Good day, ladies and gentlemen, and welcome to the Rimini Street Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Dean Pohl, Director of Investor Relations. Sir, you may begin.

Thank you, Shannon. I’d like to welcome everyone to Rimini Street’s Second Quarter 2018 Earnings Conference Call. On the call with me today is Seth Ravin, our CEO; and Tom Sabol, our CFO. Today, we issued our second quarter 2018 earnings press release, which can be found on our website. A reconciliation of GAAP to non-GAAP financial measures has been provided in the tables following the financial statements in this press release. An explanation of these measures is also included in the press release under the heading, Non-GAAP Financial Measures. 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 second quarter of 2018 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.

Thank you, Dean, and thank you, everyone, for joining us to review Rimini Street’s second quarter 2018 financial results. We founded Rimini Street in 2005 to disrupt and redefine the $160 billion enterprise software support market by developing and delivering innovative, value-driven, and award-winning enterprise software support products and services, primarily through an annualized subscription model. Today, Rimini Street is the leading independent software support provider for Oracle and SAP software products. We also provide support services for IBM, Microsoft, and salesforce.com products. Our current offerings address approximately $30 billion of the $160 billion annual global enterprise software support spend. Organizations invest significant money, labor, and time in their mission-critical enterprise software systems. Rimini Street helps clients maximize the ROI and useful life of their software assets with premium support services delivered at substantial cost savings. This allows clients to focus more of their resources on innovation that drives growth and competitive advantage. To date, we estimate that we’ve saved our clients more than $3 billion. Second quarter 2018 results – For the second quarter, we generated revenue of $62.6 million, up 20% year over year and achieved our 50th consecutive quarter of revenue growth. Annualized subscription revenue was $246 million, up 18% year over year and we also recognized $1.2 million of non-subscription revenue in the quarter. Revenue retention rate for subscriptions, which is the majority of our revenue mix, remained above 90%. We ended the quarter with 1,622 active Fortune Global 100, Fortune 500, midmarket, public sector and other clients across a broad range of industries and geographies, up 21% year over year. During the quarter, we launched new products and services that expanded Rimini Street’s future market opportunities. New products and services recently launched include support for salesforce sales cloud and service cloud as well as Rimini…

Thanks, Seth. Let me begin with a summary of our fiscal Q2 2018 results. As Seth noted, revenue for the second quarter was $62.6 million, which represents an increase of 20% year over year. The revenue was above the high end of our guidance as a result of strong growth outside of the United States. Annualized subscription revenue was $246 million, up 18% year over year. Although our revenue is primarily subscription-based, during the second quarter we recognized approximately $1.2 million of non-subscription revenue. Clients outside of the United States constituted 37% of total revenue in the second quarter, a growth of 44% year over year. This has been and will continue to be an area of continued investment and expected growth for the company. Gross margin was 58.4% in the second quarter of 2018, down from 62.5% in the second quarter of 2017, reflecting our biannual global service delivery training conference and higher benefit costs associated with a new 10-year employee service award program. While we currently expect full year 2018 gross margin to be around 60%, we currently expect our third quarter gross margin will be in the range of 60% to 62%, taking into account additional investment costs associated with the launch of new products, services, and geographic coverage. Sales and marketing expenses increased as a percentage of revenue to 36.8% in the quarter, up from 33.8% in Q1 of 2018 and 31.4% in all of fiscal 2017. As Seth noted earlier, we currently expect to spend up to 39% of revenue on sales and marketing for all of 2018. General and administrative expenses, which excludes outside litigation costs, was 16.5% of revenue in Q2 of 2018, down from 17.2% in Q2 of 2017. Going forward, we expect G&A to continue to be a source of leverage…

Thank you. [Operator Instructions] Your first question comes from Derrick Wood with Cowen. Your line is open.

Good afternoon, gentlemen. I wanted to start on the guidance, which was lowered for the year. And actually if I look at the midpoint of your guidance, it calls for Q3 to be down from Q2 and for Q4 to be down from Q3. That’s a pretty sharp reversal versus our expectations in the back half. So could you walk us through what’s changed in your outlook and what’s causing the contraction in the second half?

Sure, Derrick, it’s Seth. And you know I think when you look for the quarter over quarter to the third quarter, you take a look at the second quarter we had that $1.2 million of nonrecurring revenue that was recognized in the quarter from some earlier deals that had been withheld. So, that of course if you remove that from it, I think you’ll see that you could get – you do get consecutive growth quarter over quarter in the expectation, when you remove from the $1.2 million one time. Tom, you want to comment further as well?

Yes, so Derrick, the reason for taking it down and Seth can get into more of the details on the specifics, but the refinancing was delayed longer than we had thought and so some of the investments that we needed to make in sales and marketing, because of the covenant restrictions, we just weren’t able to get them in place as quickly as we would have wanted to. And because of that, we just don’t have the capacity in the sales and marketing group in the back half to where we originally thought it was going to be, to be able to drive the revenue numbers we were looking to attain. So that’s really the, you know that’s really the reason is that because of the covenant restrictions and the refinancing not closing as early as we would have thought it would have closed and really didn’t even close here in 2Q 3, that some of the hiring and stuff that we wanted to do earlier in the year had to be put off until we got the refinancing put in place. So that’s the reason for the change in guidance with regards to the back half of the year.

Okay. Did I guess, Seth, could you comment on what you’re seeing in the competitive landscape and what you’re seeing out of – I know you had an uptick in sales heads in Q1, kind of the early read with respect to ramp to productivity?

Sure, in fact, as you may remember from prior calls, we finished 2017 with 57 sales reps. We finished June 30, 2018, at 66. So I think that when you talk about growth there, that record – you know $2 million a head when these heads are fully productive after 9 months to 12 months, you’re seeing we added $18 million a quote of carrying capacity. Competition is fierce. That hasn’t changed in any particular point in our 13 years. What you’re seeing though is pretty good sales performance on the heads and when you look at quota carrying capacity, Derrick, you’re talking about us doing 90% quota-carrying capacity. So from an execution standpoint, we’re doing very well. We just simply don’t have the capacity as we talked about in these prior calls because we weren’t able to add heads. We just don’t have the capacity to do a lot more business. It takes the 9-month, 12-month, full time to really get those reps up and running. So all this new capacity, you know again $18 million of additional quota-carrying capacity added in the first half of the year, we want to beat it – as we said before, 85 heads by the end of the year. That translates when you add in all the additional hires that have to support them, inside sales reps, sales engineers. It adds up to about 45 heads that have to be hired in the back half of the year to finish up our plan. And we weren’t able to do that, as Tom said, because the deal took a lot longer to get closed than we expected on the refi and only closed in July. So now with none of the covenants in place, we can redirect budget appropriately to focus in on the reacceleration of billings.

Is the 85 heads still a target for the end of the year?

Yes, it is and I think as everybody’s well aware, in this economy, it’s pretty fierce to go out and find best talent. You know we’ve been finding it, but it is not easy to get the kind of top end reps we want. You know we raised compensation earlier in the year to make sure we have an A level player comp plan. We added draws for new hirers. So we’ve really done a lot in trying to attract the best talent. And I think we’ve done very well in what we’ve seen in the first half of the year, but as any company will tell you, it is not easy in this day in age and technology to recruit A players, get them on board, train them up for 9 months to 12 months, and then get them out there. I mean this is always represented one of the bigger challenges for us as well as any other tech company out there. But we are getting our heads filled and now that we have the budget relief to be able to go out and hire them without being under constraint, we’re going to accelerate that process.

Okay, regarding the new customers, it was a nice uptick from Q1. Any comment on the mix of kind of large deals versus small deals? I think last quarter was a good mix of large deals. Did that change this quarter? And how does the pipeline look for the second half?

I think that we’ve pretty much the same as Q1, the same mix. You know we have our mix of big, medium, and small deals. I would say the ASP is staying steady in that 200, 250K range. We certainly have some multimillion dollar deals mixed in as well. The pipeline on the back half of the year is strong. We were strong in the first half. We’ve seen – you know there were a good number of deals in the second quarter that we were hoping we would pull in early, but they’re going to close more likely on schedule in the third and the fourth quarter. A lot of paperwork to get done and I think as in so many other businesses, the nature of people is to focus in when their time is coming for a maintenance renewal, that’s when they really get focused on looking at alternatives. So one of the great challenges this business has always had and one we continue to work at which is how do you get people to focus on something months and months ahead of when it becomes a top priority for them? And that is just a continual area for the business that we see and we do manage to pull more and more deals in earlier, but in this case I think we saw a lot of deals we were hoping that we’d pull in months and months early, just couldn’t get that done with the paperwork and they’re on schedule in the Q3 and Q4 timeframe.

Okay. And then I want to go back to this, actually $1.2 million non-recurring. What was that related to? And I guess that’s not expected to be repeated in Q3?

Yes, you know we are primarily and have been almost 100% recurring revenue subscription business. We are and as we’ve been telling folks in these last calls, we do plan to do some additional consulting work that’s going to be non-recurring, that’s nip and tuck around the subscription revenues where customers have specific projects that they want us to do that are enabling projects and adjacent projects. And this is one of those cases where there was revenue related to certain tasks and projects that were completed in the third quarter and, therefore, the revenue is recognizable.

Okay. And I guess you’ve got your revenue outlook which is a bit of a deceleration in the second half, but Seth you commented on focused on reacceleration in billings in the second half. So, I don’t know, Tom, is there any more color you want to give on thoughts on billings?

So, Derrick, there is, as Seth indicated, because of the reduction in quota-carrying capacity heads from 2016 to where we were here early in 2018 and of course, while we’ve added nine people, they’re not ramped yet to the 9 months to 12 months that is needed. So, as Seth indicated, the pipeline is out there. And our view is, is that as we ramp our sales people, again we’ve been doing this for 13 years. We believe that the business is out there. We just were constrained from a sales and marketing standpoint and we would expect that billings, of course, would ramp first because of the model we have where there were primarily subscription revenue, almost exclusively. That we would see the billings increase first before the revenue, before the revenue reaccelerates. And that’s what we’re focused on doing is investing in sales and marketing, improving the growth in the billings number that will ultimately translate into revenue growth going forward.

Okay. And Tom, any – what is the balance sheet look like following the preferred financing?

Yes, so we ended up using about $2.7 million of our own cash on the refinancing. So, we didn’t add any cash to the balance sheet. All of the proceeds utilized were utilized to pay off the facility as well as the transaction related expenses. We had to put up, you know a little bit less than $3 million from our own balance sheet. So that’s really the only impact on the cash side of the business. Of course, one good news is that none of the cash going forward will be restrictive, other than a couple hundred thousand that we have with some – with a credit card program that’s restricted. But there will be no restricted cash with the new facility. The balance sheet from the standpoint of the equity, the preferred shares will be treated as mezzanine equity, so they won’t be in permanent equity. And of course we did issue, as noted, 2.9 million shares of stock, common stock as part of the deal. We will allocate the proceeds of the $140 million between the preferred and the common. And ultimately will, we’ll be able to talk about what that actual breakdown is, as we work through all the accounting entries. And there will be then some accretion in addition to the dividend going forward for the proceeds that were allocated to the common stock. The number of shares, the number of common shares will go up by approximately 2.9 million shares that were issued. And on a fully diluted basis, 14 million shares will be added for the preferred shares on a fully diluted basis when the stock is above $10 a share.

Yes, okay. Last question – yes. Last question for Seth, be curious to hear what the initial reaction or reception has been to the new sales force offering?

We said when we launched it that this was going to be one of those walk, job before you run where we would be piloting with customers and honing our – honing both the service as well as the sale pitch, getting our training in place, all of that in the back half of the year that we wouldn’t expect to have accretive revenue from it in 2018. But be well positioned with successful client references coming into 2019 to support the sales effort on a global basis. And I think we are proceeding along that path. In fact, you know we’ve hired additional staff around it. You know part of the reason you see the slight reduction in the gross margin, because of the fact that we are hiring for new products and services and we’re just at that size, Derrick, that when you add enough heads, we’re still going to be sensitive by 1% or 2%, given the kind of hiring we do. We’re just not big enough yet to where you could absorb that hiring without it really affecting margin that much. So, I think consistent with everything we said we’re doing with the investments and new products, new services, the hiring of sales and marketing, everything we’re putting in place is the rebuilding and catching up that we said we had to do from 2016, 2017, to build capacity. So it’s capacity of sales, capacity to drive service delivery, of adding new countries. All of these things are being invested in this year. You’ll start to see them as Tom was saying, come to fruition next year, first in accelerated bookings because we’ll see the results as the sales teams come on line and mature, we’ll start to see the uptick long before we’ll see the lagging revenue, right. So, I expect next – you know coming through next year will be yet still a catch up and building year. And I think it’s all in anticipation of a very large 2020.

Okay that’s helpful. Thanks, guys.

Sure.

Thanks, Derrick.

Thank you. I’m currently showing no further questions at this time. I’d like to turn the call back over to Seth Ravin for closing remarks.

Great. Well thank you very much everybody and want to thank you again for joining us for today’s call. And we look forward to talking with you again when we review the third quarter 2018 results. Thank you, everybody.

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation. Have a wonderful day.