Rimini Street, Inc. annual report, FY2022

Rimini Street, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 10-K, not a standalone fourth-quarter filing. Rimini Street provides subscription-based enterprise software support, managed services, security, interoperability, observability and consulting solutions, primarily for Oracle and SAP environments. At year-end, the Company supported approximately 3,020 active clients and employed more than 1,920 professionals globally.

Financial performance and key metrics

Metric	2022	2021	Change
Revenue	$409.7 million	$374.4 million	Up 9.4%
Gross profit	$257.3 million	$238.0 million	Up 8.1%
Gross margin	62.8%	63.6%	Down 80 basis points
Operating income	$8.1 million	$26.8 million	Down 69.8%
Net income (loss)	$(2.5) million	$75.2 million	Declined $77.7 million
Net income (loss) per diluted share	$(0.03)	$0.51	Declined
Cash flow from operations	$34.9 million	$66.9 million	Down $32.0 million
Debt under Credit Facility	$74.8 million	$83.3 million	Down $8.5 million

• Revenue growth was driven primarily by a 7% increase in average unique clients. U.S. revenue increased 8% to $215.4 million, while international revenue increased 11% to $194.3 million.
• Active clients increased from approximately 2,840 to 3,020; unique clients increased from more than 1,470 to more than 1,510.
• Annualized subscription revenue was approximately $420 million at December 31, 2022, compared with $393 million in 2021. Revenue retention remained 92%.
• Sales and marketing expense increased 11% to $143.0 million, and general and administrative expense increased 17% to $75.4 million, reflecting investment in growth, higher compensation, travel, technology and public-company costs.
• Litigation costs and related recoveries, net increased to $25.3 million from $16.9 million, primarily because of higher professional fees associated with the Rimini II trial.
• Interest expense increased to $4.3 million from $1.6 million because the Credit Facility was outstanding for the full year and interest rates increased.
• Cash, cash equivalents and restricted cash totaled $109.4 million at year-end. The Company also held $20.1 million of short-term investments.
• Working capital was negative by $71.3 million, largely because current liabilities included $265.8 million of deferred revenue collected before services were provided. Management stated that the working-capital deficit is less meaningful because service fulfillment costs are substantially below the related deferred revenue.
• Total remaining performance obligations were $577.9 million, including $299.9 million already billed and recorded as deferred revenue.

Material changes versus the prior comparable period

• Revenue continued to grow, but growth slowed to 9.4% from 14.6% in 2021.
• Profitability deteriorated substantially. The Company moved from $75.2 million of net income in 2021 to a $2.5 million net loss in 2022.
• Operating income fell despite higher revenue because cost of revenue grew 12%, while operating expenses grew 18%.
• Gross margin declined 80 basis points as employee compensation, engineering consulting and other delivery costs grew faster than revenue.
• The 2021 results benefited from a $55.8 million income-tax benefit arising primarily from the release of a valuation allowance. In 2022, the Company recorded $6.3 million of income-tax expense, creating a significant year-over-year earnings comparison effect.
• Operating cash flow declined 48% to $34.9 million. The 2021 cash flow benefited from a $47.3 million increase in deferred revenue, whereas deferred revenue provided only a $3.2 million operating cash flow benefit in 2022.
• Investing cash outflows increased to $24.4 million, including purchases of short-term investments and $4.3 million of capital expenditures.
• The Company repurchased and retired approximately 0.9 million common shares for $4.7 million during 2022. The authorized repurchase program was increased to $50 million, subject to Credit Facility restrictions.
• Public and private placement warrants exercisable at $11.50 per share expired unexercised on October 10, 2022. Approximately 3.4 million warrants exercisable at $5.64 per share remained outstanding at year-end.

Debt, liquidity and capital resources

• The five-year Credit Facility originally provided $90 million of term debt. The carrying amount outstanding at December 31, 2022 was $74.8 million, and the Company made $9.5 million of principal payments during the year, including a $5.0 million voluntary prepayment.
• The facility requires a minimum fixed-charge coverage ratio above 1.25, a total leverage ratio below 3.75 and minimum U.S. cash liquidity of $20 million. The Company reported compliance with its financial covenants at year-end and at the filing date.
• Approximately $40 million of incremental borrowing capacity was available based on voluntary prepayments, subject to the facility’s terms.
• In February 2023, the Credit Facility and interest-rate swap were amended to replace LIBOR with SOFR or a Base Rate. The amendment also permitted up to $10 million of certain fourth-quarter 2022 Oracle litigation costs to be added back in applicable EBITDA calculations.
• Contractual obligations totaled approximately $110.0 million, including $93.2 million of Credit Facility principal and interest and $16.8 million of lease obligations. Approximately $16.1 million was due during 2023.
• Management stated that cash, cash equivalents, restricted cash and expected operating cash flow should be sufficient for anticipated needs for at least the next 12 months, assuming no significant adverse effects from economic conditions or the COVID-19 pandemic.

Guidance, outlook, commentary and risks

• The filing does not provide a specific numerical revenue or earnings guidance range.
• Management intends to continue investing in sales and marketing, global expansion, managed services, Rimini ONE, security, interoperability, observability and consulting offerings to support long-term growth and profitability.
• The Company expects continued pressure from inflation, higher interest rates, foreign-exchange movements, possible recession, geopolitical developments and lingering pandemic effects. Management reported some non-renewals linked to client economic pressure but stated that COVID-19 did not have a significant net impact on 2022 revenue or results.
• Oracle litigation remains the most significant unusual item and business risk. Approximately 63% of 2022 revenue was derived from support for Oracle PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database products.
• In the injunction proceedings, the District Court found violations on five of ten items, awarded Oracle $0.6 million of sanctions and permitted recovery of reasonable attorneys’ fees and costs. Rimini Street accrued $6.9 million for estimated fees and costs; its appeal remained pending after oral argument in February 2023.
• In Rimini II, Oracle’s claims for monetary damages were dismissed with prejudice, but equitable claims and potential attorneys’ fees and costs remained unresolved after the bench trial concluded in December 2022. The Company had not accrued a loss because management believed an award of Oracle’s fees and costs was not probable, and stated that any loss range could not reasonably be estimated.
• The Company faces potential client liquidated damages of approximately $8.1 million if it becomes unable to provide contracted services. No such costs had been incurred or accrued.
• Other key risks include competition from Oracle, SAP and large systems integrators; reliance on client renewals and lengthy sales cycles; cybersecurity and privacy exposure; dependence on key personnel; foreign currency risk; interest-rate risk; tax matters; and the ability to scale new service offerings profitably.
• KPMG issued an unqualified audit opinion on the financial statements and internal control over financial reporting. Management concluded that internal controls were effective as of December 31, 2022.

Most important facts for investors to verify

1. Review the latest status and potential financial impact of the Oracle injunction appeal and Rimini II equitable claims, including possible attorneys’ fees, costs, injunctions or operational restrictions.
2. Assess whether the 92% revenue retention rate, client growth and approximately $420 million of annualized subscription revenue can offset slower sales growth and rising operating costs.
3. Verify liquidity, covenant compliance, required debt amortization and the effect of the SOFR transition on future interest expense.
4. Monitor operating cash flow, deferred revenue, accounts receivable collections and the sustainability of customer prepayments as a source of liquidity.
5. Determine whether investments in sales, marketing and newer offerings improve revenue growth without further eroding gross and operating margins.
6. Evaluate concentration in Oracle-related revenue, competition from software vendors and the risk that clients migrate to unsupported products, releases or cloud platforms.
7. Review the realizability of the approximately $65.5 million net deferred tax asset and the ability to use federal and state net operating loss carryforwards.