VMware Support And ServiceNow Partnership Will Expand Future Opportunities

Key Takeaways

• Strategic partnerships and service expansion, including new VMware support, are expected to drive growth through new revenue streams and enhanced product offerings.
  
• Positive litigation outcomes and a focus on cost optimization could improve net margins and profitability, while driving earnings growth.
  
• Ongoing legal battles with Oracle, rising expenses, and declining revenue from key services pose major risks to profitability and future revenue growth.

Catalysts

Provides enterprise software products, services, and support.

• Rimini Street's implementation of a new go-to-market strategy in the Americas, including a hunter-farmer sales model, is expected to drive growth in new logo acquisitions and cross-sales to existing clients, potentially boosting revenue.
  
• The expansion of services to include more software products, such as the new support for VMware, is anticipated to open up new revenue streams, contributing to top-line growth.
  
• Strategic partnerships, like the one with ServiceNow, are expected to enhance product offerings and increase sales reach, potentially driving revenue growth and improving net margins through cost-effective modernization solutions.
  
• The positive litigation outcome in Rimini II could lead to a reduction in legal expenses and a return of previously paid legal costs, potentially improving net margins and profitability.
  
• Continued focus on cost optimization and operational efficiency, alongside investment in growth opportunities like ServiceNow and VMware services, are likely to support earnings growth through improved cost management and revenue expansion.

Rimini Street Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rimini Street's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.5% today to 10.8% in 3 years time.
• Analysts expect earnings to reach $48.6 million (and earnings per share of $0.53) by about March 2028, up from $-36.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, up from -10.1x today. This future PE is lower than the current PE for the US Software industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 0.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

Rimini Street Future Earnings Per Share Growth

Risks

• The ongoing litigation with Oracle presents significant uncertainty, as seen with the recent $58.5 million in legal expenses, impacting net income and overall profitability. Further litigation could result in additional costs or regulatory risks that could influence earnings negatively.
  
• Overall revenue faced a slight decline for the full year 2024, and the cancellation of services for Oracle PeopleSoft products, which contributed 7.7% of revenue, might lead to potential revenue gaps unless adequately replaced by new revenue streams.
  
• Despite a 7.1% rise in fourth-quarter billings, the year-over-year revenue for 2024 decreased, and challenges like FX fluctuations could continue to negatively impact revenue and growth.
  
• Although the company is expanding its market and product offerings (e.g., VMware support), there is an execution risk associated with implementing new sales strategies and reorganizations like the hunter-farmer sales model, which could impact revenue generation if not executed efficiently.
  
• The increased operating expenses, including 32.8% of revenue spent on sales and marketing in Q4 2024, present a risk to net margins if the increased efforts do not translate into significantly higher revenues to cover these costs.

Valuation

• The analysts have a consensus price target of $5.625 for Rimini Street based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $448.7 million, earnings will come to $48.6 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $4.02, the analyst price target of $5.62 is 28.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.