Rimini Street, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Rimini Street provides subscription-based enterprise software support, application management, security, migration and related services, primarily for Oracle and SAP environments. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
- More than 2,900 active clients and approximately 1,830 employees as of June 30, 2022.
- Annualized recurring revenue was $397 million, up from $362 million a year earlier.
- Revenue retention rate was 95%, compared with 94% for the year ended June 30, 2021.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|
| Revenue | $101.2 million | $91.6 million | Up 10.5% |
| Gross profit | $63.9 million | $57.0 million | Up 12.0% |
| Gross margin | 63.1% | 62.2% | Up 90 bps |
| Operating income | $5.7 million | $4.6 million | Up 24.1% |
| Net income | $0.1 million | $6.8 million | Down $6.7 million |
| Net income attributable to common stockholders | $0.1 million | $(4.8) million | Improved from loss |
| Metric | Six months ended June 30, 2022 | Six months ended June 30, 2021 | Change |
|---|
| Revenue | $199.1 million | $179.5 million | Up 10.9% |
| Gross profit | $124.6 million | $111.1 million | Up 12.1% |
| Gross margin | 62.6% | 61.9% | Up 70 bps |
| Operating income | $11.6 million | $6.5 million | Up 79.0% |
| Net income | $3.2 million | $3.2 million | Substantially unchanged |
- Q2 revenue growth was driven by an approximately 8% increase in average unique clients. U.S. revenue rose 9% and international revenue rose 12%.
- Q2 sales and marketing expense increased 9% to $36.2 million, while general and administrative expense increased 14% to $18.9 million.
- Q2 litigation costs, net of recoveries, were $3.1 million; management expects 2022 litigation expense to exceed $20 million.
- Q2 interest expense increased to $1.0 million from $38,000, primarily because of the Credit Facility entered into in July 2021.
- Q2 other expense was $1.6 million, primarily from foreign-exchange losses, compared with $0.5 million of expense in the prior-year period.
- Q2 income tax expense was $3.0 million, producing an effective tax rate of 96.5%; the six-month effective tax rate was 62.2%.
Cash flow, liquidity and capital structure
- Cash, cash equivalents and restricted cash were $160.6 million at June 30, 2022, compared with $120.0 million at December 31, 2021.
- Operating cash flow for the first six months was $60.8 million, up from $47.2 million. The increase was driven principally by collections of accounts receivable.
- Capital expenditures were $1.7 million, compared with $0.8 million in the prior-year period.
- Financing cash outflows were $10.7 million, including $7.3 million of Credit Facility principal payments and $3.7 million of common-stock repurchases.
- Current liabilities exceeded current assets by $49.8 million. Management states that this deficit is less indicative of liquidity because $255.4 million of current liabilities consisted of deferred revenue, while historical fulfillment costs were approximately 37% of related deferred revenue.
- Credit Facility debt was $76.6 million at June 30, 2022, net of discounts and issuance costs, with $3.7 million classified as current. The company prepaid $5.0 million in May 2022 and made required principal payments.
- The Credit Facility bears interest at LIBOR plus a 1.75% to 2.50% margin. The company entered into a $40.0 million interest-rate swap in May 2022. A 100-basis-point increase in LIBOR would have increased annual interest expense by approximately $0.8 million based on outstanding debt at quarter-end.
- The company was in compliance with its debt covenants at June 30, 2022. The facility requires minimum liquidity of $20 million in U.S. cash.
- The company repurchased approximately 0.1 million shares for $0.5 million during the quarter and 0.7 million shares for $3.7 million during the first six months. The repurchase authorization was increased to $50 million through the facility term, subject to restrictions.
Material changes versus the prior comparable period
- Revenue and gross profit grew approximately 10% to 12%, with modest gross-margin expansion.
- Operating income improved materially, but Q2 net income declined because the prior-year quarter included a $3.7 million gain on redeemable-warrant fair value changes, while 2022 included higher interest expense, foreign-exchange losses and income taxes.
- Six-month operating cash flow increased $13.6 million, primarily because of favorable working-capital changes, including a $47.9 million reduction in accounts receivable.
- Debt service and interest costs became significant following the July 2021 borrowing used to redeem the remaining Series A Preferred Stock.
- Warrants were no longer subject to recurring fair-value mark-to-market adjustments after their reclassification to additional paid-in capital in October 2021.
- Stock-based compensation increased to $6.2 million for the first six months from $4.7 million.
Guidance, outlook, risks and unusual items
- No quantitative revenue or earnings guidance is provided in the filing. Management expects to continue investing in sales, marketing, personnel, technology and international growth.
- Management believes available cash and future operating cash flow will fund expected needs, including debt repayments, capital expenditures, working capital and other obligations, for at least 12 months from issuance of the financial statements.
- Management expects litigation-related expenses to exceed $20 million in 2022. The Rimini II jury trial was scheduled for October 31, 2022. No damages had been awarded, and the company had not accrued a loss because an award to Oracle was not considered probable and the potential loss range could not be reasonably estimated.
- In the separate injunction matter, the company accrued $6.9 million for estimated Oracle attorneys’ fees and costs and paid $0.6 million of sanctions during the first six months. The company appealed the underlying ruling.
- Approximately 64% of Q2 revenue came from support for Oracle PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database products implicated in the Rimini II litigation.
- Management reported no significant net effect from COVID-19 or inflation on Q2 results, but warned that future demand, collections, renewals and expenses could be affected by COVID-19, inflation, rising interest rates, recessionary conditions, foreign-exchange movements and geopolitical uncertainty.
- Liquidated-damages provisions in client contracts could require maximum cash payments of approximately $11.9 million if the company becomes unable to provide services; no liability had been accrued for these provisions.
- The company reported a prior 2021 phishing incident involving unauthorized sharing of some client addresses and outstanding billing data; it stated that the incident did not significantly affect operations or client relationships.
- Disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported during the quarter.
Most important facts for investors to verify
- Progress, rulings, damages exposure and cash costs related to the Oracle Rimini II trial and the injunction appeal.
- Whether litigation spending exceeding $20 million in 2022 affects profitability, cash generation or compliance with Credit Facility covenants.
- Renewal trends, revenue retention and annualized recurring revenue as macroeconomic pressure increases.
- Interest-rate exposure, LIBOR transition provisions and the effect of variable-rate debt despite the $40 million swap.
- The sustainability of operating cash flow, particularly the extent to which recent cash generation depended on collections and working-capital movements.
- Concentration of revenue in Oracle-related products and the potential effect of adverse litigation outcomes on clients, service practices and revenue.
- Execution and cost implications of international expansion, higher staffing, sales and marketing investment, and new offerings such as Rimini Protect and application management services.
