RMNI - Rimini Street Expands Offerings For Clients Reducing Vendor Bloat

2023-04-21 16:01:28 ET

Summary

• Rimini Street provides independent customer service and support for major enterprise software platforms.
• The firm has expanded its service offerings as clients seek fewer vendors for their IT support needs.
• Its litigation with Oracle may see further resolution in Q2 or Q3, but the stock appears fully valued at its present price level of around $4.00.
• I'm on Hold for RMNI in the near term.

A Quick Take On Rimini Street

Rimini Street ( RMNI ) provides independent software system support for large software platforms used by enterprises worldwide.

Management views an uncertain macroeconomic environment as favorable to its value proposition and is expanding the firm's service offerings to help clients reduce vendor bloat.

Given the apparent full valuation of the stock at its present price of around $4.00 and the remaining uncertainties in its Oracle ( ORCL ) litigation, I'm on Hold for RMNI in the near term.

Rimini Street Overview

Las Vegas, Nevada-based Rimini was founded in 2005 to provide organizations with independent support services for major software platforms.

The firm is headed by President and CEO, Seth Ravin, who was previously a Vice President at SAP, Saba, and PeopleSoft.

The company's primary offerings include support services for these platforms:

• SAP

• Salesforce

• IBM

• Microsoft

• Oracle

• Open source DBs

The firm acquires customers through its direct sales and marketing efforts and through partner referrals.

Rimini has clients across all major industry verticals.

Rimini Street's Market & Competition

According to a 2021 market research report by Grand View Research, the overall market for IT professional services was an estimated $777 billion in 2021 and is forecast to reach $2.0 trillion by 2030.

This represents a forecast CAGR of 11.2% from 2022 to 2030.

The main drivers for this expected growth are the growing demand for automation to create operational efficiencies as more companies move to the cloud-based systems.

Also, below is a chart showing the historical and projected future growth trajectory of the entire IT professional services market in the U.S., by sector:

Note that the IT Support and Training Services market is the second-smallest sector within the entire industry.

The chart below shows the global market divided by end-user type:

Rimini's Recent Financial Trends

• Total revenue by quarter has risen per the following chart:

• Gross profit margin by quarter has produced no meaningful growth in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended higher recently:

• Operating income by quarter has varied within a narrow range:

• Earnings per share (Diluted) have turned negative in Q4 2022:

(All data in the above charts is GAAP)

In the past 12 months, RMNI's stock price has fallen 29.4% vs. that of the iShares Expanded Technology-Software ETF's ( IGV ) drop of 1.8%, as the chart indicates below:

Management has not provided specific company or customer retention rate figures.

For the balance sheet, the firm ended the quarter with $129.1 million in cash, equivalents and short-term investments and $74.8 million in total debt, of which $4.8 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $30.6 million, of which capital expenditures accounted for $4.3 million. The company paid $10.9 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Rimini Street

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

RMNI's most recent GAAP Rule of 40 calculation was 19.5% as of Q4 2022's results, so the firm needs significant improvement in this regard, per the table below:

(Source - Seeking Alpha)

Future Prospects For Rimini Street

In its last earnings call (Source - Seeking Alpha), covering Q4 2022's results, management highlighted the expansion of its service portfolio as customers seek to reduce the number of vendors they interact with.

Revenue exceeded guidance for Q4, which management believes is due to this market dynamic as well as customers wanting to extract the most value from their IT systems while keeping costs down.

The macroeconomic environment forced some customers to delay new purchases in 2022, but leadership saw evidence in Q4 2022 of increased budget releases and forward movement.

Its Oracle litigation has been proceeding, with a few recent wins, but remaining matters may reach an opinion by the appeals court sometime in Q2 or Q3.

Recently, the company instituted a restructuring that management believes will result in $15 million in annualized expense reductions.

Notably, deferred revenue hasn't budged, while its backlog actually dropped year-over-year from $593 million to $578 million.

Looking ahead, management expects full year 2023 revenue to be $425 million at the midpoint of the range, or only a 3.8% growth rate.

Adjusted EBITDA, which usually excludes stock-based compensation and one-time items, is expected to be $55 million at the midpoint.

The company's financial position is reasonably strong, with ample cash and liquidity and positive free cash flow.

Regarding valuation, my discounted cash flow analysis suggests that RMNI is fully valued at its present stock price, given generous assumptions:

While management views a difficult economic environment as favorable to the firm's value propositions, in a macroeconomic downturn, companies reduce almost all of their spending, so the company would not be spared.

Given the apparent full valuation of the stock at its present price of around $4.00 and the remaining uncertainties in its Oracle litigation, I'm on Hold for RMNI in the near term.

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