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 first quarter ended September 30th, 2021. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Beisler, Investor Relations. Please go ahead.

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

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

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

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

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Richard Baldry with Roth Capital. Please go ahead.

Thanks. Well, not asking for explicit guidance, I'm sort of curious around, as you make these investments, under the conditions you see ahead assume they don't change dramatically what what type of quarterly cash burn would would probably be sort of a trough just so we can kind of balance that in a run rate of that quarterly burn against or the resources you've got to understand the runway um on this you know effort you're putting out thanks yeah i think it's um you know something where

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

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

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

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

Yeah, no, thank you. No, that process has been underway since I got here, and actually I think a little bit before I got here. I can tell you since I've been here, we do have a list of over 200 targets. We have actually worked through about 100 of those targets. We have several active conversations. We've done some IOIs. We've done some diligence, and we continue to look for things that are consistent with our business strategy and our product strategy. I've mentioned before the big challenges are valuations right now are astronomical, as you know. So we're kind of looking for the right deal at the right price, and that's taken us a little bit longer than I would have hoped. But we're making a lot of progress, talking to a lot of people and having a lot of interesting conversations.

Great. Thanks for your time. No problem. The next question is from Alan Cree with National Securities Corporation. Please go ahead.

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

Yeah, I'll answer your second question first. In terms of the transaction business, I mentioned that most of the decline was driven by non-platform customers. We actually don't have a lot of those left. So I think at some point in the next quarter or two, we'll hit the trough of them churning out and we'll only be dealing with platform customers which means we'll only be dealing with a product mix issue in terms of how many articles they're obtaining for free versus how many articles they're paying for. And so, you know, I'm disappointed that the non-platform customers are churning out, but they're not under contract. They are non-platform. And like I said, we don't have a lot of those left. I continue to believe the platform business will overall be a flat-ish business. So I would expect our performance to improve in that area over the course of the year, but I think we'll continue to see some volatility up or down as we go through the year. In terms of your first question, if you're referring to kind of, I think Bill made a comment, I made a comment. We would expect the platform growth rate to be relatively consistent with what it has been on a trailing 12 month basis. which has been in that high 20s, low 30s on a quarterly basis. Was that your question?

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

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

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

Thank you. Again, if you have a question, please press star then one. The next question is from Scott Bilodeau with Walrus Partners. Please go ahead.

Hi, guys. Thanks for taking my question. Just another follow-up on the transaction revenue. I think you laid out some percentages that, you know, as someone comes on platform, you know, they begin with, you know, 90% paid, then I think 73 and then 65%. And I think you even mentioned, you know, real mature ones down to 41%. So, you know, of the 6 million, you know, do you have a sense where they are? on that track to 41 percent because that should give you some view of how quick how you know the treadmill that that six million is heading south um you know any any uh idea any any visibility you can give us on that well we we certainly just to back up for a second we we have been working with a third party to do some of this analysis because

our systems are such that this data sits in different systems. We certainly today can run a cohort of 2017, 2018, 2019, 2020. Where are they and where do we predict they're going to go relative? And then we can layer on top of that new customers coming in. However, one of the questions I was asking a previous call, which we actually did attempt to answer, is what do we expect a new platform customer coming in to generate. And when I say new, I'm talking about new news. So they don't have a historic transaction revenue base with us. They're coming in and they're starting to buy transactions. And so we've, we've been doing some work to figure that out, but it's all over the place. So we're trying to cut that data a different way to see if it starts to get clear. If you do it on a per user count or per seat count, or if you do it in, in, in by vertical, But the question I can't answer today is if I bring in 150 new platform customers, how much transaction revenue are they going to generate? I can do an average. But when you look at the 150, they're all over the board. We have some that come in that are only generating a few thousand dollars a quarter. We have some coming in that are producing tens of thousands of dollars a quarter. And it's hard for me to predict what's going to happen looking forward without having some opinions. hopefully a strong opinion based on data of what new platform customers are going to bring into that mix.

So that's a little more of the wild card as opposed to, I would think, you know, guys that have went from off-platform to on-platform on how many transactions they've done, and you can model out, hey, as that goes to, so you get a feel for that. What you don't know is the other side of what, so you kind of know what's bleeding. What you don't quite know is what's coming on on the top side.

But we are continuing to work on that because, you know, getting our arms around that to me is a very, very high priority.

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

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

Gotcha.

I appreciate it. Thanks, guys. Thank you.

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

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

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