Rimini Street, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Rimini Street is a global provider of subscription-based enterprise software support and application management services, primarily for Oracle and SAP products. The filing covers the unaudited three months ended March 31, 2020, compared with the same period in 2019. As of March 31, 2020, the Company had more than 1,300 employees, over 2,070 active clients and over 1,160 unique clients.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $78.0 million | $65.9 million | +18.5% |
| Gross profit | $47.8 million | $42.0 million | +13.8% |
| Gross margin | 61.3% | 63.8% | Down 2.5 percentage points |
| Operating income | $3.7 million | $11.2 million | Down 66.5% |
| Net income | $2.5 million | $10.3 million | Down 75.3% |
| Net income (loss) attributable to common stockholders | $(4.1) million | $3.5 million | Turned to loss |
| Basic and diluted EPS | $(0.06) | $0.05 | Declined |
| Cash flow from operations | $26.3 million | $6.6 million | Improved $19.8 million |
- Sales and marketing expense increased 18.6% to $28.4 million, while general and administrative expense decreased 7.6% to $12.0 million.
- Litigation costs and related recoveries were a net expense of $3.7 million, compared with a net recovery of $6.1 million in Q1 2019. The prior-year period included a $12.8 million recovery related to the Oracle litigation.
- Cash, cash equivalents and restricted cash totaled $58.0 million at March 31, 2020, compared with $38.4 million at December 31, 2019.
- Accounts receivable declined to $75.2 million from $111.6 million at year-end 2019, contributing $35.4 million of operating cash inflow.
- Deferred revenue totaled $222.7 million, including $195.8 million current and $26.9 million noncurrent, representing contracted performance obligations not yet recognized as revenue.
- The Company reported no outstanding contractual debt obligations, although it had $19.1 million of operating lease liabilities and substantial preferred-stock obligations.
- Series A Preferred Stock had a March 31, 2020 carrying value of $134.0 million and a liquidation preference of approximately $156.4 million. Preferred-stock cash dividends and accretion reduced earnings attributable to common stockholders by $6.6 million in the quarter.
Material changes versus the prior comparable period
- Revenue growth accelerated to 18.5%, driven by a 9% increase in average unique clients and particularly strong international revenue growth of 32%, versus 11% growth in the United States.
- Cost of revenue increased 26.7%, faster than revenue, reflecting higher employee compensation, engineering consulting costs and allocated facilities, technology and security costs. Gross margin consequently declined to 61.3%.
- Operating income and net income decreased substantially because of increased operating investment, lower gross margin and the absence of the prior-year Oracle litigation recovery.
- Operating cash flow improved materially, primarily because of collections of accounts receivable and favorable working-capital movements.
- Cash financing outflows were $3.7 million, primarily reflecting $3.9 million of preferred-stock cash dividends. In Q1 2019, financing activities generated $1.2 million, including proceeds from a private placement.
- The Company adopted ASC 842 lease accounting prospectively on January 1, 2020, recording $18.3 million of operating lease right-of-use assets and $19.1 million of operating lease liabilities at March 31, 2020.
Guidance, outlook, commentary and risks
- Management continued to expect full-year 2020 revenue growth of 10% to 14% compared with 2019, subject to uncertainty from COVID-19.
- COVID-19 had minimal net impact on first-quarter revenue and operations. The Company shifted substantially to remote work and remote sales, while reducing travel, in-person marketing and office costs. Management expected these savings to offset accelerated virtual-program investments and employee COVID-related bonuses.
- Management stated that the duration and economic effects of COVID-19 could adversely affect sales cycles, client renewals, collections, bad-debt reserves, revenue and liquidity. The filing does not provide updated earnings or cash-flow guidance beyond the revenue-growth range.
- Liquidity is supported by client prepayments and recurring subscription revenue, but current liabilities exceeded current assets by $89.0 million. Management believes available liquidity and future operating cash flow will meet anticipated needs for at least 12 months, assuming no significant COVID-19 disruption.
- Preferred-stock cash dividends are expected to total approximately $15.8 million in 2020, with additional PIK dividends of approximately $4.7 million. Cash dividends are generally 10% annually during the initial five-year period and are expected to become 13% cash dividends thereafter.
- Oracle litigation remains a significant contingency. The permanent injunction is in effect, and management expects additional labor costs of approximately 1% to 2% of revenue. Rimini II remains unresolved, no trial date was scheduled, and the Company stated that potential damages exposure could not be reasonably estimated.
- Adverse litigation developments, including a contempt finding or a material litigation effect, could trigger mandatory redemption-related obligations under the Series A Preferred Stock and related Convertible Notes, potentially creating significant liquidity and insolvency risk.
- Other principal risks include competition from Oracle, SAP and independent providers; client retention and pricing pressure; foreign-exchange exposure; cybersecurity and data-protection obligations; dependence on key employees; and potential dilution from preferred-stock conversion, stock options and warrants.
Most important facts for investors to verify
- Whether the 10%–14% full-year 2020 revenue-growth outlook remains achievable as COVID-19 affects client spending, renewals and collections.
- Whether gross-margin pressure from AMS investments, engineering costs and injunction-related labor requirements persists.
- The timing and outcome of Rimini I injunction-related proceedings and Rimini II summary-judgment and trial developments.
- The Company’s ability to fund recurring preferred-stock cash dividends, lease obligations, litigation costs and growth investments from operating cash flow.
- The potential size and timing of any mandatory redemption or Convertible Note obligations associated with litigation or other triggering events.
- The dilutive impact of approximately 15.6 million potentially issuable shares from Series A Preferred Stock, 18.1 million warrant shares, 8.3 million outstanding option shares and other equity awards.
- Whether the substantial improvement in operating cash flow is sustainable or primarily reflects quarter-specific working-capital collections.