RMNI - Rimini Street Faces Slowing Macro Environment In 2023

2023-07-05 18:35:09 ET

Summary

• Rimini Street, Inc. provides independent software support services for large installed IT systems.
• The firm has reiterated forward revenue guidance of only 3.74% in 2023 versus 2022.
• This tepid revenue growth expectation may make an upside catalyst difficult to achieve.
• I remain on Hold for Rimini Street in the near term.

A Quick Take On Rimini Street

Rimini Street, Inc. ( RMNI ) provides software system support for large software platforms used by organizations globally.

I previously wrote about Rimini Street with a Hold rating.

Given the stock’s apparent full valuation, management’s lower revenue growth guidance for 2023 than 2022’s actual results along with increasing macroeconomic challenges as a globally synchronized slowdown appears underway, I remain on Hold for Rimini Street, Inc.

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 growing demand for automation to create operational efficiencies as more companies move 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.

Rimini’s Recent Financial Trends

• Total revenue by quarter has risen only moderately; Operating income by quarter has flattened in recent quarters.

• Gross profit margin by quarter has varied within a narrow range; Selling, G&A expenses as a percentage of total revenue by quarter have dropped in the most recent quarter.

• Earnings per share (Diluted) have turned positive in the most recent quarter.

(All data in the above charts is GAAP.)

In the past 12 months, RMNI’s stock price has fallen 21.58% vs. that of the iShares Expanded Technology-Software ETF’s ( IGV ) rise of 22.28%, as the chart indicates below.

For the balance sheet , the firm ended the quarter with $135.0 million in cash, equivalents and short-term investments and $73.9 million in total debt, of which $5.3 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash used was $7.2 million, during which capital expenditures were $4.9 million. The company paid $9.8 million in stock-based compensation ("SBC") 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 Rule of 40 calculation was 19.5% as of Q1 2023’s results, so the firm remains stable in this metric but needs further improvement, per the table below.

(Source - Seeking Alpha.)

Commentary On Rimini Street

In its last earnings call ( Source - Seeking Alpha ), covering Q1 2023’s results, management highlighted the launch of its Rimini ONE end-to-end turnkey platform for clients, of which it has seen over 100 customers sign up for.

This indicates client desire to reduce ‘vendor bloat’ as customers aim to reduce total cost of ownership for the IT spending.

Internally, the company continues to make changes to its sales processes to enhance its lead generation and closing capabilities.

Rimini’s revenue retention rate for its subscription base (97% of total revenue) was 92% for the last four quarters, indicating the firm needs to improve its product/market fit and sales & marketing efficiency to achieve no net churn (100%).

Total revenue for Q1 2023 increased by 7.8% YoY and gross profit margin rose by 0.7%.

Selling, G&A expenses as a percentage of revenue fell by 2.9% YoY and operating income rose by an impressive 48.4% to $13.5 million.

Looking ahead, management believes its Oracle legal actions could have a verdict any time in 2023, but did not characterize its expected outcome.

Leadership reiterated previous full-year 2023 revenue guidance of $425 million, which, if achieved, would represent year-over-year growth of 3.76%, significantly lower than 2022’s growth of 9.4% over 2021.

The company's financial position is reasonably strong, with ample liquidity, some long-term debt and free cash used of $7.2 million in the trailing twelve-month period.

RMNI’s Rule of 40 performance has been only mediocre, with no sequential progress made in Q1 2023.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" once, "Challeng[es][ing]" five times, "Macro" three times and "Drop" once.

Analysts questioned company leadership if the firm is seeing slowing sales cycles, but management denied seeing any fallout from the recent banking failures or macro environment factors.

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

Given management’s lower revenue growth guidance for 2023 than 2022’s actual results along with increasing macroeconomic challenges as a globally synchronized slowdown appears underway, I remain on Hold for Rimini Street, Inc. stock.

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