Rimini Street, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Rimini Street provides global enterprise software support, products and services, including application management, managed services, security, interoperability, observability, consulting and Rimini ONE. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
At September 30, 2023, the Company supported more than 3,090 active clients, including 66 Fortune 500 companies, and employed more than 2,050 professionals. Approximately 48% of quarterly revenue was generated internationally.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Revenue | $107.5 million | $101.9 million | 5.4% increase |
| Gross profit | $67.3 million | $62.7 million | 7.5% increase |
| Gross margin | 62.7% | 61.5% | 120 basis-point increase |
| Operating income | $11.2 million | $2.0 million | Increase of $9.2 million |
| Net income attributable to common stockholders | $6.8 million | $(0.4) million | Improvement of $7.2 million |
| Diluted EPS | $0.08 | Not meaningful due to loss | Improved |
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Revenue | $319.4 million | $301.0 million | 6.1% increase |
| Gross profit | $200.6 million | $187.2 million | 7.1% increase |
| Gross margin | 62.8% | 62.2% | 60 basis-point increase |
| Operating income | $32.2 million | $13.7 million | 135.8% increase |
| Net income | $16.7 million | $2.8 million | 498.4% increase |
| Diluted EPS | $0.19 | $0.03 | Improved |
Quarterly revenue growth reflected higher average unique clients and increased international revenue. Nine-month international revenue rose 10% to $156.2 million, driven primarily by Japan and Australia, while U.S. revenue increased 2% to $163.1 million.
- Annualized recurring revenue was $416 million at September 30, 2023, compared with $400 million a year earlier.
- Revenue retention was 94% for the twelve months ended September 30, 2023, unchanged from the prior-year period.
- Remaining performance obligations were $550.1 million, including $238.4 million recorded as deferred revenue.
- Deferred revenue totaled $238.4 million, of which $214.1 million was expected to be recognized within twelve months.
- Nine-month cash flow from operating activities was $13.6 million, down from $36.8 million in 2022.
- Capital expenditures were $3.7 million; investing cash flow was negative $4.2 million.
- Financing cash outflow was $5.1 million, including $3.9 million of debt principal payments and $1.0 million of share repurchases.
Balance sheet, debt and liquidity
- Cash, cash equivalents and restricted cash were $108.7 million, and short-term investments were $19.9 million, at September 30, 2023.
- Current liabilities exceeded current assets by $56.7 million. Management states that this deficit is substantially attributable to $214.1 million of deferred revenue, which represents advance customer billings.
- Accounts receivable declined to $61.2 million from $116.1 million at December 31, 2022, primarily reflecting collections.
- Debt under the Credit Facility was approximately $71.6 million net of discounts and issuance costs, with $5.9 million classified as current. The Company also had finance and operating lease obligations.
- The Credit Facility bears interest at SOFR or a base rate plus an applicable margin. The average Credit Facility interest rate was 7.12% in Q3 2023 versus 3.94% in Q3 2022.
- The Company reported $40.0 million of incremental borrowing capacity, subject to the Credit Facility terms, and stated that it was in compliance with its financial covenants.
- Management believes existing liquidity and future operating cash flow will fund anticipated needs for at least twelve months from issuance of the financial statements, assuming no significant adverse effects from macroeconomic conditions or litigation.
Material changes versus the prior comparable period
- Profitability improved substantially because revenue grew faster than cost of revenue, gross margin expanded, and litigation costs declined.
- Q3 litigation costs declined to $2.1 million from $6.2 million; nine-month litigation costs declined to $5.5 million from $12.4 million, primarily due to the timing of prior-year trial costs.
- Interest expense increased 21% in Q3 and 39% for the nine-month period because of higher variable interest rates, partially offset by interest-rate swap receipts.
- Nine-month operating cash flow declined despite higher net income, principally because deferred revenue and accrued liabilities used cash. Deferred revenue declined by $57.7 million through the first nine months.
- Sales and marketing expense increased 3% for the nine-month period as the Company continued investing in growth, while general and administrative expense declined 3%.
- Foreign exchange remained a headwind, including a $5.1 million unfavorable effect on cash during the first nine months.
Outlook, commentary, risks and unusual items
The filing does not provide a specific numerical revenue, earnings or cash-flow guidance range. Management expects to continue investing in its expanded solutions portfolio, sales and marketing, international operations and new services, while adjusting expenditures in response to demand and economic conditions.
- Oracle litigation: The Rimini II judgment found infringement involving Oracle PeopleSoft and Oracle Database products and imposed an injunction primarily affecting PeopleSoft support services. The injunction was administratively stayed and was not effective as of the filing date; the appeal was held in abeyance pending resolution of Oracle’s motion to amend the judgment. PeopleSoft-only services represented approximately 8% of Q3 revenue and 9% of nine-month revenue; approximately 64% of nine-month revenue was derived from services involving Oracle products.
- Rimini I proceedings: The Ninth Circuit affirmed four of five contempt findings and reversed one. The District Court subsequently reduced the sanctions award from $0.6 million to $0.5 million. The Company had accrued approximately $6.9 million for estimated Oracle attorneys’ fees and costs; the ultimate amount remains uncertain.
- Litigation exposure: No monetary damages were included in the Rimini II judgment, and the Company had not accrued potential future costs of complying with the injunction or potential attorneys’ fees in that matter because they were not considered probable or estimable. Adverse litigation outcomes could materially affect revenue, costs, cash flow and liquidity.
- Macroeconomic risks: Inflation, rising interest rates, foreign exchange volatility, geopolitical conflicts, possible recession and client non-renewals could affect demand, collections and margins. Management stated that these factors had not had a significant net impact on reported revenue or results for the periods presented, but future effects remain uncertain.
- Other contingencies: Maximum potential liquidated damages under client contracts were approximately $12.6 million, with no amounts accrued because no such costs had been incurred.
- Controls: Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Rimini II injunction remains stayed, the outcome of the appeal and Oracle’s motion to amend, and any resulting service-delivery costs or client losses.
- The ultimate amount and timing of Oracle attorneys’ fees and costs relating to Rimini I and any additional litigation exposure.
- Whether recurring revenue growth, the 94% retention rate and $416 million ARR continue despite economic pressure and Oracle-related risks.
- Operating cash-flow conversion, deferred revenue trends, accounts receivable collections and the effect of advance billings on liquidity.
- Compliance with Credit Facility covenants, required principal payments, variable-rate exposure and the Company’s ability to refinance or repay the remaining balance.
- The sustainability of improved profitability after unusually lower litigation costs and despite higher interest expense and planned growth investments.
- Potential dilution from approximately 8.3 million outstanding stock options and 3.4 million outstanding warrants, as well as future equity awards.