Rimini Street, Inc. annual report, FY2021

Rimini Street, Inc. — FY2021 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2021; filed March 2, 2022. The filing reports annual results rather than a standalone fourth-quarter period. Rimini Street provides subscription-based enterprise software support and application management services globally, principally for Oracle and SAP products, with additional offerings covering IBM, Microsoft, Salesforce, open-source databases and related technologies.

Business context and operating profile

• Supported more than 2,840 active clients and employed more than 1,660 professionals at year-end.
• Approximately 53% of revenue was generated in the United States and 47% internationally; international revenue growth materially exceeded U.S. growth.
• Annualized subscription revenue was approximately $393 million at December 31, 2021, compared with $349 million at December 31, 2020.
• Revenue retention was 92% in 2021, unchanged from 2020 and 2019.
• Most contracts are billed annually in advance and generally have initial non-cancelable periods of two to three years, supporting recurring revenue and deferred revenue balances.

Financial performance and key metrics

Metric	FY2021	FY2020	Change
Revenue	$374.4 million	$326.8 million	+14.6%
Gross profit	$238.0 million	$200.6 million	+18.6%
Gross margin	63.6%	61.4%	+220 bps
Operating income	$26.8 million	$17.9 million	+49.7%
Net income	$75.2 million	$11.6 million	+549.2%
Net income attributable to common stockholders	$45.2 million	$(15.2) million	Improved
Diluted earnings per share	$0.51	$(0.21)	Improved
Cash flow from operations	$66.9 million	$42.1 million	+58.0%

• Revenue growth was driven primarily by a 14% increase in average unique clients. U.S. revenue increased 4% to $199.8 million, while international revenue increased 29% to $174.6 million.
• Cost of revenue increased 8% to $136.5 million, slower than revenue growth. Lower engineering consulting costs were a principal contributor to the gross-margin improvement.
• Sales and marketing expense increased 12% to $128.5 million, and general and administrative expense increased 23% to $64.2 million, reflecting higher headcount, compensation, commissions, software costs and public-company expenses.
• Net income benefited significantly from a $55.8 million income-tax benefit, principally resulting from the release of valuation allowances on deferred tax assets. This benefit is not representative of recurring operating performance.
• Cash and cash equivalents were $119.6 million, or $120.0 million including restricted cash, at year-end. Deferred revenue totaled $300.3 million, including $253.2 million classified as current.
• The company reported a working-capital deficit of $42.7 million, largely because of advance customer billings and deferred revenue. Management stated that cash, cash equivalents, restricted cash and expected operating cash flow should cover anticipated needs for at least the next 12 months, assuming no significant COVID-19 disruption.

Debt, capital structure and liquidity

• In July 2021, the company entered into a five-year secured term loan with an original principal amount of $90 million to fund the redemption of Series A Preferred Stock. Debt outstanding at December 31, 2021 was $83.3 million, net of discounts and issuance costs.
• The facility bears interest at LIBOR plus a margin of 1.75% to 2.50%, is secured by substantially all assets of the credit parties and requires compliance with fixed-charge coverage, leverage and minimum-liquidity covenants. The company stated that it was in compliance with its financial covenants as of filing.
• Minimum U.S. cash liquidity under the facility is $20 million. Annual minimum principal payments are 5%, 5%, 7.5%, 7.5% and 10% over the five-year term, with the remaining balance due at maturity.
• All remaining Series A Preferred Stock was redeemed in 2021 for aggregate consideration of approximately $150.7 million, including dividends and make-whole amounts. The redemptions were funded with the term loan, equity-offering proceeds and cash.
• The March 2021 common-stock offering generated approximately $55.6 million of net proceeds and issued approximately 7.8 million shares.
• Contractual obligations due during 2022 totaled approximately $12.8 million, including debt principal and interest and lease obligations.

Material changes versus the prior comparable period

• Revenue increased 15%, with international revenue up 29% and active clients increasing from more than 2,480 to more than 2,840.
• Gross margin expanded by 220 basis points to 63.6%, while operating income increased nearly 50%.
• Operating cash flow increased from $42.1 million to $66.9 million, aided by a $47.3 million increase in deferred revenue.
• Net income increased sharply, but the comparison was heavily affected by the $55.8 million deferred-tax benefit in 2021.
• The company replaced the preferred-stock capital structure with secured debt and common-equity financing, resulting in $83.3 million of debt outstanding at year-end versus no reported long-term debt at December 31, 2020.
• Litigation costs and related recoveries, net increased to $16.9 million from $14.6 million, including a $7.5 million accrual related to Oracle injunction sanctions and estimated legal fees.
• The company corrected prior-period accounting for approximately 6.1 million sponsor warrants, which had been classified as equity rather than liability. The related liability was later reclassified to additional paid-in capital after the warrants were sold to outside holders.

Guidance, outlook, commentary and risks

• Management expects continued investment in sales, marketing, global expansion, product development, application management services and public-company infrastructure. The filing does not provide specific revenue or earnings guidance.
• Management stated that it does not currently expect to be profitable in the near future, despite reporting FY2021 net income; this statement should be read in light of the unusually large tax benefit.
• Management reported no significant net COVID-19 impact on FY2021 revenue or results. Remote operations reduced travel, event and office costs, but pandemic-related uncertainty could affect renewals, collections, sales cycles and future technology spending.
• The most material contingency is ongoing litigation with Oracle. In January 2022, the court found violations of the permanent injunction on five of ten items, awarded $0.6 million of sanctions and allowed Oracle to seek reasonable attorneys’ fees and costs. Rimini accrued $7.5 million as of December 31, 2021 and appealed the order.
• In the separate Rimini II litigation, the court had found infringement of certain Oracle PeopleSoft copyrights, but had awarded no damages as of year-end. The company stated that potential damages could not be reasonably estimated and that an award was not considered probable.
• Approximately 64% of FY2021 revenue was derived from support for Oracle PeopleSoft, JD Edwards, Siebel, E-Business Suite and Database products, increasing exposure to Oracle-related litigation and customer concerns.
• Other key risks include competition from Oracle, SAP and other providers; client retention and renewal risk; lengthy six-to-12-month sales cycles; cybersecurity and privacy incidents; foreign-exchange exposure; variable-rate debt and LIBOR transition risk; tax-asset realization; and dependence on key personnel.
• A 2021 phishing incident resulted in unauthorized sharing of some client addresses and outstanding billing data, although management stated that it did not significantly affect the business or client relationships.

Most important facts for investors to verify

1. Separate recurring operating performance from the $55.8 million one-time or non-recurring deferred-tax benefit and assess the sustainability of reported net income.
2. Review Oracle litigation developments, including the appeal, potential attorneys’ fees, Rimini II damages exposure and any effect on supported Oracle products.
3. Assess debt-service capacity, covenant compliance, minimum liquidity requirements and the refinancing or maturity risk associated with the secured term loan.
4. Monitor revenue retention, renewals, annualized subscription revenue, deferred revenue and the quality of operating cash flow generated by advance billings.
5. Evaluate whether international growth and higher sales and marketing investment can offset competitive pressure, litigation-related sales friction and potential margin impacts.
6. Confirm the accounting treatment and dilution implications of outstanding warrants, options, restricted stock units and the March 2021 equity offering.
7. Review the company’s tax-asset assumptions, including projected taxable income, net operating loss utilization and potential Section 382 limitations.