Rimini Street, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rimini Street is a global provider of subscription-based enterprise software support, application management, security and migration services, including support for Oracle, SAP, open-source databases and selected SaaS platforms. The filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The financial statements are unaudited and prepared under U.S. GAAP.
At March 31, 2022, the company reported more than 2,880 active clients, more than 1,470 unique clients and more than 1,680 employees. International revenue represented approximately 47% of total revenue.
Financial Results and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $97.9 million | $87.9 million | Up 11.4% |
| Gross profit | $60.7 million | $54.1 million | Up 12.3% |
| Gross margin | 62.0% | 61.5% | Up 50 basis points |
| Operating income | $5.9 million | $1.9 million | Up $4.0 million |
| Operating margin | Approximately 6.1% | Approximately 2.2% | Improved |
| Net income | $3.1 million | $(3.6) million | Improved $6.7 million |
| Net income attributable to common stockholders | $3.1 million | $(9.8) million | Improved $12.9 million |
| Diluted EPS | $0.03 | $(0.13) | Improved |
| Cash flow from operating activities | $45.8 million | $24.5 million | Up $21.4 million |
Revenue growth was attributed primarily to an 11% increase in average unique clients. U.S. revenue increased 10% to $52.3 million, while international revenue increased 13% to $45.6 million. Annualized recurring revenue was $385 million, compared with $349 million a year earlier, and the 12-month revenue retention rate improved to 94% from 91%.
Cost of revenue increased 10%, principally due to higher employee compensation associated with an 18% increase in average employees supporting revenue growth. Sales and marketing expense increased 4% but declined to approximately 32% of revenue from 35%. General and administrative expense increased 20% to $20.0 million, reflecting higher personnel, software, tax, contract labor and travel costs.
Operating results benefited from litigation costs and related recoveries declining to $3.1 million from $4.8 million, the absence of a $0.4 million operating lease impairment charge recorded in Q1 2021, and the absence of a $4.7 million loss on the fair value of redeemable warrants recorded in Q1 2021. These benefits were partly offset by interest expense increasing to $0.8 million from $47 thousand following the 2021 term loan financing.
Balance Sheet, Liquidity and Debt
- Cash, cash equivalents and restricted cash totaled $158.5 million at March 31, 2022, compared with $120.0 million at December 31, 2021.
- Working capital was negative $37.5 million because current liabilities exceeded current assets. Current deferred revenue was $248.5 million, largely reflecting customer prepayments for services to be delivered in future periods.
- Total deferred revenue was $300.0 million, compared with $250.0 million at March 31, 2021.
- Accounts receivable declined to $91.3 million from $135.4 million at year-end 2021, contributing $45.0 million of operating cash flow.
- Credit Facility debt was $82.4 million before presentation of current maturities and debt costs, with $3.7 million classified as current debt. The facility is secured, bears interest at LIBOR plus a 1.75% to 2.50% margin, and had a reported 2.5% interest rate during Q1.
- The Credit Facility requires a minimum fixed-charge coverage ratio above 1.25, a total leverage ratio below 3.75 and at least $20 million of U.S. cash liquidity. The company stated that it was in compliance with its covenants at March 31, 2022.
- Operating cash flow was $45.8 million, capital expenditures were $0.5 million and financing cash outflows were $4.1 million. Financing outflows included $3.2 million of common-stock repurchases and $1.1 million of debt principal payments.
Management stated that available cash, restricted cash and expected operating cash flow should be sufficient for anticipated needs, including debt repayments, working capital, capital expenditures and contractual obligations for at least 12 months from issuance of the financial statements. The filing does not provide formal full-year revenue or earnings guidance.
Material Changes Versus the Prior Comparable Period
- The company moved from a net loss to net income, with revenue growth and improved gross margin contributing to higher operating profitability.
- Operating cash flow increased substantially, primarily because of collections on accounts receivable and higher cash earnings.
- Interest expense increased materially because of the $90 million secured term loan entered into in July 2021 to fund the redemption of the remaining Series A Preferred Stock.
- The Series A Preferred Stock was fully redeemed in July 2021; no preferred stock dividends or accretion affected Q1 2022 earnings.
- Common shares outstanding declined as the company repurchased and retired approximately 0.6 million shares for $3.2 million during the quarter.
- The company authorized a common-stock repurchase program of up to $15.0 million through March 4, 2024, subject to credit agreement and legal restrictions.
- Stock-based compensation increased to $3.1 million from $2.2 million.
- Foreign currency translation loss improved to $0.2 million from $2.4 million.
Guidance, Outlook, Commentary and Risks
Management described recurring subscription revenue, increasing client counts, improving retention and growth in annualized recurring revenue as supporting visibility into future periods. The company expects to continue investing in sales, marketing, personnel, technology and new offerings, including application management services. It also expects public-company compliance and infrastructure costs to increase over time.
Management reported no significant net impact from COVID-19 on Q1 2022 revenue or results, while noting that future effects remain uncertain and could affect client demand, renewals, collections, staffing, sales cycles and accounting estimates. The company also identified inflation, recessionary conditions, geopolitical events and the Russia-Ukraine conflict as potential risks.
Oracle litigation remains the most significant disclosed contingency. In January 2022, the District Court found violations of the permanent injunction on five of ten items, imposed $0.6 million of sanctions and allowed Oracle to seek reasonable attorneys’ fees and costs. Rimini appealed, paid the sanctions during Q1 and had accrued $6.9 million for estimated attorneys’ fees and costs at March 31, 2022. The separate Rimini II litigation had no specific trial date as of the filing and no damages had been awarded; the company stated that any potential loss could not reasonably be estimated and had not been accrued.
Approximately 64% of Q1 2022 revenue came from support services for Oracle product lines involved in Rimini II. Adverse litigation outcomes could result in damages, injunctions, client losses, additional costs or pressure on debt covenant compliance. Other important risks include competition from Oracle, SAP and other providers, client retention, cybersecurity and privacy obligations, foreign currency exposure, variable-rate debt, LIBOR transition, concentration of voting power and potential dilution from approximately 18.1 million outstanding warrants.
The company stated that a hypothetical 100-basis-point increase in LIBOR would increase annual interest expense by approximately $0.9 million. It also reported that disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether revenue growth, annualized recurring revenue and the 94% retention rate continue, particularly given the company’s reliance on Oracle- and SAP-related support.
- The outcome and timing of the Oracle injunction appeal and Rimini II proceedings, including any additional sanctions, legal fees, damages or business restrictions.
- Compliance with the Credit Facility’s financial covenants and the company’s ability to manage variable-rate debt and required principal payments.
- Whether strong operating cash flow is sustainable after the favorable Q1 accounts-receivable collection benefit.
- The effect of continued hiring, sales and marketing investment, public-company costs and stock-based compensation on future margins.
- The remaining authorization and execution of the $15.0 million share-repurchase program, including its effect on liquidity and share count.
- Potential dilution from stock options, restricted stock units and approximately 18.1 million warrants.
- Changes in client renewals, payment timing, deferred revenue, international operations, foreign exchange and COVID-19 or broader economic conditions.