Rimini Street, Inc. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
Rimini Street is a global provider of subscription-based enterprise software support and application management services, primarily for Oracle and SAP products. The filing covers the quarter and nine months ended September 30, 2020, and was filed November 5, 2020. The interim financial statements are unaudited and prepared under U.S. GAAP.
- More than 1,380 employees and over 2,360 active clients globally at September 30, 2020.
- Annualized recurring revenue was $327 million, compared with $275 million at September 30, 2019.
- Revenue retention was 92% for both the twelve months ended September 30, 2020 and 2019.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|
| Revenue | $82.5 million | $69.2 million | Up 19.3% |
| Gross profit | $50.5 million | $43.3 million | Up 16.8% |
| Gross margin | 61.2% | 62.5% | Down 1.3 points |
| Operating income | $4.5 million | $2.2 million | Up $2.4 million |
| Net income | $3.3 million | $1.4 million | Up 143.1% |
| Net loss attributable to common stockholders | $3.4 million | $5.2 million | Improved |
| Basic and diluted loss per share | $0.05 loss | $0.08 loss | Improved |
| Metric | Nine Months 2020 | Nine Months 2019 | Change |
|---|
| Revenue | $239.0 million | $204.9 million | Up 16.6% |
| Gross profit | $146.3 million | $130.1 million | Up 12.4% |
| Gross margin | 61.2% | 63.5% | Down 2.3 points |
| Operating income | $13.4 million | $20.5 million | Down 34.6% |
| Net income | $9.3 million | $17.7 million | Down 47.4% |
| Net loss attributable to common stockholders | $10.7 million | $1.1 million | Worsened |
- International revenue grew 40% year over year in Q3 to $34.4 million; U.S. revenue grew 8% to $48.2 million.
- Q3 cost of revenue increased 23%, faster than revenue growth, reflecting higher employee compensation, engineering consulting costs and infrastructure allocations.
- Q3 sales and marketing expense increased 9% to $29.2 million, while general and administrative expense increased 18% to $13.0 million.
- Stock-based compensation was $2.2 million in Q3 and $5.4 million for the nine-month period.
Cash Flow, Liquidity, Debt and Capitalization
- Cash, cash equivalents and restricted cash were $83.7 million at September 30, 2020, compared with $38.4 million at December 31, 2019.
- Operating cash flow was $31.8 million for the first nine months, compared with $21.0 million in the prior-year period.
- Capital expenditures were $1.2 million, producing approximately $30.7 million of operating cash flow after capital expenditures.
- Financing cash flow was $15.1 million, primarily reflecting $25.7 million of net proceeds from the August 2020 common stock offering, partly offset by $11.8 million of preferred-stock cash dividends.
- The company reported no outstanding contractual debt obligations, although it had operating and capital lease obligations and Series A Preferred Stock-related obligations.
- Current liabilities exceeded current assets by $64.7 million, largely because of $179.5 million of current deferred revenue. Management stated that clients generally prepay, and historical fulfillment costs were approximately 39% of related deferred revenue.
- Series A Preferred Stock had a September 30, 2020 carrying value of $139.5 million and a liquidation preference of approximately $158.7 million. It accrues a 10% cash dividend and a 3% payment-in-kind dividend during the initial five-year period.
- Operating lease liabilities totaled $17.6 million at September 30, 2020. The company also deferred $2.5 million of payroll taxes under the CARES Act.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 19% in Q3 2020 from approximately 9% in Q3 2019, driven by client growth and strong international performance, particularly in Asia-Pacific.
- Gross margin declined because cost of revenue grew faster than revenue, partly reflecting investment in new Application Management Services offerings.
- Q3 operating income and net income improved despite higher litigation and operating expenses. For the nine-month period, profitability declined because the prior year included a $12.8 million litigation appeal recovery and related favorable litigation items.
- The company completed a public offering of 6.1 million common shares at $4.50 per share on August 18, 2020, generating approximately $25.1 million of net proceeds for working capital and general corporate purposes.
- Accounts receivable declined to $67.3 million from $111.6 million at December 31, 2019, contributing substantially to operating cash flow.
- Operating leases were recognized on the balance sheet in 2020 following adoption of ASC 842; prior periods were not adjusted.
- On October 30, 2020, after quarter-end, the company agreed to repurchase 5,000 Series A Preferred shares and associated note obligations for approximately $4.5 million.
Outlook, Commentary, Risks and Unusual Items
- Management did not provide a specific quantitative revenue or earnings forecast in the filing. Subject to COVID-19 not significantly impairing operations, management believed available liquidity and future operating cash flow would fund anticipated needs for at least twelve months from issuance of the financial statements.
- Management reported no significant net COVID-19 impact on Q3 revenue or results, but noted client nonrenewals, payment concessions and heightened uncertainty could affect future results, receivables, retention and guidance.
- Oracle litigation remains the principal contingent risk. In September 2020, the court found infringement of certain Oracle copyrights in limited circumstances, while other issues, including the legality of Process 2.0, remained for trial. No damages were awarded in the reported period, and no accrual was recorded because a loss was not considered probable and could not be reasonably estimated.
- Oracle filed a July 2020 motion alleging contempt of a permanent injunction. The potential damages range was not determinable; an adverse outcome could result in damages, injunctions, client losses and potential mandatory redemption consequences for the Series A Preferred Stock.
- The company expects additional labor costs of approximately 1% to 2% of revenue related to compliance with the permanent injunction.
- Approximately 64% of Q3 revenue was derived from support services for Oracle PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database products, increasing litigation concentration risk.
- Cash preferred dividends and PIK dividends expected through July 19, 2023 totaled approximately $75.9 million before considering the October 2020 preferred-stock repurchase.
- Other risks include competition from Oracle, SAP and other providers; client renewal and pricing pressure; foreign currency exposure; cybersecurity and data privacy; execution of new AMS and Salesforce offerings; and the need to sustain growth while managing costs.
Investor Verification Checklist
- Verify the status, scope and potential financial impact of the Oracle contempt proceeding and Rimini II litigation, including any future trial schedule or damages exposure.
- Monitor revenue retention, client additions, international growth and annualized recurring revenue for evidence that Q3 growth is sustainable.
- Reconcile reported net income with the continuing net loss attributable to common stockholders after preferred dividends and accretion.
- Assess the company’s ability to fund recurring preferred cash dividends, lease obligations, litigation costs and potential redemption or note obligations.
- Evaluate whether gross-margin pressure from hiring, consulting costs, injunction compliance and new product investments persists.
- Review the effect of the October 2020 preferred-stock repurchase and the remaining Series A Preferred Stock liquidation, dividend and conversion rights.
- Consider the sensitivity of future liquidity to client renewals, advance billings, deferred revenue consumption and COVID-19-related payment or cancellation trends.
