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 third quarter ended March 31st, 2022. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Stephen Hoosier, Investor Relations. Please go ahead.

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

Thank you, Stephen, and thanks to everyone joining us today. We are generally pleased with our continued progress and growing the business. It was our second quarter of net ARR growth over 500,000 and a record in terms of quarterly recognized revenue. We had a strong upsell quarter, which is a good sign that the product upgrades we have been investing in are valuable to our customers. The upsell number was also a company record and helped us to maintain over 110% net churn for the second quarter in a row, and now in three of the last four quarters. The business also posted over 30% growth year-over-year in platform customer growth, ARR, and platform revenue. Our net new customer deployments on a trailing 12-month basis was 168. A majority of these deployments are what we call new-new, which means they are new customers to the company, not upgrades. I'll provide some additional context after Bill walks you through the quarterly results in more detail.

Bill?

Thank you, Roy, and good afternoon, everyone. Total revenue for the third quarter of fiscal 2022 was $8.8 million, a 5% increase compared to the third quarter of fiscal 2021, and as Roy previously noted, a company record for quarterly revenue performance. Platform revenue increased 33% to $1.8 million, primarily driven by a net increase of platform deployments from last year, including 34 net new deployments in the third quarter, and strong upselling of current platform customers. The third quarter is seasonally our best period for renewals, and the company experienced its biggest upsell bookings quarter ever, increasing upsells by 12% over the third quarter of last year. As a result of this and new customer bookings, annual recurring revenue, or ARR, increased by 500,000 in the quarter and stood at 7.3 million as of March 31, 2022. This result represents a 32% year-over-year increase and a 7% sequential increase. We have added 1.8 million of ARR to the platform over the last 12 months, and nearly 1.1 million of that has been generated in the last six months. Please see today's press release for our definition and use of annual recurring revenue and other non-GAAP terms. Transaction revenue for the quarter was 7 million, essentially unchanged from the prior year quarter. I will note that Q3 is also seasonally a strong period for transactions. As a result, While the year-over-year revenue was flat, we were up sequentially about $700,000 or 11% over our performance in Q2 of this year. Due to seasonality, we expect transaction revenue to decline from this level in Q4. However, we continue to think that as we add more customers to the platform, that over time, transaction revenue will begin to grow again on a year-over-year basis. When this will happen is hard to definitively predict, but we would like to see year over year increases for a few consecutive quarters before setting any expectations that the trend has changed. Transaction customer count for the quarter was 1,193 versus 1,179 in the second quarter of fiscal 22 and 1,108 in the year ago quarter. The increase was driven by growth in corporate customers. As we turn to gross margin, I wanted to spend some time communicating a few points here, as we believe this is one of the more important metrics for the company and one which we have a heavy internal focus on. Gross margin for the first quarter was 37%, a 460 basis point improvement over the third quarter of fiscal 2021, and another corporate record performance. While a great deal of this is related to the revenue mix shift towards the higher margin platform business, it is important to note that we are also taking actions within both the platform and transaction product lines to expand the margins within each of those segments. The platform business recorded gross margin of 87.7%, a 510 basis point increase from the prior year quarter, and above our target gross margin range of 80 to 85%. due primarily to favorable leverage of labor costs related to servicing new platform customers. In addition, we reduced some platform app-related costs in the quarter, and those savings, while less material, will be permanent going forward. All that said, I think we will likely still see margins revert back to the top end of the 80% to 85% range, as we did have some open headcount in the quarter. Gross margin in our transaction business increased 120 basis points to 24%. Similar to last quarter, we were able to lighten some copyright reserves. However, the result was also impacted by some steps we have taken through ongoing data analysis to optimize the margin on particular transactions. Lastly, two overall final points on gross margin. One, keep in mind that we do allocate labor costs between platform revenue and transaction revenue, and as a result, you may see fluctuations in the margins of those segments based upon activity in the quarter. For this reason, I think it is always important to focus a little more heavily on our overall corporate gross margin. Second, while we do not expect that we will continue to experience record gross margins each consecutive quarter, We do expect that the overall trend of corporate gross margin will continue to be up and to the right as we continue to increase platform revenue, thus evidencing our ability to properly scale the business in the long term. Total operating expenses in the quarter were $3.6 million compared to $2.7 million in the prior year quarter, due primarily to higher technology and product development costs and G&A costs. Our product development costs include ongoing investment in a new product, which we have not announced yet, but are looking to release early next fiscal year. From a G&A perspective, we continue to experience additional legal and consulting costs related to our ongoing efforts to execute on our M&A strategy, as well as some additional consulting costs related to the upgrade of our internal corporate systems. Net loss for the quarter was 341,000 or one cent per share compared to net income of 50,000 or break even on a diluted share basis in the prior year quarter. The result included about 400,000 of stock compensation expense in the quarter compared to about 200,000 in the prior period. Given that, adjusted EBITDA for the quarter was positive 94,000 compared to 238,000 in the year-ago quarter. The positive adjusted EBITDA result is the first of this fiscal year in which we are making a number of investments and is a consequence of the expanding gross margins as well as some of the seasonal strength we experienced in Q3, which I noted earlier in the call. Turning to our balance sheet, cash and cash equivalents as of March 31, 2022 were 10.6 million versus 11 million on June 30, 2021. Cash flow for the quarter ran relatively breakeven as we burned about 86,000 in cash flow from operations. 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, as we move forward and into our budgeting cycle for next fiscal year, we will continue to invest in the business with a bias towards growth in ARR while at the same time tightly monitoring the success of those investments to optimize the mix between ARR growth and adjusted EBITDA. I'll now turn the call back to Roy.

Thanks, Bill. We continue to make good progress executing on our strategy to expand our offerings from document delivery to a robust set of tools that supports researchers. Our historic focus has been on helping customers acquire research documents that support their work. We will continue to develop and release tools with the intent of helping our research customers across the broader spectrum of discovery, acquisition, management, and creation of proprietary content and intellectual property. In the latter half of this calendar year, we will be expanding our reporting and analytics solution. As I have said previously, all of this is intended to provide the leading research platform used in the life sciences segment to the customers we have chosen to serve. During the quarter, we released our new reference manager product, which helps researchers manage their research documents inside the platform. It is the first of two releases, the second of which will release in July of this year. When complete, we believe we will have delivered leading functionality to our customers in terms of helping them manage their research. We are continuing to work on additional functionality in the discover or search phase, which we also intend to release later this calendar year. Early feedback on our reference manager product has been very good, and we expect to see continued strong upsells as customers adopt this optional feature. We continue to work on expanding our sales team as we progress toward FY23, and we are working with a partner to conduct a study on how we might go to market in China, which is the second largest market for STM research in the world today. We continue to have a high level of activity in M&A, but I'm disappointed to have no immediate news to report. Valuation expectations continue to be a challenge. We will continue to aggressively work global opportunities that are in line with our strategy. And I remain optimistic that these efforts will ultimately result in finding companies that are both the right fit from a strategic perspective and evaluation standpoint. On a final note, I will also say that while the overall markets have suffered, we do not see anything in the present economic environment materially impacting the company's fundamentals and outlook, which remains strong. In addition to the immediate results, excuse me, in addition to the impressive results this quarter and this year, we monitor those results on a quarterly basis against the SAS guardrails as defined by Bessemer Venture Partners. We perform at the best or top tier in terms of churn, LTV to CAC ratio, and cash flow compared to ARR growth, and are very near the best category in terms of CAC payback months. The only area we lag a bit is forward ARR growth, but this is where our investments are focused and where we are starting to see improvement. Additionally, we also monitor the software equity group's SaaS public market update each quarter. In the Q1 report, vertically focused SaaS companies are valued at 5x their median EV to TTM revenue, down from 9.4x during the same quarter last year. SAS M&A median EV to TTM revenue multiples during Q1 were 7.7 versus 6.3 last year. Even considering recent market valuation declines, our SAS fundamentals would suggest that at the present levels, we have plenty of room to run from a valuation perspective. We appreciate you taking the time to discuss our third quarter results. and we look forward to addressing any questions you may have. With that, I'd like to turn the call back over to the operator for Q&A. Operator?

Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge that request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, to register for a question, it is 1-4 on your telephone keypad. And the first question will come from Alan Klee with Maxim Group. Your line is open.

Good afternoon. Congratulations. This is really a breath of fresh air this quarter. It was very interesting what you said about how this quarter released a certain tool. Another one's coming later this year. or two other ones coming out. Could you just expand a little on what those add for the user experience? Thank you.

Sure. The one I mentioned that we recently released and we'll have a second release of it in July is what we call references, which is a reference manager application. Previously, our customers would be either emailed a link or emailed a PDF of the scientific article that they acquired. Now they'll receive that article inside the platform. They'll be able to create folders that are either individual folders or shared folders. They'll ultimately be able to mark up that PDF, make comments on it, just like OneNote, the Microsoft application, or several other markup applications. And they'll be able to store all that inside the platform. It's an important part of the research process. It's an area that we have not really fully released a product into previously. We have a product that does a little bit of that, but we're replacing that with the new references product. And as I mentioned, there's two releases, one that's already out and then a more robust release that'll come out in July. That'll be followed by a couple of other things. The way the researchers work today is they are searching for that research in a variety of tools. Some are tools that they're acquiring from another company. Some are free tools, the most popular of which are Google Scholar and PubMed. And we historically had a widget that lived inside those search tools that allowed you to pull up the details by the article. What we're doing is we're building those tools directly into the platform. So you can do the search in the platform, you can acquire it in the platform, you can receive the article and manage it in the platform. And that's the search tools we're building. And then the third thing I mentioned was analytics, which is where we have a massive amount of data underneath that platform of what people are doing with it. And we're building out an analytics engine, which will allow those customers to run much more robust reporting in terms of how much money the platform is saving for them, where they might need subscriptions, where they don't have them, or the opposite. along with other analytical tools that will help them monitor. They're doing, let's say, battery technology research for an electric car. And ultimately, we want to be able to tie that into world thieves of grants, patents applied for, patents granted, or even press releases that mention similar technology to what they're working on. So they'll be able to not only have an incredible analytics package on top of what they're doing internally, but they'll have a way to tie that to external news sources to monitor what's happening in the world related to the research that they're doing internally.

That's great. Thank you. Can you give us some color on how Article Galaxy Scholar is performing?

Excuse me. Article Galaxy Scholar is doing, I would say, okay, But I would also tell you that the two critical quarters for the academic market are the quarter we're in ending June 30th and the first quarter of our next fiscal year, which is the July through September quarter. So, you know, we have spent a lot of time laying the groundwork for a number of sales in those two quarters. We expect the majority of our annual revenue, not a majority, we expect a significant percentage of our annual revenue to come from those two quarters. And I'll report back on that in the next call.

Great. This will be my last question, then I'll get back in queue so other people can ask that. But I have a couple more after this. Can you give an update on where you are on hiring of additional sales for how much you've done of what your goal is?

Yes. We've made some progress there, not a majority of the progress, but we feel like we're on track with our plan, which was to hire most of those folks during this quarter. And, of course, we're in early mid-May. So, you know, we are making progress, but we're not at the full headcount we want to be at.

Okay. Congrats again. Thank you so much.

Thank you.

As a brief reminder to all to register for a question, it is 1-4 on your telephone keypad. The next question will come from the line of Peter Rabover with Artco Capital.

Your line is open. Hey, guys. So I have kind of a, I don't know if it's a positive question. It's probably, I'm not meaning for it to be negative, but, you know, I'm just kind of looking at the results and, you know, the operating expenses kind of, went pretty high in the last six quarters. You went from a run rate of $9 million to almost $15 million. And that's a pretty big expense. And given you are planning on acquiring somebody, I assume you will also acquire their SG&A. And I'm not really sure. And your goal was for $20 million ARR, which is probably $17 million in gross profit. I guess I'm just not really seeing the payback that you're seeing given the marginal growth in gross profit versus what you've already spent. So there's a disconnect somewhere, and I'm just trying to figure it out.

Bill, you want to take a stab at that?

Yeah, I'll say a couple of things there. One, the increase in expenses has really been in technology and product development and in G&A. Tech and product development, we've got some one-time development costs going on related to a new product. That was about $120,000 this quarter. We also have two new product managers that we brought in earlier this year. And again, I think while those are permanent, I don't see us ramping that up dramatically going forward. GNA, similarly, there's been a number of sort of expenses which we can tamper down if we want to related to both organic and inorganic initiatives. Some of those organic ones are pricing and upgrade to our systems. And the inorganic has obviously a lot to do with sourcing and doing some some early diligence on some MNA stuff. Um, when you look at gross margin, you know, if you assume that transactions stay flat, right. You know, we, we, if you're, if you're looking at 10 million of, uh, platform revenue, that's going to push the margin closer to 40%. You push it, you know, again, up to sort of a longer term goal of 20 million, that's going to push it to 50%. Um, And again, I do think if you sort of model that out, you'll start to see some of the profitability come into play, as well as as we tamper down some of these investments that were somewhat unique to this year. Well, I don't know if you want to add anything to that.

Yeah. Go ahead.

The other thing I would comment on is, as we've mentioned previously, you know, the board and Bill and I are very focused on this rule of 40 concept that the organic sales rate of the platform, which is currently, you know, 32 plus the EBITDA margin, which is currently negative, need to add up to 40, right? So these investments we're making are either going to accelerate that 32 number to a number big enough to offset negative EBITDA to total 40, or we will start dialing back this investment, generating enough EBITDA so that we meet the rule of 40. So we're not going to be able to get all the way to rule of 40 in FY23, but we expect to see a material step up in performance in terms of rule of 40. So I don't know if that helps.

It still kind of doesn't. And I'm just talking about just a platforms business. Like I said, you gave guidance, like I said, a few quarters ago for $20 million in ARR, and that roughly translated to about $17 million in gross profit. from about four or five a few months ago. And you've already added like six million in run rate of expenses. So I don't know, and I'm assuming with the acquisitions that you need to get to 20, you're gonna add probably two or three million more. So is that like, are all we're talking about is like an extra three million in gross profit in the next three years? I don't know. I'm not really seeing it.

Well, yeah, we could take this offline if it would be helpful because I'm not tracking with $6 million in incremental expenses, so I don't think we're on track to do that.

Right now it's $14,400.

Right now it's $14,400. It was like $8,600 a few months ago as of the quarter 9th.

Run that by me again. Yeah, I think the other thing to keep in mind is

Sorry, I'm looking at your summary that you have on your investor page. And on, you know, 930, your expenses were 2.4, which is, you know, approximately 9.2 million. And right now they're tracking at, you know, 14.5. So I don't know, give or take 5.3, which is maybe I'm rounding up a little bit.

But

Yeah, so a couple points. Yeah, if you look at trailing 12 months operating expenses this year, we are at 12, basically 12.8. Prior trailing 12 months, we were at 10.2, 10.3, 10.250, call it. You know, also keep in mind within this year, we have had a CFO change which triggered a bunch of one-time costs related to separation from that CFO as well as acceleration of stock comp. So, again, within the cost there of that 12.750 sort of run rate, there's 1.1 million of stock comp. So that's something that's not going to sort of obviously recur here. And so I do think, again, you know, we could sort of tally through some of these costs that we're incurring on the product development and GSA side. But, you know, there's a material chunk of those that is either one time in nature or can be pulled back or tapered back should we, you know, not see the resulting ARR growth that we want to see.

Okay. Maybe I'll... And I appreciate the color. Maybe I'll ask this another way. You were comfortable enough giving the guidance or goals of $20 million and high 80s gross profit. Are you comfortable enough giving what you think your run rate of operating expenses is needed to support that?

I don't think we are sitting here today, but I think in the next call we could add some color in that regard. Okay. Okay.

Look, I don't mean to be, like, picking on you, and, you know, I've been a long-time shareholder, but I guess I'm just overly concerned about a significant increase in operating expenses, which does not seem to, you know, jive with what's – with the ROAC that's needed to – given what you've given in the past. So that's my only concern. I'll get off the call then.

Thanks.

Yep, fair enough. Thank you. As a brief reminder to all, to register for a question, it is 1-4 on your telephone keypad.

Our next question comes from Richard Baldry with Roth Capital. Your line is open.

Thanks. If I look at nine-month to date ARR incremental sort of as a proxy for your sales growth, It's up about 32% year over year, which is, I think, a pretty good figure. Sort of curious, do you feel like that, you know, people that you've already had in their seats just executing a little bit better, or are you adding heads that are doing it? How much do you feel like, you know, you've got capacity to keep growing that ARR with the team you've got versus you've talked about hiring? I don't know, maybe discuss whether the hiring backdrop is tough, how you feel, or when you think you'll be able to bring people on. Thanks.

Yeah, in terms of the first question, I do think that obviously as the base gets bigger, it's tougher to maintain 30 plus percent growth. But, you know, I've set expectations with the sales teams that I expect their bookings growth next year to start with a four. It'll be somewhere in the 40s. And we believe we can do that with current butts in seats, not new hires. We do have some new hires that will roll in on top of that. And we're hiring additional sales resources now so that we can roll in next year with some additional heads. But most of the performance improvement we've seen this year has been some improvement of existing productivity, plus I've mentioned in previous calls, we hired a resource in Japan last year, we hired a German speaking resource last year, and they've started to come up to speed and contribute this year. Japan's been slow going, Germany's come up to speed much quicker. In terms of the hiring environment for sales, you know, I think it's – I have not seen anything that leads us to be concerned there. You know, compensation expectations are a bit higher than we'd like them to be, but that's probably a common theme across any software company out there today. So I'm not really worried about putting the folks in the seats. I'm more worried about filling the top of the pipeline with leads because we have a very consistent close rate. And to the extent we can put the leads in the top of the funnel, we have consistently for several years now converted a specific percentage. So it's just a matter of getting the top line lead funnel improved. And we brought on a new VP of marketing last quarter, which is intended to help with the marketing qualified leads. And today, a majority of our sales are coming from sales qualified leads. We want to improve that, but we want to see more improvement on the marketing side of the business. And did I address both your questions? Yep.

Yeah. So the last one for me would be, it does look like the government's letting inflation get a little bit out of hand. So I'm sort of curious your thoughts on that impact, whether it's on the revenue pricing side or costs. It seems like your end clients are not necessarily paying famous for being shy about passing on price increases, whether that's universities, pharma, tech, whatever. So how much do you feel like you'll be able to press that lever, at least to maintain the kind of operating leverage you've got now?

Thanks. Yeah, that's great. We do have kind of automatic built-in price increases at renewal of typically 4% or 5%. But this year, going into July 1, we plan on increasing pricing More than that, it is a complex formula because it depends on what features they have turned on or not. It can range anywhere from the minimum, which is typically 4% or 5% up into double-digit percent. So I can't really comment that we're going to see a 10% or 15% increase, but we are going to, frankly, take advantage of the current environment and materially raised prices on the base platform. And then these new releases that we're doing, they'll be 110%, 115% or 120% of the base platform fee. So, you know, that's why I mentioned in the conference call script that we would expect us continue to see strong upsells in the next year. Some of that's going to come through these price increases. Some of that's going to come from these new features, which if you want to turn them on is going to change your base fee from what it is today to to what it is July plus the price increase times 110, 120, or in some cases even more than that.

Maybe one last one. I know you've got a successful background in M&A and prior lives. So in the current environment and current entity, You talk about sort of the challenges that you're seeing now that you're trying to bring that as another part of your growth engine. Is it the uncertainty around a macro? Is it just finding the right targets? And with obvious valuation disruptions lately, has that become another obstacle? How do you feel about what you're seeing and where you might be sitting a year from now? Thanks.

Yeah, I mean, the biggest challenges we definitely have are valuation, followed by if we run into something larger, our ability to raise capital to acquire something that big. And then, you know, kind of closely behind that is a number of the targets that were in our original list either had VC investment or were PE, either acquired by PE or had PE investment, which kind of, of course, throws a monkey wrench into the discussions we were having. So we don't have as many kind of entrepreneurial-owned businesses that we're running into as Bill and I had in a previous life. But we are finding good opportunities that line up with the strategy and would enhance the product. I think I've painted our vision in terms of where we're going from a product point of view. And a big challenge always is either valuation or our ability to fund the price point, even if we could get over the valuation hurdle or a combination of the two. In terms of where we'll be a year from now, I think we've made some adjustments to looking at smaller businesses where we think that technology is worth more bolted into our platform than that business might be worth as a standalone business to us. And we'll continue to work those, but I've been frustrated at our slow pace here.

Thanks.

Thank you. And it's a brief reminder to all to register for a question, and it's 1-4 on your telephone keypad. Next question comes from the line of Abby Fisher with Longcast Advisors. Your line is up.

Hey, thanks for taking my question. Just a quick question and observation. It's my impression that when you joined the company, Roy, it was moderately undermanaged, and that there were some deficits in the technology and culture and other areas. So you need to bring people on board to overcome that deficit. And then once you do, you can sort of scale up this operating leverage. So I don't know if you agree with that or not, but I just wondered within that context, how far along are you in getting the right people in place in the technology side and and in the sales and marketing side to get this to a place where you're comfortable and it represents sort of your level of benchmark of management?

Yeah, I mean, that's difficult to answer on a public call, but I would say we've made some progress, but we still have work to do there. So it's tough for me to be any more specific than that.

Okay. We'll talk to you later then. Thank you. Thank you.

Our next question will be a follow-up from Alan Klee with Maxim Group. Your line is open again. Thank you.

Yes, hi. Your average selling price picked up compared to where it had been the last two quarters and was roughly flat year over year, where I think the expectation had been that it would probably be down because your incremental customer is smaller than the existing ones. So what would you attribute to what I saw as better than expected pricing?

Yeah, you want to touch on that, Bill?

Yeah, sure. It was just a bit of a unique thing in the quarter. So, you know, we actually, if you look at the deployments this quarter versus last quarter, we had less deployments, but they were much larger sales. And so the sales team just completed a number of deals with larger customers that had larger seat counts, and that pushed the ASP up this quarter significantly. over last, where it had been running, you know, kind of in the 10.6 range. It's around 10.8 now. I do expect over time in the longer term that it will come down, and we will have more customer deployments as well. But I think it's just more of a nature of some of the deals that were closed this past quarter.

Great.

Thank you so much. Thank you.

And Mr. Olivier, there are no further questions pending. I'll turn the call back to yourself. Please continue with your presentation or closing remarks. Thank you.

Oh, well, thanks, everyone, for joining us today. And as a reminder, we will be participating in a three-part advisors virtual ideas conference in June. For more information on that event, please contact your three-part advisors. And we look forward to speaking to you in September to discuss our fourth quarter and full fiscal 2022 results. Have a good night.

And all that will conclude the conference call for today. We thank you very much for your participation. You may now disconnect.