Research Solutions Inc (RSSS) 2021 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Research Solutions, Inc. Third Fiscal 2021 Earnings Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Steven Hooser, Investor Relations, for opening remarks. Please go ahead.

Thank you, Ashley, and good afternoon, everyone. Thank you for joining us today for Research Solutions Third Quarter Fiscal 2021 Earnings Call. On the call today are Peter Derycz, Executive Chairman of the Board; Roy Olivier, Interim President and Chief Executive Officer; and Alan Urban, Chief Financial Officer.

After the market closed this afternoon, the company issued a press release announcing its results for the third quarter of fiscal 2021. The release is available on the company's website at researchsolutions.com.

Before we begin the 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 Reform Act of 1995. Actual results may differ materially from those projected 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 that was issued this afternoon.

Finally, I would like to remind everyone that this call will be recorded and made available for a replay via a link on the company's website.

I would now like to turn the call over to Peter Derycz. Peter?

Thank you, Steven, and hello, everyone. For those that missed our press release in late March, I have transitioned to the role of Executive Chairman of the Board, and Roy Olivier is serving as Interim President and CEO.

After founding the company in 2006 and successfully pivoting the company towards a SaaS-based model through our platform's offering, the company is now more growth-focused than ever. My shift to Executive Chairman allows me to continue to focus on the parts of the business that I have a passion for by allowing the CEO role to focus on the overall growth of the business. I've known Roy now for quite a while as he has served on our Board for 2 years and has a strong background operating and acquiring SaaS companies. So he's a perfect match for the next phase of our company's success. He's starting on a positive note as we just completed one of our best quarters, if not the best quarter in our history. Alan will go more into those details.

So really starting on a solid foundation, and I'm really looking forward to our shareholders meeting him and getting to know him. I'm sure you will find him to be a very positive expansion of our team. We will both be on the Q&A to answer any questions about our focus on growth or regarding the organizational improvement.

With that, I'd like to turn things over to Roy Olivier. Roy?

Thank you, Peter, and hello, everyone. First, I'd like to thank Peter for all he has done to get Research Solutions to the position it is in today. Having a front-row seat for the past 2 years on the Board, I've seen the company pivot from a Transaction business to a true SaaS platform business. The way I think about the business today is that we have a legacy Transaction business and a SaaS platform business. We are ultimately delivering a transaction via the platform to help accelerate the research process. We have made great process with that pivot. And a bit later on the call, I'll be reporting a bit more on how we think we can keep that momentum going in the future.

For those on the call I have not had a chance to speak to over the past 6 weeks, prior to joining the Board, I was President and CEO of ARI Network Services, a provider of SaaS tools and marketing services. During my tenure there, ARI completed 15 acquisitions and grew revenues from less than $15 million to over $100 million. About 1/2 of that growth was organic, the remaining coming from acquisitions. During that time, we created meaningful value and delivered a great return to our shareholders. I look forward to utilizing my past operational and business development experience to drive new avenues of growth as well as lead the M&A efforts for the company.

I will get into more details about the initial plans for our strategy in a moment. But first, I'd like to turn the call over to Alan Urban to discuss the company's third quarter results. Alan?

Thank you, Roy, and good afternoon, everyone. Third quarter total revenue was $8.3 million compared to $8 million in the third quarter of fiscal 2020. Our Platform subscription revenue increased 32% to $1.3 million, driven by a 37% increase in Platform deployments from last year, including a record 51 net new deployments in the third quarter and continued upselling. ARR grew by a record $534,000. We ended the quarter with $5.6 million in annual recurring revenue, up 11% sequentially and 34% year-over-year, reflecting our continued sales efforts, including the successful upsell of our renewals and low churn of our 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 was $7 million, relatively unchanged from the prior year quarter and improved year-over-year over the past 2 quarters. Total active customer count for the quarter was 1,108 versus 1,109 in the second quarter of fiscal 2021. An increase in the number of corporate customers was offset by a decrease in academic customers.

Now turning to gross margin. I have records to report here as well. Total gross margin dollars and percentage was the largest ever at $2.7 million and 32.4%, respectively, an 80 basis point improvement over the third quarter of 2020. The increase is due to the ongoing revenue mix shift towards our higher-margin Platforms business, which now generates 41% of our total gross margin dollars compared to 33% in the prior year quarter.

The Platform business recorded gross margin in the quarter of 82.6%, relatively unchanged from the prior year quarter and still well within our target gross margin range of the high 70% to low 80%. Gross margin in our Transaction business decreased 140 basis points to 22.8%. The decrease was due to a proportional increase in labor and copyright costs.

Total operating expenses for the quarter were $2.7 million, a slight increase of $102,000 from the prior year quarter. Higher product development costs were partially offset by lower sales and marketing costs.

Net income for the quarter was $50,000 or 0 on a diluted share basis, compared to net income of $12,000 or 0 on a diluted share basis in the prior year quarter. And we have another record. Adjusted EBITDA was the largest ever at $238,000, an increase of $93,000 over the year ago quarter.

Turning to our balance sheet. Cash and cash equivalents as of March 31, 2021, were $11.2 million compared to $10.2 million for the quarter ending December 31, 2020. There were no outstanding borrowings under our $2.5 million revolving line of credit, subject to availability, and we have no long-term debt or other liabilities.

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

Thanks, Alan. I'm excited about the results and the progress the team is making towards sustained improvements in the business. After becoming the Interim President and CEO, I laid out 5 objectives for my first 100 days as follows. First was to complete a strategic planning exercise focused on how to accelerate growth and increase shareholder value. That review includes addressing Transaction churn. As you know, Transaction revenue has been a drag on the overall growth rate of the business, and we're taking steps to address this. First, I've assigned an important -- I'm sorry, I've assigned this important business segment to one executive who now owns the operating plan intended to address revenue, gross margin and churn in our Transaction business.

Moving forward, we will continue to focus on the Platform growth, but we have an increased focus on the Transaction business with an eye toward proactively managing the churn drivers to improve the financial profile of that segment of our revenue. We're also working to accelerate growth in our current Platform business. This review includes confirming our total addressable market information and identifying customers by segment and vertical. We are looking to identify customers that meet our specific criteria by name. We will then use that information to review how we deploy sales and marketing assets to accelerate new sales in the future.

Related to that same TAM project, we will also be looking for new geographic markets, new products and product extensions that we think will add value for our customers and help accelerate our SaaS platform growth. The company has historically deployed resources based on historic success. Moving forward, we need to understand where the opportunity is related to new markets and new products and invest to drive additional growth there.

Also, historically, our Platform product is focused on knowledge delivery. In other words, delivering the right copyright article in a few seconds to our customer. Looking forward, we intend to continue to be a leader in knowledge delivery. Additionally, we will expand our knowledge management tools as well as dive further into our initial work in building knowledge creation tools on our platform. This will help our users spend more time using the platform, managing the articles they have acquired and will eventually create their own intellectual property or scholarly knowledge inside Article Galaxy. The first step in this process is the release of Article Galaxy 3.0 in calendar Q3 of this year. We have shown a prototype of Article Galaxy 3.0 to customers who participate in our development partner program and have received very positive feedback.

Over time, this upgrade will move us to a more classic SaaS pricing product approach around a good, better, best offering with additional upgrades available to be added at any time. We believe this new approach will help us provide more value to our customers and ultimately have a positive impact on sales and churn.

Also aligned with the TAM product and market research we're doing, we intend to align our M&A strategy with our overall objective to better serve our customers and accelerate growth. We have already developed a list of initial targets that may represent an opportunity to add new products, expand segments and verticals or do both. We are underway in terms of having conversations with targets. And while valuation expectations are a challenge, we are finding some interesting companies that we may be able to acquire that will expand our offerings and accelerate our growth.

I believe in a disciplined approach to acquisitions. Therefore, we'll be looking for companies that fit our strategy, are accretive to our growth targets and enhance our shareholder value. In today's market, multiple expectations are challenging. However, I believe we can still find targets that fit our profile at a value that is accretive to our valuation today.

The other objectives in the 100-day plan include reviewing all aspects of the business to ensure we are well positioned for both accelerating organic growth and integrating acquisitions. Updating our vision, mission, company values to ensure we can hire and retain the right team to lead us to the next level. And reviewing our investor relations plan with a focus on expanding our shareholder base and increasing awareness with key analysts. Finally, just learning the business at a more detailed level.

I will plan on reporting back on each of these points in more detail during our next call, but for now, I'd like to turn the call back over to the operator for Q&A. Operator?

(Operator Instructions) Our first question comes from Adam Wilk.

I wanted to just touch on a couple of things that you mentioned in the prepared remarks. Just maybe you can start with the M&A side of things. I'm just kind of interested in maybe hearing you expand a little bit more about sort of the discipline around anything you're looking at acquiring and kind of what segment that might take shape and kind of how you see maybe the size? And kind of any color you want to add might be helpful to start.

Yes. Just a little color on that. As you know, we focus today primarily on the corporate business and have the most success in the pharma segment. Within corporate, there is a number of other vertical markets. There are, of course, direct competitors to us, which are interesting acquisition targets. But there are other companies out there that create tools that they either sell into other markets, other verticals within that corporate segment. Or they create the same product we have just operate primarily in another vertical market. And I think to me, those are obvious kind of home-run balls if they're integrated properly.

But in addition to the corporate segment, there is an academic segment and a government segment. And those are also interesting to us to the extent that we may or may not be able to find somebody as an example that's successful with an offering in the academic segment that we think is cross-sellable into our corporate segment. And in some examples we've run across, our product is cross-sellable into their segment, where when you do the synergy analysis of what the companies might look like combined, there's a significant cross-sell opportunity in addition to cost or other synergy opportunities that we might take advantage of.

So there's -- out of the 100 targets we found, I'm certainly learning a lot about a business I didn't know a lot about. But there are certainly folks out there that are in academic. They're in government. They've got products that we think we can cross-sell. And when you look at it from a product perspective, there's a lot of companies out there that have tools that kind of fill out that discover and download, manage and create segment of what researchers do every day that would make our platform more valuable.

In other words, today, they may use us for download, they may use some other tool to manage the documents, or they may use some of their tool to create their own intellectual property. All of those are opportunities for us, in my view, to potentially acquire those companies.

Back to your comment, I'm a big believer in it being accretive to our value. So I typically don't like to pay multiples above what we're trading at, unless there is clear line-of-sight visibility to significant synergy opportunities, whether that's cost reduction or cross-sell opportunities. I also historically am pretty creative on paying for acquisitions. I'm not a big believer in dilution. So if you look at our past track record, we've done a lot of acquisitions with a combination of cash, bank debt, seller debt, earnout. And typically, equity is the last item on the table if there is any equity offered at all. So I don't know if that helps. Thanks for the question.

It does. That's helpful. All right. So with M&A talk, obviously, the Platform growth is chugging along and maybe less so on the transaction side. So this isn't -- it's more about the maybe cross-selling or upselling capabilities and maybe adding to the tool set as opposed to like throwing in the towel on organic growth or on the transaction side. Is that like the right way to look at that?

Absolutely. In fact, part of this TAM project that we're doing is to identify markets that we may not have deployed sales resources than today or may not have enough sales resources than today to drive more growth. Because if you think about the way we've talked about TAM, which is 28,000 potential SMBs that can acquire our platform, we only have 550 of them. So first question I asked as the new guy is instead of selling 50 a quarter, why can't we sell 200 a quarter? It seems like the opportunity is there. We just need marketing and sales resources to execute around that opportunity.

And part of the -- it's a complicated answer, but part of the answer is we don't know who these people are. We don't have literally a list of names. So first thing we're doing is boiling down which countries are the major opportunities based on where we've had success and specifically what companies are in those countries. And we've done a lot of work already on who the buyers are and who the main users are, and I think we can put together a plan to accelerate Platform sales while executing on M&A to raise ARPU of the Platform by adding new products and new product extensions.

Got it. That's helpful. Just one more from me. So I noticed that the net new deployments, looks like they skyrocketed this quarter. Yet, revenues are kind of in line with maybe previous quarters, unless I'm missing something. Does that come later down the road? Or are you experiencing maybe some pressure on pricing? Or how should I kind of be looking at that?

Well, I'll ask Alan and Peter to jump in on here as well. But I think we've seen a nice number of, obviously, net new deployments in the Platform. But the Transaction business kind of is overshadowing the tremendous growth that's going on in the Platform business. I will say we are being -- our SMB efforts are paying off. So we are selling a number of platforms into the smaller customers as opposed to the very, very large pharma customers. But Peter, do you want to add to that?

Yes. I'd say also, we had, like I said, a large growth in customer additions in the past quarter. From the revenue side, we don't recognize that revenue. We recognize 1/12 of that revenue every month. So the revenue recognition on that side will trail on the customer addition side.

Okay. Great. And I'm sorry, I know I said last one, but just one more quick one if I can. Just wondering, in line with this new management change -- or shift, I'll call it, management shift. How are you guys kind of thinking about maybe disclosing things like LTV-CAC ratios, churn, that kind of thing, just to give people a better picture of kind of the strength of the business and how you're trending forward?

Yes. This is Roy. That's actually a debate that we're having right now. I'm kind of reviewing what we currently publish, and we've had some very active internal conversations about what we may want to publish. So no decision on that yet, but we'll continue to look at that and try to provide you what you need to build out the models that I think everybody wants to build, understand the investment opportunity.

(Operator Instructions) Your next question comes from Scott Billeadeau.

Most of my question was answered in the previous one. But I guess maybe to follow up on characterizing the business development function and some of the potential M&A candidates. Maybe you can give us a little feel. Is it mainly those that have platforms? Or is there also content potential as well? And many of these are in there because they have content and they built a platform to help deliver their content. Any thoughts on that? And will that mix change over time?

Yes. That's a great question. My view as the new guy is that content in this business is primarily driven by the publishers, and there's not a tremendous number of them, and we already connect to virtually all of them. So most of the acquisition targets we're looking at are tools or expansions to our current platform. For example, today, you go in, you search for peanut allergy, and you're going to get a bunch of results, just like you do on Google. Is there AI or text mining tools that would help you narrow down that search to something that's a more manageable amount of results? Are there tools out there that will help you manage the actual article once you receive it? Highlight it, annotate it, make changes to it, and we keep the source for you and then we keep your changes. Are there tools out there to help you create your own research?

I think another example is there's a lot of regulations in countries about workflows that have to be in place. And we have typically not been a workflow company that supports those, although we deliver documentation that supports the research that's part of that workflow. So is there -- are there workflow -- regulatory-driven workflow tools out there that we want to add to our portfolio that are kind of a natural addition to the same users that are using our platform every day. Peter, you may have some additional comments.

Yes. I like to add to that. Part of my new role is really looking at the industry, looking at the ecosystem of players. And when it comes specifically to the question of content, I would add that there are other content categories that could be interesting to us. Things like patents, standards, gray literature and other areas where there's different categories of content that touch on and interact or could interact with the type of content we've been focusing on, which is that STM, scientific, technical and medical literature information. So I think that, that could be an interesting area, especially if we can find a way to interweave and create new not only new knowledge management -- new knowledge delivery opportunities but even new knowledge creation opportunities by helping interweave different content categories.

So that's something that I've been sort of actively looking at when looking at targets and core players in the ecosystem. So getting deeper into STM literature the way we are pretty deep in. So it's really when it comes to the content question, specifically, it's really, okay, are there other categories of content that could really interplay well with what we're doing.

No. Great. And then just a follow-up to that. As you're doing this analysis kind of for the tool. How much -- certainly, there's tool but certainly, the higher value things are going to be the biggest pinch points that you hear from your customers. That you don't have technology and that it's too expensive internally. So obviously, that's the lilly pad that's a little farther away you want to jump to. Is that -- are there though -- I mean certainly, a lot customers and their pinch points to be a high -- those are obviously going to be higher value type opportunities to the customer. Those probably should be top of the list, but they're also probably the most expensive ones. But maybe as that list is built, give us some insight as to how you rank those.

The way we think about it today is direct competitors or product extensions that we think will fit in. When it comes to size, our early analysis when we're looking at whatever active targets we're working on, on the list right now is how big are they. And how much is recurring revenue and what does our growth profile look like. And we end up passing on a lot of those because they're simply too big to acquire. So we're looking for, I wouldn't necessarily say emerging, but something that's already in a growth mode but is still relatively small that we feel like we can acquire. We got approached actually for a company recently that's doing $25 million of revenue. That's not acquirable for us at this stage. However, there's a lot of companies out there that are doing $2 million, $3 million in revenue that may be very interested in -- or we may be very interested in cross-selling their tool into our 1,000 customer base. And we may be very interested in that other way as well, cross-selling the other way. So there's a lot of smaller companies out there that I think are acquirable that are past the prototype stage. They actually have a product, they actually have customers, and they actually have recurring revenue.

There are no further questions. This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Roy Olivier for any closing remarks.

Well, thank you, operator, and thanks to all of you for your interest in Research Solutions and participating in our call. We will be participating in a Three Part Advisors' virtual conference in mid-June, June 16 specifically. And qualified investors to contact Three Part Advisors, if you'd like to set up for a one-on-one meeting. We look forward to speaking to you again in September for our fiscal fourth quarter and full year '21 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.