Rimini Street, Inc. quarterly report, Q2 FY2020

Rimini Street, Inc. — Q2 2020 Form 10-Q Summary

Business context and reporting period

Rimini Street is a global provider of subscription-based enterprise software support and management services, primarily for Oracle and SAP products, with newer Application Management Services offerings. This unaudited report covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.

More than 2,150 active clients and more than 1,340 employees as of June 30, 2020.
Annualized subscription revenue was $311 million, versus $278 million a year earlier.
Revenue retention was 92% for the twelve months ended June 30, 2020 and 2019.

Financial performance and key metrics

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Revenue	$78.4 million	$69.9 million	$156.4 million	$135.7 million
Gross profit	$48.0 million	$44.8 million	$95.8 million	$86.9 million
Gross margin	61.2%	64.2%	61.2%	64.0%
Operating income	$5.1 million	$7.2 million	$8.9 million	$18.4 million
Net income	$3.5 million	$6.1 million	$6.0 million	$16.4 million
Net income attributable to common stockholders	$(3.2) million	$(0.2) million	$(7.3) million	$3.3 million
Operating cash flow	Not separately disclosed	Not separately disclosed	$44.2 million	$25.0 million

Q2 revenue increased 12.2%; six-month revenue increased 15.2%.
International revenue grew 29% in Q2 and 30% for the six-month period, compared with U.S. growth of 4% and 7%, respectively.
Cost of revenue increased 21.6% in Q2 and 24.1% for the six-month period, exceeding revenue growth and reducing gross margins.
Q2 sales and marketing expense was $26.8 million, essentially flat year over year. General and administrative expense increased 23.5% to $13.1 million.
Litigation costs and related recoveries were a net expense of $2.9 million in Q2 and $6.5 million for the six-month period, compared with a net expense of $0.1 million and a net recovery of $6.0 million, respectively, in the prior-year periods.
Basic and diluted loss per common share was $(0.05) in Q2 and $(0.11) for the six-month period.

Balance sheet, debt and liquidity

Cash, cash equivalents and restricted cash totaled $73.0 million at June 30, 2020, compared with $38.4 million at December 31, 2019.
Cash and cash equivalents were $72.7 million; accounts receivable was $63.5 million, down from $111.6 million at year-end.
Current liabilities exceeded current assets by $91.5 million, largely because current deferred revenue was $195.6 million. Management states that the working-capital deficit is less meaningful because customers generally prepay and historical fulfillment costs were approximately 39% of related deferred revenue.
The company reported no outstanding contractual debt obligations. Interest expense was only $12 thousand in Q2 and $25 thousand for the six-month period.
Operating cash flow was $44.2 million, driven substantially by a $46.5 million reduction in accounts receivable, partly offset by a $14.7 million decline in deferred revenue.
Capital expenditures were $0.7 million for the six-month period. Financing cash outflows included $7.8 million of cash dividends on Series A Preferred Stock.
Management believes available liquidity and future operating cash flow will fund anticipated needs for at least twelve months, assuming COVID-19 does not significantly impair operations.

Material changes versus the prior comparable period

Revenue growth accelerated, but profitability declined: Q2 net income fell 42.9%, while six-month net income fell 63.3%.
Gross margin declined 3.0 percentage points in Q2 and 2.8 percentage points for the six-month period, reflecting higher staffing, engineering consulting costs and investment in new services, including AMS.
Six-month operating income declined 51.6%, primarily because the prior-year period included a $12.8 million litigation appeal recovery, while 2020 included higher litigation expenses.
The company adopted ASC 842 lease accounting prospectively on January 1, 2020, recognizing $17.4 million of operating lease right-of-use assets and $18.3 million of operating lease liabilities at June 30, 2020.
Deferred revenue declined to $218.5 million from $235.5 million at the beginning of 2020, as recognized revenue exceeded net billings during the six-month period.
The company issued additional Series A Preferred Stock to settle payment-in-kind dividends. The preferred stock carrying value increased to $136.8 million, with a $157.6 million liquidation preference.

Guidance, outlook, risks and unusual items

The filing does not provide formal revenue or earnings guidance. Management expects continued investment in sales, marketing, new products, international expansion and public-company compliance.
Management reported no significant net COVID-19 impact on Q2 revenue or operating results. Employees largely shifted to remote work, offices were closed or partially reopened, and sales and marketing activities moved online.
COVID-19 may reduce client spending, delay sales decisions, impair collections and renewals, and increase variability in receivables, reserves and other estimates.
Oracle litigation remains a major risk. Oracle filed a July 2020 motion alleging contempt of a permanent injunction. The company believes it complied, has not accrued a loss, and cannot reasonably estimate potential damages. An adverse ruling could result in equitable, punitive or compensatory relief and materially affect operations and liquidity.
Rimini II litigation remains pending, with summary-judgment briefing completed and no trial currently scheduled. The filing states a trial was not expected before 2022, although timing could change.
Approximately 66% of Q2 revenue was derived from support services for Oracle PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database products involved in Rimini II-related claims.
The permanent injunction is expected to increase labor costs by approximately 1% to 2% of revenue.
Series A Preferred Stock carries a 10% annual cash dividend and 3% annual PIK dividend for the initial five-year period. Estimated cash and PIK dividends through July 19, 2023 total $75.9 million, including $58.4 million payable in cash.
Preferred holders may elect mandatory redemption on or after July 19, 2023, and certain litigation or material-adverse-effect events could trigger earlier redemption or obligations under related Convertible Notes.
Potential future dilution includes approximately 15.8 million common shares issuable on conversion of preferred stock, 8.3 million outstanding stock options, 3.2 million restricted stock units and 18.1 million warrants.
Liquidated damages provisions in client contracts had a maximum potential cash exposure of approximately $19.3 million at June 30, 2020; no liability had been accrued.

Most important facts for investors to verify

Whether revenue growth and 92% retention remain sustainable as COVID-19 affects client budgets, renewals and collections.
Whether gross margins recover from 61.2% as AMS and other new offerings scale.
The status and potential financial impact of Oracle’s contempt motion and Rimini II litigation.
The company’s ability to fund approximately $15.8 million to $16.8 million of annual cash preferred dividends while continuing to invest in growth.
Whether operating cash flow remains strong after the temporary benefit from collections and despite declining deferred revenue.
The potential dilution, redemption obligations and financing restrictions associated with Series A Preferred Stock, Convertible Notes and warrants.
The effect of foreign exchange movements, with approximately 39% of six-month revenue generated internationally and $0.8 million of six-month net other expense primarily from foreign-exchange losses.