Rimini Street Inc (RMNI) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Rimini Street First Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, today's program is being recorded.

And now, I'd like to introduce your host for today's program, Dean Pohl, Director of Investor Relations.

Please go ahead.

Thank you, operator.

I'd like to welcome everyone to Rimini Street's First 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 first 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 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 filings for a complete discussion of these factors and other 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.

Thanks, Dean, and thank you, everyone, for joining us to review Rimini Street's first 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, based on both the number of active clients supported and recognition by industry analyst firms.

Our current offerings cover an addressable market of more than $30 billion of the $160 billion annual global enterprise software support spend before adjusting for Rimini Street's standard 50% discount pricing to a client's current spend.

Organizations have invested significant money, labor and time in their current mission-critical enterprise software systems and want to maximize the ROI and extend the life of these investments while focusing new investments on innovations that could rapidly drive growth and competitive advantage.

To date, we have saved our clients more than $3 billion.

First quarter 2018 results.

Rimini Street executed well in the first quarter of 2018 in revenue, service delivery and global operations.

We generated net revenue of $59.8 million, a year-over-year increase of 22% from the first quarter of 2017 and delivered our 49th consecutive quarter of revenue growth.

Annualized subscription revenue was $239 million, also up 22% year-over-year.

And we delivered a gross profit of 60.6%.

We ended the first quarter of 2018 with 1,581 active clients, a year-over-year increase of 23%, which includes 75 Fortune 500 and 20 Fortune Global 100 companies.

During the quarter, we served clients across a broad range of industries and geographies, closing more than 7,000 support cases across 49 countries.

We maintained an average client satisfaction rating of 4.8 out of 5, where 5 is rated as excellent, on the company's support delivery.

We ended fiscal Q1 2018 with approximately 990 employees, an increase of 16% year-over-year.

Sales growth headwinds.

Despite seeing growing global demand in the market for our services, in Q1 2018, we faced some continuing sales growth headwinds.

First, as we noted on our Q3 and Q4 2017 earnings calls, we had to limit our investment in sales and marketing activities in 2017 due to covenants in our credit facility.

We spent 45.5% of revenue on sales and marketing in 2016, but were governed down to spending 31.4% of revenue on sales and marketing in 2017.

This reduced spend limited our ability to expand sales capacity.

In October 2017, we were able to negotiate an amendment to the credit facility, which

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including the sales and marketing spending covenant.

Accordingly, we began investing in sales and marketing and increased spend during the first quarter of 2018 to 33.8% of revenue.

We plan to further increase sales and marketing spend to between 36% and 39% of revenue in fiscal 2018.

We believe this increased spending will allow us to better serve the growing demand for our products and services.

Second, we faced some behavior by a competitor that we believe was illegal and materially impacted our new client sales in the second, third and fourth

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2017 as well as continuing in the first quarter of 2018 with what we believe is a declining impact each consecutive quarter.

We're addressing the behavior in court and seeking appropriate damages.

Litigation developments.

I would now like to review some developments in our litigation with Oracle.

As discussed on our Q4 2017 earnings call, we have 2 different litigations with Oracle: Oracle's litigation against Rimini Street filed in 2010 that is in the remand stage and referred to as Rimini 1; and Rimini Street's litigation against Oracle filed in 2014 that is in the pre-trial stage and referred to as Rimini 2.

With respect to Rimini 1, on January 8th, 2018, the U.S. Appeals Court ruled favorably for us in our appeal.

The Court of Appeals reversed certain awards made in Oracle's favor during and after the 2015 trial and vacated others, including all claims and judgment against me personally and an injunction that had already been stayed by the appellate court.

The court ordered Oracle to refund approximately $50 million that we had paid to Oracle in 2016, and we had anticipated this refund to be paid sometime in 2018.

Oracle has now refunded the approximate $50 million, including $21.5 million paid directly to Rimini Street on March 30, 2018, and $28.5 million deposited into the federal court registry, an escrow account, on May 2, 2018, to be held and distributed as appropriate following a remand ruling on Rimini 1 legal fees by the district

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Tom will provide more specifics in his prepared remarks regarding the uses of the $21.5 million refund we received from Oracle during the first quarter.

Recent launch of new product and service solutions.

On April 24, Rimini Street announced the launch of Rimini Street Mobility and Rimini Street Analytics, its latest offerings and a new family of solutions designed to provide an improved competitive advantage to organizations with mature and valuable enterprise software investments.

Rimini Street Advanced Database Security was the first offering in this new family of products and launched in 2017.

The new offerings are available immediately, and a press release that contains additional information about the new product and service solutions is posted on our website.

Rimini Street's new solutions enable an organization to quickly and cost effectively modernize their current enterprise software with the latest desired features and capabilities, future-proof their technical platforms against yet-unknown technology changes and secure their systems against the constantly evolving threat environment.

Rimini Street's new solutions allow organizations to leverage their existing systems as a solid foundation for an innovative hybrid IT strategy.

Our extensibility solutions are designed to help companies achieve these objectives by delivering cost-effective, easy-to-deploy, functional and technical capabilities to current mature enterprise software systems.

This allows CIOs to access and leverage innovation quickly without having to undertake costly disruptive upgrades, cost-prohibitive replacements or wait potentially years for the vendor to deliver functionality that's needed now.

About the new solutions.

Rimini Street Mobility allows users to quickly create and distribute a mobile application in days, delivering the fastest time to value and no business disruption.

All existing processes, customizations and logic are fully usable, so no software release migrations or upgrades are required as part of the implementation.

Rimini Street Analytics enables users to make better, faster decisions across the enterprise with a cost-effective, quick-to-deploy and easy-to-implement self-service business intelligence platform.

Users can connect and analyze data from multiple sources to create their own customer ports and dashboards on the fly.

Rimini Street Advanced Database Security, a next-generation security solution that identifies and intercepts attempted exploits of database vulnerabilities before they reach their target without requiring any changes to the database code.

This product works with all major database products from Oracle, IBM, Microsoft and SAP.

In addition, we are pleased to announce the extension of our proven award-winning support model and global capabilities to SaaS products, beginning with the launch today of service for Salesforce sales cloud and service cloud products.

Our goal is to help our clients achieve greater

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in their investment across the hybrid enterprise, which now includes support for traditionally licensed and SaaS enterprise software.

Salesforce customers can now leverage Rimini Street's award-winning, ultra-responsive support services to supplement and complement their core Salesforce-provided maintenance program to accelerate delivery of capabilities, optimize total operating costs and maximize ROI on their Salesforce investment.

These new services will enable Salesforce customers to benefit from our proven 24 by 7 by 365 operational support with 15-minute guaranteed response for urgent issues, in addition to our managed system administration services and configuration, customization and integration project services.

As Brice Salle, CIO of TouchPoint, Inc., a long-time Rimini Street client, noted about the Salesforce service launch: "We have already been reaping the benefits of Rimini Street's premium-level support for our SAP platform and have saved significant IT dollars that we redirected into more strategic initiatives within our organization.

We are delighted that Rimini Street is now offering their award-winning support model for Salesforce sales cloud and service cloud as well.

Salesforce customers who have SAP or other mission-critical ERP applications will now have the choice to bring on a high-quality, cost-effective, single-support provider across both cloud and traditionally licensed applications, which will help manage operational costs and achieve business agility."

Support services for Salesforce sales cloud and service cloud are immediately available, and a press release about the new support services for Salesforce is posted on our website.

Summary.

In summary, despite having to navigate some continuing sales growth headwinds in the first quarter of 2018, we achieved solid sales and operational results, increased our investment in sales and marketing and invested in the development of several new product and service solutions launched in April and May, including support services for Salesforce sales cloud and service cloud products.

We also had favorable developments in our ongoing litigation with Oracle, including the U.S. Court of Appeals reversing and vacating certain awards in the Rimini 1 case and ordering Oracle to refund approximately $50 million, which Oracle has done.

As we continue in fiscal 2018, we plan to fuel growth and continue improving operating leverage by recruiting and hiring additional senior executive talent, further increasing sales and marketing investments, ramping up sales of new product and service offerings and expanding global service delivery capabilities.

I will now turn the call over to Tom Sabol, our CFO.

Thanks, Seth.

Let me begin with a summary of our fiscal Q1 2018 results.

As Seth noted, revenue for the first quarter was $59.8 million, on the higher end of our guidance, and was driven by balanced growth across all geographies and represents an increase of 22% year-over-year.

Annualized subscription revenue was $239 million, up 22% year-over-year as well.

Although our revenue was nearly 100% subscription based today, we expect to deliver some limited consulting services around our products and services in the future.

Revenue from clients outside of the United States constituted 34% of total revenue in the quarter and grew by 23% year-over-year.

This has been and will continue to be an area of continued investment for the company.

Gross profit was 60.6% in the first quarter, down from 62.6% in the prior year period.

The decrease in margin was primarily driven by increased investments for growth in global infrastructure and costs associated with tax, legal and regulatory updates for specific countries.

While we still currently expect full year 2018 gross profit to be up slightly year-over-year, we currently expect our Q2 gross profit will be in the range of 57% to 59% due to costs associated with the rollout of new products.

Also, as Seth noted, sales and marketing increased as a percentage of revenue to 33.8% in the quarter, up from 31.4% in all of fiscal 2017.

We are ramping our investment in sales and marketing and are targeting spending to be in the range of 36% to 39% of revenue for fiscal 2018.

General and administrative expenses, which excludes outside litigation costs, was 18.1% of revenue in Q1 of 2018, down from 18.9% in Q1 of 2017.

Going forward, we expect G&A to continue to be a source of leverage in our model.

However, as a result of now being a public company, we will incur higher professional service and additional accounting infrastructure costs over the next few quarters, which may increase G&A as a percentage of revenue in the near term.

Litigation expense was $8.9 million in the first quarter of 2018, offset by the amortization of $7.6 million of net insurance reimbursement credits, and appeal refund proceeds of $21.3 million, which excludes $200,000 of post-judgment interest.

The refund was for certain judgment awards previously paid to Oracle that were subsequently overturned or vacated by the U.S. Court of Appeals.

Of the proceeds received, we made payments on April 3, 2018, of $17.9 million to reduce debt and $3.1 million was paid for related make-whole interest payments.

The remaining $450,000 is due to our insurance carrier.

The debt reduction decreases our total debt obligations, excluding make-whole interest to approximately $121 million and reduces our go-forward debt service costs while freeing up additional funds to further invest in growth opportunities.

It should be noted that our outside litigation spend is not linear and can fluctuate based on court activities.

In that regard, while litigation costs are generally expected to range between $2 million and $5 million per quarter, we currently believe that our Q2 costs may exceed $8 million due to the timing of expert discovery work on the Rimini 2 litigation and the appeal and remand costs related to the Rimini 1 litigation.

GAAP operating income was $25.2 million in the quarter compared to $2.8 million for the same period last year.

Non-GAAP operating income was $6.1 million in the quarter compared to $7.1 million in Q1 of 2017.

Interest expense and other debt service costs were $22 million in the first quarter of 2018 compared to $11.2 million in the same period a year ago.

The increase was driven primarily by the accrual of $3.1 million of make-whole interests discussed above and the acceleration of $7.1 million of debt service cost amortization associated with the early paydown of the credit facility from the Oracle litigation reimbursement.

A significant portion of these costs and expenses are noncash.

Our credit facility cash interest expense and other related cash fees were $4.7 million for the first quarter compared to $4.1 million in the same period of the prior year.

Other income, net of expenses in the quarter, totaled $800,000 as compared to $5.6 million of other net expenses in the same period a year ago.

The difference is due to the change in the carrying value of the embedded derivatives associated with our credit facility and the approximate $200,000 of post-judgment interest received as part of the Oracle litigation reimbursement.

We had net income of $3.5 million in the first quarter of 2018 compared to a net loss of $14.5 million in the same period of the prior year.

Non-GAAP net loss in the first quarter of 2018 was $16.1 million compared to a $4.5 million loss in the first quarter of 2017.

Net income per share was $0.05 on 68.2 million of fully diluted shares outstanding in Q1

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compared to a loss in Q1 2017

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on 24.4 million fully diluted shares outstanding in Q1 2017.

Deferred revenue as of March 31, 2018, was $195.6 million compared to $165.3 million as of March 31, 2017, an increase of 18% over the prior year and compared to $181.6 million at December 31, 2017.

We ended the quarter with $54.5 million of total cash on our balance sheet.

Cash flow from operations for Q1 2018 was $18.7 million compared to operating cash flow of $6.6 million in Q1 of 2017.

We remain committed to further reducing our cost of capital and improving free cash flows to decrease our net debt obligations and fund growth opportunities.

Now with respect to go-forward guidance.

We expect revenue to be in the range of approximately $60 million to $61 million in the second quarter of 2018.

In addition, we continue to expect revenue to be in the range of approximately $250 million to $270 million in the full year ended December 31, 2018.

And with that, operator, we'll now take questions.

(Operator Instructions) Our first question comes from the line of Derrick Wood from Cowen and Company.

Seth, you cut off as you were talking about the competitive environment.

Did you mention that there's still a little friction but it's slowly going away?

Sorry, I missed your comments and would love to get a sense for how you're feeling about addressing this heading through the rest of the year.

Sure, Derrick.

I think the competitive environment is pretty fierce between us and certainly the Oracle and SAP side of the equation.

Interestingly enough, as we now get into launching the Salesforce product with a partnership with Salesforce and a completely different go-to-market position where we may have a much more cooperative ecosystem.

But in the Oracle and SAP world, it's definitely -- it's still as fierce as it ever was.

And we continue to see different tactics by the competing vendors and, including even some pricing discounts across the Oracle world, which are fairly new in the last year that we're seeing across in different regions.

Okay.

So I mean, we know you guys are focused on investing aggressively in sales and marketing.

Can you just walk us through how that's tracking relative to expectations, what to expect from your new head of sales and how you anticipate these accelerated investments to drive new customer growth throughout the year?

Sure.

I think as we've talked about before on these calls, we're -- we have a sales ramp that's pretty long.

It's generally a 9-month to 12-month ramp before we see a sales rep become what we would consider to be nearly fully productive on $2 million annual quotas.

We brought in Greg Symon, who started on January 8. We began our next phase of scaling to meet the kind of growth numbers we want in the future.

And I think when you look at the -- the hiring plan has gone well.

We've hired a lot of A players.

We've increased our compensation plan to be extremely competitive for A players in the market.

So we've done a lot of things to make sure that we're attractive for A players in the enterprise software space.

And we've just finished a training class of 50 new folks that included sales reps.

Included our sales development reps, inside sales reps, account management, but all of them revenue focused.

It's our largest class ever, so we are getting the people hired.

And I think as we've talked about in prior calls as well, we've got -- we're a little bit behind the curve from 2017 when we couldn't expand out the sales force.

So we're seeing strong demand in the marketplace internationally as well as in North America.

We just don't have enough reps to go out and work all those deals.

There's only so many reps -- only so many deals a rep can work.

So we're going to have to take this year to rebuild, raising our sales and marketing spend, as you saw to 33% this time, over 31% last year and then moving it up to the 36% to 39% overall for the year.

So we are filling out the sales force aggressively.

We're pumping more money back into marketing, which includes events on a global basis to drive more leads in the front end of the pipe and then having the sales reps to work the deal transactions.

So I think that you're going to continue to see us on the lower end of our -- of what would be normal Rimini Street growth, which has been traditionally in the 30% arena.

With the size of numbers we have, adding this number of sales reps, I don't think you're really going to feel that revenue coming into play until 2019.

This is a building year and on a ratable model, as we get towards heavier sales in Q3 and Q4, is a back-end loaded model.

We're not going to get that much revenue earned off those deals, so you're going to see it all in 2019.

I know you've also talked about looking at cross-selling back into the installed base.

Is that -- have you seen much shift to focus more on upsell, cross-sell, or is it mostly new logo focused?

Well, I think with the Salesforce launch, especially, you're going to see us focus in on our existing client base as the most fertile field to start with for selling into.

We already have a large demand coming from the existing force.

Some of our statistics there show that we have at least 40% of our existing client base are also Salesforce users, which presents a strong opportunity for us.

As far as revenue value for this year, because we're already midyear, we're launching -- you're going through inaugural customers.

Typical, when we launch a product line, we're going to be honing that product.

We're going to be fine-tuning it as we get it out to market.

And we've got -- we've already started training the sales force, but they've got to learn how to position and sell the product.

So my sense is that I think the accretive revenue for this year from the new Salesforce product will still be fairly minimal.

But I think, again, you're going to see a lot of this pick up in 2019 as we start running with these products that we're just getting out the door now.

Yes.

And on that Salesforce announcement, it's interesting to see such endorsement from the vendor itself to be working with you as a partner.

What are they seeing in terms of the value you bring to Salesforce?

Well, I don't think it's any more surprising than for us, who have spent our entire 13 years fighting vendors, to be in a great position of working with a vendor.

I think if you're someone like Salesforce, you've got a great, strong product in the marketplace -- and I'm sure you've heard enough to know that there are patches of service challenges because most of the vendors out there are focused on implementation.

They don't specialize in long-term support of the product post-production.

And that is Rimini Street's sweet spot.

This is where we have our processes, our capabilities, our streamlined approach, our 15-minute guaranteed SLA.

All the things we do very well as a home service, we are now bringing into the Salesforce ecosystem.

I think if you're a vendor like Salesforce, what you're thinking about is, "Well, if I have all these clients out there and Rimini Street is a known excellence in delivering service for enterprise products, if they're in our ecosystem, that means our clients can be more successful, which will drive more utilization, more adoption of our products, and therefore, translation: happier clients, more sales, more adoption of our product lines and multiple product lines that Salesforce is rolling out." So I think, in this case, you're looking at a real win-win where Rimini Street is a net positive to the ecosystem.

And everyone's boats are floated higher if we're successful in the marketplace.

Okay.

Tom, a couple for you.

When I look at the calculated billings number, it looked very strong.

I come up with about 50% year-on-year growth.

I'm curious if there's some onetime items.

Could you talk to the mix on the contingent contract structure and what bearing that had on deferred revenue relative to past quarters?

Yes.

So Derrick, as we talked about on the fourth quarter call, remember, we indicated that we did have some significant opt-out activity, and we continue to have some of that this quarter as well.

But the activity level is essentially half of what it was.

So we are, in the calculated billings this quarter, seeing benefit from those opt-outs in Q4, almost all of which are now behind us.

There's 1 or 2 that still have later dates, but all of those that had dates before March 31 all converted to permanent customers.

So we did not lose any customers to date on those opt-outs.

So that all of those billings are also included in the calculated billing number that you calculate.

So that clearly helped support that.

In addition, we did have growth, as Seth indicated.

We're seeing less and less of an impact, though there still is some impact on the activities that Oracle is -- continues to do with us.

But it's becoming less and less of an impact, and so we are seeing, and did see, improvements in Q1 over a year ago.

But again, part of that is due to the opt-outs being cleared, which is a good thing, of course, from Q4 into Q1.

Okay.

And you gave guidance on gross margin of 57% to 59%.

I'm sorry, was that in Q2 or for the full year?

And do you have full year guidance?

That's for Q2, and we still believe that for the full year, we will be up slightly as we've talked about over 2017.

Not significantly, but we still expect to be up slightly in all of -- for all of 2018.

But that's 1 quarter.

We're rolling out the new products, training, those types of things as well as -- we didn't talk about it a lot, but we've added some additional countries as well.

So some infrastructure, a little bit of infrastructure costs for that are putting some pressure on the margins just -- we believe, just for the second quarter.

Okay.

So that -- what you're adding doesn't change your medium-term gross margin targets?

No, it does not.

(Operator Instructions) Our next question comes from the line of Pat Walravens from JMP Securities.

This is Matthew Spencer on for Pat.

First, could you just tell us what are the next events we should look for in the litigation with Oracle?

Sure.

Thanks for joining.

This is Seth.

So we are -- we're heading into the -- we're in the pre-trial phase for the Rimini 2 case.

We don't expect to see trial till minimum 2020, more likely 2021.

Now that we're in the -- what they consider the expert discovery phase, where our experts are writing reports and Oracle's are writing reports, and then we exchange them and argue over them, then we'll come the time when we're doing motions for summary judgment and attempting to narrow the case, leading up to trial.

But all the discovery components are done, so all the evidence has been presented by both sides to each other.

That closed back in March.

So that's the phase we're in for Rimini 2. For Rimini 1, we've already gone through the appeal.

We obviously had the favorable result.

And some of the items were sent back to the trial court to be reheard, including Oracle's legal fees and whether we should pay them or not is back before the court.

And we don't know when that will be heard.

We have no -- there's no time limit or anything, and the judge will make his decision whether he's going to have a hearing or whether he'll just make a call and let us know.

And we'll know when we get notification from the court.

But again, no timetable on that.

Great.

And second, could you talk a little bit more about Rimini Street Mobility?

What kind of traction are you seeing there?

And how important is that kind of a solution going forward?

Well, I think when you look at all of the different solutions we're putting out there in our extensibility packages, the whole idea here is, is that we have hundreds and hundreds and hundreds of clients who are on systems that are 5, 10 years old, some even older than that, who may have -- those systems may have come out before there were strong mobility options built into the product or strong analytics built into the product, just generationally.

And they have a couple options and the option, of course, that some of these software providers would like to have is tear it out, replace it with a brand-new product in order to get that kind of feature and function.

And what we're doing is you're watching Rimini Street come out with products and solutions that can bolt on to these existing systems and give you easy mobility and easy analytics without ever having to change out your core infrastructure at all.

So the cost difference is tremendous, the time savings is huge, and the overall ROI is a number that can't be beat by a software replacement project.

And what we're doing is extending the life.

And our goal at Rimini Street is to move from, say, an average 5-year lifespan with us as a client to doubling that to, say, a 10-year lifespan with a client, which, of course, means billions of dollars of additional revenue from us in the lifetime values of clients.

So I think that, that is the strategy.

And then what you have on the technology side, for example, you have things like our database security.

You have some new components that we'll be announcing in the future relative to other types of systems, whether it's around containerization, virtualization, all sorts of different technologies that allow you to move forward with today's technology and be at peace knowing that you don't have to worry about what the technology of the future is.

We are future-proofing it from some of the changes that may come down the line that we can give you 15, 20 years or more lifespan potentially on a product.

Great.

And third, what are the most important growth drivers for Rimini today?

And maybe how would you rank hiring new salespeople versus adding new products and services, versus any other initiatives?

I think for us right now, we have got to get the sales team size and our capacity where we need to be.

As you guys know, this is a numbers game.

If each of your sales reps has $2 million of capacity, even though we drive a very high attainment number, there's only so much we can put through the pipe if we don't have more sales reps.

So building out sales capacity is critical.

All you have to do is look at our -- look at the math of where we are.

Why are you seeing growth at 22%-type numbers instead of seeing numbers in the 30s where we should be historically.

It's simply math as a percentage of the bigger and bigger numbers.

We have to have more sales reps and increase capacity to be able to maintain and deliver a 30%-type number.

We do not have the sales force capacity to do that.

So that's a challenge for us.

And so I think absolutely number one, building sales force capacity.

(Operator Instructions) And this does conclude the question-and-answer session of today's program.

I'd like to hand the program back to Seth Ravin for any further remarks.

Well, great.

Well, thank you very much, and I appreciate everybody joining us today.

I did want to thank everyone as well as our staff, our investors and, of course, our analysts who spend the time to cover us.

So we appreciate it, and we look forward to seeing everybody on our second quarter 2018 results call.

Thank you very much, everybody.

Have a good day.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.