Rimini Street, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Rimini Street provides subscription-based enterprise software support and application management services, primarily for Oracle and SAP products, with additional offerings for IBM, Microsoft and Salesforce environments. The filing covers the fiscal year ended December 31, 2019, and was filed March 16, 2020. The company operated with approximately 1,270 professionals and more than 2,060 active clients across global markets.
Fiscal 2019 revenue was primarily recurring subscription revenue. Approximately 64% of revenue came from the United States and 36% from international operations. The company launched global Application Management Services for Oracle in November 2019 and expanded SAP AMS availability during the year.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $281.1 million | $253.5 million | +10.9% |
| Gross profit | $175.9 million | $157.5 million | +11.7% |
| Gross margin | 62.6% | 62.1% | +0.5 percentage points |
| Operating income | $22.1 million | $29.5 million | -25.0% |
| Net income (loss) | $17.5 million | $(64.0) million | Improved by $81.5 million |
| Net loss attributable to common stockholders | $(7.9) million | $(74.6) million | Improved by $66.7 million |
| Operating cash flow | $20.4 million | $22.4 million | -8.9% |
Fourth-quarter 2019 revenue was $76.1 million, gross profit was $45.8 million, operating income was $1.6 million and net loss was $0.2 million. Net loss attributable to common stockholders was $6.8 million, or $0.10 per basic and diluted share, after preferred-stock dividends and accretion.
Sales and marketing expense increased 19.9% to $107.3 million, or approximately 38% of revenue, reflecting higher staffing and customer-acquisition investment. General and administrative expense increased 27.3% to $47.4 million. Litigation costs and related recoveries produced a net benefit of $0.8 million in 2019, compared with $1.3 million of net expense in 2018.
Cash, cash equivalents and restricted cash totaled $38.4 million at December 31, 2019. The company had no outstanding bank or related-party debt after repaying its $2.4 million GP Sponsor note in June 2019. However, it reported an $82.4 million working-capital deficit, substantially reflecting $205.8 million of current deferred revenue and the timing of customer prepayments.
Preferred stock remains a significant liquidity obligation. Cash dividends on Series A Preferred Stock were $15.1 million in 2019 and PIK dividends were $4.5 million. Expected 2020 cash preferred dividends are approximately $15.8 million, with operating and capital lease payments of approximately $5.8 million due during the year. Management stated that available cash and expected operating cash flow should fund anticipated needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth slowed from 18% in 2018 to 11% in 2019, although active clients increased from more than 1,800 to more than 2,060 and annualized subscription revenue increased from approximately $271 million to $302 million.
- Revenue retention improved to 92% from 91% in 2018.
- Gross margin increased modestly to 62.6% from 62.1%.
- Operating income declined because sales and marketing and general and administrative expenses grew faster than revenue.
- Net income benefited substantially from the absence of 2018 debt refinancing charges and from a $12.8 million recovery of Oracle litigation-related non-taxable expenses, plus $0.2 million of related interest income. These benefits were partly offset by $3.9 million payable to an insurance company under the prior litigation settlement arrangement.
- The former Credit Facility, which generated substantial interest and financing expense in 2018, was terminated in July 2018. Interest expense fell to $0.4 million in 2019 from $32.5 million, and other debt financing expense fell to zero from $58.3 million.
- The company adopted ASC 606 using the full retrospective method in the fourth quarter of 2019, restating prior periods. The adoption changed revenue timing and the capitalization and amortization of sales commissions.
Guidance, outlook, commentary and risks
Management did not provide a specific 2020 revenue or earnings forecast. It expects revenue growth in 2020 to be relatively similar to 2019 because of subscription revenue recognition and the lag between sales investment and recognized revenue. Management expects 2020 sales and marketing expense of approximately 36% to 38% of revenue and general and administrative expense of approximately 16% to 18% of revenue. The filing states that the company expects continued investment in sales, marketing, global expansion, product development and AMS, and does not expect to be profitable in the near future despite reporting net income for 2019.
- Oracle litigation: The Rimini I permanent injunction and approximately $28.5 million attorneys’ fee award were affirmed in 2019, subject to limited modifications. The U.S. Supreme Court denied Rimini’s petition in January 2020. The company expects additional labor costs of approximately 1% to 2% of revenue to comply with the injunction and faces possible contempt proceedings.
- Rimini II litigation: Oracle’s counterclaims remain pending, with no trial date scheduled and no reasonably estimable loss range. The company states that an adverse outcome could result in substantial damages, injunctions, client losses and potential acceleration of preferred-stock-related obligations.
- Government inquiry: A federal grand jury subpoena received in March 2018 remains an unresolved contingency in the filing. The company is cooperating but cannot predict the outcome or potential penalties.
- Revenue concentration: Approximately 67% of 2019 revenue came from support for Oracle PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database products that are subject to the Rimini II litigation or related disputes.
- Capital structure: Series A Preferred Stock carries a 10% cash dividend and a 3% PIK dividend through July 19, 2023, after which dividends become cash-payable at 13% if the securities remain outstanding. Holders may require redemption beginning July 19, 2023, or earlier upon specified material adverse or litigation events. Related Convertible Notes could become payment obligations upon certain redemption events.
- Other risks: Competition from Oracle, SAP and other vendors; client retention and lengthy six- to twelve-month sales cycles; international and foreign-exchange exposure; cybersecurity and data privacy; tax liabilities; execution risk associated with AMS and new products; and dilution from preferred-stock conversion, warrants, options and restricted stock units.
Most important facts for investors to verify
- Whether revenue growth, client additions, retention and annualized subscription revenue remain sufficient to offset elevated sales, marketing and administrative spending.
- The cash impact and enforceability of the Oracle injunction, any contempt proceedings, and the ultimate outcome and timing of Rimini II.
- Whether operating cash flow can cover approximately $15.8 million of 2020 cash preferred dividends, lease obligations, growth investments and other operating requirements.
- The terms, potential acceleration and redemption exposure associated with the Series A Preferred Stock and Convertible Notes.
- The portion of future revenue dependent on Oracle products involved in ongoing litigation and the effect of any changes in Oracle support policies or customer migration decisions.
- The effect of ASC 606 adoption and the 2020 adoption of lease accounting, which management expected to add approximately $17.5 million to $19.5 million of right-of-use assets and lease liabilities without a significant income-statement or cash-flow effect.
- The status and potential consequences of the federal grand jury inquiry and any related legal costs or penalties.