Rimini Street, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Rimini Street is a global provider of subscription-based enterprise software support and application management services, primarily for Oracle and SAP products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
As of September 30, 2021, the Company supported more than 2,790 active clients and employed more than 1,590 professionals. Approximately 47% of third-quarter revenue was international, compared with 42% in the prior-year quarter.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Revenue | $95.6 million | $82.5 million | +15.9% |
| Gross profit | $62.3 million | $50.5 million | +23.2% |
| Gross margin | 65.1% | 61.2% | +3.9 percentage points |
| Operating income | $7.5 million | $4.5 million | +66.0% |
| Net income | $1.9 million | $3.6 million | -46.5% |
| Net loss attributable to common stockholders | $6.7 million | $3.1 million | Loss increased |
| Basic and diluted loss per share | $0.08 | $0.04 | Loss increased |
| Metric | Nine months 2021 | Nine months 2020 | Change |
|---|---|---|---|
| Revenue | $275.2 million | $239.0 million | +15.1% |
| Gross profit | $173.3 million | $146.3 million | +18.5% |
| Gross margin | 63.0% | 61.2% | +1.8 percentage points |
| Operating income | $14.0 million | $13.4 million | +4.6% |
| Net income | $5.2 million | $9.1 million | -43.1% |
| Net cash provided by operating activities | $47.8 million | $31.8 million | +$16.0 million |
Revenue growth was led by international operations, particularly Asia-Pacific. Q3 international revenue increased 31% to $45.2 million, while U.S. revenue increased 5% to $50.5 million. Annualized recurring revenue was $377 million at September 30, 2021, versus $327 million a year earlier, and the reported revenue retention rate improved to 93% from 92%.
Balance sheet, cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $103.4 million at September 30, 2021, compared with $87.9 million at December 31, 2020.
- Current liabilities exceeded current assets by $64.2 million. The Company states that this deficit is substantially attributable to $203.8 million of current deferred revenue, for which service fulfillment costs have historically been approximately 35% of related revenue.
- Operating cash flow was $47.8 million for the first nine months, compared with $31.8 million in 2020. The increase was driven largely by collections on accounts receivable and other working-capital changes.
- Capital expenditures were $1.5 million. Financing activities used $26.0 million, reflecting preferred-stock redemptions, dividend payments, debt issuance costs and other financing uses, partly offset by equity and debt proceeds.
- On July 20, 2021, the Company entered into a five-year secured term loan with $90 million of proceeds. Debt carrying value was $84.2 million at September 30, 2021, including $3.7 million of current maturities. The facility bears interest at LIBOR plus 1.75% to 2.50%; the reported Q3 rate was 2.4%.
- The Credit Facility requires, among other conditions, minimum liquidity of $20 million, a fixed-charge coverage ratio above 1.25 and a total leverage ratio below 3.75. Management reported compliance with the covenants as of filing.
- Management believes available cash and future operating cash flow will fund anticipated needs for at least 12 months from issuance, including debt service, working capital, capital expenditures and contractual obligations.
Material changes versus the prior comparable period
- Revenue growth outpaced cost of revenue growth, increasing Q3 gross margin to 65.1% from 61.2%.
- Sales and marketing expense increased 11% in Q3 and 14% for the first nine months as the Company expanded personnel and continued investing in growth.
- General and administrative expense increased 20% in Q3 and 28% year to date, reflecting higher personnel, tax, software and public-company costs.
- Litigation costs increased to $6.6 million in Q3 and $14.1 million year to date, primarily due to Oracle-related proceedings.
- Net income declined despite higher operating income because of increased interest expense, a $2.1 million Q3 loss on warrant fair value changes, foreign-exchange losses and higher income taxes.
- Net loss attributable to common stockholders includes preferred-stock accretion and dividends. The remaining Series A Preferred Stock was fully redeemed in July 2021, eliminating the preferred-stock balance at September 30, 2021.
- The Company completed a $57.0 million gross common-stock offering in March 2021, generating approximately $55.6 million of net proceeds, and issued $90 million of term debt. Shares outstanding increased to approximately 86.7 million from 76.4 million at December 31, 2020.
- The Company revised prior-period financial statements to classify approximately 6.1 million GP Sponsor Private Placement Warrants as liabilities rather than equity. The warrant liability was $5.1 million at September 30, 2021, versus $2.1 million at December 31, 2020.
Guidance, outlook, commentary and risks
The filing does not provide a specific numerical revenue or earnings forecast. Management expects continued investment in sales, marketing, new offerings and international expansion, including Application Management Services for Oracle and SAP and Salesforce-related services. The Company states that COVID-19 did not have a significant net impact on Q3 results and that remote-work and business-continuity measures remain in place.
- Oracle litigation: The Company faces ongoing Rimini I injunction and contempt proceedings and Rimini II copyright and related claims. No accrual was recorded because management believes sanctions or damages are not probable and the potential loss range cannot reasonably be estimated. A material adverse ruling could affect operations, revenue, liquidity and compliance with the Credit Facility.
- Revenue concentration: Approximately 62% of Q3 revenue was derived from support services for Oracle PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database products subject to Rimini II claims.
- Debt and interest-rate risk: The Credit Facility is secured, contains financial covenants and uses a variable LIBOR-based rate. A hypothetical 100-basis-point increase would have increased annual interest expense by approximately $0.1 million based on reported debt at September 30, 2021.
- Client and renewal risk: Subscription revenue is recognized over contract terms, while client payments are often received in advance. Lower new bookings, renewals or collections could affect future revenue and liquidity with a delay.
- Other contingencies: Maximum potential liquidated damages under client contracts were approximately $10.9 million, with no related accrual. Deferred CARES Act payroll taxes totaled $3.2 million, with repayment due in installments by December 2021 and December 2022.
- Controls: Management concluded disclosure controls were effective at September 30, 2021 and reported remediation of the previously identified material weakness related to warrant accounting. Investors should verify continued effectiveness in subsequent filings.
Most important facts for investors to verify
- Whether revenue growth, client additions, 93% retention and $377 million of annualized recurring revenue continue in subsequent quarters.
- Whether improved gross margins can offset rising sales, marketing, administrative and litigation costs.
- The outcome and timing of the Oracle injunction, contempt and Rimini II proceedings, including any damages, sanctions or restrictions on service practices.
- Compliance with the Credit Facility’s liquidity, leverage and fixed-charge coverage covenants, including the effect of variable interest rates and LIBOR transition.
- Whether operating cash flow remains sufficient after debt service, litigation spending, deferred payroll taxes and other contractual obligations.
- The effect of warrant fair-value changes, equity dilution, outstanding options and approximately 18.1 million warrants on reported earnings and future share count.
- Whether the remediation of warrant-accounting controls remains effective and whether any additional accounting or reporting weaknesses are identified.