Rimini Street, Inc. — Q3 2019 Form 10-Q Summary
Business context and reporting period
Rimini Street provides subscription-based enterprise software support and management services, primarily for Oracle and SAP products, with emerging Salesforce and SAP Application Management Services offerings. The filing covers the quarter and nine months ended September 30, 2019. The financial statements are unaudited and presented under U.S. GAAP.
As of September 30, 2019, the company supported more than 2,030 active clients, employed more than 1,210 professionals, and generated approximately 35% of quarterly revenue internationally. The company remained an emerging growth company.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $69.0 million, up 10.1% | $203.2 million, up 9.8% |
| Gross profit | $43.0 million | $128.4 million |
| Gross margin | 62.4%, versus 64.5% | 63.2%, versus 61.2% |
| Operating income | $2.5 million | $20.4 million |
| Net income | $1.7 million | $17.7 million |
| Net loss attributable to common stockholders | $4.8 million, or $0.07 per share | $1.2 million, or $0.02 per share |
| Operating cash flow | Not separately provided | $21.0 million |
Quarterly revenue growth was driven primarily by a 15% increase in average unique clients. Annualized subscription revenue was approximately $274 million, compared with $250 million in the prior-year quarter, while the revenue retention rate remained 92%. Sales and marketing expense increased 19.7% in the quarter and 16.5% year to date as the company invested in growth. General and administrative expense increased 22.0% in the quarter and 15.0% year to date.
Cash, cash equivalents and restricted cash totaled $42.2 million at September 30, 2019, compared with $25.2 million at December 31, 2018. Current assets were $115.2 million versus current liabilities of $214.4 million, resulting in a working capital deficit of approximately $99.3 million. The deficit largely reflects $167.0 million of current deferred revenue collected in advance from customers.
The company had no outstanding contractual debt under the former GP Sponsor note after repaying it on June 28, 2019, and the former Credit Facility had been terminated in July 2018. However, Series A Preferred Stock had a carrying value of $128.6 million and a liquidation preference of approximately $154.1 million at quarter-end. The preferred stock carries 10% annual cash dividends and 3% annual payment-in-kind dividends through the initial five-year period.
Material changes versus the prior comparable period
- Revenue increased 10.1% in the quarter and 9.8% for the first nine months, but quarterly growth slowed from approximately 17% in the third quarter of 2018.
- Quarterly gross margin declined by approximately 2.1 percentage points because cost of revenue grew faster than revenue, reflecting higher staffing, engineering consulting, technology and security costs and investment in new services.
- Year-to-date gross margin improved by approximately 2.0 percentage points because cost of revenue grew more slowly than revenue.
- Operating income was essentially flat in the quarter and declined 6.2% year to date as sales and marketing and general and administrative spending increased.
- Net income improved substantially from a $48.4 million quarterly loss and a $70.3 million year-to-date loss in 2018, primarily because the former Credit Facility was repaid and related debt charges were eliminated.
- Interest expense declined to $27,000 in the quarter and $375,000 year to date, compared with $9.5 million and $32.2 million, respectively, in 2018. The company also incurred no other debt financing expenses in 2019, compared with $48.4 million in the prior-year quarter and $58.3 million year to date.
- Operating cash flow increased to $21.0 million from $17.6 million year to date, while financing cash flow improved to a $2.3 million use from a $31.6 million use.
- The company raised approximately $9.1 million net through March and June 2019 private placements of Series A Preferred Stock and common stock, and paid $10.9 million of preferred cash dividends.
Guidance, outlook, risks and unusual items
Management stated that it expected to be profitable for the year ending December 31, 2019, but expected preferred cash dividends, PIK dividends and accretion to result in a net loss attributable to common stockholders. Management also stated that available cash and future operating cash flow should fund anticipated needs for at least 12 months from the issuance of the financial statements.
Management expects relatively lower revenue growth rates at least through 2019 because of prior sales and marketing constraints, competitive actions and increased discounting by enterprise software vendors. It plans to continue investing in sales and marketing, international expansion, Salesforce support and SAP Application Management Services.
Oracle litigation remains the most significant contingency. The Ninth Circuit affirmed the permanent injunction and prior attorneys’ fee award in August 2019, while narrowing two aspects of the injunction. Rimini agreed to pay Oracle approximately $0.5 million of appeal-related fees. The company filed a U.S. Supreme Court certiorari petition in November 2019; the filing states that the Court had not decided whether to hear the case. The injunction is expected to increase labor costs by approximately 1% to 2% of revenue. Oracle may also pursue contempt proceedings relating to compliance.
In Rimini II, summary judgment motions remained pending, no trial date was scheduled, and the company did not expect a trial before 2021. The company stated that potential damages or recovery could not be reasonably estimated and that no loss accrual had been recorded.
The company received approximately $13.0 million from Oracle in April 2019 following a U.S. Supreme Court ruling, recognized $12.8 million of recovery and $0.2 million of interest income, and recorded $4.0 million of estimated amounts owed to an insurance company. Other unusual items included a $1.8 million benefit from resolving a vendor dispute and litigation costs that fluctuated materially year over year.
Additional risks include the $25.0 million maximum exposure under client liquidated-damages provisions, preferred-stock redemption or conversion obligations, restrictions on additional indebtedness, possible dilution from preferred-stock conversion and warrants, foreign-currency exposure, a federal grand jury inquiry, competitive pressure, cybersecurity and data privacy requirements, and the company’s history of losses and accumulated deficit of $354.7 million.
The company planned to adopt the new revenue recognition standard for interim reporting beginning in fiscal 2020 using the full retrospective method. Management expected accelerated recognition for certain contracts and capitalization of certain sales commissions, but had not completed its evaluation of the full impact.
Important facts for investors to verify
- Whether revenue growth stabilizes or continues to slow, particularly as increased sales and marketing spending matures.
- Whether quarterly gross-margin pressure from new offerings, staffing and Oracle-related processes persists.
- The sufficiency of operating cash flow to fund approximately $15 million to $17 million of annual preferred cash dividends, lease obligations and growth investments.
- The terms and potential triggers for redemption of the Series A Preferred Stock and conversion or acceleration of related Convertible Notes.
- Developments in the Rimini I appeal, injunction-compliance discovery, possible contempt proceedings and the Rimini II litigation.
- The ultimate amount payable to the insurance company in connection with the Oracle recovery and related litigation costs.
- The impact of adopting the new revenue recognition and lease accounting standards in fiscal 2020.
- Potential dilution from approximately 15.4 million common shares issuable upon preferred-stock conversion, 18.1 million outstanding warrants and other equity awards.