Rimini Street, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Rimini Street is a global provider of enterprise software support, products and services, including application management, managed services, security, interoperability, observability and consulting. The filing reports unaudited results for the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
- Approximately 3,040 active clients and more than 1,530 unique clients at March 31, 2024.
- More than 2,130 employees; approximately 50% of revenue was generated in the United States and 50% internationally.
- Annualized recurring revenue was $416 million, compared with $408 million at March 31, 2023.
- Revenue retention declined to 89% from 92% for the comparable trailing twelve-month periods.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $106.7 million | $105.5 million | Up 1.2% |
| Gross profit | $63.8 million | $66.2 million | Down 3.5% |
| Gross margin | 59.8% | 62.7% | Down 290 basis points |
| Operating income | $3.4 million | $10.7 million | Down 68.5% |
| Net income | $1.3 million | $5.6 million | Down 76.6% |
| Diluted EPS | $0.01 | $0.06 | Down $0.05 |
| Cash flow from operations | $11.1 million | $8.6 million | Up $2.4 million |
- Sales and marketing expense increased 13.5% to $39.1 million, primarily due to a $4.4 million increase in travel and entertainment costs associated largely with a January 2024 sales training event.
- Cost of revenue rose 9.1% to $42.9 million, driven principally by higher employee compensation and benefits associated with a 22% increase in average headcount, while revenue increased only 1%.
- General and administrative expense was $18.4 million, broadly comparable with $18.2 million in the prior-year quarter.
- Litigation costs increased to $2.9 million from $2.7 million, primarily reflecting preparation for the Rimini II appeal.
- The effective tax rate increased to 55.9% from 42.9%; tax expense was $1.7 million compared with $4.2 million, reflecting lower pretax income and lower foreign withholding taxes.
- Cash, cash equivalents and restricted cash totaled $129.4 million at March 31, 2024. The company had a $44.5 million working-capital deficit, largely attributable to $230.0 million of current deferred revenue for services billed in advance.
- Accounts receivable declined to $78.8 million from $119.4 million at December 31, 2023, while deferred revenue declined to $254.3 million from $287.0 million.
- Total debt under the Original Credit Facility was approximately $70.9 million at March 31, 2024; the average interest rate was 7.20%, compared with 6.31% in Q1 2023.
- Cash increased by $13.6 million during the quarter, including $8.7 million from investing activities primarily due to net investment sales, offset by $1.8 million of financing cash outflows and a $4.4 million unfavorable foreign-currency effect.
Material changes versus the prior comparable period
- Revenue increased modestly, supported by growth in the average unique-client base and international revenue.
- Profitability deteriorated materially because cost of revenue and sales and marketing expenses grew substantially faster than revenue.
- Gross margin fell from 62.7% to 59.8%, and management expects short-term margin pressure as it invests in new offerings.
- Net billings declined $18.9 million to $74.1 million because new-client invoicing did not offset the loss of certain larger contracts.
- Operating cash flow improved because of collections of accounts receivable, despite lower net income and a $29.3 million decrease in deferred revenue.
- The company transferred its investments into highly liquid instruments with maturities of less than three months; all investments were classified as cash equivalents at March 31, 2024.
- No common-stock repurchases occurred during the quarter.
Guidance, outlook, contingencies and unusual items
- The filing does not provide a specific numerical revenue, earnings or cash-flow forecast. Management expects to continue investing in sales, marketing, product development and expanded service offerings, while monitoring demand and adjusting expenditures as needed.
- Management expects current cash, future operating cash flow and available resources to satisfy anticipated needs for at least the next 12 months, assuming no significant adverse impact from macroeconomic conditions or litigation.
- On April 30, 2024, the company refinanced the Original Credit Facility with a new five-year senior secured facility consisting of a $75.0 million term loan and a $35.0 million revolving line of credit. The new facility was outstanding and fully available as described in the filing at that date.
- The new facility carries variable rates based on SOFR or a base rate, plus applicable margins, and is secured by substantially all assets of the credit parties. It includes financial covenants and restrictions on additional debt, liens, investments, dividends and stock repurchases.
- Rimini II remains a significant contingency. The District Court found infringement involving Oracle PeopleSoft and Oracle Database products and entered an injunction that is currently stayed. Ninth Circuit oral argument on the company’s appeal was scheduled for June 5, 2024.
- Oracle is seeking approximately $70.6 million of attorneys’ fees and taxable costs in Rimini II. The company opposed the request and argued that any award should not exceed $14.5 million. No decision had been issued as of the filing date; no accrual was recorded because management did not believe a material loss was probable.
- PeopleSoft-related services represented approximately 8% of Q1 2024 revenue, while services for Oracle software products represented approximately 63% of total revenue. An effective injunction could require costly changes to service delivery and could result in lost clients or revenue.
- Other exposures include maximum potential liquidated damages of approximately $8.3 million, a remaining three-year vendor purchase commitment of $11.0 million, variable-rate debt, foreign-currency volatility and cybersecurity, privacy and operational risks.
- A hypothetical 10% foreign-currency movement would have affected pretax income by approximately $3.1 million and the cash-flow foreign-currency effect by approximately $4.8 million. A 100-basis-point increase in SOFR would have increased annual interest expense by approximately $0.7 million based on March 31 debt.
- Disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported during the quarter.
Most important facts for investors to verify
- Track revenue retention, net billings and annualized recurring revenue, particularly following the decline in retention to 89% and the $18.9 million year-over-year decrease in quarterly billings.
- Assess whether investments in headcount, new offerings and sales and marketing can produce revenue growth sufficient to restore gross and operating margins.
- Review the terms, interest costs, covenant compliance and required amortization of the April 30, 2024 refinancing.
- Monitor the Ninth Circuit appeal, the status of the Rimini II injunction and Oracle’s approximately $70.6 million fee request.
- Evaluate the concentration of revenue in Oracle-related services and the potential operational and financial effects of restrictions on PeopleSoft support.
- Reconcile cash generation with changes in deferred revenue, accounts receivable and advance billings; the working-capital deficit is heavily influenced by customer prepayments.
- Consider exposure to foreign-currency movements, rising SOFR-based borrowing costs, cybersecurity incidents, client renewals and broader macroeconomic pressures.