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 second fiscal 2021 quarter ended December 31st, 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 Representative.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for Research Solutions' second 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 second 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 a link on the company's website. With that, I'd now like to turn the call over to Peter Derich, Research Solutions President and CEO. Peter?

Thank you, Stephen, and thanks to everyone joining us for our second quarter fiscal 2021 results. We hope all of you remain healthy and safe as the COVID-19 pandemic continues to impact us all. Our second quarter results reflect the continued progress occurring across our company. the strategic shift to our platform offering remains at the forefront of our business model and planning. We are excited to see increased adoption as we continue to add, improve, and enhance our product offering. I am pleased that we added 29 net new deployments in the second quarter, and even more pleased that now we have surpassed the 5 million mark for annual recurring revenue, up from 4.7 million at the end of the first quarter of fiscal 2021, and a 35% increase from the same quarter a year ago. We managed this despite the lower year-over-year sales and marketing spend. We are clearly becoming more efficient as we maintain our sales and marketing discipline and continue to focus on the quality rather than the quantity of our spend.

In the coming quarters, we will put greater emphasis on strategically growing our platforms of business.

Included in this is a more formal M&A plan. I will speak more on the various initiatives we are working on, but first, I'd like to pass it over to Alan to walk through our fiscal second quarter financial results in detail. Alan?

Thank you, Peter, and good afternoon, everyone. Second quarter total revenue was $7.4 million compared to the $7.5 million in the second quarter of fiscal 2020. Our platform subscription revenue increased 29% to $1.2 million primarily driven by a net increase of platform deployments from last year, including 29 new deployments in the second quarter. The quarter ended with $5 million in annual recurring revenue, up 6% sequentially and 35% year over year, reflecting our continued sales efforts, including the successful upsell of our renewals and low churn of platform subscribers. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms. Our transaction revenue was $6.2 million compared to $6.6 million in the prior year quarter. The decrease in transaction revenue is primarily driven by a decrease in paid transaction orders. Total transaction count, which includes paid and unpaid transactions, on a year-over-year basis increased 3.5%, to 220,000. It is important to note that while our total transaction count is steadily increasing, the amount of paid transactions is steadily decreasing as we continue to transition away from new large transaction customers in favor of higher margin SMB platform customers and the amount of unpaid transactions such as open access and customers direct publisher subscription and prepaid token content is increasing as we deploy more platforms. Total active customer count decreased from the prior year quarter by 30 to 1,109. Within the total active customer count, academic customers increased by 15 on a sequential basis for a total of 300, and corporate customers increased by 4 to 809 at the end of 2020. Turning to gross margin, Our total gross margin was 32.1%, a 190 basis point improvement over the second quarter of 2020. The increase is due to the ongoing revenue mix shift towards our higher margin platforms business, which now generates approximately 42% of our total gross margin dollars. The platform business recorded gross margin in the quarter of 82.2%, a 70 basis point decrease compared to the prior year quarter. The decrease is primarily attributable to a proportional increase in the allocation of overall labor costs, but still within our target gross margin range of high 70 to low 80%. Gross margin in our transaction business decreased 30 basis points to 22.3%. The decrease was due to a proportional increase in labor and copyright costs. Total operating expenses in the quarter were $2.7 million, a $330,000 decrease from the prior year quarter. Lower sales and marketing and general and administrative costs were partially offset by higher product development costs. Net loss for the quarter was $261,000, or one cent per share, compared to a net loss of $592,000, or three cents per share, in the prior year quarter. Adjusted EBITDA improved to a positive $161,000, compared to a negative $184,000 in the year-ago quarter. Turning to our balance sheet, cash and cash equivalents as of December 31, 2020, were $10.2 million, unchanged from the quarter ending September 30, 2020, and an increase versus the $9.3 million reported at the end of fiscal 2020. There were no outstanding borrowings under our $2.5 million revolving line of credit, and we have no long-term debt or liabilities.

I'll now turn the call back to Peter. Peter? Thanks, Alan.

As our results indicate, our platform segment remains the centerpiece of our growth strategy. Article Galaxy and Article Galaxy Plus offer time and money-saving benefits for both large and small organizations. The deployments within the SMB market carry a smaller average sales price than our larger life sciences customers, but the market is broader, creating a greater long-term revenue opportunity overall. We believe the small and medium business segment offers our greatest growth opportunity. In January, we relaunched the researchsolutions.com website. We're pretty excited about this as it really highlights the value of ArticleGalaxy to customers and prospects of all sizes. It is search engine optimized, and designed to help prospects searching the Internet for solutions to find us easily and understand our value proposition clearly. We have easier to understand information about our capabilities, including quick links to case studies that describe how research-intensive organizations benefited in their mission by deploying Article Galaxy within their enterprise. I encourage you to take a look and let me know what you think. ResearchSolutions.com. In addition to the new website, we are expanding our partner network in the US, Europe, Japan, and Israel. We welcomed ProQuest Dialog as a new partner, joining other partnerships we announced in recent quarters. These partnerships, as a whole, help us create integrations that help our customer community, as well as develop conversations with new prospects, thereby feeding our lead generation engine.

Let's speak a bit about product.

During the quarter, we established a development partnership program. This program is designed to provide a framework within which platform customers can engage with us in improving and developing our product. The program gives participating customers a chance to help improve our platform by getting to know Article Galaxy inside out, preview what's coming, as well as engaging with members of our strategic product development team directly. We have 20 enterprise customers that have joined so far, primarily in the life sciences. We are receiving additional applications and are looking very much forward to receiving direct feedback and advice from our customers to determine ways to improve our products. Additionally, during the quarter, we had a whole host of product improvements in all areas, particularly in automation, reporting, workflow efficiencies, security, user experience, as well as connectivity and functionality of our Bibliogo and ArticleGalaxy widget modules. These enhancements are designed to deliver an improved customer experience, reduce customer support queries, as well as set the stage for the next version of ArticleGalaxy. As you can see, our newly formed strategic product development group has been busy, just a few months into the department's creation. As Alan mentioned earlier, our transaction count in the second quarter increased while transaction revenue decreased, similar to the prior quarter. There are two primary factors behind this movement. First, we have moved away from targeting new large transaction-only customers in favor of signing new SMB platform customers. Second, many unpaid transactions, such as open access, direct publisher subscription, and token content, are included as part of the ArticleGalaxy platform offering, and these unpaid transactions do not produce transaction revenue. However, we have a much higher gross margin of 82% on our platform versus 22% on paid transactions. Over the past many quarters, our corporate focus has been two-pronged, focused on growing our platform's business while remaining disciplined in our use of capital, and only doing so when it can be done efficiently and with results. In the coming quarters, we will put greater emphasis on strategically growing our platform business. Included in this is a more formal M&A plan. With the improvement across our debt-free balance sheet over the past year, including the doubling of our cash position and uplisting of our stock to the NASDAQ, we are in a much stronger position to consider the pipeline of opportunities available. Overall, we remain committed to providing our customers access to our expanding library of knowledge delivery, knowledge management, and knowledge creation capabilities in the most efficient and effective way possible. We believe demand for our product remains strong, and as we broaden our reach into smaller and medium-sized businesses through our lead generation and sales efforts, we believe we can build on our deployment and revenue growth trends. This, combined with the potential to grow through acquisitions, thanks to our strong balance sheet, ensures we are well positioned to deliver additional growth in the back half of fiscal 2021 and in the future. With that, I'd now like to turn the call back over to the operator for Q&A.

Operator?

Thank you. 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 two. We will pause for a moment as callers join the queue. The first question comes from John Bassler with Bassler Capital. Please go ahead.

Hi, Peter and Alan. Thanks for taking the question.

Thank you. Yeah. First, congratulations on surpassing the $5 million recurring revenue. That's great. And then I wanted to ask, what are the priorities for the higher technology and product and development costs, and how should we model those going forward?

Yeah, we're not putting a lot of information out in terms of future spend.

We are, as you can see, increasing our technology and product spend a bit. We've created a new department, but by creating a new department, it wasn't all new expenditure. It was sort of consolidating a lot of the development resources we had internally into a single group. And we are filling some gaps. So you'll see some additional spend in there, but I'd say it wouldn't be that big of a number.

Okay.

And then can you also touch on what the customer churn is in the platform segment?

Yeah, we have an interesting phenomenon. We have what we call negative churn. We have so few customers churning and so much upselling going on that right now we have what we call a negative churn number. So that's pretty good. Yeah, I think we're sort of best in class in the SaaS industry in terms of churn. We do have some logo churn, right? Not 100% of the customers stay, but the logo churn at this point is in single digits in terms of the number of logos that churn. And so we're pretty confident that that's a good indicator that the product's good, that it's used, that people want to keep it, and even willing to pay more for it next year around as long as we're improving the value of it.

That's great. And then how does the mix of the paid versus unpaid transactions for small and medium businesses compare to the traditional large transaction customers?

Yeah, I'd say, yeah, large transaction customers tend to have, large organizations in general tend to have a few more internal resources. So they may have things like subscriptions and tokens or even internal archives that we like to connect ArticleGalaxy to to help control their spend on transactions. I'd say the SMB market would like to have those capabilities. We help them get their users on a single platform. And once they do that, then we sort of posit the platform as being their library in a box or including the librarian, if you will. and try to help them control their spend by advising them on open access, on tokens, on subscriptions, and even on how to build archives and so on. So I'd say the SMB market is nowhere nearly as active on the unpaid transactions yet in terms of volume and percentage as maybe the larger transaction customers, but they're trending that way because once they adopt the platform, it gives them all the tools to be able to do that.

Okay, maybe I missed something. I thought that part of the reason the transaction volume was down was because of the focus on the SMB customer increased the number of unpaid transactions.

Yeah, so let's just clarify there. Our sales and marketing effort in the past, as we were building up the company, was focused solely on finding people that bought transactions. And then as the platform emerged and we had the higher gross margin business, we pretty much shifted all of our sales and marketing activity over to seeking out new platform customers because the margins were 82% opposed to 23% on the transaction. So there's a bit of a shift in focus on who we're trying to get in as customers. And so, yeah, that's what we're speaking about there is that we've really shifted the kind of customers we're trying to get on board. We like the small, medium-sized businesses because we're a good fit for them. There's a lot of them, and they can buy our platform, whether or not they're buying a lot of transactions.

I see. So it's really just speaking to your realign, the prioritization on the platform business.

Yeah.

Yeah, and then that's a big factor. Then, of course, there are some variations in the different categories of what would be paid or versus unpaid, and those will all be shifting, and we may report from time to time on some of those dynamics.

Is anything changing there or accelerating, or is it just inter-quarter variance? Well, we've looked at the number.

There was a decrease in the paid, an increase overall in all transactions, but a decrease in the paid transactions. I'd say we noticed that. We took notice, and we're analyzing numbers in more depth. So we don't have anything to report specifically this quarter, but we are taking a deep dive into doing more analyses. Because there are, like I said, it's sort of a multivariable situation in there with all the different categories of transactions and types of articles that exist and so on. So we'll probably report in more detail on that next quarter as we take time to dig into the data.

Great. And then the last one for me is when did the agreement with the University of Buckingham Press go live and how material are those types of arrangements to the value proposition?

Yeah, I would call that the supplier-side agreement. So we make deals with publishers of scientific information, and we consider them to be our suppliers and partners. So I'd say that's a small publisher. We've done all the large publisher and medium-sized publisher deals that there are to be done, so we've got hundreds of agreements now with publishers. So I think when you see new publisher deals, there may be some interesting deals additions from a subject matter perspective, but in general, we're really working on the long tail now of publisher deals. So we're going after publisher deals that we may be announcing or adding, or typically small-size publishers.

Got it. Okay. Well, thank you so much for taking my questions. No, thank you for asking.

Once again, if you have a question, please press star then one.

The next question comes from Scott Bilodeau with Walrus Partners. Please go ahead.

Oh, hi, guys. Several of my questions have been answered, but I do just trying to, again, you know, understand paid and unpaid and what that $6 million of transaction revenue, I mean, Is that something that, hey, you look at it, we've got a couple big guys doing it, we convert them to platforms because I just assume you get 80% of a smaller number versus 22% of a bigger number. As an example, say someone's doing 250 grand of transactions with you. what would it be on the, what's their platform revenue? How, you know, maybe give a little, you know, if you know what I'm trying to get to, I'm trying to figure out, do you want to convert all of those guys or you're never going to do that? So you're going to continue to get transaction revenue. And if you convert one, you know, is there a breakeven where at least on the revenue side, because you, like you say, you're, you don't get the revenue. from the transactions because they're non-revenue generating but you are you got the platform revenue coming in that'll come in hopefully forever as long as they don't turn out yeah i i think yeah there's a bit of clarification needed there so thanks thanks for asking that um i want to be very clear that when we uh let's say convert it's not really a conversion it's an expansion

So just because you are ordering article transactions from us and then we upsell you onto the platform, it does not mean that your transactions disappear because you're a platform customer now. You still have to buy those transactions. The platform will help you maybe lower some of the spend on the transactions, but there's no elimination of the spend. So, for example, if we add the platform to you, Well, now when you add a subscription or we can help you eliminate duplicate purchases and things like that. So I'd say the bulk of the transaction stays, and it's really an expansion, not a conversion.

Okay. Oh, understood. Okay. And then so where would a non-paid transaction come in then? Maybe clarify where – where would a non-paid transaction come in? Or is it usually for someone where you're, you're bundling something into the platform or, you know, maybe kind of clarify that for us.

Yeah. So I'd say there's two or three quick examples that I can give you. One is a customer may subscribe to a journal and their, their scientists are requesting an article in the platform and, we detect that they have a subscription to that journal, and we get the user over to the copy that's in their subscription. So we're sort of avoiding a purchase. We're still logging it as a transaction. We actually connected that user to that article, but it's not an article that we sold them. It's an article that the company already had. And so there's things like that. One example is subscriptions. Another example, the company may have an archive of articles or something like that that we can connect from previously purchased articles or other archives that they've built. So we can connect them to their internal resources instead of initiating a paid transaction. And then there's some articles out there that fall into the category called open access. And I'd say software business, you'd call that open source, open source software. There's some articles that are open access articles, which are sort of free articles that are available out there. And so we may connect a user to one of those free articles. It's a transaction on the system, but it's not a paid transaction since there's no cost for that article. Those are just a few quick examples I can give you. And us sort of figuring all of that out with the platform on behalf of the customer is part of the value of the platform, right? They don't have to worry about all these nuances and details. Do I subscribe? Do I have an archive? Is it open access? We just make it easy for the user to get to the information they need, and the platform sort of sorts through all these little nuances that I just described and others.

Gotcha. Absolutely. I mean, to a certain extent, if you generate for them a non-paid service you know, transaction, you should probably wave that in front of them and say, look what we saved you. Right. It's a way of, Hey, you already have this archive. You know, in the past, we may have had to go out and buy that, but our system found it that it's our, you know, Fred, you know, two weeks ago already bought this. So boom, you know, serve it back up. And here's the, this is the value proposition we're providing to you.

Absolutely. And we do provide reporting to our customers. There's many avenues of value that the platform brings to the customer. And so what we do is we document those as we're approaching renewal. And so upon renewal, and one of the reasons we have negative churn is we are able to upsell on price a bit upon renewal. And that is really driven by not only the increase in users that may have occurred during the year, but also by documenting this value and saying, hey, let's share this. let's share in that, that additional, that value that was created.

Yep. Um, last question is, uh, you, you, you talked, uh, about MNA, uh, and maybe if you could, you know, talk about, you know, is that, is this a more, a formalized version of MNA, you know, a business development function? Are you leading that, you know, kind of how does the, how do you build the funnel? Or do you got some outside guys helping bring books to you? Or maybe put a little color on what the game plan there is.

Yeah, I won't go into too much detail, but I would say that this is, as we mentioned during the call, is you're sort of sitting here on the company in a different situation than we were just a year ago. In terms of balance sheet, in terms of stock being on NASDAQ instead of the bulletin board, platforms are growing. And we're all sitting in a situation where over the last three years, we've, you know, let's say pivoted the company to add this new platform business line. We feel that we've made that pivot successfully. You know, we hit the 5 million ARR mark. You know, beyond a doubt, this is a real business line, right? And so we're sitting, okay, we've sort of made a lot of changes, reorganized ourselves in marketing, did a lot of changes to pivot to platforms. And now that we've accomplished that, we're looking at the next wave of growth. How are we going to grow into the future? Yeah, we're going to continue to sell. We're going to continue to market. We're going to continue to upsell and renew customers, keep that churn rate low. We're going to continue to enhance the platform, make it better, make it more valuable, make more customers want it, and make existing customers want more of the features that are in it. We're going to do all that, and then we have this additional, let's say, pathway to acquiring customers, acquiring SaaS revenue. And that would be through M&A. And so what I can say about that, without going into too much specifics, is really the first quarter that we started, we are allocating resources to it. We are creating a business development function. And you will see that, yeah, that we will have dedicated resources to that endeavor. It's still early stage. We've done four M&A transactions in the past as we built up our transaction business. And those are what I would call four successful M&A transactions in the transaction side of the business. We believe we can be successful on the platform side, but it's still early days, first quarter, that we're really dedicating resources to it. But you will see more information about that, and we are definitely serious about it.

Great. And I trust that the focus is on the platform SaaS type of the business. other extensions to the platform or someone who's got a similar platform with some other tools or widgets that we can, but it'll definitely be looking at how do we extend the platform to more things for our current customers or a way to deliver to a different customer base.

Yeah, so we have a variety of what we call selection criteria that we're using to vet targets that we identify. And there are selection criteria that directly touch product, right? There's our ability to improve Article Galaxy versus a buy versus build mode in terms of accelerating a particular capability we'd like to have. There's also sort of plain vanilla things like customer acquisitions. hey, if we have 500 platform paying customers and there's an acquisition that has another 500, we can jump up to 1,000 and start cross-selling if the customers look similar to the type of customers we already have. So there's a few selection criteria. It could go anywhere from product to customer count and things like that, but all focused within providing this solution that accelerates R&D, that makes research more efficient. And that falls into within our, you know, knowledge delivery, knowledge management, knowledge creation, you know, agenda. Great.

All right. Well, thanks, guys. Thanks. Again, nice to see a $5 million run rate. So great job on that.

Yeah, we're excited. Thanks so much. Thank you. Thank you so much, Scott, for your support.

We're really excited about all this.

Once again, if you have a question, please press star, then 1.

The next question comes from George Melis with MJH Management. Please go ahead.

Great. Thank you. Good afternoon, Peter and Alan. Congrats on reaching 5 million AR. I think you're right. It's a real business, and it seems like a very good one. Thank you. My question is, as you've improved the platform both from a usability perspective, from a functionality perspective, is the discussion, the conversation with customers, with potential customers and also maybe with existing customers, is the nature of that conversation somewhat changing? Is the profile of customers in the pipeline also undergoing some change?

Yeah, I'd say there are some changes going on there in that conversation. One change, something I mentioned in the call, is that we want customers actively involved in helping us improve and expand the product. So this partnership development program is a formal program. There's a website for it. Customers go there. They look at the program. They sign up for it and commit to being a partner with us on developing the product. And we commit to them as well. We're making commitments on giving them previews of what's coming, giving them access to our team, our product team, and so on. So there's a two-sided commitment. And so that's a new conversation. And it's a conversation that's based on We are both committed to moving this product forward. And so that's one category of conversation I think that's changing rapidly in terms of customer involvement in our product and prospect involvement in our product. The other is, as we pivoted into this platform business and got to the five million mark and started realizing that the SMB market is a very large market, and we're seeing contracts come in and more discussions happening with F&Bs, we sort of have more of a full spectrum view of the marketplace, right? We've been dealing with large pharma and large R&D companies in the past, especially as we're building our transaction business. And now we're seeing sort of a whole spectrum of customers from the very large to the medium size to the very small ones, right? And sometimes we see the very small ones become medium ones and the medium ones become larger ones. or see two medium ones by each other and become a larger one. And so what we're seeing is that the types of conversations we have with the big organizations is a lot different than the ones from the smaller organizations. And so we're getting pretty adept, I think, at modifying our conversation and the talking points and discussion points in these conversations with customers to sort of be with them along their whole growth trajectory. So we're starting out with them as a very small company and they grow over time. We can adapt and, you know, we've been there and done that with a large organization. So we can sort of help our small customers grow and evolve and accelerate their research just because of that full spectrum view we have now in the marketplace.

Okay. Okay. Thanks. That's quite helpful. Can I ask you to elaborate on that and about sort of the, the difference in the type of conversation that you have with large customers and the value that they are seeking and that you can provide as opposed to the smaller customers that probably have a lot fewer systems within their enterprise.

Yeah, so I'd say if you look at the larger organizations, they have many, they may have multiple systems that they've nurtured over time, you know, systems they acquire or subscribe to or Sometimes, in some cases, systems that they built internally. And so we have a whole suite of APIs and connectivity tools and things like that for, let's say, the larger customers that have these external systems or internal systems. And so for us, it's like, I think for larger customers, we're working with an internal team at the customer to get things done. I think there's conversations with maybe an internal team of information managers or information system people. to get certain things done. And I'd say when you look at the small organization, like go all the way down the spectrum to the small organization, they may be using multiple tools ad hoc just because each employee of the company sort of figured out their own thing. And so I think from the small company perspective, we're saying, okay, well, you don't have a team internally like these large companies have. So why don't you consider us to be your team? We'll integrate the things that make sense to help you accelerate your research. And so in that sense, when they buy Article Galaxy, in a sense, they're sort of getting the team that goes along with it. And so we become their system integrator and I'd say even suggester as to what systems should they be using, analyze what they do have and figure out how to connect it all together and bring them forward in the future. So sometimes I say that we're sort of the information system in a box to the small companies. And then for large companies, we're integrating with their existing box.

Great. Okay. I think that helps me very much. Okay. Thanks a lot, guys. Good luck. Thank you, George. Thank you for your support.

This concludes the question and answer session. I would like to turn the conference back over to Peter for closing remarks.

Yeah, I'd just like to thank everybody for joining, and for those that participated with questions, always happy to answer your questions here or separately through our investor relations firm. Just rest assured that we're sitting strong on a product, on a balance sheet, and we're looking forward to taking the time and resources and energy to growing the company and taking the further next step.

So we've pivoted, and now it's time to continue the growth. Thank you so much.

This concludes today's conference call.