Rimini Street, Inc. — Form 10-Q Summary
Business context and reporting period
Rimini Street provides subscription-based enterprise software support services, primarily for Oracle and SAP products, globally. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods. The company reported approximately 1,075 employees and more than 1,620 active clients as of June 30, 2018.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $62.6 million | $52.0 million | $122.5 million | $101.1 million |
| Gross profit | $36.6 million | $32.5 million | $72.8 million | $63.2 million |
| Gross margin | 58.4% | 62.5% | 59.5% | 62.5% |
| Operating income (loss) | $(6.0) million | $7.5 million | $19.3 million | $10.3 million |
| Net loss | $(25.4) million | $(25.9) million | $(21.9) million | $(40.3) million |
| Operating cash flow | Not separately provided | Not separately provided | $27.2 million | $35.1 million |
Revenue increased 20% in the quarter and 21% year to date. International revenue grew 44% in the quarter and 33% year to date, while U.S. revenue grew 10% and 16%, respectively. Annualized subscription revenue was approximately $246 million, compared with $208 million a year earlier. Revenue retention was 93%, compared with 94% in the prior-year period.
As of June 30, 2018, cash and cash equivalents were $24.9 million and restricted cash was $10.6 million, for total cash, cash equivalents and restricted cash of $35.5 million. Accounts receivable was $63.4 million and deferred revenue was $200.4 million, including current and long-term amounts. Current liabilities exceeded current assets by $131.1 million, principally reflecting deferred revenue.
Net cash provided by operating activities was $27.2 million for the first six months, versus $35.1 million in 2017. Capital expenditures were $0.5 million. Financing activities used $30.3 million, primarily for debt principal payments and related make-whole premiums.
Reported debt had a net carrying value of $76.0 million at June 30, 2018, including $73.6 million under the Credit Facility and $2.4 million owed to the GP Sponsor. Contractual obligations under the Credit Facility were $119.3 million before debt discounts and issuance costs. The Credit Facility carried a stated interest rate of 15.0%, including 12.0% cash interest and 3.0% paid-in-kind interest, with an estimated overall effective rate of 43.4% at June 30, 2018.
Material changes versus the prior comparable period
- Revenue growth remained strong, but the rate moderated from approximately 37% in the second quarter of 2017 to 20% in the second quarter of 2018. Management attributed the moderation to prior Credit Facility spending restrictions and competitive actions affecting prospective sales.
- Gross margin declined to 58.4% from 62.5% in the quarter and to 59.5% from 62.5% year to date. Drivers included higher staffing and consulting costs, a global service delivery conference, a new sabbatical benefit plan, and international infrastructure and regulatory investments.
- Sales and marketing expense increased 46% in the quarter and 42% year to date as the company expanded personnel, commissions, conferences, trade shows and other marketing activities.
- Quarterly operating results were adversely affected by $9.1 million of litigation costs, compared with net litigation costs of $0.3 million in the prior-year quarter. Year-to-date litigation costs were a net recovery of $10.9 million, reflecting a $21.3 million Rimini I appeal recovery, partially offset by $18.0 million of professional fees.
- Net loss improved year to date primarily because of the Rimini I appeal recovery, lower debt financing charges and the absence of the prior-year redeemable-warrant fair-value loss. The company nevertheless reported a larger quarterly operating loss due to higher operating expenses.
- Active clients increased from more than 1,330 to more than 1,620, and unique clients increased from more than 830 to more than 955.
Guidance, outlook, risks and unusual items
Management stated that it did not expect the company to be profitable for 2018. It expected second-half 2018 sales and marketing expense to range between 36% and 39% of revenue and gross margin to increase slightly from the second-quarter level. Management also indicated that revenue growth could remain similar to, or below, the second-quarter rate through at least the first half of 2019 because subscription revenue is recognized over contract terms.
On July 19, 2018, after quarter-end, the company completed a private placement of 140,000 shares of Series A Preferred Stock and approximately 2.9 million common shares for $133.0 million of gross proceeds. Net proceeds after approximately $4.7 million of transaction costs were $128.3 million. The proceeds were used primarily to pay $132.8 million to terminate the Credit Facility. The refinancing is expected to reduce near-term cash financing payments, but the preferred stock carries a 10.0% annual cash dividend and a 3.0% annual payment-in-kind dividend for the first five years, followed by a 13.0% cash dividend rate thereafter.
The company expects a third-quarter 2018 non-cash charge of approximately $47.0 million to $48.0 million for the write-off of debt discount and issuance costs, a $7.3 million make-whole premium charge, and a $7.8 million gain from eliminating the Credit Facility embedded derivative liability.
Material contingencies include ongoing Oracle litigation. In Rimini I, the Ninth Circuit reversed or remanded portions of the prior judgment; the company received $21.5 million in March 2018, while $28.5 million of potential legal-fee recovery remained deposited with the District Court pending a decision. In Rimini II, Oracle counterclaims and the company’s claims remain unresolved; the company stated that a loss range could not be determined and that no loss was probable or accrued. The company also received a federal grand jury subpoena concerning specified support and operational practices and is cooperating with the inquiry.
Additional risks include continued litigation and possible injunctions, dependence on Oracle-related revenue, competition from software vendors and alternative support providers, customer retention, foreign currency exposure, cybersecurity and data-privacy obligations, the ability to maintain liquidity, preferred-stock redemption rights, and restrictions under the Series A Preferred Stock and related Promissory Notes. The company’s disclosure controls were deemed effective as of June 30, 2018.
Most important facts for investors to verify
- Whether the July 2018 refinancing fully improves liquidity after considering preferred-stock cash dividends, PIK dividends, the GP Sponsor note due January 2019, lease obligations and potential redemption obligations.
- The actual third-quarter impact of the expected $47.0 million to $48.0 million debt-cost write-off, $7.3 million make-whole charge and $7.8 million derivative gain.
- The outcomes and timing of the Rimini I attorney-fee remand, Supreme Court petition and possible injunction, including any recovery of the $28.5 million deposited with the District Court.
- The potential damages, injunction exposure and timing of trial in Rimini II, as well as any effect on Oracle-related revenue and preferred-stock redemption rights.
- The progress and financial impact of the federal grand jury inquiry.
- Whether increased sales and marketing investment translates into new-client growth, improved retention and sustainable margins.
- The effect of the upcoming revenue-recognition standard adoption and lease-accounting changes on reported revenue, liabilities and comparability.