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 this fiscal first quarter and September 30th, 2022. 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, sir.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for Research Solutions' first quarter fiscal 2023 earnings call. On the call today are Roy W. Olivier, President and Chief Executive Officer, and Bill Nerther, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the first quarter of fiscal 2023. The release is available on the company's website, 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 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' recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial conditions. Also on today's call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. A reconciliation of these numbers 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. I would now like to turn the call over to Roy W. Olivier. Roy?

Thanks, John. And thanks to everyone for joining us for our first quarter fiscal 2023 results. The first quarter was a great quarter in many respects. The overall revenue growth rate boosted by strong transaction revenue was 12%, which is the highest going back five plus years. Platform revenue is up 34% with ARR up 33%. And we were excited to see platform revenue above 2 million and ARR exceeding 8 million for the first time. All of this drove continued improvement in our gross margins, which contributed to very strong net income and EBITDA, both of which are records. I do have some additional details and comments I'd like to share about the quarter, but first I'd like to pass over to Bill to walk through our fiscal first quarter 2023 financial results in detail, and then I'll wrap up with some additional comments.

Bill? Thank you, Roy, and good afternoon, everyone.

Total revenue for the first quarter of fiscal 2023 was 8.7 million, a 12% increase from the first quarter of fiscal 2022. Our platform subscription revenue increased 34% and surpassed $2 million for the first time in a quarter. The growth was primarily driven by a net increase of platform deployments over the last 12 months, including 23 in the first quarter and 166 over the trailing 12 months. We ended the quarter with $8.3 million in annual recurring revenue, up 33% year over year and 5% sequentially, reflecting our continued sales and upselling efforts and low churn of existing platform subscribers. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP items. Our transaction revenue increased almost 7% from the first quarter of fiscal 2022 to 6.7 million. As noted in our press release, this was the largest year-over-year percentage increase in transaction revenue since the second quarter of our fiscal year 2018. The increase was primarily due to an increase in paid transactions combined with some of the pricing initiatives we undertook in the second half of our fiscal year 2022. Our total active customer count for the quarter was 1,220, a net increase of 67 from the same period a year ago. The increase was due to more corporate customers over the past 12 months. Gross margin for the first quarter was 38.6%, a 420 basis point improvement over the first quarter of 2022. This continued the trend of our gross margins moving up and to the right as our revenue mix continues its shift towards the higher margin platforms business. Despite being only 23% of the revenue, the platforms segment contributed 53% of the gross profit in the quarter. The platform business recorded gross margin of 88.6% above our target gross margin, range and approximately 490 basis points higher than the prior year quarter this was primarily due to lower software costs as well as lower personnel costs associated with the platform segment gross margin in our transaction business increased 100 basis points year over year to 23.4 percent the increase was mainly due to some of our pricing initiatives The margin is slightly down from the prior two sequential quarters where we had lightened some of our copyright royalty reserves, which we did not do in this quarter. Total operating expenses in the quarter were 3.2 million compared to 3 million in the prior year quarter. The modest increase to last year was due primarily to increased headcount in technology and product development, as well as an increase in foreign currency loss due to the present foreign currency environment. I mentioned on our prior call that I expected operating expenses for Q1 of fiscal year 2023 to come in below where they were in Q3 and Q4 of last year. And they not only achieved that, but were also below where they were in Q2 of last year. This largely reflects the offset of some items that impacted us on a one-time basis in fiscal year 2022, as well as some of our cost initiatives taken at the end of fiscal 2022. note that as we move forward one item with some uncertainty related to the operating expenses will be the non-cash stock compensation expense associated with our long-term equity stock plan recall that we implemented this plan this year to replace the old executive stock compensation plan on november 1st of this year we issued 1 million 950 000 shares of restricted stock to the executive team However, those shares will not vest until certain stock price thresholds are achieved. A third-party firm is doing evaluation on the grants to determine how much we should expense over the five-year life of the grant, which will have an impact on our net income, but not on our adjusted EBITDA. Keep in mind, however, that while the shares are outstanding, they only vest if the stock price thresholds and market cap improvement levels are attained. All that said, net income for the first fiscal quarter was $215,000 or one cent per diluted share compared to a loss of $372,000 or two cents per share in the prior year quarter. Adjusted EBITDA for the quarter was $433,000 compared to a negative $181,000 in the year-ago quarter. These were both quarterly profit records for the business. We think they are indicative of how our business can scale profitably as the platform segment continues to grow and become a larger component of our overall revenue. In addition, this profitability will be further accelerated if our transaction business starts to grow again. Turning to cash, the profitability I mentioned has translated into cash flow. We generated over 100,000 of cash flow from operations in the quarter. This is especially significant given that in the first quarter, we paid our executive bonuses for fiscal year 2022, some large commission accelerators related to our strong sales performance at the close of our fiscal year 2022, and also a material amount of publisher royalties. Keep in mind, I expect cash flow to fluctuate quarter over quarter, but overall to be roughly in line or slightly behind our EBITDA on a trailing 12-month basis. Turning to our balance sheet, cash and cash equivalents as of September 30, 2022, were $10.4 million versus $10.6 million on June 30, 2022. Note that during the quarter, we paid $300,000 related to the acquisition of customer contracts from Fizz Carl's room. The ending balance reflects that payment offset by the previously mentioned 100,000 generated 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, while I think we have reached an important transition point from a profitability perspective, I want to caution against making assumptions that our adjusted EBITDA will continue to increase each quarter from here. There were some new hires slated for Q1 that were not hired until late in the quarter. Additionally, we previously discussed some changes to the cost structure of our team in Mexico, which will take effect starting in Q3 and will likely add over $100,000 of additional cost per quarter. As a result, it is likely that you will see a drop in adjusted EBITDA for Q2 and see the EBITDA increase and decrease with transaction volume, which is seasonally better in Q3 versus Q4. All that said, we remain committed to being adjusted EBITDA and cash flow positive for the fiscal year, and we are striving to accomplish that in each quarter this fiscal year.

I'll now turn the call back to Roy. Roy?

Thanks, Bill. Given the short time since our last call, I will focus today's comments on four topics. First, a product update, which I think is relevant to our FY23 goals. Second, I'll provide some color on how we are thinking about fiscal 2023. Third, I'll discuss the status and progress of the recently announced customer asset acquisition. And finally, I'll provide an update regarding our general M&A efforts. From a product perspective, we launched Curedatus about a month ago, and I'm excited to announce that we did sign our first customer contract for the product with a German med tech company. The product's initial launch has been focused on the med tech industry, but we will be adding the requirements to support other industries, for example, pharmaceuticals, as we ramp up and continue to develop the product. We believe the total addressable market for the med tech industry is around 92,000 companies or 660 million US dollars. We believe the serviceable available market or SAM in the Europe and North American markets to be about 62,000 companies or about $450 million. These numbers are based on an average SaaS platform fee of around 7,000 US dollars. And I do remain very excited about this opportunity So far, we've had a great response to the product launch. We've also continued the development of Article Galaxy and Article Galaxy references. Due to our install base of about 750 Article Galaxy customers and a major Russian-based competitor exiting the reference management business, we've seen strong interest in the references product. Today, we've upgraded or sold 38 customers on the standard version and 41 customers on the pro version. We've also built a large pipeline for new sales. Turning to Article Galaxy Scholar, or AGS, which is our university library product, we're changing our go-to-market approach to include both a standard and a freemium product.

The standard product that we have today is basically, let me back up for a second.

The freemium product that we just launched is basically our standard product with some of the features removed. We did this to increase installs based on strong transaction sales from previously installed versions. The concept here is to land with the freemium product and to take the increase in our transactional revenue from that product and then expand to the paid version via upsells. As a reminder, we are focused on the U.S. market today where the TAM is about 2,500 libraries or $7.5 million in platform revenue and $45 million in transactional revenue. I'll continue to report on progress with this new go-to-market strategy going forward. Turning to my FY23 outlook, I do not want to – I do want to comment on Q1's performance. We had very strong upsells, low churn for the quarter, both of which exceeded our expectations. However, we were behind our targets for new platform customers in Q1. Some of this is due to us pulling the Q1 opportunities into Q4 of FY22. Some is related to us retooling some of our prospecting and internal systems, and some is related to the general economy. While the first and second items I mentioned should resolve themselves over time, I have some concern about the general economy and the current interest rates potentially impacting the companies we sell to. We have seen a few opportunities in our pipeline put on hold as some companies dial back spend in this uncertain environment. We may not have a clear view of the total impact of the economic issues until the end of our Q3 or early Q4. That said, I'll provide updates in our future calls. Based on what I know today, we continue to expect our ARR to be over 10 million for the year. As stated previously, we expect the business will be cash flow positive and generate positive adjusted EBITDA for the full year. We do not have any significant updates regarding the FIS customer onboarding project that we announced last month. We are progressing and will have more to report in February. That said, we are confident that between this project and a large new customer coming online, we should see a nice increase in transaction revenues starting in FY23 Q3. Finally, I'll comment on our M&A activity. As I said in our last call, we're finally seeing valuations that are actionable and much more willingness to find creative ways to get a deal done. We remain committed to bringing on about 6 million in ARR over the three-year window I described about 18 months ago, and I'm confident we'll hit that goal and have something to talk about soon. Before I turn the call over for questions, I do want to remind everyone that we will be presenting at the Southwest Ideas Conference in Dallas on November 17th. Qualified investors that would like to attend or schedule a meeting should contact our IR firm three-part advisors. With that, I'd like to now 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 Alan Klee of Maxim Group. Please go ahead.

Yes, good evening and congratulations. So just dig in a little more of explaining the strength in transactions. And then also you said expenses will be up a little bit this year. Could you just go over that again of the numbers on that? Thank you.

Bill, you want to take that and then I'll add some comments? Sure.

Yeah, so again, we're with transactions where we actually are starting to see some strength and some pickup this year. And that's coming from two things. It's coming from increase in paid transaction count. So actually just transactions where people are paying us a service fee and paying for an article actually going up in number. The other thing is we did, as I mentioned, undertake some pricing initiatives last year, but they were done sort of in the second half of last year. And so that's where that's coming from. And again, we remain cautiously optimistic. I've said before, I'd like to see, you know, two consecutive quarters of growth, minimally before we start to say there's a trend in transaction growth. And, you know, certainly there was a nice quarter here. I think we're off to a decent start in the month of October for transactions, but, you know, we'll see how that plays out over the full next quarter. With regards to expenses, you know, I think, yeah, we could see those go up. I don't think we're talking, you know, extremely materially. I will talk about first the sort of cash-related expenses. There were a number of hires that we had in our budget that just in this environment took longer to fill the position than we had hoped. And so some of those hires came on at the end, you know, towards the end of our quarter and some in early October as well. And, you know, secondly, you know, from the non-cash standpoint, you know, there is sort of an item out there with respect to the stock-based comp related to the long-term equity bonus plan that, you know, we'll have to see where that gets valued and what that comes in at. Once it is valued, we'll know the number for the future. because it'll be stable through each period. But, you know, we want to see where that comes out before, you know, cautioning or before sort of saying where we think the operating expenses will be. So I think they will be up, too. I think they will be, again, modestly up and still in a situation that allows us to generate a positive adjusted EBITDA in the quarter.

Okay. Did I hear, you know, around 100,000 a quarter?

That comment was related to our Mexico cost structure, which is changing, but that will not happen until Q3. That is $100,000 that will get added in Q3, and that will, again, effectively start Jan 1 with those expenses. So that will start, but that will also start the quarter that is traditionally our seasonally our best quarter from a transaction perspective as well. So You know, what I sort of see is kind of the EBITDA could go down and then go back up. And then in Q4, the transactions drop off again. And so that'll probably bring it down again. So it is going to move around a bit through the year. And that was the main point I wanted to make in the closing of my statement.

Okay, and then just my last question, the gross margins for the platform segment increased and they decreased in transactions. Are both of them numbers that you saw this quarter kind of reasonable run rates going forward?

I expect the platform gross margin to probably come down a little bit, and not too much, but then the transaction actually to go up a little bit. So I still think we're on a trend where transaction margin will go up. There were a couple things in the quarter that just had a negative impact on it. But again, these are not dramatic shifts in either direction, I would say.

Thank you so much, and congrats.

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

The next question comes from Richard Baldry of Roth Capital. Please go ahead.

Thanks. Could you talk a little bit more about the customer acquisition on the Karlsruhe side? I'm probably butchering that name, of course, but I think what I read was something like 700 total customers, maybe 400 more recently active. which is a pretty big number compared to your $1,220 base. So what are the implications of that? When could some of those move over? Are there revenue implications similar to your own customers? Just to give us sort of an idea of what the magnitude and impact of that could be over whatever period of time you want to choose to look at.

Yeah. First off, I don't think we'll see any revenue impact until starting in January. So right now what we're doing is we're having conversations with customers about onboarding and moving them over. They do have about 400 active customers. So I think the maximum number of customers we would move would be 400 or some percentage of 400, obviously. I think in terms of The incremental opportunity, Bill, you probably have these numbers off the top of your head. I've forgotten them. But I want to say that the incremental opportunity here, if we were to onboard all customers and maintain their trailing 12-month revenue run rate, would be about $1.5 million.

Bill, is that right? Yeah, it could be.

Again, depending on how you look at it, it could be a little bit more than that. But that is sort of the – a good number to use.

And can you talk about how comparable sort of the usage patterns that, like, do you offer all the functionality it would take sort of any way for us to gauge how likely it is for you to retain, you know, sort of all of that customer base or, you know, based on feature parity, however you want to think about it?

Yeah, I don't think we have a good estimate on that. It definitely will not be 100%. There are some other competitors that are aggressively pursuing these customers. They're trying to secure the customer relationship primarily through just price. And what we did, to address your question, is that we basically created a Fizz version of the Article Galaxy product that would meet the needs of those customers. So we've, we've created a kind of a special version of AG, uh, it's rolled into the package and, you know, they get all the functionality that they were getting under the fizz relationship, uh, with a couple of exceptions, I'll talk about in a minute. Uh, and then there's an upsell opportunity for our team to upsell them to the full article galaxy product later. So I think we line up very well from a product parody point of view. I will say the one thing that we're making some progress on that we have to solve by January 1st is that FIS typically did sell the transactions as well as their service fees in three currencies. We've historically operated in a single currency, the U.S. dollar. So there has been a very large amount of meetings over the last 30, 45 days that to figure out how we're going to present yen for Japan, euro for Europe. Actually, they do the British pound as well as the U.S. dollar. So we're making good progress there, and I'm sure we'll get that done. But, you know, I think we've got a good chance of bringing over kind of the larger, more strategic customers. However, you know, we are in a competitive slog with other folks that are going in there just pitching price, trying to take that business.

Okay. And the strength in transactions obviously drove a pretty good EBITDA number in that you want to be cautious and try to figure out how sustainable that is. But assuming it proves to be sustainable, what are the implications for your own sort of strategic spending, strategic hiring, whether the product side, go-to-market side? So if your profitability looks sustainably above prior expectations, where would you look? Would you look to keep it all on the bottom line or maybe alter some of your plans and reinvest harder in some areas that might drive better growth?

I don't think, I don't know that I have a complete accurate answer there. I think that, you know, our intention would be to leave most of it on the bottom line. I think if there was an investment we have confidence in, you know, we would certainly look at that. However, you know, coming back to M&A, you know, whatever we do from an M&A perspective, we need to make sure that we can fund. And, you know, if we do a deal and the combined organization is throwing off more cash, you know, like I said, I think a majority of that stays at the bottom line. But, you know, if we do a different type of acquisition, we may need to use that cash to drive growth in that business or integrate the businesses. You know, there's Yeah, I don't think we've made a final decision because we haven't gotten the M&A checkbox checked yet. But certainly organically, we don't need to invest in other areas of the business to drive growth in the short term.

Great. Thanks for answering my questions. Thank you. Great. Thanks a lot.

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

Okay. Well, thank you. And thanks, everyone, for joining us on today's call. You know, we look forward to speaking to you in February to discuss our second quarter results. Have a great day.

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