Research Solutions, Inc

Good afternoon, everyone, and thank you for participating in today's conference call to discuss research, solutions, financial, and operating results for its first fiscal 2021 quarter ended September 30th, 2020. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Stephen Hooser, Investor Relations. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for Research Solutions' first quarter fiscal 2021 earnings call. On the call today are Peter Derich, President and Chief Executive Officer, and Alan Urban, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the first quarter of fiscal 2021. The release is available on the company's website at researchsolutions.com. Before Peter and Alan 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 projected 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 conditions. 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 that this call will be recorded and made available for replay via link on the company's website. With that, I'd now like to turn the call over to Peter Derich, Research Solutions President and Chief Executive Officer.

Peter?

Thank you, Steven, and thanks to everyone joining us for our first quarter fiscal 2021 results. We hope all of you remain healthy and safe as the COVID-19 pandemic continues. Since we spoke in September for our year-end results, we have continued to build upon the success we achieved in fiscal 2020, including increasing our platform deployments, entering into new partnerships, and enhancing our product offerings. We added 31 net new deployments in the first quarter. and reported another record for annual recurring revenue at 4.7 million, up from 4.4 million at the end of fiscal 2020, and a 35% increase from the same quarter a year ago. I am delighted to see the continued traction due to the one-stop-shop offering of our ArticleGalaxy platform that helps life science and other organizations save time and money, provide an enterprise-wide system of record, and accelerate their research. A large number of our customers operate within the life sciences industry and are researching potential therapeutics and vaccines to address the COVID-19 pandemic. We continue to provide our COVID Research Viewer Gadget, which provides access to copyright prematerials when available. We are proud to help contribute to this cause by helping these researchers find treatments for the virus in the hopes that we can all return to a level of normalcy. I will speak more on the various initiatives we are implementing shortly. But first, I'd like to pass it over to Alan to walk through our fiscal first quarter financial results in detail. Alan?

Thank you, Peter, and good afternoon, everyone. Our first quarter total revenue was $7.7 million, a 2% increase from the first quarter of fiscal 2020. Our platform subscription revenue increased 33% to approximately $1.1 million, primarily driven by a net increase in platform deployments over last year, including 31 net deployments in the first quarter. The quarter ended with $4.7 million in annual recurring revenue, up 7% sequentially and 36% year-over-year, reflecting our continued sales efforts, high upsell, and low churn of platform customers. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms. Our transaction revenue decreased 2% to 6.6 million compared to 6.7 million in the prior year quarter. The total transaction count, which includes paid and unpaid articles, on a year-over-year basis increased from approximately 216,000 to 226,000. Our total active customer count decreased by 44 to 1,190. Within the total active customer count, academic customers increased by four for a total of 285, and corporate customers decreased by 48 to 805, which is essentially flat compared to the Q4 quarter. Now turning to gross margins, our total gross margin was 31.6%, a 110 basis point improvement over the first quarter of 2020. The increase is due to the ongoing revenue mix shift towards our higher margin platforms business. The platform business recorded gross margin in the quarter of 82.1%, a 30 basis point decrease compared to the prior year quarter. The decrease is primarily attributable to a proportional increase in the allocation of platform labor costs, but still within our platform target gross margin range of high 70 to low 80%. Gross margin in our transactions business decreased 100 basis points to 22.9%. The decrease was due to a proportional increase in labor and copyright costs. Total operating expenses in the quarter were $2.4 million, virtually unchanged from the prior year quarter, as lower sales and marketing and general and administrative costs offset higher product development costs. Net income for the quarter was $15,000 or $0 per share compared to a net loss of $81,000 or $0 per share in the prior year quarter. Adjusted EBITDA improved to $167,000 compared to $36,000 in the year-ago quarter. Turning to our balance sheet, cash and cash equivalents as of September 30, 2020 increased to $10.2 million versus $9.3 million on June 30, 2020. There were no outstanding borrowings under our $2.5 million revolving line of credit, and we have no long-term debt or liabilities. As long as our revenue mix continues to shift towards our higher margin platforms business and operating expenses remain essentially flat, we expect to generate positive EBITDA, net income, and cash flow, further strengthening our financial position. Our ability to add to our CASP position and remain debt-free in the middle of the COVID-19 pandemic speaks to the strength of our organization and keeps us well-positioned to respond to any changes that may arise, as well as consider potential acquisitions should we be presented an opportunity that makes strategic and financial sense. I'll now turn the call back to Peter. Peter.

Thanks, Alan. As our first quarter results show, we continue to focus on the growth of our platform segment. We believe Article Galaxy offers multiple benefits for both small and large organizations. While larger organizations carry a larger average sales price, the universe of potential customers in small and medium businesses is much greater, and these customers often face the same if not greater needs due to the lack of internal resources while facing the same regulatory and competitive landscapes as larger life sciences companies. As Alan mentioned earlier, our sales and marketing expense for the quarter decreased on a year-over-year basis. This is primarily due to our reducing media spend and other marketing spend that we felt was not generating a sufficient return. However, our number of net new deployments increased year over year and sequentially compared to the fourth quarter. While this reflects just one quarter's data point, it does offer proof that how we allocate our marketing dollars matters more than the absolute dollar amount of sales and marketing spend. I'm excited to report that our ArticleGalaxy Plus offering has been positively received and was adopted by more than half of our new deployments in the first quarter. We are looking to add more publishers as part of this offering. As mentioned in our previous call, in July, we hired Mihiel van der Heijden as our Chief Product Officer. Mihiel spent the prior nine years at Springer Nature focused on technology and development, and previously was Head of Product Management at Elsevier. Mihiel and his group will focus on continued customer-centric product innovation and management, as well as further strengthening our product development capabilities. Shortly after the end of the quarter, we announced our partnership with biotechnology innovation organizations. also known as BIO. BIO is the world's largest trade association representing biotechnology companies in the United States and 30 other countries, and their business solutions unit is the industry's largest cost-savings purchasing program for their more than 4,500 member organizations. These organizations can now subscribe to our ArticleGalaxy platform at a discounted rate and gain access to more than 70 million journal articles. This partnership fits squarely in our wheelhouse to provide workforce solutions for R&D companies, including those within the life sciences sector. In addition, over the past few weeks, we rolled out a number of automation and UI improvements that will result in a significantly improved customer experience. Our team also did some analysis on the cost-benefit proposition for our customers using Article Galaxy and Article Galaxy+. The end result of the automation improvements combined with the cost benefit analysis led us to conclude that ArticleGalaxy provides the fastest and lowest cost alternative for research teams to legally access published scientific research. This is true for both small and medium sized businesses as well as larger organizations. This analysis really shows the value of both ArticleGalaxy and ArticleGalaxy+. We are incorporating this information into the training of our sales, marketing, and customer happiness team so they can effectively communicate these improvements and help existing and potential customers understand the power and value of our platform. It's truly a world-class product that helps R&D organizations save time and money as well as accelerate their research. Overall, our commitment to providing must-have information resources remains intact. and we will continually examine ways to make our platform and other services more efficient and effective. We believe demand trends for our product remain favorable and expect our lead generation and sales efforts will also contribute to additional deployments and revenue growth. This, combined with our strong balance sheet, leaves us well-positioned for continued progress throughout fiscal 2021 and beyond. With that, I'd now like to turn the call back over to the operator for Q&A. Operator?

We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2.

We will pause for a moment as callers join the queue. Once again, if you have a question, please press star, then one. There are no questioners in the queue.

I'd like to turn the conference back over to Peter Derwitt for closing remarks. Actually, there are some questions popping up. My mistake, sorry, my mistake. The first question comes from George Malas from MKH Management. Please go ahead.

Thank you very much, operator. Hello, Peter and Alan. Seems like a good quarter, good continuation of the growth. Maybe, Peter, can you go into a little bit more detail on the sales and marketing side? What seems to be working and where do you think you might be able to put more resources to possibly accelerate net new deployments?

Yeah, George, thanks. Yeah, we, as you know, we reorganized sales and marketing a couple years ago to really focus on the platform business, and as part of that, you know, it's not just a matter of bringing, you know, new leadership in and getting, you know, getting things reorganized, but it was also you know, some experimenting, uh, doing some things that work and some things that didn't. And then, um, and so basically, yeah, we've recently just started, um, sort of streamlining that, uh, specifically on the marketing side, um, eliminated some, uh, some, uh, campaigns that weren't working and focused on the ones that did. Uh, we, you know, we were never big believers in, in, in spending with, uh, you know, out of control. So, um, Now that we've sort of got more of a formula going and, you know, the partnerships, we're also seeing, you know, sort of what's working, what's not. And then product enhancement, things like Article Galaxy Plus, finding out what's working. We've realized that it's not really a matter of, like, how many sales reps you're throwing out on the street. It's really, you know, what kind of support you're getting them, what kind of, you know, warm, you know, and good lead generation you're doing, appointment settings. and additional initiatives that are in support of sales. So I think we're sort of fine-tuning our customer acquisition cost, and now that we're fine-tuning it, you know, we're looking at sort of what worked and maybe applying more resources to the items that worked. And like I said, it's more about support and lead generation than it is actually about sales reps on the street. They're not even on the street anymore. But, yeah, that's sort of the area that we're finding success. you know, to get more bang for our buck.

Okay, great. Thank you very much. Appreciate it.

Yeah, we'll be putting just an additional thought on that. We'll be adding, yeah, we'll be giving the bio partnership a really good run for its money as well. So there's going to be some effort there. There's a lot of companies that we have to reach out to.

Okay. The next question comes from Peter from ArtCode Capital. Please go ahead.

Hey, guys. So, yeah, that's a good segue. I wanted to ask more about the partnerships that you've had. You know, you've had a few partnerships, you know, Springer, I know, I think it's Evo is the other one. I'm not really sure. And you've had, I don't know, 112 platform additions in the last 12 months. So I'm just curious, out of those 112, how many were partnership-related? Yeah. How are the partnerships working, et cetera, with respect to getting those sales and getting those platforms?

Yeah, I think the partnerships are all of a different nature, right? And different ones sort of came on board as partnerships sort of at the beginning of the year, and then there were some integrations that occurred later in the year and so on. So I'd say – We don't put out figures as to how many of those deals are driven by partnerships, but I can say that the Springer Nature deal has been a good deal driver or enhancer. We're getting a good number of deals that are optical galaxy sales that opt for optical galaxy plus. So we're seeing some good traction there. Bio is brand new, so I have no comment there. However, I can say that Bio has been really interactive, put a team on the partnership, but we put a team on the partnership. And then, yeah, and good leads and lead generation, I think, coming from some of the other partnerships, some more than others. But, yeah, I'm sure not all partnerships are going to work out equally, but I'd say that right now at this point, Bio and Springer Nature are the ones that are generating more action, I'd say.

Okay. Thanks. And then I've had a little bit of an average price dip this quarter. Is there any reason for that?

No, I think it's just standard fluctuation. Over time, it goes up, but there's deals that drop off in terms of churn or new deals. And I think we added a lot of deals and maybe they're a little bit smaller in nature. So maybe just drop the average sales price down slightly. It's a very slight drop. Okay.

And then what's your renewal return rate, I guess, has been?

Yeah, we don't put out exact figures, but it's single digit. We have low logo churn. I call it single digit logo churn. And then you know, that's more than made up for by the renewals and upsells, which gives us total negative churn when you're looking at dollars. So churn's great. I think the product stands up well. It gets used and deployed, and people like it and sort of stick with it year over year. And on top of that, we have an amazing customer happiness group that does customer support to a level that none of our peers in our industry do. And then our ability to then take that, you know, sort of great customer experience throughout the year and then turn that into a renewal and an upsell, you know, just a great setup there in the customer happiness group. So we're pretty happy about that.

Okay, great. And then I guess maybe a very nebulous question, potentially nebulous answer, but what's the, I guess, There's a development pipeline looking outside of customers in terms of more partnerships or whether they're technical partnerships or M&A or anything like that. Can you pick up that or any opportunities that you're seeing?

Yeah, we're selectively choosing which partners we want to work with. We don't want to do 100 partnerships. We want to do a handful that we can really focus on. dedicate resources to and get resources allocated to from our partner. So that's just going to be an ongoing process. As part of that mix and just general, you know, developing of the business, we are looking at starting to look at M&A as a possible avenue for customer acquisition, product enhancement, and so on. It's early days, but, you know, if you look, us where we are now compared to where we were a year ago. You know, we weren't on NASDAQ. We had half the balance sheet. You know, COVID was still, you know, we hadn't gone past COVID. I think it hadn't even started a year ago. But I think we're sitting here now on this side of COVID, this side of NASDAQ, this side of this balance sheet that we have. And we're saying, hey, you know what, M&A could be an interesting opportunity if we can find If we can find something that's the right size that has a good EBITDA profile, customer account profile, and fits well with our product strategy, then we'd definitely start taking a look at those types of opportunities.

Yeah, I mean, maybe on the other side of that, how wedded are you or how important is the transaction side of the business to the platform side of the business? I mean, I guess at this point it's you know, it's profitable, it's growing. And, you know, I, I guess as a long time shareholder, I would say it's probably almost, it's hindering the, the stock profile, the company profile in terms of growth, revenue growth, because you're obviously growing the platforms business, but the transactions business is so much, so much bigger and obviously not growing and declining. So would it make sense to potentially separate those two or, you know, do a transaction like you've done in the past with InfoTree? Just curious.

Yeah, it's always a possibility. However, the products are pretty intertwined at this point. When we look at the product, sort of our thinking on the product strategy right now is that the product sort of falls into three categories. What we call knowledge delivery, which is the transactions business. knowledge management, which brings more of the platform features and functionality to support the knowledge that was delivered, and then knowledge creation, where, hey, now that knowledge has been delivered, being managed, can that help in the creation of new knowledge? So I'd say knowledge delivery is a key attribute now, and so that makes for a situation where the transaction business and the platform business are pretty intertwined at this point. for the right offer, for the right deal or, you know, right situation or right arose, we could probably figure out a way to, to keep them connected technically, but maybe not from a business perspective, but it, I just don't see that kind of a situation rising in the short term. Maybe, maybe a longer term proposition is a platform, you know, gets more involved in the management and knowledge creation areas.

Great. Thanks. Those were just kind of shark in the dark questions, but thank you for the call. Yeah.

No, but thanks. No, thanks to people like you were able to look under the covers and see what's really going on with the, uh, you know, the emergence of this platform business. And yeah, we do know that it's, um, you know, the, the, the combination or the, you know, let's say the, uh, the consolidated numbers don't really tell the whole story. And, um, so thanks to shareholders like you have really, you know, looked under the hood and, um, understood what's really going on here. But yeah, we understand that not everybody on their screens were able to get under that hood.

Great. Okay, I'll hop off and let somebody else ask questions. Thanks for the nice words. No, thank you.

Once again, if you have a question, please press star, then 1. The next question comes from Scott Bilodeau from Walrus Partners. Please go ahead.

Oh, hi, guys. Thanks for taking my questions. Good quarter. Just following along a little bit on certainly transactions, but I guess more specifically, I wonder if you could highlight a little bit on the platform deployments Are you starting to deploy smaller, larger, midsize firms? What's kind of the mix, and is there any change in kind of the average, you know, the ASPs for the types of deployments you're doing at this point in time?

Yeah, I'd say new accounts come in at a lower average sales price, and, you know, the average sales price overall is, you know, because once a customer's you know, growing onto the platform and growing in size or just starting to take advantage of more features, you know, the price starts increasing. So I'd say new, new will always be probably at a lower rate than, than the average, uh, for most deals. However, we do get some, we do get some larger deals, uh, that pop around that, that come in at the higher, higher than the average, um, sales price. So, um, there's the occasional large, large life science company that comes around as a deal. Um, but I'd say for the most part, our efforts and the activity that's actually occurring on the street is in small and medium-sized companies. So that's where we're continuing to see most of the action.

Great. Yeah, I was going to follow up with that just in terms of you had mentioned the small, mid-sized enterprises. Is there a different go-to-market strategy there, or do you need more volumes of calls as you go a little bit downstream. And maybe you're not technically going downstream, but that's where the opportunity is. As you mentioned, you're kind of optimizing sales and marketing spend. You must be finding different ways to get to that particular universe, which sometimes is more costly to get to. But any thoughts there would be great.

Yeah, I think, well, there's a couple of areas. One is, yeah, we are fine-tuning our marketing to be more SEO-driven, having the right content available, having the right information right at the right time for the right type of question that's being typed into a search engine. So you will see definitely our website and our, let's say, online materials evolve quite a bit over the next six months. So that's definitely a thing. And then we're looking at partnerships like the partnership we do with Bio. They represent a huge number of biotech companies around the world, and most of them are small in any size. So you can sort of look at what we're doing on the partnership side and find that we're looking to do that. I'd say on the large account side, it's a bit of a different nature. The large accounts know about us. And I think those deals are more driven by RFPs or special situations where a need has arisen at a large company. They know we're out there, and they contact us. So it's more purchasing-driven or RFP-driven, and then typically those deals are managed by an information professional or a librarian in conjunction with purchasing. So it's different. different crowd, but we definitely looking for a web lead generation and online lead generation and appointment setting and things like that to really drive the volume.

Okay. And then in terms of a platform, as you start to certainly, as you mentioned, you know, you probably start, you know, a deployment and the goal is to, you know, somewhat land and expand certainly. And you did kind of say, I think you had briefly mentioned about kind of churn, which is technically positive because the dollar value of churn is positive. Although you may lose some, the same customer sales is increasing as you land and expand. Are there any metrics in terms of, gee, we've got nine widgets they can turn on and the average customer has turned on two widgets? you know, a new customer has zero and a mature customer has six or, you know, not knowing. I mean, do you have something like that or the idea of you can constantly go back to a current customer with another thing that they can turn on and just trying to get a feel for what is left in the current customer base or in the, you know, someone you brought on three or four years ago, what's left in the tank to get from some customer like that?

Yeah, well, definitely it's data-driven. When it comes to renewal and upselling, ahead of the point of renewal, the account manager on the customer happiness team reaches out to the customer with basically what I call an account review, and that account review is data-driven, so we look at things like basic things like the number of users using the platform. Once it's installed, did the user base grow, or did the company grow since we first signed the contract with them? So user growth is a big one, and then we also do look at activity on the platform to determine whether new features that are relevant to them today that just weren't relevant when they first signed on So that could be the case that when they started, they started out small, and then now that they're into it, a few new things to turn on can help them a lot. So that's also the case. And then the third case in that arena is, hey, the platform itself is improving. So whether something was on or off the day you signed up is one thing, but the fact that, hey, during the year, this platform is actually getting better and there's new things that just weren't even there to decide on in the past, you know, should be able to continue to drive the growth. And we do see product development, strategic product development is a key driver of our growth going forward for new, new deals and for renewals and upsells.

So, you know, certainly you have a dashboard kind of, well, you know, new, you know, user, you know, at least in terms of when a renewal comes up, users, what features, And then how about pricing? Is pricing an issue yet, or is it adding more to the platform to keep pricing? There's usually kind of a little bit of both of those, but what do you got for a pricing power? Have you not really explored that yet?

Yeah, of course, I always think we're underpriced, but there's that side of things. And then market reality as well. Sometimes customers, they have limited budget increase capability and so on, so we're also realistic in our approach. But I definitely think that when you look at the vendor mix that our customers are using, they have a lot of vendors that are charging a lot more than we're charging, I'd say. And so I think as long as we're delivering the very foundation of continuous innovation and continuous innovation that's useful to them, then I believe then we'll be able to start moving into a higher category of, say, vendor on their priority list.

Yeah. Yeah, like I say, you've got to give them more, but if you're giving them more, you should be able to at least get some, you know, even – you know, small pricing trends, you know, positive pricing, you know, and you can support it by, you know, new stuff you're packing into the platform over time. All right. Well, good. Thanks, guys. That's all the questions I had. Appreciate it.

All right. Thank you, Scott. Appreciate it as well. This concludes the question and answer session. I would like to turn the conference back over to Peter Derich for any closing remarks.

Yeah, I'd like to thank everybody for attending, and those who will be listening on the recording as well. You know, we're making good progress here. Stock's not reflecting that, but we think it will eventually reflect that. We're seeing good activity on the expansion of our shareholders. And, yeah, we're going to keep working on innovation, keep working on products that matter for life sciences and help science move forward with what we're doing. So thank you all, and we'll see you next quarter.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.