Rimini Street, Inc. — Form 10-Q Summary
Business context and reporting period
Rimini Street is a global provider of subscription-based enterprise software support services, primarily for Oracle and SAP products. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods.
As of September 30, 2018, the Company employed approximately 1,090 professionals and supported more than 1,730 active clients, including 81 Fortune 500 companies. The Company reported approximately 70% of nine-month revenue from Oracle-related product support services.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $62.6 million, up 17% | $185.1 million, up 20% |
| Gross profit | $40.4 million | $113.2 million |
| Gross margin | 64.5%, versus 62.5% | 61.2%, versus 62.5% |
| Operating income | $2.5 million | $21.8 million |
| Net loss | $48.4 million | $70.3 million |
| Loss applicable to common stockholders | $53.1 million | $75.0 million |
| Basic and diluted loss per share | $0.85 | $1.24 |
| Operating cash flow | Not separately provided for the quarter | $17.6 million, versus $30.8 million |
Quarterly operating income was reduced by substantially higher litigation and sales and marketing costs. Net loss also reflected $48.4 million of other debt financing expenses, primarily the write-off of debt discounts and issuance costs upon repayment of the former Credit Facility.
At September 30, 2018, cash and cash equivalents were $23.5 million and total cash, cash equivalents and restricted cash were $23.9 million. Accounts receivable were $42.5 million, while current deferred revenue was $143.6 million. Total assets were $81.5 million, compared with $122.2 million at December 31, 2017.
Debt consisted primarily of the $2.7 million carrying value of a related-party note payable due January 4, 2019. The former Credit Facility was fully repaid and terminated in July 2018. Series A Preferred Stock had a $140.0 million liquidation preference and a $113.2 million carrying value at quarter-end.
Material changes versus the prior comparable period
- Revenue increased $9.0 million, or 17%, in the quarter and $30.4 million, or 20%, for the nine months.
- International revenue increased 32% in both the quarter and nine-month period, while U.S. revenue increased 10% and 14%, respectively.
- Active clients increased to 1,732 from 1,459, and unique clients increased to 1,012 from 886.
- Annualized subscription revenue increased to approximately $250 million from $214 million. Revenue retention declined to 92% from 95%.
- Quarterly gross margin improved by 2.0 percentage points, but nine-month gross margin declined by 1.3 percentage points due partly to a $2.1 million support staff conference and costs associated with a new sabbatical benefit plan.
- Sales and marketing expense increased 30% in the quarter and 38% for the nine months as the Company expanded its sales force and marketing activities.
- Net litigation costs were $7.0 million in the quarter, compared with $0.4 million in the prior-year quarter. For the nine months, litigation costs were a net benefit of $3.9 million, primarily because of a $21.3 million recovery related to the Oracle Rimini I appeal.
- Operating cash flow decreased $13.2 million for the nine months, principally because the prior-year period benefited from larger favorable changes in operating liabilities and the deferred insurance settlement.
Financing, outlook, risks and unusual items
- On July 19, 2018, the Company completed a private placement generating $133.0 million of gross proceeds from 140,000 shares of Series A Preferred Stock and approximately 2.9 million common shares. Substantially all proceeds, together with cash on hand, funded $132.8 million of payments to terminate the former Credit Facility.
- The Series A Preferred Stock requires a 10% annual cash dividend and a 3% annual payment-in-kind dividend for the first five years. The Company estimated cash dividends of approximately $14.2 million over the initial 12 months following issuance.
- Management stated that it did not expect to be profitable for 2018. It expected fourth-quarter sales and marketing expense to approach 40% of revenue and anticipated fourth-quarter gross margin pressure from onboarding and expansion investments. Full-year 2018 gross margin was expected to be essentially flat with 2017.
- Management expected litigation costs of approximately $5.0 million to $6.0 million in the fourth quarter of 2018 and generally $2.0 million to $5.0 million per quarter through the Rimini II trial date, subject to fluctuation.
- Management believed available cash, cash flows from operations and other resources would cover anticipated needs for at least 12 months, including working capital, capital expenditures, approximately $14.2 million of preferred cash dividends, the $3.0 million GP Sponsor note, and approximately $5.6 million of lease obligations due within 12 months. Current liabilities exceeded current assets by $124.2 million, largely because of deferred revenue.
- Oracle litigation remained material. The District Court imposed a renewed injunction and ordered the return of $28.5 million of escrowed funds to Oracle. The Company appealed and sought a stay. The Supreme Court granted review of the approximately $12.8 million non-taxable-cost issue. The Company estimated that an injunction could increase labor costs by approximately 1% to 2% of revenue.
- Rimini II remains unresolved, with no trial scheduled and no reliable estimate of potential damages or recovery. The Company stated that an adverse outcome could result in damages, injunctions, client losses, or mandatory redemption obligations relating to the Series A Preferred Stock.
- The Company was responding to a federal grand jury subpoena concerning support for certain software systems and related operational practices. The filing does not provide a clear resolution or quantified exposure.
- The Company planned to adopt the new revenue recognition standard using the full retrospective method beginning in the first quarter of 2019. Management expected changes primarily in the timing of revenue recognition and capitalization of certain sales commissions, but had not completed its quantitative assessment.
Most important facts for investors to verify
- Whether revenue growth, client additions and the 92% retention rate offset increased sales, marketing, litigation and preferred dividend costs.
- The Company’s ability to generate sufficient operating cash flow while funding approximately $14.2 million of annual preferred cash dividends and the January 2019 related-party note repayment.
- The ultimate effect of the Oracle Rimini I injunction, Supreme Court appeal and Rimini II litigation on service delivery, revenue, legal costs and potential redemption obligations.
- The outcome of the federal grand jury inquiry and any resulting penalties or operational restrictions.
- The quantified impact of the January 2019 revenue recognition adoption and subsequent accounting for contract acquisition costs.
- Potential dilution from the Series A Preferred Stock, payment-in-kind dividends, 18.1 million outstanding warrants and 12.3 million outstanding stock options.