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Rimini Street, Inc. (RMNI)
Q3Â 2019 Earnings Call
Nov 7, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen thank you for standing by and welcome to the Rimini Street's Third Quarter 2019 Earnings Conference Call. [Operator Instructions].
I would now like to hand the conference over to your speaker today Dean Pohl. Thank you. Please go ahead sir.
Dean Pohl -- Director of Investor Relation
Thank you, Operator I'd like to welcome everyone to Rimini Street's Third 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 third 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 table following the financial statements in this 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. 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 our Form 10-Q for the third 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 of the Board
Thank you, Dean and thank you everyone for joining us today. In the third quarter we continued to see improving performance from investments made over the past 18 months in global sales capacity productivity and infrastructure. We also continued expanding our global capabilities in new product and service offerings opening operations in Dubai to serve the Gulf region and announced the global availability of Application Management Services for SAP. In addition today we announced the global availability of Application Management Services for Oracle database and applications. The third quarter ended September 30 2019 we generated revenue of $69 million with a year-over-year increase of 10.1% with annualized subscription revenue of $274 million. Gross margin for the quarter was 62.4%. Revenue retention rate for subscriptions which is substantially all of our current revenue mix remained above 90% with more than 70% of subscription revenue noncancelable for at least 12 months on a rolling basis. We ended the quarter with 2032 active clients representing a year-over-year net increase of 17%. The quarter included several notable sales wins including leading auto manufacturer Hyundai-Kia Motors who switched to Rimini Street for support and maintenance of its global database portfolio.
Our active client count included nearly 100 Fortune 500 and Fortune Global 100 companies. The quarter-end employee count totaled 1220 a year-over-year increase of approximately 12%. For the third quarter our global service delivery team closed over 7500 support cases; delivered more than 15000 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. Our strong and consistent client satisfaction was recognized with numerous awards during the quarter including Stevie awards for Company of the Year | Computer Services and Customer Service Team of the Year. Investments and initiatives. Our primary investment initiatives remain consistent which are to drive accelerated revenue growth increase our share of client IT spend and grow the lifetime value of each of our clients. To further these initiatives in the third quarter we continued to invest in global sales capacity and productivity new product and service offerings new geographic capabilities and upsell programs targeting existing clients. As noted earlier during the third quarter we announced the global availability of Application Management Services for SAP.
And today we announced the global availability of Application Management Services for Oracle database and applications. In addition to leveraging Rimini Street's award-winning support services for Oracle and SAP that replaces expensive and lower-value software vendor annual support with a more responsive and robust support offering clients can have Rimini Street run their Oracle and SAP systems day to day with integrated application management and support services provided by a single trusted vendor. As an integrated service Rimini Street can provide clients a better model better skilled resources better service outcomes higher satisfaction and save our clients' time labor and money. According to industry analysts the global market for Application Management Services is approximately $82 billion and expected to grow more than 5% annually. We believe Rimini Street is well positioned to disrupt this large market as an adjacent software service the way we disrupted the application support industry. We believe our integrated management and support service offerings is a unique and valuable competitive offering in the market and creates a significant opportunity for us to secure additional long-term subscription service contracts grow revenues and increase the share of our clients' IT spend.
Already we have achieved sales wins with our new Application Management Services and we are delivering our integrated application management and support service offerings to clients across a variety of industries. Competition. Competition with our primary competitors Oracle and SAP remains fierce. Both software vendors are engaged in continuing efforts to force their licensees to upgrade and migrate from current stable software releases to the vendor's newest immature products. Oracle is ending full support for some software releases by 2025 and SAP has declared that tens of thousands of licensees around the world using their most popular current product and release must migrate to their newest product by 2025 in order to remain fully supported. Data from surveys conducted by Rimini Street and published on our website indicate that 80% of Oracle respondents stated they are not planning to move or unsure about migrating to Oracle Software-as-a-Service products and 80% of SAP licensees stated they plan to continue running their current customized and mature SAP systems to at least or beyond 2025.
We believe the forced retirement of popular and stable releases by Oracle and SAP should create an even stronger demand environment and sales opportunity for Rimini Street's application management and support services in the years ahead. Recent Oracle litigation developments. On November 5 2019 we filed an appeal to the U.S. Supreme Court to resolve an issue in our ongoing litigation with Oracle. A hearing may or may not be granted. Previously we successfully appealed to the U.S. Supreme Court on another issue relating to our litigation with Oracle. And on March 4 2019 the court issued a unanimous decision in our favor and ordered Oracle to return $12.8 million in nontaxable court cost plus interest. Summary. We believe our continued investments over the past 18 months in sales capacity and productivity new products and services and global expansion are continuing to yield improved results. Before I turn the call over to Tom Sabol our CFO I want to note that Tom will be leaving us on November 15 to pursue another opportunity in the state in which he resides. Stanley Mbugua previously the company's Vice President Corporate Controller was appointed Group Vice President and Chief Accounting Officer effective November 5 2019. We are actively recruiting a new Chief Financial Officer. I want to thank Tom for his financial stewardship over the past three years which included the successful completion of several substantial refinancing transactions and taking the company public in 2017.
We wish Tom well in his new role. Now over to you Tom.
Thomas Sabol -- Senior Vice President and Chief Financial Officer
Thank you Seth and I want to thank you the Board and all my fellow Rimini Street coworkers for the opportunity to collaborate and assist with the growth of the company over the past three years. Third quarter revenue sales and marketing and general and administrative spend were all within our quarterly guidance range. And gross margin for the third quarter and year-to-date are both above our previous provided guidance ranges. As Seth noted revenue for the third quarter was $69 million a year-over-year increase of 10% with annualized subscription revenue of approximately $274 million. For the third quarter of 2019 clients within the United States constituted 65% of total revenue while international clients were 35% of total revenue representing aggregate year-over-year total revenue growth rates of 10% for both the U.S. and international markets. Gross margin was 62.4% for the third quarter down from 64.5% in the 2018 third quarter. While we believe that gross margin from our established services will continue to expand this will be offset by the ramp-up of costs associated with the introduction of our newer products such as Salesforce and the global rollout of our application managed services for SAP and Oracle mentioned earlier by Seth.
Therefore we continue to expect our overall gross margins to be around 60% to 61% for the full year which is consistent with our prior guidance of approximately 60%. Sales and marketing expenses as a percentage of revenue were 38.7% for the third quarter up from 35.6% for the third quarter of 2018. Sales and marketing expenses are currently running higher than the previous year's period due to the impact of sales rep hiring during 2019 where we have increased capacity by over 20%. We expect sales and marketing expenses to be in the range of 39% to 41% of revenue for full year 2019 with the high-end guidance down 1% from previous guidance. General and administrative expenses as a percentage of revenue which excludes outside litigation costs was 15.2% for the third quarter up from 13.7% for the third quarter of 2018. We expect G&A expenses as a percentage of revenue to be in the range of 16% to 18% for full year 2019 unchanged from previous guidance. The higher level of spend is due in part to increased public company costs for the implementation of the new revenue and leasing accounting standards along with increased personnel and IT system costs associated with growth and geographic expansion. Net litigation expense for the third quarter of 2019 was $3.3 million compared to $7 million for the third quarter of 2018.
The decrease is largely due to less discovery and remand work compared to the prior year. It should be noted that our outside litigation spend is not linear and can fluctuate each quarter based on litigation activities. We expect litigation expense to be in the range of $2 million to $5 million for the fourth quarter of 2019 absent any significant changes. GAAP operating income was $2.5 million for the quarter which was unchanged from Q3 2018. Non-GAAP operating income was $7.5 million for the quarter compared to $10.7 million of operating income from Q3 of 2018. Net income was $1.7 million for the quarter compared to a net loss of $48.4 million from Q3 of 2018. The prior year's third quarter included $46.9 million in debt discounts at issuance write-offs payments of make-whole premium and the write-off of embedded derivatives all related to the repayment and termination of the 2016 credit facility in July 2018. Non-GAAP net income was $6.7 million for the third quarter which was unchanged from the 2018 third quarter. Cash dividends on the Series A convertible preferred were $3.9 million for the third quarter of 2019 while payment in kind dividends were $1.1 million which were settled with the issuance of 1149 shares of Series A preferred stock to the holders on October 1 2019.
Reflecting the Series A dividends basic and diluted net earnings per share attributable to common stockholders was a loss of $0.07 for the quarter compared to a loss of $0.85 per share from Q3 2018. Adjusted EBITDA was $7.6 million for the quarter compared to $10.8 million from Q3 2018. Deferred revenue as of September 30 2019 was approximately $201 million up 15% from $175 million as of September 30 2018. We ended the third quarter with $42.2 million of total cash on our balance sheet. For the 9 months ended September 30 2019 cash flow from operations increased to $21 million compared to $17.6 million for the nine months ended September 30 2018. Now with respect to revenue guidance we are maintaining the midpoint of our full year revenue guidance of $275 million while narrowing the range to $274.5 million to $275.5 million and guiding fourth quarter 2019 revenue to be in the range of $71.3 million to $72.3 million.
And with that operator we'll now take questions.
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from Derrick Wood with Cowen.
Derrick Wood -- Cowen -- Analyst
And Tom we'll miss you. Good luck in your next endeavor. So I wanted to start on the really strong new customer count. I think the second biggest we have -- we've seen on record and I want to drill into this a little bit I guess a 3-parter here. So first it sounds like this was driven by improved sales productivity coming online. Any other factors to call out? Second are there any particular areas of strength either by product or geography? And then third given that it didn't really move the needle on changing your revenue outlook for the year I would assume these are perhaps smaller deals in nature. Could you just touch on that?
Seth Ravin -- Chief Executive Officer and Chairman of the Board
Sure Derrick. Thank you very much. And I think that we -- to answer your multipart. So first of all as you know we've put a lot of additional feet on the street with the sales program. We're starting to see as we would expect as those sellers become more productive we're going to see transactions not uncommon for the new sellers to be working on smaller mid-sized transaction. We also had quite a few on the larger side as well one of the better quarters in recent quarters of a mix of small medium and large transactions which is always our preferred pipeline structure. So I think that was a positive that we've seen on a global basis. I think in terms of strength of geography Asia Pac did very very well. We saw that across Asia all the way down through Australia and New Zealand. So the entire Asia Pac region probably the strongest performing region globally in the third quarter.
What's driving? I think we have a lot of traction with our new marketing messages that we rolled out at the beginning of 2019. And I think the indicators for that are not only to close deals but the growing pipelines and what we're seeing in terms of increasing lead-generation numbers. So I think we're watching it start to move its way through the pipe growing leads more conversion into opportunities and then movement into closed deals. So I think we're seeing all the things that we would want from a good marketing traction and that marketing message on top of it also relates to what we've been saying about the forced retirement of current releases from full support that's coming for the Oracle and SAP world. So I think that that's also giving us a boost that I think will play out in future quarters.
Derrick Wood -- Cowen -- Analyst
Great, That's great color. And I guess if I think about it a couple of quarters ago you had a bit more litigation noise in the market. Is this coming up less frequently in your engagements? Or is this always going to be part of your sales cycle? I'm sorry for the background noise.
Seth Ravin -- Chief Executive Officer and Chairman of the Board
No. Okay. No. I think for the time being it's always there. You look at the size of our transactions you look at the mission-critical nature of our support and I think there's just no way during the competitive cycle that our competitors aren't going to try and raise litigation as a fun item in the sales process. And it is something we pretty much still deal with in every single transaction. But obviously we work our way through that as companies do their diligence. It still does affect us. It still does have some deals that it derails the transactions. It's unfortunate but it is just the fact of being in litigation. It always has been for the many many years we're there. I would say though Derek it has less effect overall on the transactions than it did years ago. That I think is true.
Derrick Wood -- Cowen -- Analyst
Okay. And then on the Application Management Services it's probably too early but I mean it sounds like you've already closed some deals. So I just wanted to hit a little bit more on what the initial uptake has been and whether you're seeing it perhaps impact win rates or pipeline conversions or just conversations around selling your core offerings.
Seth Ravin -- Chief Executive Officer and Chairman of the Board
I'm actually very excited by it. I think we've seen -- we've closed a good number of deals already. We haven't hit the material threshold financially to talk about them as separate product lines yet. But I think when you look at it in fact that we only sell the AMS services to customers who buy our core support you have to buy the support to get the AMS. So because of that what we've seen happen is as companies have renewed and extended their contracts on the support side just to get the AMS and mix them together in an integrated service. So the upside is not only getting new additional accretive revenue but you're securing and extending the long-term nature of our support. So the bigger solution gives a customer an opportunity to stay even longer with us on a longer-term engagement with us much deeper embedded into the customers' IT department. So I think it's been very positive. It's been very well received on a global basis and we've put a lot of people in that department just to staff up. These AMS projects are big. One client alone we have over 30 head count dedicated to serving one of our new big clients on AMS. And that's where you're seeing the gross margin take a bit of a hit right now. As you would expect given our size you just look at our size and our ratios if you're going to be adding a significant number of heads like that you're going to take some hit on your gross margin in the short term but the long-term revenue upside is substantial.
Derrick Wood -- Cowen -- Analyst
Okay. A good segue over to Tom. And I know gross margin was down year-on-year but it was still a lot higher than what you had guided. So what -- and that was the same case a quarter ago. So what's been driving Tom the upside in gross margin?
Thomas Sabol -- Senior Vice President and Chief Financial Officer
Yes. So while as Seth indicated Derrick we are spending money on ramping up the AMS. The support margins continue to improve to offset that. So if you look at just our support-only margins those margins have continued to increase quicker than we would have thought. Again some of that's leveraged but it's also just more better efficiency. I know we've talked in the past about how we're using artificial intelligence with some of the things we're doing there to more quickly deploy and better deploy the right resources right tickets and with the right customers. And so we're seeing the benefit of those types of things on the support side which is why in the last couple of quarters as you mentioned we've exceeded our gross margin target. We still believe though for the full year we'll be in the 60% to 61% range.
Derrick Wood -- Cowen -- Analyst
Okay. You guys have a decent overseas. There's been some weakness in currencies relative to the dollar. Can you just talk about what the foreign currency impact was in the quarter and maybe what your assumptions are for the year?
Thomas Sabol -- Senior Vice President and Chief Financial Officer
Yes. We would say that the reason why we were at the kind of the lower end of the range part of that was clearly FX related. But a number of our contracts though were also in dollars overseas as well. So we don't think it's enough to call out with regards to discussing the impact and we wouldn't expect it to have a significant impact in Q4 going forward at least at this point.
Derrick Wood -- Cowen -- Analyst
Yes. Okay. And last one just an update on number of reps today or end of quarter and how you're feeling about the 80 to 85 plan by year-end.
Seth Ravin -- Chief Executive Officer and Chairman of the Board
Sure Derrick. We run at about the high 70s right now. We just had some staff changes. I think we're somewhere in the 77 79. So we're right about the 80 number including normal attrition and turnover rates. And I feel good about that number. We have been focused as we talked about before more on pausing the hiring a little bit and getting our productivity higher with the existing reps. We just needed to take a little bit of a hiring pause to absorb the new head count really get them up to speed because we believe we still have a lot of untapped leverage and capacity within the new hires as they ramp and you'll see that into next year that even keeping the same number of reps into the next few quarters because they're on ramped quotas our quota-carrying capacity will still increase into next year plus productivity. We think that's going to give us the kinds of numbers that we want to be able to achieve next year.
Operator
[Operator Instructions] And we have a question from Jacob Silverman with Alliance Global Partners.
Jacob Silverman -- Alliance Global Partners -- Analyst
Yes. This is Jacob stepping in for Brian. Nice quarter. Could you guys give us any color on the resistance you're seeing to Oracle and SAP as you're scaling up? I know you mentioned a little bit before but maybe go into a little more detail.
Seth Ravin -- Chief Executive Officer and Chairman of the Board
Yes. I think we're at an interesting transition point in the market where companies have -- who had these big enterprise suites from Oracle and SAP are in the middle of trying to understand the different IT paradigm which is "Do I move forward with another big monolithic next-generation system that will cost a fortune? And at the end of that multiyear cycle of implementation and changeover and huge investment will my business have any additional competitive advantage? Or will I spend all my time and focus changing out a back-end system that's already working at a transactional level and miss the opportunity to focus my attention in areas where I create competitive advantage and growth opportunities for the company." So there's a budgetary battle going on about choice of investment and ROI and there's also a battle about IT structure and technology where we're watching companies try to figure out whether they should again invest in another big monolithic system or embrace a different architecture which is all these best-of-breed products whether it's -- maybe I decide to use a Workday for payroll and HR and a Salesforce for CRM.
Even SAP of course have been buying products like Concur Ariba SuccessFactors all these pieces that come into effect. And Oracle the same. So we're watching a different architectural model that may be emerging of best-of-breed products all connected with integrators such as a MuleSoft from -- that of course is now owned by Salesforce or a Dell Boomi. And you're watching this. Is it multiple products from different vendors connected by integration or a full big suite from a single vendor? So this is the turmoil that's in front of them right now and they're moving to Rimini Street many of these customers exactly what our message is which is no one really knows how all these pieces are going to play out in these new architectures. And why not at least buy yourself a 15- to 20-year insurance policy move to Rimini Street save a fortune get better service and be able to delay those decisions from having to predict which of these models may be the better one? We believe five to seven years from now you're going to have an opportunity to understand which of these models is gaining traction which one is yesterday's model.
We believe some of these new products such as the SAP S4/HANA platform might in fact be the last of the dinosaurs. It might be the last major monolithic implementation that a company ever does. And if they wait five years they might discover that that's the wrong direction and they don't -- and they get to save that money and focus on new technology. So there's a lot of that taking place in the buying cycle. And the vendors from an Oracle and SAP vendor perspective they are not well liked by the customers. They're trying to shove these products down their throat when the companies aren't sure they need them. You've seen the backlash to it and you've seen the fact that there's a lot of resistance to changing out these major cost platforms when the current platforms work.
Derrick Wood -- Cowen -- Analyst
Okay. Great. And then for marketing expenses so you've been seeing a decent amount of uptake from new sales reps. Is there any -- do you plan on continuing that trend of spending more on marketing and sales? Or do you think that's kind of hit its peak for now?
Seth Ravin -- Chief Executive Officer and Chairman of the Board
I think we're trying to peak it out. I mean as you know we had to play catch-up from being held back by those covenants from our past financing that we only got to start spending money really 18 months ago. So we had to accelerate spending for the catch-up purpose. We would like to see our sales and marketing number come down a little bit into the mid-30s as we try to strive to GAAP profitability try to bring a little more balance. And I think if we can get another couple of good quarters in of performance improvement in the sales force and maturing of the sales force I think we're going to be able to start to tick down sales and marketing a little bit. But I think we're peaking right about now if we get where we want to be.
Operator
And our next question comes from Drew Foster with Citigroup.
Drew Foster -- Citigroup -- Analyst
You highlighted some strength internationally and you opened up a new office in Dubai. I was just curious if you were following the same playbook there that you had cited on recent calls where you are essentially opening up a smaller office with a few reps and a couple of support people or if you've made any tweaks to that model. And what's helped you so far internationally?
Thomas Sabol -- Senior Vice President and Chief Financial Officer
Sure Drew. I think that the answer is yes. I think we've got a pretty good cookie-cutter approach for most countries. I would say the exception was Mexico. Mexico I think we already have over 10 people in that office a lot of opportunity in Mexico with all the manufacturing down there. I think Dubai we put a smaller footprint there. We already serve customers in the Gulf region. And we're really trying to get a feel for where offices should be. We already have clients in Saudi Arabia and around the Gulf trying to get a feel for where we should position staff to be most effective not only for selling but servicing our clients in the Gulf. So it's still -- I would call it still in the exploratory early phase of figuring out the Gulf market. As you know we also serve the Middle East out of Israel where we have a very large client base and operation. So we are looking to fill in holes and gaps around the region because so many of our clients operate in 100 to 200 countries and we need the capability to service them in every time zone region and all critical languages.
Drew Foster -- Citigroup -- Analyst
Got it. Okay. And then you noticed -- or you mentioned that you had sort of taken your foot off the gas pedal in terms of hiring and have focused more on building out sort of the support functions of the sales organization in terms of sales enablement and maturing it. Can you help put some more color around just how more productive your reps have gotten as a result of those investments and where the maturity of that organization stands today versus what you think it could be?
Seth Ravin -- Chief Executive Officer and Chairman of the Board
I think the greater challenge -- it's interesting. Internationally I think we've been faster at maturing the sales force outside the United States. The U.S. is lagging a little bit. I think it's because we put more new reps in. And on top of the new reps we put new directors on top of them. And so I think you -- as we talked about in prior calls a little bit of blind leading the blind leading to more errors on the battlefield than we would normally like to see just as everybody learns the business. And when the manager and the person underneath them are new to the business that leads to a lot more errors. So I think just North America has got a little more catching up to do with all of its new hires. But I think the effectiveness of what we're doing in terms of maturing the reps globally because they were smaller teams had less new players added to them we're able to absorb them a little faster. And I think again North America will probably require another couple of quarters to get up to the kind of productivity level that we've seen in the past before we added in all the new hires and matching up to what we're seeing in the faster movement in international.
Operator
Thank you. And I'm showing no further questions. I would like to turn the call back to Seth for any closing remarks.
Seth Ravin -- Chief Executive Officer and Chairman of the Board
Thank you very much and thank you everyone. Appreciate the time today and I appreciate the questions. Look forward to our fourth quarter and full year call coming up when just -- into the next year. So with that thank you and have a good end of year for everybody. Thank you very much.
Operator
[Operator Closing Remarks].
Duration: 38 minutes
Call participants:
Dean Pohl -- Director of Investor Relation
Seth Ravin -- Chief Executive Officer and Chairman of the Board
Thomas Sabol -- Senior Vice President and Chief Financial Officer
Derrick Wood -- Cowen -- Analyst
Jacob Silverman -- Alliance Global Partners -- Analyst
Drew Foster -- Citigroup -- Analyst
