Rimini Street, Inc. — Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 10-K, not a quarterly filing, although fourth-quarter data is presented. Rimini Street provides subscription-based enterprise software support and application management services, primarily for Oracle and SAP products. At year-end, it supported more than 2,480 active clients and employed approximately 1,420 professionals.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $326.8 million | $281.1 million | +16.3% |
| Gross profit | $200.6 million | $175.9 million | +14.0% |
| Gross margin | 61.4% | 62.6% | Down 1.2 points |
| Operating income | $17.9 million | $22.1 million | Down 19.2% |
| Net income | $13.0 million | $17.5 million | Down 26.0% |
| Net loss attributable to common stockholders | $13.8 million | $7.9 million | Wider loss |
| Operating cash flow | $42.1 million | $20.4 million | +106.6% |
| Cash, cash equivalents and restricted cash | $87.9 million | $38.4 million | +129.0% |
| Annualized subscription revenue | Approximately $349 million | Approximately $302 million | +16% |
| Revenue retention rate | 92% | 92% | Stable |
Fourth-quarter 2020 revenue was $87.8 million, up 15% from $76.1 million in the fourth quarter of 2019. Fourth-quarter net income was $3.7 million, compared with a $0.2 million net loss in the prior-year quarter.
- U.S. revenue increased 7% to $191.4 million; international revenue increased 33% to $135.3 million. International revenue represented approximately 41% of total revenue.
- Active clients increased from more than 2,060 to more than 2,480, while unique clients increased from more than 1,160 to more than 1,310.
- Cost of revenue increased 20%, faster than revenue, primarily due to higher compensation, engineering consulting and allocated operating costs.
- Sales and marketing expense increased 7% to $114.7 million, while general and administrative expense increased 10% to $52.2 million.
- Litigation costs and related recoveries were a net expense of $14.6 million, compared with a net recovery of $0.8 million in 2019.
Liquidity, capital structure and cash flow
- The company reported a $62.1 million working capital deficit, substantially reflecting $229.0 million of current deferred revenue. Management stated that customer prepayments and the relatively low historical cost of fulfilling those commitments support liquidity.
- There was no outstanding balance under the former Credit Facility or other note payable at December 31, 2020. Capital lease obligations totaled approximately $1.8 million.
- Series A Preferred Stock had a $154.9 million liquidation preference and a $137.9 million carrying value. It carries a 10% annual cash dividend and a 3% payment-in-kind dividend through July 19, 2023, after which dividends are generally payable in cash at 13%.
- Cash dividends on Series A Preferred Stock were $15.7 million in 2020, and PIK dividends were $4.7 million. Expected cash dividends for 2021 are approximately $14.8 million.
- The company completed a $27.5 million common-stock offering in August 2020, generating approximately $25.1 million of net proceeds. It also repurchased 5,000 Series A Preferred shares for approximately $4.5 million in October 2020.
- On January 5, 2021, the company agreed to repurchase an additional 10,000 preferred shares and related obligations for approximately $9.0 million.
- Operating cash flow benefited from increased deferred revenue of $22.7 million, partly offset by increases in accounts receivable and deferred contract costs.
Material changes versus the prior comparable period
- Revenue growth accelerated to 16% from 11% in 2019, led principally by international expansion and new-client additions rather than significant cross-selling to existing unique clients.
- Profitability declined despite higher revenue: gross margin fell to 61.4%, operating income declined 19%, and net income declined 26%.
- Litigation expense increased materially because of discovery and defense activity related to Oracle litigation; the prior year included a $12.8 million litigation appeal recovery.
- Operating cash generation more than doubled, and year-end cash increased by $49.5 million, including proceeds from the August equity offering.
- The company adopted lease accounting under ASC 842 in 2020, recognizing $17.5 million of operating lease right-of-use assets and $19.9 million of operating lease liabilities at year-end.
- Remote operations, reduced travel and canceled in-person events helped offset COVID-19-related compensation bonuses and other costs. Management reported no significant net impact on 2020 revenue or results of operations, but some clients did not renew because of pandemic-related financial pressure.
Guidance, outlook, risks and unusual items
Management did not provide a specific numerical revenue or earnings forecast in the supplied filing and stated that it did not expect to be profitable in the near future, despite reporting net income in 2020 and 2019. The company expects to continue investing in sales and marketing, global expansion, new products and Application Management Services.
- Oracle litigation: In September 2020, the court found infringement of 17 Oracle PeopleSoft copyrights involving certain “gap customers” and four additional copyrights involving two clients. No damages had been awarded as of year-end, and the company recorded no accrual because damages were considered not probable and could not be reasonably estimated.
- Oracle also filed a July 2020 motion alleging contempt of a permanent injunction. The company disputes the allegations and recorded no accrual. An adverse ruling could result in damages, attorneys’ fees, injunctions, client claims or preferred-stock redemption obligations.
- Approximately 64% of 2020 revenue was derived from services supporting Oracle PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database products that are relevant to the Oracle litigation.
- The company remains exposed to COVID-19 duration and macroeconomic risks, including delayed sales, lower renewals, payment concessions, bad debts and reduced technology spending.
- Additional risks include competition from Oracle, SAP and other providers; customer retention; long sales cycles; cybersecurity and data privacy; foreign currency and international operations; employee retention; tax assessments; and potential limits on the use of net operating losses.
- Liquidated-damage provisions in customer contracts could require payments of up to approximately $13.8 million if the company becomes unable to provide contracted services, although no such costs had been incurred.
Most important facts for investors to verify
- Progress, damages exposure and possible injunctions in Rimini I and Rimini II, including the effect on Oracle-related revenue.
- Ability to fund recurring preferred-stock cash dividends and potential redemption or Convertible Note obligations beginning in 2023 or earlier upon specified events.
- Whether revenue growth can continue while cost of revenue, litigation expenses and global operating costs remain elevated.
- Quality and sustainability of operating cash flow, including the contribution from customer prepayments and deferred revenue.
- Client retention, new-client additions, cross-selling to existing clients and the commercial traction of Oracle and SAP Application Management Services.
- Impact of COVID-19 on future renewals, receivable collections, bad-debt expense and sales cycles.
- Potential dilution from 15.5 million shares issuable upon conversion of Series A Preferred Stock, approximately 18.1 million warrant shares and outstanding equity awards.