Research Solutions, Inc. (RSSS) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon, everyone. And thank you for participating in today’s conference call to discuss Research Solutions Financial and Operating Results for its Fiscal First Quarter ended September 30, 2021. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Beisler, Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Research Solutions first quarter of fiscal 2022 earnings call. On the call today are Roy W. Olivier, President and Chief Executive Officer and Bill Nurthen, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the first quarter of fiscal 2022. That release is available on the company’s website at researchsolutions.com. Before Roy and Bill begin their prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Research Solutions’ recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. Also on today’s call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. A reconciliation of those measures to GAAP measures is included in the earnings press release issued this afternoon. Finally, I would like to remind everyone this call will be recorded and made available for replay via a link on the company’s website. I would now like to turn the call over to Roy?

Thank you, John. And thanks to everyone for joining us for our first quarter of fiscal 2022 results. I'm also excited to introduce Bill Nurthen who joined us in October. Bill has 20-plus years in corporate finance, including multiple CFO roles and Bill and I worked together at ARI Network Services for six years. I'm confident that Bill can help us improve the business in many ways. Our first quarter results reflect the continued momentum in SaaS platform revenues. Overall, we met or exceeded our platform revenue targets regarding new customer platform deployments, platform upsells and from existing transaction customers. We fell short of our revenue targets, which I'll explain a little more detail later in the call. On a trailing 12 month basis, we added 158 net new platforms up from 112 trailing 12 month platforms sold as of 9/30/2020. Net new deployments for the quarter were slightly above last year and were consistent with our expectation as Q1 and Q2 are typically slower than Q3 and Q4. Transaction sales were below expectation for the quarter. Overall, transactions including platform and not platform is growing, but the percentage of those transactions generating revenue declined for the quarter year-over-year. That decline is primarily due to churn within the non-platform customers. Looking at the total average number of monthly transactions in a calendar year or in 2020, and in year to date 2021, corporate and academic platform customers grew total transaction volume or count by 14% year-over-year and that same period, those customers grew transaction revenue 6% year-over-year. So in short, total transaction usage by platform customers is growing, but revenue is not growing at the same rate because more customers are acquiring articles via non-billable sources like open access, subscriptions, tokens or reuse rights. We expect to see continued volatility with transaction revenues going forward. The good news is that the platform customers are seeing high returns on their investment as our platform helps them maximize the percentage of articles they can acquire at low or no cost, which has kept our platform rates very low -- our platform churn rates, I'm sorry, very low. I'll have a few more comments on that later in the call. Overall, the first quarter of fiscal 2021 other than transaction revenue was a good start to the year and in line with our expectations. After Bill provides a bit more detail, I'll be back to discuss what investments we're making this year to accelerate future revenue growth, which are reflected in the first quarter's results, particularly in our EBITDA. For now, I'll pass the call over to Bill to walk through our fiscal quarter results in a bit more detail. Bill?

Thanks, Roy. I'm excited to be on board and working together again. Good afternoon to everyone on the call. Total revenue for the first quarter of fiscal year 2022 was $7.7 million unchanged from the first quarter of fiscal year 2021. Platform revenue increased 32% to $1.5 million primarily driven by a net increase of platform deployments over the past year, including 37 in net new deployments in the first quarter. In addition, the number was also impacted by upselling within our current customer base of platform customers. Annual recurring revenue at the end of the quarter, stood at $6.3 million up 7% sequentially and 33% year-over-year, reflecting our continued sales and upselling efforts and low churn of existing platform customers. Please see today's press release for our definition and use of annual recurring revenue and other non-GAAP items. Transaction revenue for the quarter was $6.2 million compared to $6.6 million from the prior year quarter, while we are down from Q1 of last year for many of the reasons Roy discussed, I will also note that transaction revenue can also fluctuate and we experienced similar levels of transaction revenue back in the second quarter of fiscal year, 2021 before seeing a rebound in transactions for the remainder of that fiscal year. Transaction customer count for the quarter was 1,153 versus 1,090 in the first quarter of fiscal year 2021 as we experienced roughly 5% to 6% increases in both our corporate and academic customer counts. Gross margin for the first quarter was 34.4%, a 275 basis point improvement over the first quarter of fiscal 2021. The increase is due to the revenue mix shift towards our higher margin platform business and it should be noted that this is the company's highest gross margin performance on record, since the introduction of the platform revenue. The platform business recorded gross margin of 83.7% and approximately 160 basis point increase from the prior year quarter and at the high end of our target gross margin range of high 70% to low 80%. Gross margin in our transaction business decreased 50 basis points to 22.4%. The decrease is primarily related to a portion of our transaction cost of sales being fixed and allocating that costs over a lower level of transaction revenue in the quarter. Total operating expenses in the quarter were $3 million compared to $2.4 million in the prior year quarter due primarily to higher technology and product development costs and higher general and administrative costs. In product development, we have expanded headcount to accelerate the development of new products and product extensions. In G&A, we have some additional headcount expense related to both supporting organic and acquisitive growth, as well as some expense associated with upgrading some of our back office systems. Net loss for the quarter was $372,000 or $0.01 on a per share basis compared to net income of $15,000 or nil on a per diluted share basis in the prior year quarter. Adjusted EBITDA was negative $181,000 compared to positive $167,000 in the year ago quarter, with the difference being driven by the increase in operating expenses that I previously discussed. Turning to our balance sheet and cash flow, cash and cash equivalent as of September 30, 2021 was $10.9 million compared to $11 million on June 30, 2021. The difference is largely related to the use of about $72,000 in cash flow from operations in the quarter. There were no outstanding borrowings under our $2.5 million revolving line of credit, and we have no long term debt or liabilities. In conclusion, I wanted to give some insight into our outlook for this year. First, we are pleased with the growth rate of the platform, revenue and ARR, and we'll continue our efforts to grow platform revenue and subscriptions at relatively similar rates. Second, there are some intentional investments we are making to maintain and potentially accelerate those growth rinks. Roy will describe some of these in more detail. However, you will likely see the cost of those investments on the technology and product development line and G&A line of our income statement. We intend to invest in sales headcount as well and you may see some increases there. However, we believe we can offset a good portion of that investment by some reductions in discretionary marketing spend. In addition, there are a couple unique expense items to point out for this year. One is that there will be some costs related to the changes in the executive team that will hit the P&L. Second, there are some changes in the Mexico labor laws that have served to increase the cost of our labor force there by about $300,000 on an annualized basis. The net of all this is that while we expect gross profit to be up year over year for fiscal year 2022, we expect adjusted EBITDA to be down at likely to be negative for the year. As I noted before, this quarter was a record for gross margin and as the platform continues to grow, we should continue to see company gross profit grow at a faster rate than overall company revenue. This gives us scale and as we grow and are able to realize some of the investments we are making, this should start to have an impact not only on the bottom line, but also on the overall cash produced by the operations of the business. I'll now turn the call back to Roy.

Thanks Bill. During last quarter's call, we reviewed our current thinking regarding our go forward strategy. I will not cover that again today, but it remains unchanged from the last call regarding transactions. I'd like to comment on what the platform is doing for our customers. We ran two customer cohorts and analyze the results, their results over time. The first cohort where customers that went live with the platform on or about January 1, 2020, and had been non platform customers for at least a year before the switch, before implementing the platform, those customers were paying for about 90% of the articles or transactions they acquired after implementing the platform that percentage dropped on average to 73% in the first year and 65% in the second year, this was due to the platform, helping them leverage free content options, like open access, tokens, subscriptions and reuse rights. The second cohort we analyzed was our initial set of platform customers who implemented the platform in 2017 and are still using it today. Those customers have seen their paid articles as a percentage of total articles acquired, continue to decline that group of customers has seen the percentage of paid articles declined from 59% in 2017 to 41% in 2020. This is strong evidence that the platform is doing what we intended it to do and speaks to why we have very low churn and negative churn rates, negative net churn rates. I'm sorry. It's exciting to see the savings our platform is generating for our customers. I mentioned on the last call that we'll be making additional investments in several areas of some of, some of the largest being additional sales product and software engineering resources. Many of these investments have been underway and although they did negatively impact our EBITDA in Q1, these investments will start to pay off in additional sales growth in late fiscal year, 2022 and fully in fiscal year 2023 and beyond some of those investments include first, we are investing in additional salespeople, a new sales tools to help our prospecting teams generate more leads to the entire sales team. That investment will be about 200,000 over the course of the year with the existing sales teams. Some of that specifically the prospecting system is already generating results and should start building larger pipelines. During the second half of the year, we're also investing about 300,000 in the article galaxy scholar launch this year, as a reminder, this is a version of article galaxy that is focused on university libraries. It has been in soft launch and we have had some early success. The initial investments are to expand the sales and development teams to increase sales. In the second half of the year, we are also investing about 400,000 to build a new product that we expect to launch in late fiscal year 2022. This product is related to our core article galaxy product, and we're excited about what we think it can generate in terms of revenues starting in fiscal year 2023, we're also investing about 160,000 and our business development team to identify and acquire companies that we think are creative to our business and product strategy. I covered this topic in detail in the last call. So I won't repeat it here. I do believe these investments will ultimately accelerate our growth rate in the future, allowing us to be more profitable as we scale the business as always, we appreciate your time and interest in research solutions. We have a great team that gets up every morning with a mission to provide tools and services, to power research and knowledge creation for the world's leading organizations. I continue to be excited about our future and hope to speak with you again. So with that, I'd like to turn the call back over to the operator for Q&A. Operator?

We will now begin the question-and-answer session. [Operator instructions] Our first question is from Richard Baldry with ROTH Capital. Please go ahead.

Thanks. Well, not asking for explicit guidance, I'm sort of curious around as you make these investments under the conditions you see ahead as some, they don't change dramatically. What type of quarterly cash burn would probably be sort of a trough, just so we can kind of balance that in a run rate of that quarterly burn against sort of the resources you've got to understand the runway on the effort you're putting out. Thanks.

Yeah, I think it's something where we're going to monitor it and see where it is. I suspect if you're looking at, what you could see in a given quarter that could probably be up to about a quarter of a million on a quarterly basis. But again, that's something we'll continue to monitor. We are down, as I said, the 72 cash flow from operations this quarter. I think that's probably in the area of where you'd see the 250 that I quoted where you'd see the trough at, but it's something that we can monitor and update you on a quarterly basis.

And then maybe on the sales side, I know you're trying to make some investments there. Can you talk about how you feel about the team, the productivity, sort of the number of heads you have now where you like to get it to challenges in building that teams for over the short term? Thanks.

Yeah. I mentioned, I think on the last call that in the last 12 months we've added, coverage for German speaking in Japanese speaking countries those two resources are ramping up well and starting to be productive, our existing sales team that existed in Europe and the U S before that continue to be productive and are doing a nice job. And then on the flip side, the teams that do upsells they sell new existing customers, customers that are currently transactionally and a responsible return. They also continue to do a nice job, both from an activity point of view and a results point of view. So for us, this exercise is how do we add more heads? And then how do we fill those pipelines, which we typically do either through what we call a prospecting team, which does sales qualified leads or the marketing team, which does marketing qualified leads. I think the two challenges we have in those kind of three things I mentioned is one of them was having good visibility to who our prospective customers, and we have built out a system that improves that dramatically. We don't feel like we need more prospectors, so we don't have any seats to fill there. It was just building a piece of technology that we've been working on over the last six months to generate more customer leads for the prospecting teams who were sending the appointments for the sales reps. That seems to be going pretty well. The, the, the piece, the piece that we need to continue to work on is our ability to recruit and hire salespeople and get them productive in a reasonable period of time. That's been a challenge for the organization. We've made some progress there, and we feel pretty comfortable with what we're doing today, which is a bit different than what we were doing a year ago. But hiring in this market continues to be a challenge, especially for experience top line sales people, which is what we're looking for. The flip side is that the marketing organization I've mentioned in previous calls is a little bit of a reboot right now. We're trying to figure out where to invest marketing dollars to get the best spend. So we'll continue with those efforts in terms of having very clear goals, very clear measurement systems. And I've actually asked the team to not be investing in discretionary marketing or advertising sources until we can track that. And we should be able to track that in the relatively near future. But today, and I've mentioned this on previous calls, the vast majority of our sales come from sales qualified leads or the prospecting teams. So does that help?

Yes. It does. And, just from a very high level, could you talk about how you feel about M and a now I think last time you said there's, this could literally be a couple of hundred M and a targets. Has there been any sort of movement on beginning to move forward on the path to figure out what your appropriate, which are interested? Or do you feel like, now that you've got the new CFO in your seated it's time to get that process started. Thanks.

Yeah. No, thank you. No, that process has been underway since I got here and actually I think a little bit before I got here, I can tell you this, since I've been here, we do have a list of over 200 targets. We have actually worked through about a hundred of those targets. We have several active conversations, we've done some idolize, we've done some diligence and we continue to look for things that are consistent with our business strategy and our product strategy. I've mentioned before the big challenge there is valuations right now, or are astronomical as so we're kind of looking for the right deal at the right price. And that's taken us a little bit longer than I would've hoped, but we're making a lot of progress talking to a lot of people and having a lot of interesting conversations.

Next question is from Allen Klee with National Securities Corporation. Please go ahead.

Yes. Hi. I'm at Maxim, but hello. So your plan, the key takeaway for me on this quarter, one of the keys was the strength in platforms segment. And I thought I heard some commentary to think about kind of the growth we saw this quarter of continuing through the year. Does that mean the absolute level of platform revenue sales, or are you referring to the percentage change year over year as being like a number we could think about and then in transactions, is it reasonable to assume that it's going to stay kind of at this issue? I mean, it's a good issue that you're saving your customers money, but that it's probably likely that as a result that this business will, will be declining a bit. Thank you.

Yeah, I'll answer your second question. First, in terms of the transaction business, I mentioned that most of the decline was driven by non platform customers. We actually don't have a lot of those left. So I think at some point in the next quarter or two, we'll hit trough of them churning out, and we'll only be dealing with platform customers, which means we'll only be dealing with a product mix issue in terms of how many articles they're obtaining for free versus how many articles they're paying for. And so, I'm disappointed that the non platform customers are turning out, but they're not under contract. They are non platform. And like I said, we don't have a lot of those left. I continue to believe the platform business will overall be a flattish business. So I would expect our performance to improve in that area over the course of the year. But I think we'll continue to see some volatility up or down as we go through the year. In terms of your first question if you're, if you're referring to kind of, I think donate a comment, I made a comment, we would expect the platform growth rate to be relatively consistent with what it has been on a trailing 12 month basis, which has been, in that high twenties, low thirties on a quarterly basis. Is that your question?

Yeah, that's very helpful. That's great. That actually implies it's getting well because the amount of bookings increases to keep that up. So that's a good thing. And then just, you, you've mentioned you have a lot of initiatives of the academic offering name one and some others just go through again, how to think about the timing of when these things are potentially coming on. So we can think of, and if you have, I don't know if it's possible to kind of talk about maybe the, what, which ones you, size wise, how you could think about them qualitatively, or maybe if they're not allowed in the beginning, but the potential, thank you.

Yeah. I think in terms of the initiatives, the first is investing in the current Sales force, which is selling into corporate with the corporate version of article galaxy. And what I've challenged the head of sales there to do is what do you need? What's the plan to get to 40% year over year growth in terms of bookings? I don't think we're going to get there this year, but I think we have a pretty good plan to bring on additional head count drive more leads into the install base, and we're very comfortable with the number of platforms we would need to sell per year versus what our tan is to get to a 40% year over year growth rate in dollars. So not going to happen maybe till the latter half of this year, but it is something that we're very focused on doing. And frankly, the biggest gap for us is putting qualified salespeople in the because we, we feel like we've got the prospecting part down and we feel like we have the process down in terms of selling corporate customers article galaxy scholar. We don't expect that to produce a lot of bookings this year. We'll be a few hundred thousand dollars, but next year, again, it's going to come down to the size of the sales team and if we can get them in seats before the beginning of the fiscal year fully trained, then I feel like next year, you'll start to see material impact from that product. The unnamed product will not be complete until toward the end of this year, but both it and the scholar, the article gospel scholar product, certainly have Tams that suggest we should be able to drive growth in those businesses, similar to the growth we drove with the article galaxy product when we first launched it. Is that all?

Yeah, that's great. Okay. Thank you so much.

[Operator instructions] The next question is from Scott Bilodeau with Walrus Partners. Please go ahead.

Oh, hi guys. Thanks for taking my question. Just another follow-up on the transaction revenue. I think you, you laid out some percentages that as someone comes on platform they begin with 90% paid, then I think 73 and then 65%. And I think even mentioned real mature ones down to 41%. So, of the $6 million, home, do you have a sense where they are on that track to 41%, because that should give you some view of how quick coasts, the treadmill that, that six millions heading south any idea, any visibility you can give us on that?

Well, we certainly is the bagger percent. We have been working with a third party to do some of this analysis because our, our systems are such that this data sits in different systems. We certainly today can run a cohort of 2017, 2018, 2019, 2020, where are they? And where do we predict they're going to go relative, and then we can layer on top of that new customers coming in. However, one of the questions I was asking a previous call, which we actually did attempt to answer is what do we expect a new platform customer coming in to generate? And when I say new, I'm talking about new, so they, don't a historic transaction revenue base with us. They're coming in and they're starting to buy transactions. And so we've, we've been doing some work to figure that out, but it's all over the place. So we're now trying to cut that data a different way to see if it starts to get clear if you do it on a per user count or per seat count, or if you do it in, in, in, by vertical. But the question I can answer today is if I bring in 150 new platform customers, how much transaction revenue really going to generate, I can do an average, but when you look at the, the 150, they're all over the board, we have some that come in that are only generating a few thousand dollars a quarter. We have some coming in that are, that are producing tens of thousands of dollars a quarter. And it's hard for me to predict what's going to happen looking forward without having some, some opinion, hopefully a strong opinion based on data of what new platform customers are going to bring into that, or bring into that mix. So that's a little more of the wild card, as opposed to I look at guys that have went from off-platform to on-platform, I had how much, how many transactions they've done and you can model out, Hey, is that goes to, so you get a feel for that. What you don't know is the other side of what they kind of know what's bleeding, what you don't quite know is what's coming on the top side. Yeah. We are continuing to work on that because, getting our arms around that to me is a very, very high priority.

Yeah. Great. Yeah, the second question is that, mentioned on the business development side, obviously valuations are astronomical, which probably isn't going to change any time soon. So I don't think we're going to get a quarter where all of a sudden valuations are great again, and you can buy. So given that, what are you going to do and how are you going to pay for these for an acquisition? Yeah,

I think, what we're looking at now is earlier stage companies that have interesting technology maybe do not have a Sales force, we feel like we could pay them a reasonable amount for their business and then cross sell it into our product, using our Sales force and potentially use our Sales force to sell their product. So, we're probably not going to be buying as mature companies as I would have liked to. But I think there's some very interesting earlier stage companies out there that can be acquired at a reasonable valuation that add a lot of value to the platform and the business strategy. So in terms of how we pay for them I think I've discussed that in a previous call, but I think it's going to be a combination attach potentially earn out potentially seller debt. And there will be some stock component in it, but I think Phil, if you go back and look at Ari, as we did not do a massive amount of Lucian and I don't see us changing that behavior, that's you? I appreciate it. Thanks guys. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Roy Olivier for any closing remarks.

Well thank you again for your time today. And I look forward to catching up in person or via Zoom at some point in the near future. Thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.