Rimini Street, Inc. (RMNI) Earnings Call Transcript
June 2, 2022
Earnings Call Speaker Segments
Great. Thanks, everyone, for coming. I'm Derrick Wood, senior analyst covering software at Cowen. And we have Rimini, Seth Ravin, Founder and CEO. Thanks, Seth, for coming.
Thank you for having us, again.
Great to see you. So as usual, I guess we'll kick off with a brief overview of Rimini and the journey you've been on.
Sure. We're 16 years since founding. We've been public for 5 years. We are now around $400 million in annual revenue. And our target is, of course, north of a 20% operating profit hopefully by 2026 is our target with a target of $1 billion of revenue annually by then. We turned out -- we're really a tech-enabled service. We're turning out gross margins north of 60% and see ourselves with an ability to get to potentially mid-60s by 2026 and potentially even beyond that. Our market size, our TAM is about $170 billion in the tech space. What we do is -- our primary business is we come in and replace enterprise software maintenance contracts from vendors such as Oracle and SAP. We'll come in, replace those at roughly 50% of what the customer was paying the vendor, providing a better service contract with a higher amount of responsiveness and services. And from there, we're now building out. We have our AMS business. We have a security business, professional services. So now we have a full bag of products and services to offer our customers to grow that footprint.
Great. You're certainly trailblazing a new market, and you've now been in the market for a long time. So what's the reception around third-party maintenance? And maybe if you talk about geographically where there's more reception to it and where there's challenges and how you keep overcoming those questions around the idea of third-party maintenance.
Well, there's no doubt we've disrupted a very lucrative market since the vendors will tend to have over 90% profit margins on this business. So we stepped in at a different price point, with a better service, and we've seen reception globally. We have operations in 22 countries, nearly 1,700 full-time employees and about 1,000 for specialty work on contract. We've continued to grow now with basically over 4,700 customers worldwide including 180 of the Fortune 500. So we've watched the business go from something that people would adopt if they were considered brave or a market leader. We now are really reaching mainstream with the size of the customer base. And I think, again, being a critical mass business, the more customers that make these changes, the more feel comfortable coming on board. We've seen great demand all over the world. We do about 60% of our revenues in U.S. The rest of world is the other 40%. So again, good distribution globally as well as by industry. We service just about every industry out there now.
And what are the most common applications that you see moving to third-party support? And what does that journey typically look like? Or why do they make that decision to go that route?
So they could make the decision for cost savings, but that has transitioned more and more into taking the savings that we deliver and being able to reinvest it back into other initiatives, especially digital transformation, innovation within their business to improve competitive advantage. So that's the real driver. You're really in an optimization mode where we're helping them figure out how to spend the right amount of money on different parts of IT. We are coming at this primarily with core transaction systems, big ERP, CRM systems, payroll, anything that's a large transaction system, we help drive better value out of it, better reliability in the system, and we remove cost out of that equation.
What's the -- I don't know if I've heard you give this, the average lifetime of a customer in terms of how long they stay on support and, ultimately, they may decommission the application altogether and then move on to the next one. So maybe there's longevity of that customer. But typically, how long before they retire an application?
Well, these transaction systems are so large and so customized that they're using them for 10, 15, 20 years. We have clients who have signed 10-year noncancelable contracts because they have that much view towards the future that they're going to use these transaction systems because we've been able to provide a support level that they can rely on to drive value out of those 10 years. And that's on top of, in many cases, 5 or 10 years that they've already had the systems. So this is in great contrast to the software vendors who always are trying to move people to new systems about every 3 years when the real life of these systems is 15 to 20 years in terms of average lifespan. So our -- from our point of view, we believe we're going to have a lifetime value of customers probably between 5 and 10 years on some of the services we offer. But now that we offer AMS, where we're running these systems for them, security and other components, we believe we can extend that lifetime indefinitely with the other services.
You mentioned the forced upgrades and stuff like that by the vendors. Any -- if you look at over the next few years, are there any market catalysts from those core platforms to think about forced upgrades, things like that, that could benefit you?
Well, sure. First, you have the vendors always trying to pull the new product in because that's how they make money. And of course, they do that with the systems integrators, who, of course, want to do those new implementations and upgrades. That's a huge driver of revenue for them. So we come in at a different place. We're there with the customer to drive value out of their existing systems while helping them fund transformation and become a leader in their industry or maintain their leadership in an industry. So we truly have transitioned into a strategic play, whether it's a large global like Hyundai using us in 100 countries, even a Toyota, GM, et cetera. So it depends on the industry, what we're able to do in that industry, I think we're going to continue to help people at a strategic level. Take a look at the environment we're in today. We've got interest rates. We've got war. We've got pandemic. We have never had more issues facing organizations and how to navigate supply chain, labor shortages. We have people who are absolutely frozen from an IT perspective and business strategy because they don't know what to do. Deglobalization, should I build that factory in China or should I rethink that and build it in the United States or somewhere else? All these issues have fallen on IT, and they're all IT solutions to many, many of these components. And we held, for example, an event in Tokyo last week. We had 150 executives show up, a CIO, CFO, senior executives, all hungry to try and understand how to navigate this environment and how we can help them do that. So we're extremely bullish that we're good. In good times, we do well. We grew every single year through the economic expansion. We've grown every year since we were founded 16 years ago. And we see acceleration in times when there's confusion, when there's a lot of disruption in the marketplace where we can add value.
And that's -- there's certainly a lot of confusion and uncertainty, so this environment should play well in terms of certainly getting the attention of new customers and existing customers.
Correct. And we're seeing more existing customers expand their contracts with us, with our invoicing going from 10% towards existing clients, 90% new logos. Now we're doing 30% from existing customers. So we're definitely seeing customers buying up our new expanded service portfolio and adding that to the Rimini Street bills.
Wow. Okay. What about the -- I mean, sales force was kind of a newer partner. It's been a few years and you're servicing that environment. I think it's still pretty small, but any update on the demand out of that?
Well, lots of growth in the AMS space. We're adding more countries. It's fascinating, as you roll out some of these services globally, you run into different political issues. For example, some of our customers are also now becoming our competitors. We're very heavy in the tech space, for example, serving large tech companies. Some of those companies are the very companies we're competing with in other countries. And so it creates this new co-opetition challenge that many companies have, and we're having to navigate that because some of the services we're literally offering to compete are the services that these other tech companies are using from us.
I was referencing Salesforce.com.
Even on the Salesforce platform.
So they do have like a value-add service that they offer.
Yes. And some of these players are actually using our Salesforce AMS services, and we're out competing against them in those marketplaces.
Yes. Yes, who are the competitors in AMS?
Well, they're a different set. They're not the software vendors. It's the SIs. It's Accentures of the world, the DXCs, the Capgeminis. And it depends on the market and who's got the presence there, but we are actually out to replace all of these players in different countries.
And what's your -- do you have an advantage play versus -- I mean, those are obviously very large system integrators. Like what's your advantage?
Sure. And we're winning against them even with our early part of the business. One of the key advantages we have is they're all bespoke contracts. We come in from the ground up, analyze what the customer needs, build a customized program. And one of the most unique factors is that for us, we are able to have our teams on the ground escalate up to our service teams who provide full support. So unlike companies that normally move up in a market and they do things that are more challenging, we actually start off and support, which is the most challenging arena. We're the provider of last resort in terms of the stack. Now we're moving downstream, so it's actually easier for us to run a system that support it, and our folks all work together as a single offering. Nobody else offers that in the marketplace.
Yes. Okay. How about on -- what are you doing in security? Obviously, yes, security is going to be -- people do not cut budgets, and it's super important right now as more data goes to the cloud and more ransomware and all that stuff. So what are you guys doing on the security side?
Well, security is an area of a few people associate with Rimini Street, but it's been growing in our sales quite a bit. We're partnered with McAfee on one product. We're partnered with some other companies on different products. We can support a database, middleware and application-level security. We offer the ability to close an attack vector in a matter of hours using virtual patching technology unlike the software vendors who are using the old way, which is you have to figure out what the vector is, you have to create a software patch, then you have to test it, get it out to customers. Customers then have to do tremendous regression testing to make sure it doesn't break any of their systems, then move it into production. Even Oracle had said it can take a customer over a year to apply that kind of patch. Meanwhile, they're exposed. We can solve a patch issue in a matter of hours using virtual patching, where we create a wall around the database, around the applications. We're able to make changes to middleware. And these technologies are very, very advanced, and customers are adopting them very successfully.
Okay. Interesting that you mentioned that 30% of your revenue now or your new bookings are coming from the installed base. That's moved up from 10%, and that's really due to the AMS and security cross-sell?
And professional services, which wasn't available before.
What -- I mean it's probably hard to have a -- maybe there's an average number of what the ASP uplift is if you add AMS, for example. Do you have an average number in terms of what kind of uplift it is?
Yes, I can tell you that the average is that if you were paying for support and you called that 1x, that the AMS uplift if they add AMS tend to be 2 to 3x. So you would literally go from 1x to a 4x type model if you add AMS alone on top of the support. So it's a very, very big uplift in terms of revenue.
Wow. And what does the gross margin profile look like versus core support?
Well, the way that we're looking at it is on a blended basis. On a blended basis, we're still talking north of 60%, which is why we're targeting and still very optimistic that we'll see a steady state of 60 -- mid-60s in terms of gross margin by 2026. Now it does have a slightly lower margin profile. But when you blend that with our other services, we still feel very confident we're going to see gross margin expansion.
How do you think about targeting other vendor ecosystems like Microsoft and IBM?
Well, we do support some Microsoft products in the database world. We support IBM database products and middleware. So we do already have expansion into those areas. They're not as big in some of the apps, but we certainly would continue to look to expand. Now we do open source database as well. So we have increased and expanded the number of products that we're supporting officially. Unofficially, we have what we call the shadow support, a group of products which are products we support but they're not on a line card anywhere and they're not advertised. That's over 90 different additional products like OpenText.
Okay. Open -- what open source tech do you support?
All of the databases. Yes, so all your major databases, from MongoDB and even the MySQLs and others at Oracle.
Yes. What about helping companies run maybe in single-tenant cloud environments, if you're going to create kind of private cloud within an AWS or something, it would seem like you need some help running that if you're going to have to control that. Is that a market opportunity?
So we're partners with AWS, and we continue to work closely with Microsoft and Google on the Azure and the Google Cloud products. We are helping many clients pick up their existing licenses from their data centers and lift and shift and move those over to AWS and Cloud workloads. And that's simply because the economics are there, and we're big supporters. The cost of when you depreciate your equipment in the data center, everyone facing massive data center cash outlays to rebuild the next generation of servers, it's cheaper, more economical and high security to move to one of these cloud environments. And then they often will get better performance because of the hyperscale. And so it really makes economic and performance basis to make that move. And we are helping customers do that. And we offer services through professional service to help customers make that transition.
But the core application focus still is around ERP, payroll. That's probably the most common.
Heavy ERP, including the payroll, including CRM
And CRM. Okay. And the Oracle, SAP split still kind of the 2/3, 1/3-ish?
Yes. We have so many of the Oracle products, it's such a wide suite. So it's about 70% of our revenue related to Oracle products and about 30% on SAP products.
Did you recently name a new CTO? So what's -- any new focus from the office of the CTO created?
Sure. This was a whole new group that we created at the office of CTO, Eric Helmer, a great technologist. And what we do with our CTO is it's less internally focused. It's really more externally focused. They're building road mapping and assistance on technology road mapping for our clients and our prospects. So think of it really more as a service to help clients, again, figure out where they're going to go in the next 5, 10, 15 years on an unbiased level. Most of the vendors, of course, their whole bias is they want you to use their products. We are product agnostic. So we will look at the technology, we will look at the goals of the company, and we will use that to design a road mapping for the customer.
Okay. Can we talk -- I know you've made a lot of changes from some of the leadership, from the CMO to some of the hedge of different regions and sales. Can you talk about kind of all the changes you've made over the last 6 or 9 months?
Sure. It's an amazing journey when you're building for multibillion-dollar operations. As anyone who's ever built the company from dollar 1 knows you go through different phases, different organizational structures, different leadership needs, where you move from the entrepreneurial class of management to scaling class. Now you have thousands of customers. You have $400 million of revenue. To get to $1 billion, you have to change the structures for scale, and you need additional management that has been there and done that on much larger deployments. And so you've watched Rimini Street bring in different new leadership who have that experience such as our CMO, who was Head of Brand for Oracle, or our new Head of Sales for the Western U.S., who was also a senior leader at Oracle. This is a common part of that transition. And so yes, we'll continue to make leadership changes to evolve the organization for that multibillion-dollar revenue operation.
I guess, bringing people from Oracle, how does that help you in strategic and tactical warfare?
Well, I think if anyone knows the company and you've ever gone out to Oracle's website, you'll find these actual pages would say why you shouldn't go to Rimini Street, which is amazing because it's the only vendor you will ever see up there all these years. And it's an amazing tactic because we all know the IBM way, which was focus on your business, don't never talk about your competition. So this flies very much in the face. But the nice part is, is Jeff Spicer, who just joined as CMO from -- who is Head of Brand for Oracle, was the one who came up with those pages. So it's especially nice when the people who are fighting us, who are coming up with the tactics against us now have switched sides and have joined us. And I think that's an important status point to know where you stand in the marketplace when those who didn't take you necessarily seriously in the early years are now looking to join and switch sides and become part of a global force with us.
Interesting. Yes. And you mentioned the new Head of Western U.S. I think you've kind of combined theaters with Latin Am and North America. So you're kind of putting these pieces together. What else needs to get done and new hires that you're looking to do in the months ahead?
Well, we have filled out a lot of the management positions that we set out to rehire. We created a lot of new management, of course, to handle the size growth that we're looking to achieve. We've been combining geographic regions to reduce overhead costs. And so that's all part of that scaling function. As the organization grows, when you're handling thousands of customers and you're preparing to handle 10,000 customers, you have to make these moves in order to have the streamlined operations to handle that scale.
And on the -- did you make any changes from a comp structure perspective? I know it's a tough hiring environment out there. You're still working on kind of getting sales capacity on a net basis and a stronger growth mode. Can you talk to those 2 dynamics?
Sure. Of course, it's a hiring challenge for everybody. That's across the board. We've seen costs go up like everybody else in labor, but we've been able to successfully offset that because we have operations in 22 countries. We've been able to shift some hiring to lower cost markets. We've also had new technology that we use, which is proprietary. And we've had patents issued, which great. That has allowed tremendous leverage in our resources, which is how we continue to grow gross margin even at a time when costs are increasing across the world of engineering and other positions. So we've been successful at managing through that. Of course, we've had, as you know, challenges hiring sales reps. When you're out hiring the best of the best, we're competing against everybody for those great hires. That cost, by the way, has gone up from what was about $240,000 for a $2 million a year quota rep has gone up to about $310,000 over the last year, pretty significant. The nice part is most of that, you don't have to pay unless they actually achieve the numbers. So that's the good thing about being highly leveraged sales reps. But we've seen these costs go up. And those, of course, affect everybody's operation. But I think we're managing it well.
What -- do you have any targets for end of the year in terms of where you'd like to be and growth in sales capacity?
Well, we said 95 to 100 sellers. We've been between 70 and 80, so we still believe it's doable. We brought in a new Head of Revenue Recruiting to drive higher numbers out of the recruiting function and deliver higher-quality reps. So I think overall, we've been pleased with the numbers that are coming out of the new team. But it's going to take a few months, I think, to measure the quality, to make sure that it's not just quantity.
It takes 6 to 9 months to ramp up, too, right?
Yes, full ramp, we've seen as much as a year to get fully productive. Our reps who are on board a year or more as a group are generating, on average, 90% attainment numbers plus on $2 million quotas. So we're very, very productive once we hit that full stride.
Yes. And I think Q1, you talked about ASPs being up 2x year-on-year to like $400,000 on maybe lower deal count. But certainly, the tenured reps were kind of putting up larger deals. Is that -- was that an aberration of having kind of 2x kind of deal sizes? Or is that a bigger trend to take?
I think we'll have to see based on Q1 numbers, but I feel like we are definitely seeing a trend towards more big deals. We've seen quarters where we've had a record number of million dollar plus annual fee deals, which we consider to be a major deal. And we've seen on top of that where we've done our second and third and fourth largest deals in our history in the last few quarters. So we're definitely seeing large deals come into mix.
But they seem like they have been a bit lumpy. International, a couple of quarters ago, had maybe deal slippage or something, and the growth has decelerated. How are you feeling about getting international growth reaccelerating?
Well, first, you have a flow-through. The third quarter last year, because we missed a bunch of SAP deals, that flow-through on the rev rec is, of course, going to have to work its way through the snake, as we say. And we think that, that should probably be another quarter or 2 before that's fully through. But I think that overall, we've made progress. That was growing pains, a lot of new reps who didn't know how to go out and close complex deals yet and not enough management over them to manage that process, so we definitely tripped in the third quarter on new bookings last year, although the rest of the number were strong. And I think, again, we have been a bit lumpy. We grow. We grow every quarter, we grow every year, but it's been a little bit moderated in the growth because of all the investments in transition that we're doing at the same time. And so you do pay a little bit of a price for that, but we have, again, continued to grow through it.
So to get to $1 billion in the time frame you've laid out, you certainly have to see a good amount of growth acceleration. And you feel like the investments you're making this year, you really start to see that pay off and stronger growth next year? Is that the framework to think about?
Yes. I think if you do the math to get to $1 billion from $400 million, you've got to have a CAGR north of 20% through the rest of the next 5 years to get there at that run rate. From our perspective, we're still holding to our confidence in the ability to get to that $1 billion run rate in 2026. And I think that from our perspective, in order to do that, we've got to get a 2 handle on growth next year, in '23. So everything you see us doing right now is building and trying to complete the infrastructure transitions, the hiring, everything we need to put in place to have a running start on January 1, '23, because we all know with ratable revenue, you got to kind of get those deals done in the first 2 quarters or you can't make it up really on the back half of the time you have left to earn on revenue. So I think that's really what it's all about is a super strong first half of 2023 to set the bar for a 20% type number in growth for '23 in order to make that target.
Okay. What's the update to share with investors around the litigation?
We have our Rimini 2 trial we are really excited is finally coming to the courts. We expect trial to be starting October 31, '22. We filed this case against Oracle in 2014, so we've been waiting 8 years to get a chance to get in front of the court. So pretty exciting. It's going to be a great event, and we hope that will be finished before the end of the year. And if there's going to be any appeals on either side, which we all know with us and Oracle, we've been in court 12 years together, it's probably a fair bet there will be an appeal from one side or the other, which will probably go on for potentially another 5 years after that. It's just the U.S. court system. It takes a long time to work our way through. But we -- again, we've -- when we first started with Oracle in court, we were, I think, $25 million, $30 million in revenue. And now we're $400 million. We continue to add hundreds and hundreds of Oracle customers, and we look forward to continuing to do that through the coming years.
What are the claims on the table with regards to this case?
Well, it's pretty complicated, but essentially, think of it this way. The courts have agreed and already ruled that Rimini Street has the right to be in the business of providing support to Oracle customers. They have a right to buy it. We fight with Oracle over how that support is provided. It's sort of if you were a car mechanic working on a car, everyone agrees you can work on the car. Oracle and us dispute what tools you can use, are you allowed to open the hood to work on the engine even though you're allowed to work on the engine. These are very, very technical points which are not -- have ever been dealt with in the court, so this is all new material. Just as the Digital Millennium Act and other things were about trying to bring copyright law into the digital era, we're discussing things that have never ever been held in a court, so it is pretty complicated.
Okay. We're just about out of time. I wanted to finish with the -- you got an announcement on a new buyback. I mean can you share what was incremental?
Sure. Yesterday -- we announced a quarter ago that we were going to do a $15 million buyback over 2 years. We now have expanded that yesterday. We announced that, that is now a $50 million -- up to $50 million over 4 years, so an expansion of that buyback. We also paid down another $5 million on our outstanding credit facility, which has no prepayment penalty. And we're down to less than, what, I think, $81 million now in debt, which we have at sort of a LIBOR plus 1.75% rate, which is excellent from Capital One and Fifth Third. So great rates there, but we want to continue to pay that down. And we continue to make moves. So the fact we can return money to shareholders, at the same time, we can pay down debt and invest in the business. I think we are right where we want to be.
Perfect. Sounds great. Thanks, Seth.
Thank you very much.
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