Rimini Street, Inc. — Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
Rimini Street is a global provider of enterprise software support, products and services, including application management, security, interoperability, observability and consulting solutions. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
As of March 31, 2023, the Company supported more than 3,000 active clients, including 78 Fortune 500 companies, employed more than 1,860 professionals and generated approximately 49% of revenue internationally. The Company’s recurring-revenue model generally involves annual or multi-year advance billings.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $105.5 million | $97.9 million | Up 7.8% |
| Gross profit | $66.2 million | $60.7 million | Up 9.0% |
| Gross margin | 62.7% | 62.0% | Up 70 basis points |
| Operating income | $10.7 million | $5.9 million | Up 79.8% |
| Net income | $5.6 million | $3.1 million | Up 82.7% |
| Diluted EPS | $0.06 | $0.03 | Increased |
| Operating cash flow | $8.6 million | $45.8 million | Down $37.2 million |
International revenue increased 14% to $52.1 million, while U.S. revenue increased 2% to $53.4 million. Annualized recurring revenue was $408 million, compared with $385 million a year earlier. The revenue retention rate declined to 92% from 94%.
Sales and marketing expense increased 9% to $34.5 million, reflecting higher compensation, commissions, advertising, travel and contract labor. General and administrative expense decreased 9% to $18.2 million, primarily due to lower bonuses and stock-based compensation. Net litigation costs declined to $2.7 million from $3.1 million.
Balance Sheet, Debt and Liquidity
- Cash, cash equivalents and restricted cash were $116.6 million at March 31, 2023, compared with $109.4 million at December 31, 2022.
- Short-term investments were $18.8 million.
- Current liabilities exceeded current assets by $67.8 million, primarily because of $257.3 million of current deferred revenue. Management states that the working-capital deficit is less meaningful because clients generally prepay and historical fulfillment costs were approximately 37% of related deferred revenue.
- Total debt under the Credit Facility was approximately $73.9 million carrying value, with $5.3 million classified as current maturities. The Company also had finance lease obligations.
- The Credit Facility was amended in February 2023 to transition from LIBOR to SOFR. The average interest rate was 6.31% in Q1 2023 versus 2.47% in Q1 2022.
- The Credit Facility includes minimum fixed-charge coverage, maximum leverage and minimum U.S. cash liquidity covenants. The Company reported compliance with its financial covenants as of March 31, 2023 and the filing date.
- Management believes available liquidity and future operating cash flow will be sufficient to fund operations, debt repayments, capital expenditures and other obligations for at least 12 months from issuance of the financial statements.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 7.8%, driven primarily by international revenue growth and a modest increase in unique clients.
- Gross margin improved by 70 basis points as revenue growth exceeded the increase in cost of revenue.
- Operating and net income grew substantially, despite higher sales and marketing spending and increased interest expense.
- Operating cash flow declined sharply, primarily because Q1 2022 benefited from a $45.0 million favorable accounts-receivable change, while Q1 2023 included significant cash uses for accrued liabilities and deferred revenue.
- Accounts receivable decreased to $89.3 million from $116.1 million at year-end 2022, and reported days sales outstanding was 96 days versus 91 days in the prior-year quarter.
- Deferred revenue decreased to $287.4 million, including current and noncurrent balances, from $300.0 million at March 31, 2022. Remaining performance obligations were $556.1 million.
- No common stock was repurchased in Q1 2023, compared with $3.2 million of repurchases in Q1 2022.
- Interest expense increased 65.7% due primarily to higher variable interest rates, partially offset by interest-rate-swap receipts.
Guidance, Outlook, Commentary and Risks
The filing does not provide specific quantitative revenue, earnings or cash-flow guidance. Management expects to continue investing in sales and marketing, international expansion, new offerings, Rimini ONE, application management services and other components of its Solutions Portfolio. Management also expects certain public-company, compliance, personnel, legal, technology and insurance costs to increase over time.
Management states that inflation, rising interest rates, geopolitical uncertainty, potential recessionary conditions and lingering COVID-19 effects did not have a significant net impact on Q1 2023 results, but could affect demand, renewals, collections, expenses and liquidity in future periods.
- Oracle litigation: The Ninth Circuit had not issued a decision on the appeal concerning alleged violations of the permanent injunction. The Company had accrued $6.9 million for estimated attorneys’ fees and costs. The Rimini II bench trial concluded in December 2022, with the parties filing proposed findings in February 2023; the matter remained pending. Oracle’s monetary damages claims in Rimini II were dismissed with prejudice, but attorneys’ fees, costs and equitable relief remained possible.
- Revenue concentration: Approximately 62% of Q1 2023 revenue came from support services for specified Oracle products involved in the injunction and Rimini II matters.
- Interest-rate exposure: A hypothetical 100-basis-point increase in SOFR would increase annual interest expense by approximately $0.8 million, before considering the interest-rate swap.
- Foreign exchange exposure: A hypothetical 10% currency-rate change would affect pretax income by approximately $0.6 million and the cash-flow effect of foreign-currency translation by approximately $7.0 million.
- Contractual contingencies: Maximum potential liquidated-damage payments under client agreements were approximately $11.7 million; no liability had been accrued because no such costs had been incurred.
- Business risks: Key risks include client retention, competition from Oracle, SAP and other providers, dependence on Oracle-related product lines, cybersecurity and privacy compliance, global operations, variable-rate debt, litigation outcomes and the ability to sustain profitability and cash generation.
Most Important Facts for Investors to Verify
- Whether revenue retention remains near or below the reported 92% level and whether international growth offsets any renewal or client-demand weakness.
- The timing and outcome of the Oracle injunction appeal and Rimini II proceedings, including potential attorneys’ fees, costs, injunctions or operating restrictions.
- Compliance with Credit Facility covenants, required principal payments and the effect of SOFR and other rate increases on interest expense.
- Whether operating cash flow normalizes after the unusually large working-capital benefit in Q1 2022 and whether deferred revenue and billings support future liquidity.
- Progress and profitability of the expanded Solutions Portfolio, including Rimini ONE and application management services.
- Trends in client retention, active and unique clients, annualized recurring revenue, accounts-receivable aging and days sales outstanding.
- Potential dilution from approximately 7.4 million outstanding stock options and 3.4 million outstanding warrants, subject to applicable exercise conditions.