Rimini Street, Inc. quarterly report, Q2 FY2023

Rimini Street, Inc. — Form 10-Q Summary

Reporting period: Quarterly and year-to-date periods ended June 30, 2023. The unaudited statements are prepared under U.S. GAAP. Rimini Street provides global enterprise software support, products and services, including managed services and its Rimini ONE portfolio.

Business context

As of June 30, 2023, the Company supported more than 3,020 active clients, employed more than 1,940 professionals, and generated most revenue from subscription-based support services. Annualized recurring revenue was $410 million, compared with $397 million a year earlier. Revenue retention was 94%, compared with 95% for the comparable prior-year period.

Key financial metrics

Metric	Three months ended June 30, 2023	Three months ended June 30, 2022	Six months ended June 30, 2023	Six months ended June 30, 2022
Revenue	$106.4 million	$101.2 million	$211.9 million	$199.1 million
Gross profit	$67.1 million	$63.9 million	$133.2 million	$124.6 million
Gross margin	63.0%	63.1%	62.9%	62.6%
Operating income	$10.3 million	$5.7 million	$21.0 million	$11.6 million
Net income	$4.3 million	$0.1 million	$9.9 million	$3.2 million
Diluted EPS	$0.05	Less than $0.01	$0.11	$0.04
Cash flow from operations	Not separately provided	Not separately provided	$21.7 million	$60.8 million

Second-quarter revenue increased 5.2%, driven primarily by international revenue, which rose 11% to $52.4 million. U.S. revenue was essentially flat at $54.0 million.
Six-month revenue increased 6.4%; international revenue rose 12%, while U.S. revenue increased 1%.
Second-quarter operating income increased 81%, reflecting revenue growth and a $2.5 million reduction in net litigation costs, partly offset by higher cost of revenue and sales and marketing spending.
Six-month operating income increased 80%, with operating expenses down slightly despite higher sales and marketing costs.
Interest expense increased 39% in the quarter and 51% year to date because of higher rates on the variable-rate Credit Facility. A rate swap reduced interest expense by $0.2 million in the quarter and $0.4 million year to date.
Effective tax rates were high at 53.5% in the quarter and 48.0% year to date.

Liquidity, cash flow and debt

Cash, cash equivalents and restricted cash were $124.0 million at June 30, 2023, compared with $109.4 million at December 31, 2022. Short-term investments were $17.1 million.
The Company reported a working-capital deficit of $64.2 million, primarily because current deferred revenue was $259.1 million. Management stated that deferred revenue is collected in advance and that historical fulfillment costs were approximately 37% of related deferred revenue.
Operating cash flow was $21.7 million for the first six months, down from $60.8 million in the prior-year period. The decline primarily reflected less favorable working-capital changes, including lower deferred revenue and accrued-liability cash flows.
Investing cash flow was a use of $1.1 million, including $2.1 million of capital expenditures, partly offset by net investment-sale proceeds.
Financing cash flow was a use of $3.3 million, including $2.3 million of Credit Facility principal payments and $1.0 million of share repurchases.
Credit Facility debt was approximately $73.0 million net of discounts and issuance costs, with $5.9 million classified as current maturities. The Company reported approximately $76.0 million of outstanding debt for market-risk purposes.
The Credit Facility was amended to replace LIBOR with SOFR. The average interest rate was 6.85% in the second quarter and 6.58% year to date, compared with 2.76% and 2.61%, respectively, in the prior-year periods.
The Company stated that it was in compliance with its financial covenants and had approximately $40 million of incremental borrowing capacity, subject to the facility terms. Management believes available liquidity and future operating cash flow will meet anticipated needs for at least 12 months from issuance of the financial statements.

Material changes versus the prior comparable period

Revenue growth accelerated internationally, particularly in Japan and Australia, while U.S. revenue remained broadly unchanged.
Gross margin improved by 30 basis points for the six-month period but declined by 10 basis points in the second quarter.
Net litigation costs declined to $0.6 million in the quarter and $3.3 million year to date, versus $3.1 million and $6.2 million, respectively, in the prior-year periods.
Sales and marketing expense increased 3% in the quarter and 6% year to date as the Company increased trade show, advertising, marketing and personnel spending.
General and administrative expense was flat in the quarter and decreased 4% year to date.
Accounts receivable declined to $85.1 million from $116.1 million at year-end, contributing $31.1 million of operating cash flow. Reported days sales outstanding improved to 78 days from 92 days a year earlier.
The Company repurchased and retired approximately 248,000 shares for $1.0 million during the quarter. Approximately $44.2 million remained available under the $50 million repurchase authorization at June 30, 2023.

Outlook, litigation and principal risks

The filing does not provide specific quarterly or full-year revenue, earnings or cash-flow guidance. Management expects to continue investing in sales, marketing, product development and international expansion, while monitoring demand amid inflation, higher interest rates and global economic uncertainty.

Rimini II litigation: On July 24, 2023, after the reporting date, the District Court issued findings and a permanent injunction. The Court found infringement involving Oracle PeopleSoft and Oracle Database products, although the injunction primarily limits the manner in which PeopleSoft support can be delivered and does not fully prohibit those services. No monetary damages were awarded in the ruling.
The injunction requires deletion of specified PeopleSoft environments, files, updates and automated tools, restrictions on copyright notices and certain public statements, a corrective press release, and a compliance certification. The Company appealed and sought a stay; the timing and outcome were uncertain as of the filing date.
PeopleSoft support represented approximately 8% of second-quarter revenue and approximately 9% of first-half revenue. Support for Oracle PeopleSoft, J.D. Edwards, Siebel and Database products represented approximately 43% of first-half revenue.
The Company expects additional labor and other compliance costs from the Rimini II injunction, but stated that those costs were not estimable and had not been accrued at June 30, 2023. An adverse outcome could materially affect financial position, results of operations and cash flows.
In the separate Rimini I contempt matter, the Company had accrued $6.9 million for estimated Oracle attorneys’ fees and costs. The related appeal remained pending.
Liquidated-damages provisions in client contracts could require payments of up to approximately $13.7 million if the Company becomes unable to provide contracted services; no liability had been accrued for these provisions.
Key additional risks include variable-rate debt and SOFR exposure, international currency fluctuations, client retention and renewal risk, competition from software vendors and self-support, cybersecurity and privacy obligations, dependence on key personnel, and potential restrictions under the Credit Facility.
A hypothetical 100-basis-point increase in SOFR would increase annual interest expense by approximately $0.8 million. A hypothetical 10% currency movement would affect pretax income by approximately $1.9 million and the cash-flow translation effect by approximately $5.0 million.

Important facts for investors to verify

Progress and ultimate outcome of the Rimini II appeal, stay request, compliance obligations and any related future costs or client attrition.
Status and potential amount of Oracle attorneys’ fees and costs in both Rimini I and Rimini II.
Ability to sustain revenue retention, international growth and client additions while approximately 43% of first-half revenue is tied to Oracle product lines affected by injunction-related matters.
Operating cash-flow conversion, including the impact of billings, deferred revenue, collections and accrued liabilities.
Interest-rate exposure, required Credit Facility amortization, covenant compliance and refinancing or maturity requirements.
Whether the $64.2 million working-capital deficit remains manageable given the advance-billing nature of deferred revenue.
Potential dilution from approximately 8.4 million outstanding stock options and 3.4 million outstanding warrants, subject to vesting, exercise prices and anti-dilution effects.