Rimini Street, Inc. Form 10-Q Summary
Business context and reporting period
Rimini Street provides subscription-based enterprise software support and application management services, primarily for Oracle and SAP products, with expanding offerings for open-source databases, SaaS and security. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
- More than 3,000 active clients and more than 1,870 employees as of September 30, 2022.
- Annualized recurring revenue was $400 million, compared with $377 million in the prior-year period.
- Revenue retention rate was 94%, compared with 93% for the twelve months ended September 30, 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $101.9 million | $95.6 million | $301.0 million | $275.2 million |
| Gross profit | $62.7 million | $62.3 million | $187.2 million | $173.3 million |
| Gross margin | 61.5% | 65.1% | 62.2% | 63.0% |
| Operating income | $2.0 million | $7.5 million | $13.7 million | $14.0 million |
| Operating margin | 2.0% | 7.9% | 4.5% | 5.1% |
| Net income (loss) | $(0.4) million | $1.9 million | $2.8 million | $5.2 million |
| Net margin | (0.4)% | 2.0% | 0.9% | 1.9% |
| Operating cash flow | Not provided | Not provided | $36.8 million | $47.8 million |
Q3 revenue increased 6.6%, while nine-month revenue increased 9.4%. U.S. revenue was $53.4 million in Q3 and international revenue was $48.5 million. No customer represented more than 10% of revenue.
As of September 30, 2022, cash, cash equivalents and restricted cash totaled $119.0 million, and short-term investments totaled $11.1 million. Current liabilities exceeded current assets by $61.6 million, largely because of $212.1 million of current deferred revenue. Management stated that advance customer billings make the working-capital deficit less indicative of liquidity because service fulfillment costs historically represented approximately 39% of related deferred revenue.
Debt consisted primarily of the Credit Facility, with $75.7 million of carrying value at September 30, 2022, including $4.2 million of current maturities. The facility bears interest at LIBOR plus a margin; the Q3 rate was approximately 4.25%. The Company prepaid $5.0 million in May 2022 and made three scheduled principal payments of approximately $1.1 million each during the first nine months. A $40.0 million interest-rate swap partially mitigates variable-rate exposure.
Material changes versus the prior comparable period
- Revenue growth was accompanied by substantially higher costs: Q3 cost of revenue rose 17.7%, faster than revenue, reducing gross margin by 360 basis points. Nine-month gross margin declined 80 basis points.
- Q3 operating income fell 73% to $2.0 million, and the Company moved from net income of $1.9 million to a net loss of $0.4 million.
- Sales and marketing expense increased 10.5% in Q3 and 8.1% for nine months, reflecting higher compensation, marketing, travel and growth investments.
- General and administrative expense increased 18.1% in Q3 and 17.5% for nine months, primarily due to higher personnel, software, travel and public-company costs.
- Interest expense increased to $1.2 million in Q3 and $3.0 million for nine months, principally because of the Credit Facility and higher LIBOR rates.
- Foreign-exchange losses contributed to other expense of $1.3 million in Q3 and $2.7 million for nine months.
- Operating cash flow declined to $36.8 million from $47.8 million, while investing cash outflows increased to $14.3 million, including $11.1 million of investment purchases.
- The Company repurchased and retired 0.2 million shares for $1.0 million in Q3 and 0.9 million shares for $4.7 million during the first nine months. The authorized repurchase program was increased to $50 million.
Outlook, commentary, risks and unusual items
- No formal numerical revenue or earnings guidance is provided in the filing. Management expects cash, future operating cash flow and existing investments to fund anticipated needs for at least twelve months, assuming no significant deterioration in economic conditions.
- Management expects litigation-related expenses to be in the mid-$20 million range for 2022 and expects continued investment in sales, marketing, personnel, technology and public-company compliance.
- Management cited inflation, rising interest rates, foreign-exchange volatility, potential recession, geopolitical uncertainty, lingering COVID-19 effects and possible changes in client technology spending as risks.
- Oracle-related litigation remains material. The Company accrued $6.9 million for estimated attorneys’ fees and costs related to the Rimini I injunction proceedings and paid $0.6 million in sanctions during the first nine months. The related appeal was pending as of the filing.
- In October 2022, after the balance-sheet date, Oracle’s monetary damages claims in Rimini II were dismissed with prejudice; claims concerning equitable relief and potential attorneys’ fees or costs remained relevant.
- The Company disclosed that approximately 63% of nine-month 2022 revenue came from services supporting specified Oracle product lines involved in Rimini II, increasing litigation concentration risk.
- Public and private placement warrants expired unexercised on October 10, 2022, eliminating the related potential dilution from those warrants.
- Credit Facility covenants include a minimum fixed-charge coverage ratio above 1.25, a total leverage ratio below 3.75 and minimum U.S. cash liquidity of $20 million. The Company stated it was in compliance as of September 30, 2022.
- Deferred payroll taxes of approximately $1.6 million remained payable in December 2022 under the CARES Act.
- Disclosure controls and procedures were determined to be effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and client additions can continue while cost growth is controlled and gross margins recover.
- The timing, outcome and remaining financial exposure from Oracle litigation, including attorneys’ fees, injunction-related restrictions and potential business disruption.
- Compliance with Credit Facility covenants and the effect of rising interest rates or LIBOR transition on debt service.
- Whether operating cash flow remains sufficient after debt repayment, litigation spending, share repurchases and growth investments.
- The sustainability of the 94% revenue retention rate and the conversion of annualized recurring revenue into future billings and cash collections.
- Exposure to foreign-exchange movements, inflation, recessionary conditions, cybersecurity incidents and changes in client enterprise-software platforms.