Rimini Street, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Rimini Street provides subscription-based enterprise software support services, primarily for Oracle and SAP products. This unaudited Form 10-Q covers the three months ended March 31, 2018. The March 31, 2017 comparison reflects the predecessor operating company following the October 2017 reverse recapitalization.
At March 31, 2018, the company had approximately 990 employees, more than 1,580 active clients, and more than 940 unique clients. It reported 49 consecutive quarters of revenue growth.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenue | $59.8 million | $49.1 million | Up 22% |
| Gross profit | $36.3 million | $30.7 million | Up 18% |
| Gross margin | 60.6% | 62.6% | Down 2.0 percentage points |
| Operating income | $25.2 million | $2.8 million | Improved |
| Income before taxes | $4.0 million | $(14.0) million | Improved |
| Net income (loss) | $3.5 million | $(14.5) million | Improved |
| Diluted earnings (loss) per share | $0.05 | $(0.59) | Improved |
| Operating cash flow | $18.7 million | $6.6 million | Improved |
Revenue growth was driven primarily by a 19% increase in average unique clients and a 25% increase in average active clients. U.S. revenue increased 21% to $39.5 million, while international revenue increased 23% to $20.3 million. Annualized subscription revenue was approximately $239 million, compared with $196 million a year earlier. Revenue retention declined to 93% from 94%.
Sales and marketing expense increased 38% to $20.2 million, and general and administrative expense increased 16% to $10.8 million. Litigation costs were offset by a $21.3 million recovery of previously paid Oracle judgment amounts and $7.6 million of insurance recoveries, producing net litigation recoveries of $20.0 million in Q1 2018.
Cash, cash equivalents and restricted cash totaled $54.5 million at March 31, 2018, including $22.1 million of unrestricted cash and $31.9 million held in lender-controlled accounts. The company reported a working capital deficit of $117.3 million, largely reflecting $160.0 million of deferred revenue collected in advance from customers. Accounts receivable were $71.0 million.
Total debt had a net carrying value of $92.8 million, consisting primarily of the Credit Facility. Contractual debt obligations were approximately $141.9 million, including principal, trigger-event fees and consulting obligations. The Credit Facility bears stated interest of 15.0%, including 12.0% cash interest and 3.0% paid-in-kind interest; its estimated overall effective rate was 42.4% at March 31, 2018. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue increased 22%, but cost of revenue increased 28%, reducing gross margin from 62.6% to 60.6%.
- The company moved from a $14.5 million net loss to $3.5 million of net income, primarily reflecting the Oracle litigation recovery and lower derivative-related losses.
- Operating cash flow increased to $18.7 million from $6.6 million; Q1 2018 included the $21.5 million Oracle appeal cash receipt, which was largely used after quarter-end to repay debt and related charges.
- Interest expense increased 35% to $13.4 million, including a $3.1 million make-whole premium. Other debt financing expense increased to $8.6 million, including a $7.2 million write-off of debt issuance costs.
- Restricted cash increased from $18.1 million to $32.4 million, while total debt net of discount increased from $82.1 million to $92.8 million.
- The company increased sales and marketing investment after debt covenant restrictions were relaxed in October 2017.
Guidance, outlook, risks and unusual items
- Management stated that it does not expect to be profitable for the full year ending December 31, 2018.
- Sales and marketing expense is expected to range between 36% and 39% of 2018 revenue.
- Gross margin was expected to be 57% to 59% in Q2 2018 because of a periodic global service delivery conference and related costs.
- Management expects litigation costs generally of $2 million to $5 million per quarter through the Rimini II trial date, with Q2 2018 costs potentially exceeding $8 million.
- Management believes available cash, restricted cash and future operating cash flow will fund anticipated needs for at least 12 months. Approximately $17.5 million remained available under the delayed-draw B Term Loan, subject to lender consent.
- Debt and lease obligations due during the 12 months ending March 31, 2019 were estimated at $62.1 million, including approximately $56.5 million of debt-related payments and $5.6 million of lease payments.
- On April 3, 2018, the company paid $21.0 million under the Credit Facility, comprising $17.9 million of principal and $3.1 million of make-whole premium.
- Oracle’s renewed request for reinstatement of an injunction remained pending. Any injunction could increase support costs or otherwise affect operations. The company also disclosed ongoing Rimini II litigation, for which a loss range could not be determined and no accrual was recorded.
- In May 2018, Oracle deposited $28.5 million with the District Court pending a decision on the refund of Oracle legal fees. The ultimate amount and timing of any recovery were uncertain, and any released funds would generally be required to repay the Credit Facility.
- The company received a federal grand jury subpoena in March 2018 concerning specified support and operational practices and stated that it was cooperating.
- Key risks include high-cost and restrictive debt, litigation and injunction exposure, competitive actions, slowing revenue growth, foreign currency fluctuations, customer retention, and reliance on customer prepayments.
Investor verification points
- Verify the sustainability of revenue growth after the reported slowdown from approximately 42% growth in Q1 2017 to 22% in Q1 2018.
- Assess whether gross margin can recover after the Q2 2018 expected decline and whether sales and marketing investment produces sufficient new business.
- Reconcile unrestricted versus restricted cash with the company’s near-term debt, interest, make-whole and lease obligations.
- Monitor Credit Facility covenant compliance, mandatory repayments, effective borrowing costs and availability of the undrawn tranche.
- Track the Oracle injunction, Rimini I fee refund proceedings, Rimini II litigation and the federal grand jury inquiry.
- Separate recurring operating cash flow from the one-time $21.5 million Oracle appeal receipt.
- Review dilution from approximately 13.0 million outstanding stock options, 18.1 million warrants and additional equity awards.