Research Solutions Inc (RSSS) 2020 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, 2020. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Steven Hooser, investor relations. Please go ahead, sir.

Thank you, and good afternoon, everyone. Thank you for joining us today for Research Solutions' Fourth Quarter and Year-end Fiscal 2020 Earnings Call. On the call with me today are Peter Derycz, 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 fourth quarter and full year fiscal 2020. The release is available on the company's website at researchsolutions.com.

Before Peter and Alan begin their prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation 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 more detailed discussions 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, including 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 the link on the company's website.

I would now like to turn the call over to Peter Derycz, Research Solutions' President and CEO. Peter?

Thank you, Steven, and thanks to everyone joining us for our fourth quarter and fiscal 2020 results. We hope all of you continue to stay safe as the COVID-19 pandemic continues.

Fiscal 2020 represented another strong year of progress for our company. We grew revenue, entered into significant partnerships, enhanced our product offerings, uplisted to the NASDAQ and exited the year in a much stronger financial position. We remain an efficient resource for scientific, technical and medical research information and tools as our Article Galaxy platform helps organizations save time and money as a system of record and a one-stop shop for all of our customers' needs.

Our Platform segment led us to another strong year of revenue growth. We added 100 net deployments over the course of the year, including 27 in the fourth quarter. In fact, over the past 2 years, we have more than doubled revenue and nearly doubled the number of deployments of our Platforms business. The increase in platform deployments also led to increases within our Transaction business in terms of revenue, total customers and transaction count.

During the past year, we signed a number of partnerships to broaden our available offerings. Through the integration of Evidence Partners, we combined the features of Article Galaxy, our award-winning document delivery service, with DistillerSR, the industry leader in literature review software. We also launched Article Galaxy+, which gives our small and medium Platform customers access to 35% of the world's scientific literature at no additional transaction costs through our partnership with Springer Nature. Additionally, we enhanced the features and capabilities of our Platform segment during fiscal 2020. In April, Article Galaxy was added to the Microsoft Azure Marketplace, providing customers a faster and simpler way to connect their Internets to Article Galaxy. And in July, we fully integrated Article Galaxy with DistillerSR, providing users one-click access to articles at the lowest cost.

Thanks to the continued hard work and success of our sales efforts and ability to strengthen our balance sheet, we successfully uplisted to the NASDAQ Capital Market on March 23. This move increases our market visibility, broadens the pool of potential institutional investors and provides greater liquidity, all of which should benefit our shareholders long term.

Finally, we are fortunate that our operations have been largely unaffected by the effects of COVID-19 since we have been running under a virtual operating model for quite a while. This allowed us to focus on executing our key initiatives rather than spending time modifying and adapting our operations. In fact, our business has seen a net benefit from COVID as many within the life sciences field use our services as part of their research and have found a solid partner and SaaS product in Article Galaxy to help them improve their research efficiency. We continue to provide our COVID-19 Research Viewer Gadget, which provides copyright-free materials to users when available. We are proud to assist those working tirelessly to find treatments and therapies for this virus. This continues to further motivate our team every day.

I will give greater detail on the various initiatives we are implementing shortly. But first, I'd like to pass over to Alan to walk through our fiscal fourth quarter and 2020 year-end financial results in detail. Alan?

Thank you, Peter, and good afternoon, everyone.

For the fourth quarter of fiscal year 2020, total revenue was $7.9 million, a 5.5% increase from the fourth quarter of fiscal 2019.

Our Platform subscription revenue increased 33% to approximately $1.1 million, primarily driven by a net increase in platform deployments from last year, including 27 in the fourth quarter. Quarter ended with $4.4 million in annual recurring revenue, up 7% sequentially and 38% year-over-year, 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 terms.

Our Transaction revenue increased 2% to $6.8 million compared to $6.7 million in the prior year quarter. Transaction count on a year-over-year basis increased from approximately 215,000 to 231,000, and our total active customers of 1,087 was essentially even to the 1,090 active customers in the fourth quarter of fiscal 2019.

Turning to gross margin. Our total gross margin was 31.8%, a 200 basis point improvement over the fourth quarter of 2019. The increase was due to the ongoing revenue mix shift towards our higher-margin Platform business. The Platform business recorded gross margin in the quarter of 85.6%, a 330 basis point increase compared to the prior year quarter. The increase is primarily attributable to lower third-party data costs as a result of the expanding scale within the business. Gross margin in our Transactions business decreased 10 basis points to 23.4% and the decrease was primarily attributable to higher copyright costs.

Total operating expenses in the quarter were $2.5 million compared to $2.4 million in the prior year quarter due primarily to slightly higher general and administrative and sales and marketing expenses. Net loss improved by $71,000 over the previous year quarter to $1,000 or 0 on a per share basis. Adjusted EBITDA improved to $146,000 compared to negative $41,000 in the year ago quarter.

For the full year fiscal 2020, total revenue increased 7.9% to $31.1 million versus $28.8 million in fiscal 2019.

Our Platform subscription revenue increased 38% year-over-year to $3.9 million. ARR was $4.4 million compared to $3.2 million at the end of fiscal 2019. Total platform deployments as of June 30 were 401, a net increase of 100 deployments or 33% from a year ago. Our full year Transaction revenue was $27.2 million, a 4.6% increase from fiscal 2019. Transaction count increased from 831,000 to approximately 888,000, and total active customer count grew from 1,081 to 1,119.

On to gross margin. Total gross margin for fiscal 2020 was 31% compared to 29% in the previous fiscal year. Gross margin for the Platform segment of our business was 83.4%, an increase of 150 basis points compared to the prior year. The margin increase is primarily due to decreases in third-party data costs. The leverage provided by the scaling of our Platform business has allowed us to consistently meet or exceed the high end of our target gross margin range of the high 70% to low 80%. Gross margin in our Transaction business improved 30 basis points from fiscal 2019 to 23.5%. Lower copyright and personnel costs were the primary factors behind the improvement.

Total operating expenses in fiscal 2020 were $10.5 million compared to $9.6 million in the prior fiscal year. The increase was primarily due to greater sales and marketing and general and administrative costs, including fees associated with our recent NASDAQ uplisting.

An operating loss of $852,000 in fiscal 2020 was a $403,000 improvement compared to fiscal 2019. Net loss for fiscal 2020, which includes a $117,000 gain on the sale of a discontinued operation, was $662,000 or a loss of $0.03 per share compared to a loss of $960,000 or $0.05 per share in fiscal 2019. Adjusted EBITDA was a positive $143,000 in fiscal 2020 compared to negative $364,000 in the previous fiscal year.

Turning to our balance sheet. Cash and cash equivalents as of June 30, 2020, increased to $9.3 million versus $5.4 million on June 30, 2019. The increase was primarily attributable to cash generated from our operations and proceeds from the exercise of $1.5 million warrants during the year. There were no outstanding borrowings under our $2.5 million revolving line of credit, and we have no long-term debt or liabilities.

As our Platforms business continues to become a larger part of our revenue mix, we expect increasing total gross margin and profit. And as our operating expenses continue to hold steady, this will result in positive EBITDA, net income and cash flow, further strengthening our financial position. However, while we remain disciplined, we are also opportunistic in our use of capital and stand ready to accelerate growth by investing in sales, marketing and product development if it can be done efficiently and with results. We have been able to strengthen our balance sheet during the COVID-19 pandemic, and we remain vigilant and able to react quickly to changes in this unprecedented environment.

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

Thanks, Alan.

Heading into fiscal 2021, our main objective is to continue to build on the momentum experienced last year. We are in a much better position both financially and strategically than we were a year ago. The reorganization of our sales and marketing teams 2 years ago has resulted in meaningful gains, as Alan and I previously stated. Expanding our market focus to small and medium-sized businesses provides equal knowledge access to companies of all size, including those not large enough to have a centralized corporate library, while keeping the same rigorous requirements of the major pharma and R&D companies we service.

Selling our Article Galaxy platform remains a top priority and offers multiple benefits. First, the Platform SaaS model carries a much higher margin than the Transaction side of our business. Second, as platform users purchase individual articles, we capture transaction revenue similar to non-platform users. Third, as we create additional features, functionality and services, we are able to increase our platform price upon contract renewal to reflect the new benefits the platform provides to our customers. In fact, over the past year, the average sales price for our platform increased 8% to almost $11,000 a year on average. This, plus the high level of retention due to the stickiness of our platform, has essentially resulted in significant net negative churn rate for this segment.

Also critical to our ongoing success is our product development efforts in recent years. We recently hired Michiel van der Heijden as our Chief Product Officer. Michiel spent the previous 9 years at Springer Nature, focused on technology and development, and prior to that was a head of product management at Elsevier. Michiel and his group will focus on customer-centric product innovation and management to further strengthen our product development capabilities.

One of our key shareholders recently shared an article with me from MIT Sloan Management Review that stated product-led growth is the future of SaaS growth. I could not agree more. And while we've been pretty good at building a SaaS platform, we look forward to getting even better with our expanded focus on strategic product management. We also recently launched a beta version of our Article Galaxy Scholar platform into our production environment. A select group of universities are now being implemented on the beta platform, and we're looking forward to their feedback as we plan a broader launch. Over the last 2 years, quite a few universities have joined the roster of our Transaction customers. As a result of the COVID-19 pandemic, ensuing budget cuts and other factors, the way universities access knowledge is changing rapidly. Our intent is to ensure Article Galaxy Scholar is available to that market, whose needs for tools, efficiency and cost savings with regards to knowledge access, management and creation are evolving rapidly.

Our organization remains committed to providing the most up-to-date and helpful resources. And we will consistently evaluate ways in which we can make the research process as relevant and seamless as possible. We continue to be optimistic about the demand trends moving forward. With the additional product improvements, partnership opportunities on tap and better lead generation, combined with our strong balance sheet, we are well positioned for continued progress in fiscal 2021 and beyond.

With that, I'd now like to turn the call back over to the operator for Q&A. Operator?

(Operator Instructions) The first question comes from Peter Rabover from Artko Capital.

Just wanted to touch on what Alan had said that you guys could choose to increase spend in marketing if it -- if you -- if it drives revenue growth. And I guess I ask this question every few quarters but just curious how -- I guess, how direct do you feel that your spend is relative to results? Do you have a better idea, better control of it, that if you hire one more person, this will increase an X amount of deployments, and I guess any color on that will be appreciated.

Yes. Thanks, Peter. Yes, we definitely are optimistic to that. We do feel that the trends inside our sales and marketing operations are getting to a point where we're starting to see some improvements in customer acquisition costs and so on. But there are some unknowns as well. The -- we have some new partnerships coming onboard as well. We're not certain exactly how that's going to pan out in terms of getting a few quarters of numbers under our belt and seeing what those look like. But definitely, we are feeling that, compared to last year at this time, where we are today, that we have a lot more certainty. Our salespeople's pipelines are filling up better. And so -- and we feel that we -- as we reduce the customer acquisition costs, the spend on that can become more effectively deployed. So we're definitely on the lookout. We don't have a precise number, exactly what you're asking for, for you, but we do feel that all the indicators and the KPIs and the benchmarks that we're following are improving, which increases the likelihood that we'll be able to spend more effectively in that category.

Okay. May be a little tougher question, but you've obviously had some good success with wins and deployments. But I'm more curious on the ones that you didn't win where it was explicit that, "We're not interested." I'm just curious for the reasons why you don't win some accounts. So is it price? Is it competition, functionality? So things of that nature.

Yes, I think the sort of the biggest, let's say, objection is unavailable budget at that point in time when we're talking to that prospect. So we find prospects throughout the year and contact them regardless of where they are in their budget cycle. So I think the biggest objection at this point that I've heard is really that we're just not budgeted for that at this point in time. I think, by the time we get a call or a demo going, most of the time, what we're offering is relevant. So I don't think it was, let's say, a big product pushback or even price perspective. And as you can see, our average sales price is actually increasing. So it's really a matter of did we hit them at the right time in terms of budget and where they are in their budget year. Can they liberate some budget to actually make the purchase? And if not, then we've got them on the radar, on our radar, and we'll get back to them.

Okay. And then, I mean, like we're a week away from finishing this quarter. Any color you want to give us for how this quarter is going?

Yes. I can say we don't put out specific guidance on that, but I can say that the trends that we've seen, the positive trends are continuing. And so yes, we're eager to put out next quarter's numbers. And we think you'll find that the trends are continuing in positive direction.

The next question comes from Scott Weis from Semco Capital.

Guys, can you -- related to the last question, can you identify competitors that you do go up against when you approach a potential customer? And then secondly, do you provide annual guidance? I would love to hear some thoughts as to the mix shift towards the Platform business and what percentage of revenues you expect it to be in 1 year and 2 years and then total revenues for fiscal '21 and '22.

Yes, at this point, we're not putting out that kind of guidance. So we're always talking about it, but at this point, we're not doing it. So I wouldn't be able to provide any to you on this call. In terms of competition and what we're seeing out there, we always felt that our top competition is sort of do-it-yourself. But we are starting to disclose in our 10-K more company names and things like that, that we're running into or what are these -- what are tools that people are using when they're trying to piece together a solution. And some of those tools are maybe other pieces of software or companies and some of that is staffing and administrative assistance or internally built software as well. So aside from, let's say, what would be in the 10-K, just do-it-yourself approach, to writing your own code or setting up your own people to try to do things manually, things that we can all automate and make a lot more scalable than companies can themselves. But yes, I'd call it the do-it-yourself model...

Great. And then one more question, if I may. You cited a COVID benefit. Can you put some numbers around that? And can you talk about how you expect that -- how long you expect that to continue for?

Yes, we cannot put numbers around it, but what we've seen is that there's been significant disruption in many customers and prospect organizations when COVID appeared and people had to move out of the office. And so what we're finding is that as people moving out of the office that -- let's say the do-it-yourselfers or the staff-based processes get disrupted. And as a result, cloud solutions like ours become more useful. And so I think if you were teetering on the edge of doing it yourself or just using some cloud solutions, I think a lot of companies are now realizing the benefit of using scalable cloud-based solutions. So we're definitely seeing that.

We -- before -- but when COVID first broke out, we were a little concerned, right, because we could no longer meet customers or prospects in person. We couldn't go to these conferences we were going to. All -- let's say all the face-to-face sales and marketing attractions ceased. And so that caused a little concern. And we said, okay, well, if we can't meet them and greet them, how are we going to sell to them? But the reality is that people were fine adapting to cloud-based communications and then found -- and we found that our platform may be actually more relevant than it was before the pandemic. And so that's sort of what we're talking about in terms of the benefit that customers are perceiving.

(Operator Instructions) This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Peter Derycz for any closing remarks.

Yes. Well, thanks, everybody, for attending. Our team, entire team, and operations are super motivated. We are in a much better spot today than we were just 12 months ago. So that's pretty exciting for us. And we're going to continue to work hard and carry forward our initiatives.

Thank you so much. We'll talk you soon on the next quarterly call.

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