Rimini Street crushes Q3 FY2020, demonstrates need for 3PM

Den Howlett Profile picture for user gonzodaddy November 6, 2020
Summary:
Anyone surprised that Rimini Street beat market expectations for Q3 FY2020? I"m not. Here's why.

Rimini Street logo
(Rimini Street)

The pandemic may be hurting some vendors but it's proving a boon for third-party maintenance (3PM) vendor Rimini Street as it posted better than expected Q3 FY2020 results and raised its outlook for the remainder of the year. By the numbers:

  • Revenue was $82.5 million for the 2020 third quarter, an increase of 19.3% compared to $69.2 million for the same period last year.
  • Annual Recurring Revenue was $327 million for the 2020 third quarter, an increase of 18.6% compared to $275 million for the same period last year.
  • Active Clients as of September 30, 2020 were 2,365, an increase of 16.4% compared to 2,032 Active Clients as of September 30, 2019.
  • Revenue Retention Rate was 92% for both the trailing 12 months ended September 30, 2020 and for the comparable period ended September 30, 2019.
  • Gross margin was 61.2% for the 2020 third quarter compared to 62.5% for the same period last year.
  • Operating income was $4.5 million for the 2020 third quarter compared to $2.2 million for the same period last year.
  • Non-GAAP Operating Income was $10.5 million for the 2020 third quarter compared to $7.1 million for the same period last year.
  • Net income was $3.3 million for the 2020 third quarter compared to $1.4 million for the same period last year.
  • Non-GAAP Net Income was $9.3 million for the 2020 third quarter compared to $6.3 million for the same period last year.
  • Adjusted EBITDA for the 2020 third quarter was $11.0 million compared to $7.3 million for the same period last year.

The company raised its outlook for FY 2020 to $321.5 million to $322.5 million, up from a much wider range of $314 million to $320 million.

But it is in the detail shown in the company's 10-Q filing where I find interest, largely because Rimini Street explicitly discussed the impact of the pandemic. This is what the company reported (my emphasis added):

The COVID-19 pandemic had no significant net impact on our revenue or results of operations during the third quarter of 2020, and we continued to deliver uninterrupted and critical support services to our clients during this period. Our ability to utilize our secure remote-connectivity global infrastructure promotes the safety of our employees while abiding by the restrictions currently in place throughout the world. While we did implement discounted or extended payment terms for certain of our clients, in most cases it was in exchange for contractual concessions favorable to us, for example, extended contract terms or marketing support for references, and the collective impact of such changes was not material to our results. However, the COVID-19 pandemic has impacted business markets worldwide, primarily due to the uncertainty relating to the continued effects of the pandemic. As a result, we have experienced some clients not renewing our services as their businesses have been adversely impacted during the pandemic. Despite this, we expect to continue to be able to market, sell and provide our current and future products and services to clients globally. We also expect to continue investing in the development and improvement of new and existing products and services to address client needs.

Bear in mind that Rimini Street offers 3PM at an on average cost saving of 50% compared to the list prices of its main competitors, SAP and Oracle.

You can therefore argue that it is more likely to be susceptible to the impact fo the pandemic since a proportion of its customers will likely be distressed. However, as we have heard in customer discussions generally, CFO mandates require operational units to find cash also means that Rimini Street offers what, for some, represents an attractive value proposition. 

Also bear in mind that extended terms and additional discounting carry their own risks. We do not know for example what the global impact will be on businesses generally although it is clear some sectors will see high rates of contraction.

As might be expected, Rimini Street cannot predict with any degree of certainty just how the pandemic will impact its operations going forward but the fact it is confident in its outcome for the fiscal year and is both continuing to invest while also expanding the customer base tells me they are in good shape. This has got to be good news for customers who are considering their IT cost base and the value they are deriving from their IT investments. 

In a recent conversation David Rowe, CMO Rimini Street pointed out that while most everyone is working from a home office, the business is ticking along nicely. While he would not be drawn on whether or how the company would return to office-based operations at some point in the future, he said that having a largely distributed workforce prior to the pandemic allowed them to operate without missing a beat. 

More generally, the pandemic is opening up fresh opportunities for firms like Rimini Street. Question marks over the value of IT investments, especially in the SAP customer base are giving C-suite personnel pause for thought about how they optimize IT applications related spend. Historically, Rimini Street has helped customers release IT budgets for innovation and while this may mean a net decline in spending with primary vendors, it is a value add that customers appreciate and from which Rimini Street benefits.

The fact Rimini Street posts a profit at its competitive rates can only put pressure on primary vendors who see maintenance as a cash cow. But that's not the only lever Rimini Street can pull. In its report, the company noted that it has improved Priority 1 and Priority 2 case response times and changed its SLAs accordingly. Priority 1 cases for examples carry a guaranteed response time of 10 minutes from 15 minutes. 

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