successful globally on it. As far as in terms of moving that forward, we're looking to probably hold around mid-80 the number of hires, we had back ended about 15 to 20 hires when we talked about doing the 90 to 100 planned for this year.
Instead, what we're going to do is, we're going to probably hold to about 85 somewhere by the end of May. We've instead, decided to hire up and expand our sales enablement and effectiveness team. So we're going to balance a little bit. We're going to digest the sales reps that we have, and we're going to focus on getting better performance out of that 85. So we'll take a little hiatus and we'll push that 15, 20 additional heads to the first quarter of 2020 instead of the last quarter of 2019 and again focus on effectiveness. And as you can see, it didn't change our guidance for 2019.
Derrick Wood -- Cowen and Company -- Analyst
Got it, okay. In terms of the new sales leadership, what are you hoping that they bring and what impact are they already having?
Seth Ravin -- Chief Executive Officer and Chairman
I think the new sales leadership is maturing. As you know, we added quite a few director level folks who are overseeing 6 to 8 reps at the time. They are coming along. They're building their book of business now. They've got some deals under their belt, they're learning how to navigate the deals, they're learning how to close them. So I think we're seeing those progress and I think most of them will do very well. We're seeing the new Head of North America, doing well, learning the business, again, only here a few months, Tim DeLisle, doing very well in getting his hands around North America.
Our new Head of Europe, EMEA, learning the business. He's been here just officially a year, I think this week. So that's been a big learning curve for him. A lot of new heads of marketing. So I think overall, I think you're just watching the team mature, learning the business and getting more comfortable and being able to execute.
Derrick Wood -- Cowen and Company -- Analyst
Okay. Tom, you had nice strength in gross margins in Q1. What was the driver on that?
Thomas Sabol -- Chief Financial Officer and Senior Vice President
So 2 things. One, the Group is focused on as we always have been on trying to expand margins, one of the things we're doing is we're using less consultants -- we're using -- we're hiring more people full time and we think that's improving our efficiencies, as we're starting to rely less.
We still use a number of consultants. So I don't want to say we don't use them. But we're starting to rely more on full time folks and reducing the number of outside consultants that we're using, and we're getting, it's clearly starting to show, that we're getting better efficiencies. However, I will mention as I mentioned on the comments, that we still believe, we'll be in the 60% range, as we ramp Salesforce.com and some other services.
So we will have some cost there, and we'll also be talking roughly later on in the year of some new geographies, that we're going into. So we still think will be around 60%. But we are focused on hiring more full time people and utilizing less on the consulting side, which we think is helping us drive better efficiencies.
Derrick Wood -- Cowen and Company -- Analyst
Okay. And the slight downtick in the expectation around sales and marketing, that's I presume due to the change of pace of hiring for the year and maybe offset by a little bit more marketing is that -- do I have that right?
Seth Ravin -- Chief Executive Officer and Chairman
Yes, I mean it's a direct respect of moving 15, 20 heads to first quarter 2020 and the associated staff that goes with it, such as lead-gen folks and there's a whole contingent of people that build out with every certain group of sales reps. So yes, that's where you're seeing it.
Thomas Sabol -- Chief Financial Officer and Senior Vice President
But it's just a slight reduction.
Seth Ravin -- Chief Executive Officer and Chairman
Yes. So 1% of the guidance range. That's correct.
Operator
Our next question comes from Richard Baldry with ROTH Capital.
Richard K. Baldry -- Roth Capital Partners, LLC -- Analyst
It's notable, I guess that international is growing 15% versus 8% in the U.S. Can you talk about, so what the drivers that different, how replicable the successes internationally are you think in the domestic market? Thanks.
Seth Ravin -- Chief Executive Officer and Chairman
Sure, Rich. Just calling adds up your things, yes, just calling. Listen, we -- when you see the international growth, remember, you're building on a smaller number. So you're going to have a higher percentage growth. I think the -- the facts are that we're opening up a bunch of new markets that have a lot of demand for them. We're seeing great growth in them, and that's why, you're watching the maturity difference between North America, which is a very mature market.
We've been here marketing for 14 years and we're stepping into a bunch of new areas where you're taking greenfield opportunities and there is decent amount of low hanging fruit for us to come in and get. So I think you're just watching us execute on that with the new expansions.
Richard K. Baldry -- Roth Capital Partners, LLC -- Analyst
When we look at the new hires that you're putting in, where will they be allocated sort of geographically? Or is there any attempt to do sort of industry vertical focuses, the new additions? Thanks.
Seth Ravin -- Chief Executive Officer and Chairman
I think you're actually looking at both. You've seen us expand out and we'll make some more announcements, as we expand to some additional countries. But recently you saw us announce New Zealand, we just announced our expansion for Eastern Europe into Russia and Poland, where we're seeing again good amounts of demand and opportunity, as we build out staff in these regions to take advantage of it.
We are also doing some verticalization. You look at Rimini Street's big markets were very, very big and things like public sector and retail, areas where you traditionally have lower margin, higher competition or you have challenges in changing out systems in the kind of quick time period that normally is required by the vendors. So our model fits very, very nicely into public sector. And we have created reps within our model. North America just deployed this year, dedicated public sector and education, so it's really public sector and higher education reps, focused on those segments.
We've been testing that in other international markets where we've had very good success. So that's one component. And then you might see some verticalization again around the retail sector, where we have very strong presence globally.
Operator
Our next question comes from Brian Kinstlinger with Alliance Global.
Brian Kinstlinger -- Alliance Global Partners -- Analyst
Adjusted EBITDA was higher than expected, given 2019 was characterized, I think originally as a year's investing in sales and marketing, it still is obviously, but you got a lot of moving parts of holding the line in the mid 80s, I think for -- is what you said for the headcount in sales, while adding some more sales support people. Can you talk about, giving all these moving parts, do you expect to see leverage on the EBITDA numbers as you grow revenue? Or you will be reinvesting more profitability and the goal still will be a little less profit this year than maybe we saw in the first quarter?
Thomas Sabol -- Chief Financial Officer and Senior Vice President
Yes. Clearly, Brian, the margin improvement during the first quarter -- gross margin improvement in the first quarter clearly helped the EBITDA number. We still have plans as we've indicated, was down slightly to significantly invest year-over-year in the sales and marketing side.
So we're not looking right now to indicate that we're going to have a higher EBITDA than what we originally thought. So I would say, there shouldn't be a significant change from an EBITDA, we'll get a little bit of a benefit out of maybe some slightly lower sales and marketing spend. But as Seth indicated, that really wasn't done for profitability. It was really done to focus on the efficiencies of the sales group and the training there of that group, but a smaller group. But it really was driven by the improved gross margins in the first quarter.
But again, as indicated by Seth and me as well, there's a lot of investment going on with new products, as well as into the sales and marketing side of the business.
Brian Kinstlinger -- Alliance Global Partners -- Analyst
Great. The -- I think you got, you -- I joined late, but I definitely heard some of the reasons, that the gross margin was stronger than expected. I think that originally you expect it will be a little bit of pressure on it. Given some of the increased cost, you had to add to the process, is what you've achieved in the first quarter sustainable? Or we continue to see a little bit of weakness from there as you need to add some additional personnel or some additional services capabilities?
Thomas Sabol -- Chief Financial Officer and Senior Vice President
Yes. Again, we would expect for the full year, that we're going to be near our 60% guidance. So there will be some slight degradation, we believe, going forward because of the new services as well as the new geographies that we'll be going into.
Brian Kinstlinger -- Alliance Global Partners -- Analyst
Great. And sorry, if I -- again, I joined late, so sorry, if I'm repeating a question. But the 1Q upside in revenue was it stronger close rates, increased demand from existing customers or was it maybe new regions growing faster than you thought they would originally, what drove that upside in the first quarter?
Thomas Sabol -- Chief Financial Officer and Senior Vice President
So, it's really a combination of both new business and renewal rates. Our renewal rates stayed above 90%. So it's really a combination of the 2.
Brian Kinstlinger -- Alliance Global Partners -- Analyst
And remind me of the companies, that don't renew and there are some churn, is that mostly M&A, is it -- they've change applications that no longer need your services. What is the feedback of those that don't renew?
Seth Ravin -- Chief Executive Officer and Chairman
Yes, Brian, Seth here. So I don't think it's really changed that much. I think you have churn associated, M&A has always been one of the top basis when the company they leaves, because they've joined another company and they're going to use their system or they're going to do something different when they combine entities. So there's a variety of reasons around M&A. Second of all, are people who are just -- who are going to pick a new system, because they're on a 20-year old system and it's time to change up.
We've had several companies who have left Rimini Street support very happy, they got their 15 plus years, got the great return on investment, went back, pick the new system, implemented it. An example of that is Wendy's, RB's when they merge together, they picked the new system, implemented it, you know, an example of that is when these RBs when they merge together, they picked a new system to implement from Oracle, they went -- relicensed with Oracle, built the new system, and then brought it back to Rimini Street to carry forward.
And that's why we've always had this slightly different churn model than a software company, because our customers can come and go with different products, they went away for 2 years and came back and another great new customer again. And we see that happening on a fairly regular basis these days.
Brian Kinstlinger -- Alliance Global Partners -- Analyst
Okay. Great. Last question I have. I did hear you mid 80s by May is where you'll hold the line, the salespeople, did you give a number of where you ended the quarter, I know last quarter, you thought you'd end the quarter around 68, where did the sales kind of actually end up or where are you today?
Seth Ravin -- Chief Executive Officer and Chairman
Yes, we're about 75 today. So we expect to fill out the remainder of our sales folks by the end of May.
Operator
Thank you. And I'm showing no further questions at this time. I like to turn the call back over to Seth Ravin for closing remarks.
Seth Ravin -- Chief Executive Officer and Chairman
Great. Thank you very much. I want to thank everyone again for joining us for our quarterly call. We look forward to having all of you join us again for our second quarter 2019 call. Thanks, again, everybody. Have a good day.
Operator
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.
Duration: 33 minutes
Call participants:
Dean Pohl -- Director of Investor Relations
Seth Ravin -- Chief Executive Officer and Chairman
Thomas Sabol -- Chief Financial Officer and Senior Vice President
Derrick Wood -- Cowen and Company -- Analyst
Richard K. Baldry -- Roth Capital Partners, LLC -- Analyst
Brian Kinstlinger -- Alliance Global Partners -- Analyst
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