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 fiscal fourth quarter and full year ended June 30th, 2021. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Basler, Investor Relations. Please go ahead, sir.

Thank you, Carl. Good afternoon, everyone. Thank you for joining us today for Research Solutions' fourth quarter and full year fiscal 2021 earnings call. With us today, we have Roy W. Olivier, the Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the fourth quarter and full year fiscal 2021. That release is available on the company's website, researchsolutions.com. Before Roy and Alan begin their prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and 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 the research solutions filings with the SEC for a more detailed discussion of the risks that could impact the call, could impact the company's future operating results in financial financial conditions. Also on today's call, management will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. 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 W. Olivier.

Roy? Thank you, John. And thanks to everyone for joining us and for our fourth quarter and fiscal 2021 results. Our fourth quarter results reflect the continued momentum in our business. Overall, we met or exceeded our targets for the quarter and the year regarding new customer platform deployments, platform upsells from existing transaction customers, and upsells of existing platform contract renewals, as well as churns. Over the past two years, we have added more than 250 net new platform deployments, including 152 in fiscal 2021. Net new deployments for the quarter were the second highest ever, trailing only the prior quarter. And deployments from customers completely new to Research Solutions was the highest in the company's history. I'd like to start by taking a few minutes to provide an update on the key priorities that were part of my first 100-day review when I became interim CEO. I described those items during several investor calls and at two separate conferences earlier in the year. Those items were, first, complete strategic planning exercise focused on how to accelerate growth. This was the most expansive priority in terms of the review. It included addressing questions around accelerating growth, addressing transaction churn, looking at new markets, expanding our product value proposition, and developing a strategic acquisition strategy. We have completed the review in each of those areas, and in the short term, much of our efforts to accelerate growth organically will be targeted at adding additional sales and development resources, to improve sales results and accelerate product development. While we have taken steps to address transaction churn, we expect this to continue to be a headwind on overall results. There are many reasons for this, one of which is that the platform works very well and our customers see a material decline in their transaction costs year over year. Our primary focus will be on growing recurring revenues from where they are today to over 20 million in three years and keeping transaction revenues relatively flat. From a market's perspective, our historic focus with platforms has been in the corporate segment. We will continue to focus in this area and we'll be expanding the number of vertical markets we serve in this segment, which drives much of our growth currently. In mid fiscal 2022, we will be launching a new product focused on the academic space. That product is in soft launch now, and we are getting good traction with it. From a product perspective, we are also expanding our offering in two ways. As a reminder, we consider the high-level research process to be discover, acquire, manage, and create. So first, we are moving to a good, better, best offering with our ArticleGalaxy platform. And second, we are expanding from a primary focus on document delivery or acquire to offering tools at various points in the research cycle. Those include improving our value in the discovery and manage phase in fiscal 2022, followed by functionality to help create intellectual property in fiscal 2023. Regarding acquisitions, we have made good progress and have had several productive conversations with exciting opportunities that would fit well into our business and product strategy. I'll report more on that later in the call. Second, we reviewed the current business with an eye toward growth, operational efficiency, and to position the company to integrate acquisitions quickly. We have completed this review and are in the process of implementing several initiatives intended to eliminate silos and improve productivity across the business. Those include updating our accounting system, rolling out Office 365, improving our CRM systems, and developing improved internal reporting around platform usage and analytics. The platform usage and analytics reporting will also be a feature available to customers in a future release. Third, I indicated we wanted to review and update the vision, mission, and company values in order to attract and retain the talent we need to accelerate growth. We have completed that work and we are starting to release the updated vision, mission, and we'll complete the work on updated company values shortly. You will start to see some of those changes reflected on our company website and other external marketing materials in the coming weeks. And lastly, we indicated that we wanted to review and update our IR plan with a focus on expanding our shareholder base and working to garner additional analyst coverage. We have completed our initial review and have two firms providing analyst coverage at this time. and we will continue to focus on executing a proactive IR strategy going forward. Overall, I consider fiscal 2021 to be a successful year for Research Solutions, with many pieces in place that will set up the company well for fiscal 2022. I will give additional detail on the various initiatives we are implementing in a moment, but first, I'd like to pass it over to Alan to walk you through our fiscal fourth quarter and 2021 year-end financial results in detail. Alan?

Thanks, Roy, and good afternoon, everyone. For the fourth quarter fiscal 2020, total revenue was $8.2 million, a 4.2% increase from the fourth quarter of fiscal 2020. Apologies, that was fourth quarter fiscal 21 revenue. Our platform subscription revenue increased 34% to $1.4 million, primarily driven by a net increase of platform deployments from last year, including 41 net new in the fourth quarter and upselling current platform customers. The quarter ended with 5.9 million in annual recurring revenue, up 6% sequentially and 32% year over year, reflecting our continued sales and upselling efforts and low churn of existing 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 for the quarter was 6.8 million, relatively unchanged from the prior year quarter. Transaction customer count for the quarter was 1,132 versus 1,108 in the third quarter of fiscal 2021. The increase was primarily due to more academic customers. Gross margin for the fourth quarter was 33.4%, a 160 basis point improvement over the fourth quarter of 2020. The increase is due to the ongoing revenue mix shift towards our higher margin platform business. The platform business recorded gross margin of 82% within our total gross margin range of high 70 to low 80%. Gross margin in our transactions business decreased 30 basis points to 23.1%. The decrease was primarily attributable to a proportional increase in labor costs. Total operating expenses in the quarter were 2.8 million compared to 2.5 million in the prior year quarter, due primarily to higher technology and product development and administrative personnel costs. Net loss for the quarter was 89,000 or nil on a per share basis, compared to a loss of $1,000 also nil on a per share basis in the prior year quarter. Adjusted EBITDA was $134,000 compared to $146,000 in the year-ago quarter. Now moving on to the full year of fiscal 2021, total revenue increased 2.2% to $31.8 million compared to $31.1 million in fiscal 2020. Our platform subscription revenue increased 32% year over year to $5.1 million, and ARR was $5.9 million compared to $4.4 million at the end of fiscal 2020. Total platform deployments as of June 30th were 553, a net increase of 152 deployments, or 38% from a year ago. Our full year transaction revenue was $26.6 million, a 2% decrease from fiscal 2020. Moving on to gross margins, for the full year fiscal 2021, gross margin was 32.4%, a 140 basis point increase from the previous fiscal year. Gross margin for the platform business was 82.2% compared to 83.4% in fiscal 2020. Gross margin in our transactions business was 22.8% compared to 23.5% in fiscal 2020. Proportionally higher copyright and personnel costs were the primary factors behind the decrease. Total operating expenses in fiscal 21 were 10.6 million compared to 10.5 million in the prior fiscal year. The increase was primarily due to greater technology and product development personnel costs. Net loss for fiscal 2021 was $285,000 or one cent per share. This represents a $495,000 improvement from fiscal 2020 when adjusting for last year's $117,000 gain on the sale of discontinued operations. adjusted EBITDA was a positive 700,000 in fiscal 2021 compared to 143,000 in the previous fiscal year. Turning to our balance sheet, cash and cash equivalents as of June 30th, 2021 increased to 11 million versus 9.3 million on June 30th, 2020. The increase was primarily attributable to cash generated from operating activities. There were no outstanding borrowings under our $2.5 million revolving line of credit, and we have no long-term debt or long-term liabilities.

I'll now turn the call back to Roy.

Mr. Olivier, your line may be muted, sir.

I was muted. Thank you. And thanks, Alan. I'd like to take this opportunity to discuss our current thinking in terms of our strategy moving forward and then discuss some short-term operational objectives. Our immediate focus is updated as follows. We intend to continue to provide tools that power knowledge creation with a focus on global R&D in the STM space. We will strategically focus on the global corporate and academic markets. We intend to grow our recurring revenues or ARR from current levels to north of 20 million through accelerating organic growth and acquiring companies that are consistent with our product and business strategy. We intend to invest in driving additional sales growth with an eye toward maintaining the SAS rule of 40 where platform growth rate plus EBITDA margin is greater than 40. We expect to focus our efforts on delivering two products, Article Galaxy in a corporate and an academic-focused version, and a new unannounced product. We intend to continue to be the leaders in customer service, support, and product innovation for the markets that we serve. In order to do these things, we will need to, execute on our current operating plan, improve execution in several areas of the business, including sales activity, delivering our product roadmap, improved human resources, specifically in the employee and management training area, and by improving our internal operating and reporting systems. We will also need to execute on a business development strategy that adds three to four million in acquired ARR each year for the next three years. We will focus on opportunities that are consistent with our product and business strategy and meet our financial expectations. Those expectations include paying a reasonable multiple, which continue to be a headwind on executing on a deal in the short term. We will not execute on an opportunity unless the financial rationale supports the decision. We will require additional investments in several areas, some of the largest being additional sales, product, and software engineering resources. Many of these investments are already underway, and although they will negatively impact our EBITDA in fiscal 2022, these investments will start to pay off in additional sales growth in late 22 and fully in fiscal 2023 and beyond. One of the biggest organic drivers of future growth for us will be delivering on our product roadmap. So I'd like to start with an update on our products. Last month, we released the most recent upgrade to our platform known as Oracle Galaxy 3.0. Today, we have successfully deployed this major update to 99% of our customer base with minimal issues and overall very positive feedback. With a more modern look and feel, better search tools and functionality for the end user, Article Galaxy 3.0 offers an even better value proposition to our customers and will serve as the foundation on which we will build the good, better, best versions of the platform. Article Galaxy Plus has signed up several new publishers during the quarter. As a reminder, Article Galaxy Plus is Article Galaxy 3.0 with some content from publishers included in the subscription price. Between those new publishers and open access content, Article Galaxy Plus covers about one third of the total world's STM content. We continue to actively engage publishers to add additional publishers to the Article Galaxy Plus offering. Also during the year, we expanded our platform sales beyond our core life sciences market. A large fragrance company purchased the platform, a first large sale in that vertical. A very large engineering mining company in the Nordics chose the platform as well. The customer indicated the reporting and analytics that are provided within the platform will help them make informed decisions about managing their business. We also continue to make good progress. with Article Galaxy Scholar, our academic focused product. We are in soft launch and are making great progress toward a full calendar launch in the first quarter of calendar 2022. Additionally, in Q1 of fiscal 2022, we signed a top five pharma company who selected Article Galaxy 3.0. It's a win against competition and will replace their internally developed solution. Today, roughly 70% of the top 25 pharma companies use Research Solutions. 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'm excited about our future and hope to speak with you again soon. With that, I'd 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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We'll pause for a moment as callers join the queue. The first question comes from Richard Baldry from Roth Capital. Please go ahead.

Thanks. To the extent you're able, can you talk about whether you've looked at sort of any preliminary pipeline of M&A targets and any color on sort of reasonableness of what you think their expectations are for valuations? Obviously, the market's pretty frothy, so I'm curious whether the M&A market thinks it should be too, or if you think things are fairly rational, and sort of maybe from a high level, where the priorities for M&A might be along that sort of discover, acquire, manage, create spectrum. Thanks.

Yep. Yeah, good question. Yeah, we've created a list of 200 plus targets. We have a resource whose only role it is to reach out, contact those targets, and start a dialogue. We've had dialogue with, I'd have to count them, but 10 to 20 targets. We've had face-to-face meetings with, face-to-face or Zoom meetings with probably half a dozen targets. We've provided a few IOIs. And, you know, in terms of your question about valuations, we see, frankly, a material difference between valuation expectations in the United States and Europe. U.S. valuations are – valuation expectations are very high, and we've had a number of conversations stop when we get to the valuation question because they may read an article about somebody that's worth 14 times revenue, but we don't think that's realistic, nor would we pay that. In Europe, however, we have had some very good conversations with, I think, folks that have more realistic expectations who are also more focused on becoming part of a bigger team to grow their business faster. And those are the acquisitions that historically have worked well for me where key executives want to roll some of their equity and continue to be part of the team and grow that business over a matter of time. So definitely seeing a lot of valuation expectations, which I think are not realistic. and we've seen some primarily overseas that are realistic. And when I say realistic, I'm talking about a teens multiple of EBITDA or a single-digit multiple of revenue if it's high-quality recurring revenue with extremely low churn. Does that help?

Yes. And then when you think about the investments you want to make in the sales and marketing, as I look at the last two years, you'd spend about $2.5 million in fiscal 20 and a little over $2 million in fiscal 21. Are you thinking of getting back to that fiscal 20 level or in 22? Or do you think it goes above that with conditions normalized? I think maybe fiscal 21 is a little below trend because there's not a lot of travel and expenses like that in it because of COVID stuff. So How do we think about what normalized current sales and marketing would be and what you think it'll be as you look out after the investments are made in fiscal 22? Thanks.

Yep. And by the way, I forgot to answer the second part of your acquisition question, which is where is the priorities? You know, today we certainly love any opportunity to acquire a direct competitor, which is somebody that's primarily in the document delivery business. There's not really very many of those, so frankly, we haven't had any meaningful conversations in that segment. The two segments that are a priority for us now are the discovery area and the manage area, and we have had a lot of discussions in both of those segments. We've also had a number of interesting discussions in another segment. When you think about what we do, there's a government segment, corporate segment, academic segment. So looking at folks that do what we do in the government segment or in the academic segment where there may be a cross-sell opportunity, those are super interesting for us because if we feel we can take our product into that segment where they have experience and cross-sell it and vice versa, those typically create some synergy longer term that we really like. To your question about sales and marketing, We have not disclosed kind of how much it's going to go up. As a reminder, I think we have disclosed we have somewhere between five and seven new new, so they're only selling to new customers, salespeople. We have roughly the same amount, a little bit more actually, of salespeople that do new existing, so they work on existing customers that are buying transactions only and try to sell them a platform. That team's also responsible for upsells and churns. And those two teams are backed by a prospecting team and a marketing team. Most of our investments as we think about the short term, which is FY22, is adding salespeople into the new, new group and making some additional investments in marketing to drive more marketing qualified leads. When I look at the business today, a majority of our sales are generated through a sales qualified lead, which means it comes either from the salesperson or the prospecting team that's part of sales. And we've made some investments, created a new, frankly, marketing plan, and we're making some changes to our internal systems to measure live the effectiveness of these investments. But all that is really intended to drive the percentage of sales generated from an MQL or marketing qualified lead to be about the same as a sales qualified lead. And today it's very lopsided towards sales qualified leads. I will tell you, we're not making, you know, we're not adding 10 people there, but we are adding a few people there. I would also remind you that we added two people in FY21, one that covers Japan and one that covers German speaking. And both those folks are ramping nicely, and we think they're doing a nice job in those territories. And we'll continue to, you know, add folks based on the TAM research we're doing and try to drive more growth because we think that based on the TAM data we have, we can justify more salespeople. Our challenge is the ramp, getting them to ramp and be productive in less than a year historically has been challenging for us, but we're going to do some things from a sales management perspective to try to accelerate that ramp. I'm sorry for the really long answer.

That's okay. Maybe the last one for me, you know, you've got a pretty good cash balance too. So I'm sort of curious, How do you think about and internally differentiate between internally developing a new product versus acquiring it? With the resources you've got, you could obviously push the R&D headcount pretty strongly if you felt like it. So how do you really come up with that decision? Is it just time to market and existing customer bases, or is there more to it? And how do we think about the level of R&D investments you want to make for internal support? Thanks.

Yeah, for me, it's ROI and time to market. You know, I mean, if we invest in acquiring it, what does that look like versus developing it? And what implications are there for time to market? I mean, I was looking at one product recently or an initiative we were thinking about doing recently. And frankly, the time to market for us to develop it, I kind of feel like the war would be over by then. In other words, we would be so far behind, we'd be trying to catch up. And so there I would rather accelerate development either by hiring a third-party development firm to do what we can't do in the short term because of our current headcount constraints or acquire somebody in that segment. But in order to do that, there needs to be a financial model that makes sense.

Okay. Thanks. Congrats on a good year. Thank you.

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

The next question comes from Alan Klee from Maxim Group. Please go ahead.

Yes, hello. I know you do rigorous analysis of opportunities and TAM analysis. So as you've done that, what conclusions did you come up with in terms of the new products that you're offering, the good, better, best, academics vertical, and one that's not yet disclosed in terms of what they could theoretically represent compared to kind of the base of where you are now?

Well, first off, on the TAM research for the core business, which is the corporate business, you know, I think we've I certainly feel comfortable now confirming that the 28,000 number that we have talked about publicly for several years is a realistic number. I think that in terms of academic, there is a, frankly, a larger TAM for the library segment. I think we are learning a lot about how we go to market there, what the ARPU is there, and what... what we expect our unit per month sales rate to be. And I don't think we've learned enough to give a reliable kind of thinking of what that is. But I can tell you it is a big market. It is frankly bigger than the corporate market, but the ARPU is lower. So I would say its prospects TAM-wise are similar in size to the corporate market. In terms of the undisclosed product, it is a product that... is being driven somewhat by regulatory forces around the world. It's TAM is also, I would say it's TAM is similar to the corporate market, but it's a few verticals within the corporate market. In other words, it's not applicable to something like mining or for that matter, law where we have some legal customers, but it is applicable to some of the large verticals there. And its TAM is, its TAM and ARPU is, I'd have to do the math, but I would off the cuff say it's similar in size to the corporate segment that we pursued today.

Thank you.

You also mentioned one of the areas of focus I think related to productivity and other things was to try to improve your systems, internal reporting on usage and analytics, and how that might be something that you then sell. Could you just expand a little more on this for us to understand what the issues are and what you're looking to accomplish?

Yeah, I think there's two completely separate issues. One is just internal productivity that's related to having a lot of data silos where data resides without any type of analytics or reporting to help us understand what's going on with the core business. And pulling together reports and information becomes an exercise in which data silos it's in. How do I get the data? How do I build a giant spreadsheet and put everything in there? So I think what we want to do is eliminate some of these silos, try to streamline the number of systems we use from a pretty big number today to a smaller number, because we want to be able to very easily have access not only to our internal data that we can react to on a daily basis instead of a monthly or quarterly basis, but we also want to be able to very quickly understand what is happening with our customers who are using the platform. And today, our platform data kind of resides in our accounting system. Our transaction data resides in the platform and is not easily accessible. So going forward, we want to put that data together to do relatively obvious things like what does a cohort look like of our oldest customers who bought the platform? What happened to their transaction revenue over time versus people who bought a year ago? What happened the year before they bought? What happened the year after they bought? That type of reporting, we not only want to use internally, but all of the data that exists in these two systems today present, I think, a fantastic opportunity for us to create reporting analytics and dashboards for our customers, which add real value to their experience. Helps them understand if a subscription they have is really paying off for them or whether or not that money should be invested elsewhere. also helps them understand what's really going on in their organization at a high level and a granular level in terms of what articles are being purchased, what research is being done, et cetera. So I think it's a combination of improving our internal productivity because we have, when I look at some departments and I ask questions about why is productivity not higher, they're doing a lot of work to manually pull together reports, which we can eliminate. And on the external front, I see reporting analytics and dashboards as a revenue opportunity for the platform that we can't act on unless we do some internal systems integration work, which we're doing.

Thank you. You have very low churn with your customers. So the way revenues increase are selling more customers. Like with platform, I think you said you added 41. But then also, very importantly, is upselling to current customers. Can you talk a little about that process and how you feel about that?

Yeah, I think there's a few teams that are doing a really nice job today. One is that team that's responsible for new existing upsells and churn. And they do a nice job of raising ARPU each year by adding users and adding functionality to the platform. As product delivers on the good, better, best, the analytics, more discovery tools to speed up the discovery process, and more tools to help them manage content that they've acquired, which we typically refer to as reference manager capability, we'll continue to drive up that ARPU. So those teams, I think, work really well. But to your previous question, those teams spend a lot of time pulling together manual reporting. I want to eliminate that time and turn it into sales activity time because that's just going to help us drive even more. incremental revenue.

My last question is just, it's like longer term, but thinking, so you have a three-year goal of getting your recurring revenue to 20 million. And I think you said you'd like to acquire three to four million a year on that. How do Do you think it's just the internal growth that you can get on top of that? Where do you see the main drivers of where the organic growth goes on top of that?

Well, I think the main drivers of organic growth is going to be in the two areas it's in today, which is new-new by expanding the sales team and upsells by executing on our product strategy and adding value features that come along with a bump in the ARR to turn that feature on. Maybe I didn't understand the question, but the organic growth strategy is as simple as more salespeople execute on the product strategy.

Okay, great. Thank you so much. Thank you.

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

The next question comes from Adam Wilk from Greystone Capital. Please go ahead.

Hey, guys. Thanks for taking my question. I appreciate it. I think you covered it mostly, but maybe I can tweak it a little. I appreciate the commentary on M&A and valuations. And I was wondering if the next – if the $3 million to $4 million per year ARR growth over the next three years, that's inclusive of M&A and is the way – To look at that, maybe you're going to acquire the document delivery business, as you said, maybe a competitor, and then cross or upsell their customers the platform. Am I thinking about that correctly? Thanks.

Yeah, I think in terms of numbers, you know, our organic growth rate, if you just take our historic growth rate and you were to model it out, I think it suggests a number of three or a little bit more than $3 million a year in ARR to get to $20 million. So I think it's closer to three than it is to four, first off. Second off to your second question, yes, we would certainly love to have an opportunity to acquire a document delivery, a competitor, and cross-selling platforms. But frankly, there might be one or two of those. There's not very many of those. So when we think about driving additional ARR, it's looking at it's looking at opportunities that are kind of close to us. And that may be tools that really help scientists or researchers discover what they want faster. And that may come along with a set of customers that we can cross-sell our platform in, and we can take the discover tools that that target has and integrate them into our platform to turn it on and raise ARR for our base of now, you know, 500 plus, almost 600 customers. Same on the other side. On the managed side, we have some reference manager capability we've developed over the years, but if we found somebody that had some interesting technology there, we would certainly take a look at adding that, especially if they had a set of customers, we have a set of customers, and there's a cross-sell opportunity on both sides for us. So I think the more likely scenario is that it's either somebody on the discovery side or the managed side, or... The other option is we play primarily in corporate. There are folks out there that are in a similar business to ours, but they service either government or academic. And there also would be a cross-sell opportunity to take our product into academic, which we're already starting to do, but we're in the infancy stage, or taking our product into government, which we have, I don't know, maybe a dozen government customers today, but it's not something we really focus on. So, you know, it's more about the segment level, which is corporate, government, academic. And then when we get down underneath corporate, it's more about discovery tools, managed tools, and then ultimately creation tools that are things you can turn on to add value to the platform and raise ARR.

Great. Thank you. That's very helpful. That's it for me. Thanks again, and great job. Thank you.

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

Well, thanks again for everyone's time and attention, and we look forward to catching up during the next quarter's call.

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