Rimini Street, Inc. (RMNI) Earnings Call Transcript & Summary

All right. Hi, everyone, and welcome to the 24th Annual Needham Growth Conference. I'm Matt Calitri, I'm a member of the Needham Software Research team. And I'm pleased to be joined by Seth Ravin and Michael Perica, from Rimini Street. A quick housekeeping item here. For anyone who wants to submit a question, there is a chat box underneath the presentation. So please don't be shy to throw those in, and we'll try to get to all of them. And with that, I'll hand it over. Thanks guys for coming.

Thanks a lot, Matt. Thanks for having us back again this year. And good afternoon and morning, everybody. Seth Ravin, CEO and Chairman of the Board for Rimini Street, and I've got Michael Perica, our CFO, with us today. I'm going to cover about the business, and he'll cover about the financial side during the presentation. And we'll leave plenty of time for Q&A, because we live in an interesting business where we've been disrupting the annual maintenance business for companies like Oracle and SAP in the ERP space. And now we are also disrupting the AMS market against players such as Accenture, DXC, et cetera. So we are living in many different worlds as well as our new security products. So we'll go ahead and just walk through this pretty quickly so we can get to Q&A. From a company perspective, we're 16 years old, nearly 1,600 employees across 22 different countries of operation. Truly a global company with over 50% of our revenues coming from outside the United States already. We've serviced over 4,400 customers, including over 180 of the Fortune 500. So we primarily serve large to very large publicly traded entities as well as government entities. We service a lot of different product lines, including from Oracle, many different products there as well as SAP. And we provide application management services to even companies and products such as salesforce.com. We've recently entered support for the open source arena, where we have many, many different companies around the world, who want to use open source products, but want to have a trusted brand and support for it, and not just rely on community, given the critical nature of those deployments. Very much the way you saw Red Hat step into the Linux space and offer an enterprise-grade product to the marketplace. We bring enterprise level support to open source products around the world. If you take a look at our revenue by industry and geography, we service just about every industry there is. We also service quite a bit in the geography globally, probably lightest on the African continent overall, but we've been expanding through the Middle East, and I would expect that Africa will be an area of expansion for us in the years ahead. We already service customers in South Africa. If you take a look at where we are, we're headquartered in Las Vegas. We were founded in Las Vegas, continue to be headquartered there, but we do have offices, as I said, all around the world. Management team, we bring together minds from the best of what we saw in enterprise software. We came out of PeopleSoft, many of us built PeopleSoft with Dave Duffield and the Aneel Bhusri, who went on, of course, to build Workday. We went on to build Rimini Street. Peter Gassner went on to Salesforce to help Marc Benioff build out Salesforce platform and then, of course, launched Veeva. Michael Gregoire went off to build Taleo, which was sold off to Oracle, went on to run CA. And of course, now he's off to other endeavors as well. We've brought in people from all different backgrounds including Michael, who joined us recently in the last couple of years as Chief Financial Officer, as we approach moving from the $400 million range of revenue as we set our sights on $1 billion revenue operations by 2026. The market opportunity for the services that we offer in the IT world is $170 billion. And here's how it sort of breaks out around Rimini Street's current offerings in the marketplace. Total a TAM of about $29 billion. So you can see not only when we're doing $400 million a year on average, you're talking about a massive expansion just within the TAM of the products that we service today of $29 billion. But then expanding out overall, if we added additional product lines, we have a $170 billion opportunity. One of the largest sets of TAMs you're going to find in the IT space. Now when you take a look at that, that really only comprises our 2 primary product lines, which is the support replacement for the annual maintenance on enterprise software, and it comprises the AMS products. This does not include all of our other products such as support for different types of technology, including the open source products, our security offerings, our professional services, and other product lines that Rimini Street has expanded into over the last few years. Now when we think about expanding into our market space is Rimini Street is a double-digit grower every year. We have all these different growth vectors that we focus on. On global expansion, we continue to add additional countries and territories where we sell our services. New products. We continue to launch new service offerings. And these are all subscription-based services. Today, Rimini Street, over 99% of our revenue is subscription, so very much like a SaaS business. And we also have the ability to have new licensed products. We've been developing our own licensed products, which we've made available in SaaS format. We're expanding out new logo acquisition. Tens and tens of thousands of customer opportunities for us to go out and expand on the logo side. And existing clients where we did very little upsell before, traditionally 10% of our new client sales were to existing clients. We have now refocused and we're driving that number higher. And we've talked to the Street in our earnings calls about moving that number up. We've seen north of 20% already as we continue to look for additional expansion in an area that we believe is over $1 billion a year in open white space on an annualized basis, that we can go after in our existing customers alone. So lots of different growth drivers, lots of different vectors here for opportunity. And we continue to pursue all of those, because we're financially capable of doing that today. Now the services that we offer customers continue to expand, but this gives you a sense of 5 different ways that we're helping clients today. The first one is our ability to retain out the annual maintenance fees, which are very high that vendors charge for annual support on enterprise software, especially ERP. We come in, we offer at half the price at a much better service model on that annualized support. And that composes most of our revenue today, as you've seen, we've been run rate annualized revenue of $377 million as of the end of the third quarter. We improved the enterprise apps management. So we will come in and not only replace the annual maintenance, but we will also run those systems for our customers today. So we can both run and do the support. And we're the only company in the world at scale that will do both of those things in a combined offering. So very, very exciting there. That's our new Rimini One service. And we will leverage public cloud benefits. We have the ability to move customers out of their data center, lift and shift their existing enterprise applications into an AWS, an Azure or Google Cloud, 3 of our preferred vendors, and we're partners on the AWS side. And we can do that and reduce their total operating cost by getting off older equipment and out of older data centers into hyper-scaled environments that are offered by the public cloud providers. And that will help them reduce cost on operations. We will also help them manage those public cloud operations to reduce costs further and even help them optimize their software licensing to make sure that they're paying the right license fees for the right services and the right products that they want. The combination of these 5 items alone should help them shift down operating costs dramatically, freeing up capital that they can then invest in other innovation projects. And we do that a lot. In many ways, Rimini Street has become a funding source for new projects when you can't go to the Board and you can't ask for additional money. Every IT department has a fixed budget, no matter how successful the company is. Rimini Street comes in, reoptimizes that spend within that IT department, lowers the cost around ERP maintenance and AMS operations, lowers the cost with cloud provision. We're able to do all of that freeing up additional capital that can then be used to leverage innovation, digital transformation funding and drive growth and accelerate growth for companies. And this is what's really behind Rimini Street's success year after year. In fact, as I mentioned, one of the unique things we're able to do is we pull together the vendor application support. We replace that and we replace the application management. These are generally 2 different levels within the IT infrastructure and support and service that's required within the organization. We pull those 2 together into our own unique offering and bundle. And this gives us a competitive advantage that nobody else has in the industry. Now competition is different depending on whether you're talking about support or AMS. So we list them out separately here, but these are generally the companies that we're going to compete with in each of our primary product lines. And then as I mentioned, the fact that we bring those 2 together in a unique offering, nobody else offers that at our size and scale today on a global basis. So clients are going to buy from us for a variety of reasons. One, to save money. Two, to refocus their teams and their budgets on more important strategic advantages that fuel growth. This is an important part. As I mentioned, this is really the primary driver. If you're someone like T-Mobile, and you're spending billions on potential upgrades and migrations to systems on your ERP side that you don't find valuable, but instead, you need to reinvest to build out your 5G infrastructure on a global basis. And you can redeploy literally 9 figures of money that we're saving them and plus billions of dollars of deferred costs on upgrades and migrations that you don't need on your ERP and allowing that to be reinvested in better parts of the business to drive value, that is common for us across as why you see us in 180 global 500 companies and in so many global 100s as well as so many large government entities. We do service for not only, which you would consider to be public help. We also see us in military, for example, whether it's the Israeli military, who uses Rimini Street or in nuclear power, weapon systems. So we are in all parts of government, all parts of the military and weapon sector as well as every other area of industry. Now we're also going to improve the ERP outcomes. These big systems on the ERP side require a lot of work. They're very expensive to operate, and we reduce those costs, and we improve the execution on those systems. We keep them up and running more. We keep happier users. We make them more productive overall. So when you take a look at our success, take a look at our support ratings, we have a 4.9 and higher out of 5.0 client satisfaction rate, which we believe is the highest in the industry. According to Gartner, we have 86% of the global market of independent maintenance around the world for Oracle and SAP products. And if you look across the board, we've saved our clients over $5 billion since inception of the company. So we really have a proven track record of success. We're looking to accelerate our business. We're looking to continue that growth, add additional product lines, and play a critical role as a mission-critical supplier to the biggest companies and government entities in the world. So I'm going to go ahead and turn this over now to Michael on the financial side, who'll go through that, and then we'll go into Q&A.

Thank you, Seth. Starting off with our key operating metrics, looking at the top left, active clients, as you see, as of the last quarter we reported. Q3 of fiscal year 2021, we ended with 2,793. Just as a clarification, this is a definition of platforms that we support. If you're thinking from an overall enterprise relationship perspective, roughly you can cut this in half. Turning to the top right, our annualized subscription revenue or ARR as of the most recent quarter annualized is the $377 million, continuing on an [indiscernible] growth trajectory. On the bottom left, the revenue retention rate, as the title suggests, this is dollar for dollar, well into the 90s, improving even throughout 2021, reflective as Seth noted earlier, of our solutions approach. As you noted on the white space -- as you noted on the improvement on the cross-sell, we're really seeing that play out, though this is a rearward-looking metric. We're seeing that improvement based on that component of our strategy. On the bottom right, our gross margin. Highlighting, we peaked for an annualized perspective in 2019, and rolled over later in '19 throughout 2020. This is reflective of the start-up cost of putting our managed services capabilities in place. We're actually pleased with our momentum we're seeing throughout 2021, an improvement in the gross margin and frankly, a reflection of the efficiencies we anticipated. And I believe we're ahead of schedule to see from an overall solutions approach and the value we offer to our clients from the core support total managed services. Next slide, Seth, please. Taking a look at our profit and loss statement, trending performance, nearly 1 quarter away from a 5-year look. For year-to-date, in 2021, we have 15.1% topline growth to the $275 million. Our gross margin year-to-date, up strongly, as I highlighted previously, from the year ago reflecting the efficiencies. And in part, as we noted in our last call that we are behind on some hiring, given the challenges that also assisted near term. On the gross margin trending throughout the year, we do see a dip typically in the fourth quarter. This is at the high end, the 63% of our annualized guidance of the 62% to 63%. Nonetheless, doing well on that front. Sales and marketing as a spend in line. Our G&A up 170 basis points year-to-date. Year-over-year, we have highlighted first half of the year due to various activities, mainly on the capital market side. We had one time a couple of million dollars of spend, that is behind us. And you should see the trend as we saw in Q3, continue through the rest of 2021, as we noted and guided to continue to come down on an overall perspective. Healthy adjusted EBITDA margin, the 13.3% despite some of these cost challenges and inflationary pressures, delivering expansion there. We're feeling good in that category as well. Next slide, Seth. Taking a look at our long-term financial model and goals. We highlighted this. We're standing by this. In February, nearly almost 11 months ago, nearly a year ago in our first Investor Day, February of 2021. If you take a look at the implied top right CAGR, our long-term revenue growth target of achieving the $1 billion through fiscal 2026 combined with the operating margin to 20%. And clearly, we are engaging and grading ourselves on a rule of 40 model. We're out of the gate a little bit behind on the top line as known and noted throughout our updated guidance as you see the $371 to $372 million. Nonetheless, based on our gross margin performance and opportunity for leverage to our adjusted EBITDA and operating profit, we're trending ahead. Nonetheless, it's not going to be a straight line as we know, but we do see significant growth based on our strategy, opportunity as well as the leverage that we see mainly on the gross margin, the G&A, but also can see some on the sales and marketing side as we improve the efficiencies there. Next slide, Seth. Taking a look at our cap structure. Highlighting as of the most recent quarter, September 30, the shares outstanding of the 86.7 million. If we take a look at the potential dilutive items, we were not -- did not have a diluted weighted average share count. But given the refinancing of our pref that occurred in the July time frame, and there was a lot of onetime items and cleanup in that quarter that are behind us. Looking forward relative to the share price, see a diluted share count in these various items in the low 90s, 90 million range there. We would like to highlight our overall financial position as we see in the table below net cash position of the $18.8 million, we ended last year and a net debt position, calculating our pref instrument that was slightly over $150 million, we had a net debt position of $67 million, $68 million or so. So that's nearly a $90 million liquidity swing just in the 9 months, highlighted through a series of activities in the capital markets with discounted repurchase of the pref in a couple of tranches and a successful equity offering as well as a closing out and paying off through a debt refinancing with -- as you see at the very bottom of the slide, with very attractive economics, in the 2-ish 3% range. So as you can see, it's assisting on our -- building our cash, augmenting our operating and free cash flow generation in the area that we have noted and we continue to focus on. I think that's it for me, Seth, and we can turn it back over to Matt, and we can go transition to Q&A.

Thanks, Michael.

Excellent. Thank you, guys. That was great. All right. So a couple of questions rolling in here. And as a reminder, please feel free to keep sending them in the chat. We'll try to get to all of them. We want to open up here, and Seth, the news this week came out on some legal activity. I just wanted to kind of get your thoughts on, I guess, the ruling and where you guys are at with that and how you see it moving forward?

Well, Matt, as we said, we're disruptive. And when you disrupt a multibillion-dollar business -- let's not forget, Oracle has $20 billion a year in annual maintenance fees at nearly a 95% profit of margin. So there's obviously a lot of desire on Oracle's world to try and preserve that, and we've been battling for 11 years in court. This is what it takes when you disrupt an industry. You have to go through these cycles. It's going to be David and Goliath battles. That's the way it is. And we started this battle with Oracle when we were less than $30 million a year in annual revenue. And as you've seen, we're run rate now of nearly $400 million. So during this entire 11 years, we continue to grow through this process. We manage it and it will probably go on for several years more, but the impact to the business, which is really important to understand, we are not prohibited from providing any support services for Oracle products. We are fighting over the way in which we provide those services. And that's what's been in the courts for the last 11 years. There's upcoming additional trials, which will probably go on to years more of appeals. But we've been all the way up to the Supreme Court where we had a 9-0 victory against Oracle, which was a great win for us and making new case law. So when you push the envelope and you're in new areas, this is what happens. We had some rulings this week. It was a mixed ruling. The court ruled half in our favor and half in Oracle's favor, and so we'll continue to work through it. But these are just, as we say, there's many battles in a full war, and we continue to believe we will win the full war eventually to create a fully open and accessible market for competitors like there is in every other industry.

Yes, that's a great way of looking at it. Thanks for providing some color there. Another question here on -- so there's a slide up, and you noted there's been a refocus on existing customer growth as well as going after those new logo opportunities. And you mentioned, too, that you saw a big market there. Was that the biggest driver for this refocus? Or what exactly kind of told you that you need to change the approach?

I think, Matt, when we built the company, we specifically focused on new logo acquisition for the first 13 or 14 years, because it was more important to establish our position in the marketplace with logos. So that you had breadth across the customer base. So that was the absolute focus. So we didn't spend a lot of time upselling or cross-selling the existing client base for their other service. The other thing was we only started launching the AMS and our other service offerings in recent years. So now we do have this big bag of services that we can take out to our existing clients and say, "hey, you're only using 1 of our 10 services. Let's take a look at the others. We think we can help you with a lot more." And our clients -- and I know that when the analysts go out and talk to our clients, they see us as one of their most trusted providers and they're telling the analysts that they want to buy more services from us as that trusted provider. So you have all the elements. You have the clients, who want the services. You have Rimini Street now offering the services. What we've been doing in the last couple of years, which, of course, you saw even in the third quarter, we have some growing pains around -- we're building a multiproduct sales organization where we used to just sell the support. It's really complicated to move a lot of different products through the same sales force, training everyone up, how do you support that? How do they go to market and sell that when you have different buyers within the organization? So the transition from being a single-product company to a multiproduct company can be a bit painful. And you're saying that over the last years, even though we continue to grow and we're putting up some really strong numbers, we believe, at the same time, you've got to get through the sales force transformation and there's always inefficiencies and challenges when you do that. And we're -- as we've said, we believe we're 70%, 80% through that transition cycle, but we still got some challenges to get through it to get all those products out to market in 22 countries.

Yes. That makes a lot of sense. So what would you say that mix is kind of looking like now as far as the new logos versus the upsell?

Well, we -- and as we said on the last earnings call, we've been seeing -- we've moved from, we believe 10% of our new client sales to about 20% selling back to the existing clients. So that's a huge -- we've literally doubled the amount that we're selling to the existing clients as a percent. And we think that if you go out there and take a look, the really, really top SaaS companies sell about 30% back to existing clients. So we've set that as a goal. It's not a short-term goal. But from a long-term goal, we want to match up what we're seeing in the best of SaaS companies. And so we've set sort of that target around we'd love to see 30% eventually coming from existing clients.

That's great. Yes. And you mentioned the global expansion, and that was a part of the presentation as well. What areas are you looking to -- are you seeing this expansion to? Are you looking to next? And what's sort of the process for how you choose which territories you're going to target?

When we started the company 11 years ago -- 16 years ago, everything was opportunistic. You get a large deal, someone's in the new country. That's what you use as a lever to go there. You're watching Rimini Street, as we mature into this $1 billion arena on revenues, we're switching from opportunistic to more strategic, which means you start to plan ahead. You start to look at the markets and make decisions about where you want to go into, rather than letting a deal pull you in. And so that's where we are now. We're in that process. We're looking at it. For example, we just opened the Philippines with a new entity there, because we already have clients on the ground. And we're making some decisions about Europe. Europe is always complicated. You have a lot of different countries and different cultures between north and south. There are countries we're very successful, and there's others, we haven't really done much in. And so those are the areas, I would say, we're really focusing in. And I mentioned Africa. Obviously, China has been extremely busy in Africa, looking to the opportunities there. It's still a very untapped market, and it is for Rimini Street. We've got clients in South Africa. But most of the continent, we really haven't done anything to tackle or look at strategically. So those are areas that are big expansion opportunities for us.

Excellent. Yes. Is there any role with partnerships in the global expansion? Or you said it's been a bit more proactive now. How exactly are you approaching that?

Well, we do have partners. We do have resellers, very few of them, mostly in Asia. And we do have alliance partners, who we work closely with side-by-side in different countries. We have not had an expansive partner program yet, but I can tell you that in the future, we certainly do expect to have more partnerships and alliances, because the size companies we service are so large. They have many, many different providers. Some of them we work with, we've got agreements with, where we will tackle issues together. So I think, again, as we mature and -- Rimini Street is that 800-pound gorilla in extraordinary IT services, we're going to be very specialized. And we want to be -- very much we want to be the McKinsey of IT. We want to be the guys that you call in. When you've got complex issues, you need a path forward that's not easy. We're the guys you call to help figure that out and build and support that solution. So I think, again, we're maturing ourselves into this market position through the success that we've done and the companies we serve. And I think you'll see more partners as part of that program. I think it's a requirement.

Yes, that's excellent. Thank you for providing some color there. A couple more on the macro side here. One big theme we've seen recently is this great resignation or great attrition recently. And it seems like the more for talent just gets crazier and crazier. How has that been affecting your hiring process? What kind of things have you been doing to kind of combat this? And what's your outlook for the next year or so?

Nobody has been exempt from this challenge, even us. I mean we've had traditionally a loss rate of 10%, which is less than half the industry rate. So we've always had a very, very strong retention rate for our employees and long-term tenure. The number of people over 10 years, because we give out 10-year awards including a month's sabbatical and all sorts of things that go with that, has been really amazing how many people are in that category. But we have seen churn mostly in people, who have started in the last couple of years. They don't seem to be as anchored as long-term employees. So we're really focused on that. And of course, every company is looking to say, where -- why are these resignations coming? Where are they going? What's the purpose? What do we do about it? We have chosen not to throw money at people. Some companies have decided to just simply throw money to see if that stops it. We don't believe that money is the motivator. We have to be the place everybody wants to work. We want to be, as we said, that McKinsey of IT. We want everyone to want to be here, and we've always had that strong attraction. So we are looking -- we're changing some jobs around a little bit. We know that, because Rimini Street's allowed most of its work force to work remotely even before the pandemic. That's not been a change for any of our employees. That flexibility has been there for most people. So we're really trying to understand what are people looking for? What are they restless about? And I think it's really about career pathing. Most people want to know how do I move to the next level? How do I get 2 steps forward? And I think we have work to do like a lot of companies and making that clear, hey, if I do this, this and this, I can move up in my career. And I think those are really the keys to helping people stay longer, so they don't feel like they need to go somewhere else to move their career forward.

Interesting. Yes, it's always neat to hear that the different approaches that companies are taking, because like you said, no one has stated it, and there's a million different ways of going about it and trying to get into people's minds as far as what they're doing. Well, a bit more of like a broader outlook here. What's the trend that you see in the industry that you think will happen faster than people are currently predicting?

Well, I've been excited again -- traveling the world before the pandemic, I used to spend 80% of my time traveling globally to meet with clients. Now we do it remotely, but the message is the same on a global basis. I think what's really amazing, as horrible as this pandemic has been, as terrible as it's taken on a human toll, an emotional toll, the impact that we have had in accelerating digital transformation, process improvement, all of the -- using electronic process where we used to use manual. All of those things have accelerated on a global basis out of need. And I'll point to Japan, for example, which has one of the most conservative business cultures. When you get a contract from Japan, it has to be bound in a special paper contract, in a special format, and we sign these things manually again and again. For the first time since we started the pandemic, people using electronic signature and the government has gotten behind electronic signature. So now we use DocuSign to sign contracts. And it's really exciting to watch something that would have taken another 10 years likely in evolution, has now been sped up to the last year and 2 years, and people's mindsets are evolving and their understanding that we can do things better and faster, and we can use humans for the things where they need to make decisions and use judgment. And we can use automation more. UiPath, another example of a great company that's doing exciting things to automate roadwork where people have to do the same thing again and again. So that, again, we can use our most expensive resource, human beings, to think and to use their judgment, things that the machine cannot do as well. So I think it's pretty exciting how this is going to accelerate really the globalization of technology.

I've never heard that sort of cultural piece on the Japanese contracts. That's very interesting.

Yes. I mean it's an advanced culture. But business-wise, you have to follow very strict low-tech operating models in the past.

Yes. And it's interesting, you talked about the acceleration of the digital transformation. That's something we hear a lot with our coverages. And I guess on that note, too, and we sort of -- we spoke about the whole COVID thing before we jumped on live here. But how else have you seen it affect your -- I guess, your business and your customers' business? And are you seeing any like material impact from this most recent Omicron flareup?

Well, I mean it's unbelievable how fast it's spreading. It really is not stopping at the door of any vaccine. Although I'll tell you, it's saving lives left and right, no doubt, and I've seen it in our own company. But we're having about 10 people a day get sick, which is highest we've seen of any time during the pandemic. Now luckily, again, because most of our people are vaccinated, it's fairly mild, and they're continuing to be able to work. So it's not taking them out of the workforce. It slows them down a little bit. But I don't think it's going to have any real material impact on our business. Sure, it's frustrating whenever one you're talking to is sick and they can't get this done or that done. So there are -- it slows down some things, but it's not going to interfere, I believe, with the business. And from our clients' perspective, I think it's the same. It's a drag on the business. It's not stopping the business. It just means we can't be as efficient as we want or if you think about it, just add up the labor hours. If I've got 10 people, who aren't working that week, 10 times 40 just assume that, assuming people, I mean, 40 hours will be a short week at Rimini Street. But that's 400 hours of labor that may not have gotten done that week. So yes, it's going to slow you down a bit.

Yes. No, it makes a ton of sense. And like Chris saying earlier, hopefully, soon enough, we'll be back to doing these in person. I want to be sensitive to your time here. So maybe just one more. I guess, for our investors on the call and everything, what would you say are your biggest priorities for the year ahead? And what do you want everyone to kind of leave with the takeaway message?

Well, I think everyone, who attends our quarterly calls knows. I mean we are focused on the go-to-market sales execution. We have a massive market. We have fantastic proven products and services that are loved around the world. And it's all about how much can you sell. Building out a bigger sales force, we've jumped from 14 sales reps to 70 to 80. We got to get to 200 reps in the coming years. It is really challenging to build up, to hire that number of people, train that number of people, and get those number of people selling efficiently on a global basis. All of that is very challenging for any company. And so I think that's where -- once again, we are focused. We have the products, we have the market. It's all sales execution for us, and we're rebuilding marketing and sales. The entire revenue engine is being upgraded and scaled to handle billion revenue operations.

Excellent. That's great. Well, good luck with everything, and thank you so much for being here, both of you guys, and thank you to everyone, who joined in to view. I hope you enjoyed the conference this week and the remaining talks here, and we'll be in touch.

Thank you very much. Thanks, everybody. Have a good day.