Rimini Street, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Rimini Street is a global provider of subscription-based enterprise software support and management services, primarily for Oracle and SAP products, with newer offerings for Salesforce and SAP application management. The filing covers the unaudited three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
As of June 30, 2019, the Company supported more than 1,890 active clients, including 80 Fortune 500 companies, employed more than 1,170 professionals, and generated approximately 35% of revenue internationally.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $68.0 million, up 8.5% | $134.2 million, up 9.6% |
| Gross profit | $42.9 million | $85.3 million |
| Gross margin | 63.2%, versus 58.4% | 63.6%, versus 59.5% |
| Operating income | $5.2 million, versus $6.0 million loss | $17.9 million, versus $19.3 million |
| Net income | $4.1 million, versus $25.4 million loss | $15.9 million, versus $21.9 million loss |
| Net income attributable to common stockholders | $2.2 million loss | $2.9 million income |
| EPS attributable to common stockholders | $(0.03) basic and diluted | $0.04 basic and diluted |
| Operating cash flow | Not separately provided for the quarter | $25.0 million, versus $27.2 million |
Quarterly sales and marketing expense increased 14% to $26.3 million, while general and administrative expense increased 9% to $11.3 million. Six-month sales and marketing expense increased 15% to $49.7 million and general and administrative expense increased 12% to $23.7 million.
Cash, cash equivalents and restricted cash totaled $50.3 million at June 30, 2019, compared with $25.2 million at December 31, 2018. Accounts receivable was $71.4 million, while deferred revenue was $219.6 million, including $190.9 million classified as current. Total assets were $139.7 million.
The Company reported a working-capital deficit of $104.8 million, largely because customer prepayments are recorded as deferred revenue. Management stated that historical fulfillment costs were approximately 37% of related deferred revenue and believed available liquidity plus future operating cash flow would fund anticipated needs for at least 12 months.
No contractual debt remained at June 30, 2019. The former Credit Facility had been repaid and terminated in July 2018, and the $1.2 million GP Sponsor note was repaid on June 28, 2019. However, the Company had $126.0 million of redeemable Series A Preferred Stock, with a $153.0 million liquidation preference, as well as accrued cash and PIK dividends.
Material changes versus the prior comparable period
- Revenue growth slowed to 8.5% in the second quarter from approximately 20% in the second quarter of 2018. Management attributed the slower growth to competitive actions, increased vendor discounting, and the lag between higher sales and marketing spending and revenue realization.
- Average unique clients increased approximately 15% in the second quarter and 14% for the six-month period. Annualized subscription revenue increased to approximately $270 million from $246 million.
- Revenue retention declined to 92% from 93% for the comparable 12-month periods ended June 30.
- Gross margin improved substantially because revenue increased while cost of revenue declined. The comparison benefited from the absence of the 2018 global service delivery conference and related travel costs.
- Operating income increased in the quarter but declined 7% for the six-month period because higher sales and marketing and general and administrative costs more than offset the improvement in gross profit.
- Interest expense fell 99% in the quarter and 98% for the six-month period following repayment of the former Credit Facility. Prior-year results included substantial debt accretion, PIK interest, financing costs and embedded-derivative losses.
- Litigation-related operating expense declined significantly in the quarter. Six-month litigation costs and recoveries were a net benefit of $6.0 million, compared with a $10.9 million benefit in the prior year, reflecting different Oracle appeal recoveries and insurance-related accruals.
- The Company raised approximately $9.1 million of net cash through March and June 2019 private placements of Series A Preferred Stock and Common Stock. It also paid $7.1 million of preferred-stock cash dividends during the six months.
Guidance, outlook, risks and unusual items
Management stated that it did not expect the Company to be profitable for the year ending December 31, 2019, despite quarterly and year-to-date net income in the filing. The Company intends to continue investing in sales, marketing, international expansion, and new products and services.
Series A Preferred Stock carries a 10% annual cash dividend and a 3% annual PIK dividend for the first five years. Estimated cash and PIK dividends through July 19, 2023 total approximately $95.5 million, including $73.4 million in cash dividends. Holders may elect redemption beginning July 19, 2023, and certain litigation or adverse-event outcomes could trigger earlier mandatory redemption and related Convertible Note obligations.
Oracle litigation remains a material uncertainty. The Ninth Circuit heard oral argument in July 2019 regarding the Rimini I injunction and attorneys’ fee award; management did not expect a ruling until December 2019 or January 2020, although timing could vary. The Company expects additional labor costs of approximately 1% to 2% of revenue while the injunction remains in effect. Discovery relating to potential injunction compliance was scheduled to close October 8, 2019, with a potential contempt filing deadline of October 20, 2019.
In Rimini II, summary-judgment briefing was complete, but no trial date was scheduled. The Company stated that it could not reasonably estimate potential damages exposure and had made no accrual because an adverse damages award was not considered probable. Oracle-related products represented approximately 70% of second-quarter revenue, increasing the potential impact of adverse litigation outcomes.
The U.S. Supreme Court required Oracle to return approximately $12.8 million of non-taxable expenses plus interest. Oracle paid approximately $13.0 million on April 5, 2019. The Company recognized the recovery but accrued $4.3 million of estimated amounts owed to an insurance company under a prior settlement agreement.
The Company received a federal grand jury subpoena in March 2018 relating to specified support and operational practices and continued to cooperate. The filing does not provide a clear expected resolution or quantified exposure from the inquiry.
The Company elected to adopt the new revenue-recognition standard for interim reporting beginning in the first quarter of fiscal 2020. Management expected accelerated recognition for certain contracts and capitalization of certain sales commissions, but had not completed its evaluation of the full impact. The new lease standard was also scheduled for adoption in fiscal 2020.
Most important facts for investors to verify
- Whether revenue growth continues to decelerate and whether increased sales and marketing investment improves new-client acquisition.
- Whether the 92% revenue retention rate stabilizes or declines further.
- The cash burden of the preferred-stock dividend obligations and the potential effect of future redemption rights.
- The Ninth Circuit outcome regarding the Rimini I injunction and attorneys’ fees, including any contempt proceedings or operational restrictions.
- The eventual outcome and potential damages or injunctions in Rimini II, for which the filing states that loss exposure cannot currently be estimated.
- The resolution and potential financial impact of the federal grand jury inquiry.
- The effect of adopting the new revenue-recognition and lease accounting standards in fiscal 2020.
- Whether $50.3 million of available cash and projected operating cash flow remain sufficient given the working-capital deficit, litigation costs, preferred dividends and growth investments.
- Potential dilution from 15.3 million shares issuable upon conversion of Series A Preferred Stock, 10.1 million outstanding stock options, and 18.1 million outstanding warrants.