Rimini: Substantial Recurring Revenue, Reallocation Of Resources, And Undervalued

Rimini Street, Inc. ( NASDAQ: RMNI ) reports recurrent revenue, many clients, and international growth. The company recently announced the reallocation of resources, which could have a beneficial effect on future free cash flow growth. I also appreciate quite a bit that the Board of Directors approved a stock repurchase program, which could accelerate the demand for the stock, and lower the cost of capital. I did identify several risks from the ongoing litigation with Oracle ( ORCL ) or changes in the price for certain enterprise software. With that, RMNI does trade significantly cheap. Conservative forecast of future free cash flow would imply significant undervaluation.

RMNI: Many Clients, And Links With Large Software Vendors

RMNI offers a solutions portfolio of enterprise software and managed services for different products from SAP ( SAP ), IBM ( IBM ), Salesforce ( CRM ), and other open-source database software. In addition, the company provides clients with Rimini ONE, which intends to optimize clients' technologies including enterprise resource planning, customer relationship management systems, and product lifecycle management databases. The company appears to report a large list of clients, so I think that the revenue base appears well diversified.

As of June 30, 2024 and 2023, we had over 3,000 and 3,020 active clients, respectively. Source: 10-Q

I think that it is a great moment to review the company's business model mainly because of the recent undervaluation. Recent quarterly earnings report seem to push the stock price down. In the last quarter, the company reported lower than expected EPS, and lower than expected quarterly revenue. With that, EPS expected for the year ended 2025 is expected to show 5.7% growth y/y.

According to the last quarterly report, the headcount stands at close to 2.1k employees, and the current market capitalization is below $300 million. RMNI also reports positive free cash flow, positive net income, and annualized recurring revenue of $399 million from the company's subscription-based model. With these figures in mind, I think that the company could be trading at much more than $300 million.

As of June 30, 2024, we employed over 2,140 professionals and supported over 3,000 active clients globally, including 74 Fortune 500 companies and 17 Fortune Global 100 companies across a broad range of industries. Source: 10-Q

Our annualized recurring revenue was $399 million and $410 million as of June 30, 2024 and 2023, respectively. Source: 10-Q

Assumption #1: Internationalization Could Bring A Significant Amount Of Revenue Growth

With know-how developed in the United States, the company appears to be expanding the business model in foreign jurisdictions, where RMNI could obtain significant business growth. In the quarter ended June 30, 2024, close to 50% of the total amount of revenue came from the United States. The company reports subsidiaries in Australia, Brazil, UAE, France, Germany, Hong Kong, India, Israel, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Poland, Singapore, Sweden, Taiwan, Canada, and the United Kingdom.

A significant component of our long-term strategy involves the further expansion of our operations and client base outside the United States. Source: 10-Q

Approximately 50% and 51% of our revenue was generated in the United States for the three months ended June 30, 2024 and 2023, respectively. Approximately 50% and 49% of our revenue was generated in foreign jurisdictions for the three months ended June 30, 2024 and 2023, respectively. Source: 10-Q

Assumption #2: Recent Changes Could Enhance Future Net Profit Margin

In the last quarter, the company noted that it will no longer offer services for Oracle PeopleSoft products. As a result, I think that we may see a decrease in revenue related to services for Oracle PeopleSoft products, which were responsible for 8% of the total 2023 revenue. With that, I think that the company may benefit from a reallocation of resources in the long term. The lawsuits launched by Oracle against the company could lead to fines and lower net income growth. In my view, the market will most likely appreciate the measures taken by company.

As we provide services for Oracle PeopleSoft products to clients globally, the wind-down process is expected to take place over several phases and will likely take a year or longer before we are able to cease providing all Oracle PeopleSoft services. Source: 10-Q

It is also worth noting that RMNI announced a series of cost structure optimizations, which could include headcount reductions. I reviewed previous annual reports delivered by RMNI. I could not really find many expenses related to restructuring efforts. Hence, the recent announcement appears even more meaningful. In my view, the announcement could have a beneficial effect on future FCF margin growth and stock price dynamics.

Given our current business conditions, we began a process to evaluate and optimize our cost structure through a headcount reduction during the three months ended June 30, 2024. Source: 10-Q

Assumption #3: The Company Collects Money In Advance, Which Is Ideal For FCF Forecasting

The company reports a substantial amount of deferred revenue. The book value per share is negative because of the total amount of deferred revenue. The company collects cash in hand from customers, and promises to deliver services. It is quite ideal. As a result, the company delivers a large amount of CFO and FCF. There is also a significant amount of recurrent revenue, which is quite beneficial for free cash flow forecasting. In my view, future free cash flow growth will most likely show certain stability thanks to the company's recurrent revenue.

We typically collect cash from our clients in advance of when the related service costs are incurred, which resulted in deferred revenue of $240.4 million that is included in current liabilities as of June 30, 2024. Source: 10-Q

Assumption #4: Repurchase Of Shares Could Lower The WACC, And Accelerate The Stock Price

The company authorized a stock repurchase program, which I think could have a beneficial effect on future price dynamics. As a consequence, RMNI could benefit from a lower cost of equity, and the WACC could also decline. In the best case scenario, I would expect an increase in the demand for the stock, which could lead to higher stock price marks.

The Board of Directors authorized an increase to our previously announced Common Stock repurchase program to increase the value of the securities that could be acquired by us from up to $15.0 million over two years to up to $50.0 million over the next four years. Source: 10-k

Free Cash Flow Expectations, And Peers

In order to design future free cash flow expectations, I assumed further generation of recurrent revenue, successful internationalization, and reorganization efforts.

RMNI does not report a lot of debt. However, I studied the company's debt agreements in order to assess the WACC. RMNI uses the SOFR, which ranges from 2.75% to 3.5%. In the future, I would be expecting changes in the SOFR and volatility in the interest rates. Hence, I tried to be as conservative as possible, so I used a WACC of 6%.

For the term loan, we have a choice of interest rates between SOFR and a Base Rate (as defined in the 2024 Credit Facility), in each case plus an applicable margin. The applicable margin is based on our Consolidated Total Leverage Ratio (as defined in the 2024 Credit Facility) and whether we elect SOFR (ranging from 2.75% to 3.5%) or Base Rate (ranging from 1.75% to 2.5%). Source: 10-Q

I tried to be as conservative as possible while making future free cash flow forecasting. My numbers are in line with the unlevered FCF reported by RMNI in the past.

With FCF ranging from $47 million to $49 million, a WACC of 6%, and long-term growth of 2%, I obtained a total equity valuation of $1.1 billion and a target price of $12 per share.

• NPV of FCF: $272.64 million
• NPV of TV: $829.23 million
• Total EV $1,101.87
• Net Debt: -$50 million
• Equity: $1,151.87 million
• Shares Outstanding: 90.7 million
• Target Price: $12.6

RMNI also trades substantially undervalued as compared to other peers. The company trades at close to 9x GAAP earnings. Competitors trade at close to 29x GAAP TTM earnings.

Besides, competitors also trade at close to 17x TTM EV/EBITDA. RMNI's EV/ TTM EBITDA is significantly smaller than that of competitors.

The valuation reported by other analysts include an average target price close to $3.4 per share. In sum, the company does seem quite undervalued.

Risks From Litigation

In the last annual report, the company mentioned a significant number of lawsuits from large companies like Oracle. We are talking about litigation that is ongoing for the last ten years. The fines imposed to RMNI seem to be small, and do not seem to push the company out of business.

With that, management may have to pay a considerable amount of dollars to lawyers, and will have to pay fines. As a result, in my view, the company could suffer from lower net income growth in the coming years or certain decline in profitability from time to time.

If we are obligated to pay substantial attorneys' fees and/or costs to Oracle as a result of the District Court's rulings in Rimini II, or are enjoined from certain business practices, this could reduce the amount of cash flows available to pay principal, interest, fees and other amounts due under our 2024 Credit Facility, which could result in an event of default, in which case the lenders could demand accelerated payment of principal, accrued and unpaid interest, and other fees. Source: 10-Q

Changes In Price Agreements

The company may also suffer from price changes from enterprise software vendors. As a result, RMNI could see declines in its free cash flow margin or lower net income growth. If the company fails to negotiate with clients about the new prices, clients could also decide to work with other competitors. In the worst case scenario, the decline in recurrent revenue could lead to large declines in the stock price. If equity researchers lower their expectations because of a decline in the number of clients reported, demand for the stock could also decline substantially.

If the enterprise software vendors offer deep discounts on certain services or lower prices generally, we may need to change our pricing models, which could have an adverse effect on our results of operations. In addition, our other product and service offerings, such as our Rimini ONE integrated services, have pricing models that use a variety of different metrics and formulas as compared to our support solutions. Source: 10-Q

Selling Of Shares By A Large Shareholder, And The Reverse Merger

There seems to exist a large shareholder, who registered a sale of some shares owned. I do not think that market participants out there will appreciate that large shareholders are selling shares at the current price mark. It really does not look good because the shares appear quite cheap right now. The following lines are from a recent quarterly report. I also did not appreciate that RMNI became public through a merger in 2017 with a public company. Many investors may not buy shares because the company did not organize an IPO. A reverse merger transaction is a bit easier than an IPO, but involves risks for shareholders.

Additionally, we have registered for resale the shares of Common Stock of certain of our significant holders of our Common Stock, including our largest stockholder, Adams Street Partners, LLC. Any sale of large amounts of our Common Stock on the open market or in privately negotiated transactions could have the effect of increasing the volatility and putting significant downward pressure on the price of our Common Stock. Source: 10-Q

Conclusion

Currently trading at less than $300 million and with more than 2k employees, RMNI will most likely benefit from further internationalization of the business model and further recurrent revenue generation. Besides, the company decided to reduce the number of products offered to clients, and announced a reorganization of its activities. In my opinion, these initiatives could bring an acceleration in the free cash flow growth and net income growth. There are several risks coming from the fact that a large shareholder registered a sale of some shares. In addition, changes in the price of enterprise software vendors or failed price negotiations with clients could lower net income growth and FCF growth. Finally, litigation with large companies like Oracle could deteriorate future net income growth. With all that being said, the company appears very cheap at its current price mark.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RMNI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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