Expanding Into VMware And AI Amid Cuts And Legal Woes, With Mixed Financial Forecasts

Key Takeaways

• Expanding service offerings and investing in automation, AI, and analytics aim to broaden market appeal and enhance service delivery, potentially increasing revenue.
  
• Strategic cost reduction and selective hiring focus on improving profitability and targeting higher-value services, indicating a shift towards more profitable deals.
  
• Exiting PeopleSoft support and ongoing Oracle litigation introduce immediate revenue risks and legal uncertainties, alongside challenges in operational efficiency and global market susceptibility.

Catalysts

Provides enterprise software products, services, and support.

• Expanding service offerings beyond Oracle and SAP to include VMware and other technologies could drive new revenue streams by appealing to a broader market and potentially improving gross margins through higher-margin services.
  
• Implementing a $35 million cost reduction program aims to streamline operations and reduce expenses, which could improve net margins by lowering operational costs and enhancing profitability.
  
• Exiting the PeopleSoft support business could reduce legal and compliance costs, possibly improving net income by decreasing expenses associated with ongoing litigation and compliance challenges.
  
• Growing the global engineering team and investment in areas such as automation, AI, and analytics could enhance service delivery and client satisfaction, potentially leading to increased contract volumes and higher annual recurring revenue.
  
• Strategic hiring, including enterprise architects and regional CTOs, despite overall cost-cutting measures, indicates a focus on higher-value services and consultative sales approaches, which could lead to larger, more profitable deals and positively impact revenue growth and margins.

Assumptions

• Analysts are assuming Rimini Street's revenue will decrease by -5.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.8% today to 2.4% in 3 years time.
• Analysts expect earnings to reach $8.5 million (and earnings per share of $0.08) by about October 2027, down from $16.3 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 56.4x on those 2027 earnings, up from 9.4x today. This future PE is greater than the current PE for the US Software industry at 38.9x.
• Analysts expect the number of shares outstanding to grow by 7.75% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Risks

• The decision to exit the PeopleSoft support business, representing 8% of the company's revenue, could result in immediate revenue loss and affect profitability until the company can effectively reallocate resources and capital to higher margin services.
  
• The ongoing litigation with Oracle presents legal and financial uncertainties that could impact future earnings, especially if the outcomes of the litigation require substantial financial resources or lead to unfavorable operational restrictions.
  
• The company's restructuring and cost reduction program, aimed at saving $35 million, indicates underlying challenges in operational efficiency and cost management that could affect net margins if the anticipated savings are not fully realized or lead to a decrease in service quality.
  
• A decline in revenue retention rate to 88% signals potential challenges in client satisfaction or competitive positioning, which could affect recurring revenue streams and long-term financial stability.
  
• Adverse foreign exchange movements and their noted impact on revenue and operating cash flow highlight the company's susceptibility to global financial market fluctuations, which could negatively impact earnings and operational cash flow in future periods.

Valuation

• The analysts have a consensus price target of $3.4 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 $5.0, and the most bearish reporting a price target of just $2.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $358.7 million, earnings will come to $8.5 million, and it would be trading on a PE ratio of 56.4x, assuming you use a discount rate of 7.9%.
• Given the current share price of $1.69, the analyst's price target of $3.4 is 50.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.