Research Solutions Inc (RSSS) 2021 Q4 法說會逐字稿

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 30, 2021. 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, Carl, and 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,

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Chief 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 and financial conditions.

Also on today's call, management will reference certain non-GAAP financial measures, which we believe will 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 this call will be recorded and made available for replay via 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, everyone, for joining us 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 churn.

Over the past 2 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 2 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 3 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 2 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 Article Galaxy 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 several -- 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 2 firms providing analyst coverage at this time, and we'll 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 up-selling 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%.

The 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 $0.00 on a per-share basis compared to a loss of $1,000, also $0.00 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 30 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 $0.01 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 30, 2021, increased to $11 million versus $9.3 million on June 30, 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. 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, the 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 SaaS Rule of 40, where platform growth rate plus EBITDA margin is greater than 40. We expect to focus our efforts on delivering 2 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 road map, 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 $3 million to $4 million in acquired ARR each year for the next 3 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 road map. 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 Article 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+ 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+ covers about 1/3 of the total world's STM content. We continue to actively engage publishers to add additional publishers to the Article Galaxy+ 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 5 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?

(Operator Instructions) The first question comes from Richard Baldry from ROTH Capital.

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 is 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?

Yes. Yes, good question. Yes, we've created a list of 200-plus targets. We have a resource whose only role it is to reach out contactless 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 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 break of conversations stop when we get to the valuation question because they may read an article about somebody that's worth 14x 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 looked at the last 2 years, you'd spend about $2.5 million in fiscal '20 and a little over $2 million in fiscal '21. Do you -- are you thinking of getting back to that fiscal '20 level or in '22? Or do you think it goes above that? With conditions normalize, 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 maybe sales and marketing would be and what you think it will be as you look out after the investments are made in fiscal 22?

Yes. And by the way, I forgot to answer the second part of your acquisition question, which is where is the priorities? 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 2 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 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 5 and 7 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 is also responsible for upsells and churn. And those 2 teams are backed by a prospecting team and a marketing team.

Most of our investments, as we think about the short term, which is FY '22, 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. It'll be about the same as a sales qualified lead. And today, it's very lopsided towards sales qualified lead.

I will tell you, we're not making -- we're not adding 10 people there, but we are adding a few people there. I would also remind you that we added 2 people in FY '21, 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 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 last one for me. 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 an 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?

Yes. For me, it's ROI and time to market. 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 and our 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. Congrats on good year.

(Operator Instructions) The next question comes from Allen Klee from Maxim Group.

Yes. I know you do rigorous analysis of opportunities and a 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, I think we -- 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 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 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 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. Its TAM is also -- I would say, its 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 (inaudible) say it's similar in size to the corporate segment that we pursue today.

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 your -- what the issues are and what you're looking to accomplish?

Yes, I think there's 2 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 silo is this 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 that 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 2 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 the 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 of the 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.

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 bit about that process and how you feel about that?

Yes. I think one of the -- 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.

Okay. My last question is just -- it's like longer term, but thinking. So you have a 3-year goal of getting your recurring revenue to $20 million. And I think you said you'd like to acquire $3 million to $4 million a year on that. How do -- do you think -- 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 2 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. I'm not -- maybe I didn't understand the question, but that's -- the organic growth strategy is as simple as more salespeople execute on the product strategy.

(Operator Instructions) The next question comes from Adam Wilk from Greystone Capital.

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 -- is the $3 million to $4 million per year ARR growth over the next 3 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?

Yes. I think in terms of numbers, 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 $3 million or a little bit more than $3 million a year in ARR to get to $20 million. So I think it's closer to $3 million than it is to $4 million, 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 1 or 2 of those. There's not very many of those. So when we think about driving additional ARR, 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 500 plus, almost 600 customers.

Same on the other side. On the manage 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 manage 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 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, manage tools and then ultimately, creation tools that are things you can turn on to add value to the platform and raise ARR.

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.

Thank you.