Rimini Street, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Rimini Street provides subscription-based independent enterprise software support for Oracle, SAP, IBM, Microsoft and related products. The filing covers the fiscal year ended December 31, 2017, including fourth-quarter results. The October 10, 2017 merger with GP Investments Acquisition Corp. was accounted for as a reverse recapitalization, with Rimini Street’s predecessor treated as the accounting acquirer.
- Approximately 920 employees and more than 1,560 active clients at year-end, including 70 Fortune 500 companies.
- Approximately 68% of 2017 revenue was generated in the United States and 32% internationally.
- Subscription revenue was generally invoiced in advance and recognized over the service period; deferred revenue was $181.6 million at year-end.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net revenue | $212.6 million | $160.2 million | +33% |
| Gross profit | $129.7 million | $93.1 million | +39% |
| Gross margin | 61.0% | 58.1% | +2.9 pts |
| Operating income | $22.0 million | $13.9 million | +57.7% |
| Net loss | $53.3 million | $12.9 million | Loss increased |
| Operating cash flow | $29.2 million | $(59.6) million | Improved |
- Annual operating margin was approximately 10.3%; net margin was approximately negative 25.1%. The filing does not present adjusted EBITDA.
- Fourth-quarter revenue was $57.9 million, up 24% year over year. Fourth-quarter gross profit was $33.0 million, implying a gross margin of approximately 57.0%, and net loss was $3.9 million.
- Annualized subscription revenue was approximately $232 million, compared with $187 million in 2016. Revenue retention was 93%, versus 94% in 2016.
- Cash and cash equivalents were $22.0 million, restricted cash was $18.1 million, and working capital deficit was $116.6 million.
- Debt carrying value was $82.1 million, while contractual Credit Facility and related debt obligations totaled approximately $142.5 million, including principal, fees and consulting obligations. The Credit Facility bears 12% cash interest and 3% paid-in-kind interest and matures in June 2020.
- 2018 contractual obligations were approximately $40.3 million, including $34.6 million of Credit Facility payments and $5.7 million of lease payments. Management stated that available resources and expected operating cash flow should fund obligations for at least 12 months.
Material changes versus the prior comparable period
- Revenue growth continued for the 48th consecutive quarter, driven primarily by a 37% increase in average active clients and a 21% increase in average unique clients.
- Gross margin expanded as revenue grew faster than support costs and engineering capacity was utilized more efficiently.
- Sales and marketing expense declined 8% to $66.8 million because of lower commissions, travel, contract labor and bonus costs. Credit Facility covenants constrained sales and marketing spending during much of 2017.
- Interest expense increased to $43.4 million from $13.4 million, and other debt financing expense increased to $18.4 million from $6.4 million, substantially offsetting operating income.
- The company recognized a $16.4 million loss from the change in fair value of redeemable warrants and a $3.8 million gain from embedded derivatives. These items were substantially affected by the merger and Credit Facility amendments.
- Operating cash flow improved from a $59.6 million use in 2016 to $29.2 million provided in 2017, aided by customer prepayments, higher deferred revenue and an $8.0 million net operating cash benefit from an insurance settlement.
- The October 2017 Credit Facility amendment converted $50.0 million of exit-fee obligations into principal, reduced near-term amortization and relaxed certain covenants. The company was in compliance with its debt covenants at December 31, 2017.
Guidance, outlook, commentary and risks
- Management did not provide a formal numerical annual revenue or earnings forecast. It expected increased sales and marketing spending in 2018, but stated that the related revenue benefit could take several quarters.
- Management expected revenue growth rates similar to fourth-quarter 2017, approximately 24% year over year, at least through the first half of 2018, primarily because of the subscription revenue model and lower sales activity in 2017.
- The company did not expect to be profitable in the near future and planned continued investment in global sales, marketing, products and services.
- The Oracle litigation remains material. In January 2018, the Ninth Circuit reversed or vacated portions of the approximately $124.4 million judgment previously paid to Oracle, potentially allowing refunds of up to $50.3 million. The company expected approximately $21.3 million in the second quarter of 2018, but the ultimate amount and timing were uncertain; any refund must generally be used to repay the Credit Facility.
- Separate Rimini II litigation with Oracle remained unresolved, with no trial expected before 2020 and no estimable loss range as of year-end. Approximately 72% of 2017 revenue related to Oracle product lines subject to the litigation.
- On March 2, 2018, the company received a federal grand jury subpoena concerning specified support and operational practices. The company intended to cooperate but could not predict the outcome.
- Key risks include substantial leverage and restrictive covenants, dependence on Oracle and SAP product support, client renewals, competition from software vendors, long sales cycles, cybersecurity and data protection, foreign currency exposure, and continuing operating losses.
- The company stated that previously identified material weaknesses in revenue recognition, sales taxes, litigation accruals and embedded derivatives had been remediated by December 31, 2017. However, management did not perform a formal assessment of internal control over financial reporting for 2017 because of its recent transition to public-company reporting.
Most important facts for investors to verify
- Actual cash receipts, timing and permitted use of any Oracle litigation refunds.
- Progress and potential damages, injunctions or operating restrictions in Rimini II and the federal grand jury inquiry.
- Compliance with Credit Facility covenants, required amortization, high effective borrowing costs and the June 2020 maturity.
- Fourth-quarter and first-half 2018 sales trends, renewal rates, client additions and whether sales and marketing investment restores growth.
- Whether the 61% annual gross margin and positive operating cash flow are sustainable without non-recurring insurance proceeds or other unusual items.
- Completion and effectiveness of internal-control enhancements and the impact of adopting new revenue-recognition and lease accounting standards.