Rimini Street, Inc. quarterly report, Q1 FY2019

Rimini Street, Inc. — Form 10-Q Summary

Reporting period: Three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company provides subscription-based enterprise software support services globally, primarily for Oracle and SAP products. The financial statements are unaudited and prepared under U.S. GAAP.

Key Financial Metrics

Metric	Q1 2019	Q1 2018	Change
Revenue	$66.3 million	$59.8 million	+10.8%
Gross profit	$42.4 million	$36.3 million	+17.0%
Gross margin	64.0%	60.6%	+3.4 percentage points
Operating income	$12.7 million	$25.2 million	-49.6%
Net income	$11.8 million	$3.5 million	+237.2%
Net income attributable to common stockholders	$4.7 million	$3.5 million	+35.2%
Diluted earnings per share	$0.07	$0.05	Increased
Cash flow from operations	$6.6 million	$18.7 million	-$12.1 million
Capital expenditures	$0.4 million	$0.3 million	Increased

Sales and marketing expense increased 15.7% to $23.4 million, while general and administrative expense increased 15.0% to $12.4 million.
Operating results included net litigation costs and related recoveries of negative $6.1 million, compared with negative $20.0 million in the prior-year period.
Interest expense declined to $0.2 million from $13.4 million, and other debt financing expenses declined to zero from $8.6 million, following repayment and termination of the former Credit Facility in July 2018.
Cash, cash equivalents and restricted cash totaled $32.7 million at March 31, 2019, compared with $25.2 million at December 31, 2018.
Current liabilities exceeded current assets by $110.6 million, substantially because of $180.6 million of deferred revenue. Management states that customers generally prepay for services and estimates that historical fulfillment costs were approximately 36% of related deferred revenue.
Accounts receivable declined to $63.6 million from $80.6 million at year-end, while other receivables increased to $13.0 million.
Debt consisted primarily of a $1.2 million related-party note payable, classified as current and due June 28, 2019. The former $125.0 million Credit Facility was repaid and terminated in July 2018.

Business and Operating Developments

The company supported more than 1,850 active clients and employed more than 1,110 professionals at March 31, 2019.
Annualized subscription revenue was approximately $265 million, compared with $239 million a year earlier.
Revenue retention was 92%, compared with 93% for the prior-year comparable period.
International revenue increased 15% to $23.4 million and represented approximately 35% of total revenue. U.S. revenue increased 8% to $42.9 million.
Management attributed revenue growth primarily to a 13% increase in average unique clients. Growth was affected by competitive actions, vendor discounting and the lag between increased sales and marketing investment and recognized subscription revenue.

Material Changes Versus the Prior Comparable Period

Revenue growth moderated to 11% from approximately 22% in the first quarter of 2018. Management expects relatively lower growth rates at least through the first half of 2019, or longer if sales and marketing investments do not generate increased sales activity.
Gross margin improved to 64% from 61%, as revenue grew faster than cost of revenue. Reduced engineering consulting costs partly offset higher employee compensation costs.
Operating income fell despite higher gross profit because the prior-year period benefited from substantially larger litigation recoveries.
Net income increased mainly because the company no longer incurred the substantial financing costs associated with the former Credit Facility and recognized a $12.8 million recovery related to the U.S. Supreme Court’s Oracle ruling, plus approximately $0.2 million of interest income.
Operating cash flow decreased substantially because the prior-year period included significant non-cash debt charges and favorable deferred-revenue-related working-capital effects.

Capitalization, Liquidity and Unusual Items

On March 7, 2019, the company completed a private placement of 6,500 shares of Series A Preferred Stock and 134,483 common shares for $5.8 million of gross proceeds and approximately $5.0 million of net proceeds after transaction costs. Proceeds are intended for growth capital, including sales and marketing.
Series A Preferred Stock carries a 10% annual cash dividend and a 3% annual payment-in-kind dividend for the first five years. Estimated 2019 cash and PIK dividends total $19.4 million, including $14.9 million payable in cash.
As of March 31, 2019, the Series A Preferred Stock had a $148.4 million liquidation preference and a $120.9 million net carrying value. It was convertible into approximately 14.8 million common shares, subject to applicable terms.
On March 4, 2019, the U.S. Supreme Court ruled that Oracle must return approximately $12.8 million of non-taxable expenses previously paid by Rimini Street. Oracle paid approximately $13.0 million on April 5, 2019. The company recognized the recovery in the first quarter and recorded a $4.6 million estimated obligation to its insurance company.
The company expects to repay the $1.2 million GP Sponsor note in the second quarter of 2019 and has approximately $4.6 million of operating and capital lease payments due within the next 12 months.
Management believes existing cash, restricted cash and future operating cash flow will fund anticipated needs for at least 12 months from issuance of the financial statements, but also states that it does not expect to be profitable for full-year 2019.

Guidance, Outlook and Risks

No formal revenue or earnings guidance is provided in the filing. Management does not expect full-year 2019 profitability.
Management expects litigation costs, excluding litigation appeal refunds, of approximately $13 million to $15 million for fiscal 2019. Litigation costs may range from $2 million to $5 million per quarter through the Rimini II trial date.
The existing Oracle injunction may require additional labor costs equal to approximately 1% to 2% of revenue. The appeal hearing was tentatively scheduled for July 12, 2019.
Rimini II remains pending; summary judgment briefing was completed, no trial date was scheduled, and the company did not expect trial before 2021. The company stated that a loss range could not be estimated and no accrual was recorded because damages were not considered probable.
Approximately 69% of first-quarter revenue was derived from Oracle product lines involved in the Rimini II litigation or Rimini I appeal, creating significant litigation and customer-retention exposure.
A federal grand jury inquiry concerning support and operational practices remained ongoing; the company is cooperating and cannot predict the outcome.
Key business risks include competition and discounting by enterprise software vendors, customer renewal and retention risk, dependence on Oracle and SAP product ecosystems, foreign currency exposure, cybersecurity and data privacy requirements, potential need for additional capital, and the ability to fund recurring preferred-stock dividends.
The company adopted the extended transition period available to emerging growth companies. It expects to adopt the new revenue standard for interim reporting beginning in the first quarter of fiscal 2020; the preliminary assessment indicates potentially accelerated revenue recognition and capitalization of approximately $18.5 million of contract-acquisition costs as of January 1, 2017.

Important Facts for Investors to Verify

Whether operating cash flow and customer renewals are sufficient to fund growth, preferred-stock cash dividends and other contractual obligations.
The timing and outcome of the Rimini I injunction and attorneys’ fee appeal and the potential impact of the Rimini II litigation.
The final amount payable to the insurance company from the $13.0 million Oracle recovery.
The company’s ability to achieve improved growth from increased sales and marketing spending while maintaining the 64% gross margin.
The June 28, 2019 maturity and repayment of the remaining GP Sponsor note.
The potential dilution from approximately 14.8 million convertible preferred shares, 18.1 million warrants and outstanding stock options.
The effect of adopting the new revenue-recognition standard, including the amount and timing of any restatement or transition adjustment.
Whether the company’s current liquidity assessment remains valid given its $110.6 million working-capital deficit, recurring preferred dividends and stated expectation of a full-year loss.