Research Solutions Inc (RSSS) 2018 Q2 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 second quarter ended December 31, 2017.

Earlier today, the company issued a press release discussing these results, and a copy of the release is available for viewing and can be downloaded from the Investor Relations Section of the company's website. Joining us today are Research Solutions' President and CEO, Peter Derycz; and the company's CFO, Alan Urban. Following their remarks, we will open the call for your questions.

Then before we conclude today's call, I will provide the necessary cautions regarding any forward-looking statements made by management. I will also provide information regarding the company's use of non-GAAP financial information.

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

I'll now turn the call over to Peter Derycz, Research Solutions' President and CEO. Please go ahead.

Thank you, operator, and good afternoon, everyone.

I'll open the call with a few brief comments about our business, and then pass the call to Alan to speak about our financial results. Finally, I will return to address other details and our outlook.

Our second quarter showed continued robust revenue growth in our SaaS-based Platforms offering, growing 89% year-over-year and helping support a strong quarter in our Transactions business. In fact, our Transactions revenue grew by 9% in our second quarter with 150 basis points of gross margin expansion and 12% growth in total Transactions customers. The combination of this healthy customer growth and the proactive measures we put in place last year to improve gross margins continue to have their intended effect.

Version 2.0 of our Article Galaxy Platform went live in December and the early feedback on user experience has been quite positive. We look forward to completing the migration by March and implementing other major framework additions like self-registration in the next several months.

I will have more to say about Platforms and forthcoming upgrades, but first, I'd like to pass the call to Alan who will walk through our fiscal Q2 results in detail.

Alan?

Thank you, Peter, and good afternoon, everyone.

Jumping right into the results. Our Platform subscription revenue increased 89% to 413,000, which was driven by a 92% increase in total Platform deployments to 184. This translates into 23 net incremental deployments in Q2. The quarter ended with annual recurring Platform revenue up 89% on a year-over-year basis to $1.7 million and up 7% sequentially. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms.

Transaction revenue was up 9% to $6.4 million compared to the same year-ago quarter. This was driven by a 12% growth in customer count to 1,044. In addition, the number of corporate customers was up 8% to 816, and academic customers were up 25% to 228. Together, this drove a 6% increase in transaction count to approximately 205,000. Together, we saw a consolidated revenue growth of 12% to $6.8 million versus $6.1 million in the same year-ago quarter.

Moving on to gross margins. Our Platform business saw gross margins decline by 110 basis points to 78.1%. This decline was driven by the addition of new data sources that further enhance our Platform. While the addition of new data sources increases our cost of revenue in the short term, we believe these investments are necessary to create a highly valued and differentiated offering for our customers. Our target Platform gross margin is in the high 70% to low 80% range.

As Peter mentioned, gross margin in our Transactions business was up 150 basis points to 22%. Our ongoing actions to improve margins, including price increases and cost reductions, are a key driver for the year-over-year improvement.

Consolidated gross margin increased 280 basis points to 25.4% compared to the same year-ago quarter due to the margin growth in our Transactions business and a revenue mix shift to a higher-margin Platform business.

Our total operating expenses were unchanged at $2.4 million compared to the same year-ago quarter and aligns with our strategy to optimize our sales resources, including the reallocation of expenses and more efficient ways of acquiring customers through content generation and digital and inbound marketing.

Net loss from continuing operations totaled $700,000 or negative $0.03 per share compared to a net loss of $1.1 million or negative $0.05 per share in the year-ago quarter.

Adjusted EBITDA totaled negative $300,000 compared to negative $700,000 in the year-ago quarter. As we have noted today and in prior quarterly results, we have grown our Platform business at a strong clip and believe significant opportunities remain.

Given our momentum and the large opportunities ahead of us, we have decided to be more opportunistic in future growth opportunities if we believe it can further accelerate customer adoption, even at the expense of being adjusted EBITDA breakeven in fiscal 2019. Now profitability will certainly remain a focus, but we believe it's prudent to have the flexibility to invest in opportunities that may arise as we look to further our Platform penetration.

Moving on to the balance sheet. Cash and equivalents at December 31, 2017, were $4.9 million versus $5.8 million at June 30, 2017.

There were no outstanding borrowings under our revolving line of credit. Our balance sheet continues to remain clean with cash and receivables comprising nearly all of our assets and accounts payable, accrued expenses and deferred revenue representing nearly all of our liabilities.

This completes our financial summary. I'll now turn the call back to Peter. Peter?

Thanks, Alan.

I'd like to spend more time on our Platforms business. As mentioned, Version 2.0 went live in December. Some of the features of the launch include our customers getting an in-depth view of every one of our gadgets, which will help improve the speed of adoption and rollout to inter-company workgroups. It also features more administrator controls, tabbed gadget dashboards, instant article ordering, enhanced literature search tool and full-screen gadgets, all deployed on a new and more scalable computing and data storage backbone. The first wave of customer migrations have gone smoothly, and the feedback has been positive. We have 2 more waves of migration planned that will be completed by the end of March.

Once complete, this will set the stage for 2 additional framework improvements. We are calling them Version 2.1 and 2.2, coming in the spring and summer months. Next quarter, we will launch 2.1, which features powerful reference management tools for researchers. These tools will allow users to compile the geographies and list of scientific studies that a user or a group of users may be interested in, which fosters a greater collaboration amongst workgroups and colleagues. This tool, combined with other gadgets, will also help researchers accelerate the publishing of their research.

Additionally, it will have super easy import and export features to improve the connectivity between Article Galaxy and external databases or tools researchers use in their daily workflows. This unique collaboration tool will be built into our system day 1 and is yet another unique differentiator of our cloud-based Platform.

Version 2.2 will feature our self-registration capabilities and will go live in early summer. As previously discussed, the power of self-registration will allow more efficient lead generation, which we believe will drive even more deployments and transactions.

Versions 2.1 and 2.2 are major framework enhancements. Within this powerful framework, we are delivering a constant stream of innovation with weekly launches of new smart Platform apps we call gadgets.

Our gadget factory is in full swing and is delivering new innovation daily. Our gadget-oriented systems architecture allows us to be super agile in response to customer requests for new functionality. With Article Galaxy 2.0, we are entering an entirely new era of being able to help our customers achieve new levels of research efficiency.

Now returning to self-registration and Version 2.2, with this capability, we are looking to further improve our sales and marketing function. This will include the reorganization of our departments around focused pods. Each pod will have a discrete purpose or goal and we will measure their productivity and effectiveness based upon the return on each activity. We believe the segmentation is the best way to measure our efficiency and supports prior comments we've made about optimizing our sales and marketing resources to yield the greatest results.

Looking to the remainder of our year, we began calendar 2018 with a particularly strong January in our Platforms business and look forward to building upon this momentum as the year unfolds. We expect this will be driven, not only by Version 2.1 and 2.2 framework additions, but also via the powerful weekly improvements produced by our gadget factory. And a sales and marketing department, we are refining to drive optimum efficiency and investment returns.

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

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

So I've got a question, do you think your migration to the new product kind of makes customers wait until you're releasing new versions before they sign up?

No, not at all. Not at all. I don't think it impacts that at all.

Okay. And then maybe you guys can elaborate on your -- you talked about some potential investments that you may see -- you may invest in before returning to breakeven. So can you maybe elaborate on the types of investments you're thinking about?

Yes, what we're doing is -- as you know, with Version 2.2, we're launching the ability for users to come sign up all on their own, which is a big contrast to what we have going on today. Right now, we strictly do enterprise sales, which means we have a process where a customer that's interested now has to talk to a sales rep, has to get a contract written up, has to get sort of implemented on the system, and then go live with their users. So that's sort of a labor-intensive process. And we're looking to streamline that with Version 2.2, where any individual or workgroup can come on, sign up on their own, put in a credit card, agree to terms online and self-configure.

And so with that arises the opportunity to basically generate new demand for our products through marketing. And so we're really looking at new marketing approaches to adapt ourselves to better create an inflow of new customers through these self-registration capabilities.

That's what we talk about -- that's what we mean when really talking about being open to new ideas or new investments. It's really sort of in the marketing front as we roll out Version 2.2, learning what works, what doesn't work. And maybe if we find something that really works, yes, we'd probably invest in it in a little bit more of an accelerated fashion.

Okay. So I guess, just to double check what I'm hearing is, you expect to get higher margins from the Version 2.2 because there's less sales associated with it, but you expect to take those savings and reinvest them into other marketing activities. Is that what I'm hearing right?

Yes, correct. I think with the advent of digital marketing and social marketing, we have a real ability to make metrics-driven investments in how to market and sell. I guess, the old way of marketing, you ran ads and you committed to run full-page ads in a particular journal or magazine for a few months and then saw what happened. In today's digital and social marketing environment, you have such an ability to do testing. And I think when we find -- if we find something that we test that works, we would be foolish not to make additional investments and pursuing new avenues that are working.

Fair enough. And so where do you think we would see those investments going forward? Would that just increase like the $2.4 million run rate that you guys have had the last couple of quarters? Or is that more on the gross margin side?

Yes, just the additional sales and marketing expense.

Okay. And are we talking just high 6 figures, low 7 figures? What do you think those expenses would be?

We don't know. All we know is that they'll -- if we make those type of additional investments that they will be sort of numbers driven and results driven.

Okay. And then -- sorry, I keep asking. But you've mentioned you had a strong January, and if you could maybe parse that out with why you had it and where the strength came from?

Yes. I think -- well, obviously, January comes after December. And I think December, you have some interruptions because of the holidays and so on. So I think maybe if there was any contract slowness in December, probably January is a bit of a catch-up month. Yes, things were looking really good in January in terms of signed contracts that had effective dates of January, which is when we start recognizing the revenue. And then that's what's happening. And then the pipeline -- the sales pipeline in our CRM system looks great, and then contract requests from sales reps look strong as well. So going into February, we're feeling pretty good.

And is that kind of the same breakdown between corporate and academic that you've had in the past?

Yes. I'd say, most of the -- on the Platforms sales, specifically, it's really corporate. We have a lot of academic editions, but I think those fall mostly on the transaction side of the business.

Okay. And then, I think you've mentioned price increases on the transaction side, is that -- has that been successful? Any pushback? Any loss of demand? Or has that gone through pretty smoothly?

Yes, I would say we were done with it. I think we started the initial parts of that, and we didn't want to do sort of like across-the-board price increases all at once. So we're looking at when contracts renew. And so let's say, go 1/12 of the customer base at a time, we break it out over a year.

So yes, so far, so good. I think we're the best at what we do in terms of the Transaction business. So there's no reason not to be able to pay more for more value. We do have the best Transaction business out there, and then that's increasingly supported by what you can do on the Platform side. So now that the Platforms is getting more powerful too, it just makes more sense to pay for value and for us to figure out how to get a fair exchange.

(Operator Instructions) The next question comes from Scott Billeadeau of Walrus Partners.

Just a couple things. One, can you talk a little bit about ASP, especially as you go to the Platform business -- and I don't know if it's seat-based or -- and maybe talk a little bit about as you go into the self-sign-up, my understanding is you kind of do Platforms for large organizations. Would these just be kind of mom-and-pop shops? Or maybe fill me in on the difference there. And would it just be kind of a per-seat subscription that they would use on a credit card, kind of bang them monthly until they say no? Or maybe give us a little heads-up on what you're thinking there.

Yes. Well, right now, our average ASPs are just under $10,000. And we tend to charge it all at once as soon as the customer signs a contract and we invoice it. The going out to, let's say, smaller medium-sized businesses, it's something that's been happening already. So that's already factored into the Platform price on average. We are getting a lot of contracts from a lot of organizations whose names we haven't heard of before. Of course, we love the big names and the big scientific companies out there as customers, and many large scientific customers are staying with us and we love them. And that's the big part of our customer base. But as we've been building out the platform, we haven't seen a lot more activity from small and medium-sized enterprise, which is one of the reasons we've been driven to offer self-registration as well.

So I think what you're going to see from us is that the average sales price will fluctuate up and down a little bit, but you will probably have to add new metrics because when we come up with self-registration for individuals, professionals and workgroups, we will be doing it on a fee -- not a seat basis, but I would say a user basis. And so we're probably going to add a few new metrics to what we're reporting on in terms of number of users and so on as well. And so there will be the ASP that you're seeing reported on now, but there'll be some new additional metrics that we'll be adding on to give more clarity on who's signing up as well as what they're paying.

Yes. And for end results, certainly, it's ASP. They want to get on so that they can do transactions, I mean, certainly, that is -- is that the game plan? And so it's a matter of you got to balance what the entry fee is to get onto the Platform versus Transaction once they're there. What's your thoughts there?

Well, there's a lot of things going on around transactions. So yes, I think the ability to just, let's say, pull out a credit card to buy one study or one article, that's great and that's a transaction. But the reality of the matter is workgroups and organizations have a whole lot of workflow issues around paying these transactions. And so creating lists of studies are important in managing, sharing, collaborating. And so what we're doing in the Platform is saying, "Okay, we understand that people need to buy a transaction to be able to get caught up on a subject or read about some research, but what else are they doing with their day? What else are they doing with that study?" And so we're offering tools in the Platform that will help people get more efficient with other parts of their day.

So in terms of Platform development, what we're looking at is saying, "Okay, well, we know people -- we know all scientists around the world, all researchers need the studies, and that's part of the reason of the success of the platform, but we also know that they have other things going on with their day. And we're looking at those other things going on with their day, whether they involve studies or ancillary activities and building out the Platform to sort of be there for a larger part of their day.

So some of that's just more -- create the stickiness and incremental transactions as opposed to, I guess, if there's a huge value-add piece, a module that you add -- you can add for that. What is -- is there a strategy for -- hey, if we introduce this to the Platform, this is this something we can get an incremental $100 a month for or something like that? Or is it mainly to drive the stickiness of the platform you have?

I think it's both. I think we've seen that as long as we're delivering more value to customers that they're willing to pay more. So we're always looking to deliver innovation into the platform that will help us provide more value and, then in return, be compensated for that. So we're definitely that. And then stickiness is another big thing for us. With all the new tools and end-user-driven gadgets, we will see how end users are putting more and more of their own data onto our platform. And once you have data and collaboration going on in the Platform, we'll see a lot more stickiness than we're seeing already, which -- we already have a negative churn rate. So it's sticky already, but we're really focused on making it more sticky, which means in reality making it more useful to end users around the world.

Has there been -- I apologize. I have one more question. As you're looking for 2.1, 2.2, any big -- is there a big thing, hey, we need this in the platform? Everyone's been beating this on us for a certain thing. Any -- are there a couple of things that have just kind of come out from the user base, and hey, we got to solve these 2 things?

Yes. One of them is the reference management tool that we're coming out with 2.1. That is sort of a big development for us. And we know that all of our customers and users, they use a bunch of different reference management tools and they're looking to consolidate the platforms that they're on. That's a big one. That's a very customer-driven development for us, so I'd say, that's one such example.

And then I don't think there are any other big -- let's say big stones out there, but what we're seeing is that within the scientific research community, there are a lot of niches and a lot of niche workflows. And that's why we sort of gadgetized our whole environment is we wanted to be able to deliver innovation to molecular biologists and geneticists and so on, innovation that means something to them, and we do that via gadgets so that a molecular biologist doesn't have to have the gadget on the screen that the geneticist has, and vice versa.

There are no more questions at this time. This concludes the question-and-answer session.

Before we conclude today's call, I would like to provide Research Solutions' safe harbor statement that includes important cautions regarding forward-looking statements made during today's call as well as statements regarding the company's use of non-GAAP financial information.

Statements made by management during today's call contain forward-looking statements that include information relating to future events and future financial and operating performance. Examples of such forward-looking statements in this presentation include, but are not limited to, statements regarding the expected continued improvement and marketing -- market acceptance of the company's products and services, and the expected continued growth in transaction and platform deployments, that the company will continue to stay a very lean and efficient organization, and that the company faces few barriers in terms of achieving greater global expansion and revenue growth.

Such forward-looking statements should not be interpreted as a guarantee of future performance or results and will not necessarily be accurate indications of the times at or by which the performance or those results will be achieved. The forward-looking statements were based on information available at this time.

They are made, and our management's good faith belief, that as at that time with respect to the future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed and/or suggested by the forward-looking statements.

Important factors that could cause differences include, but are not limited to, changes in economic conditions, general competitive factors, acceptance of the company's products in the market, the company's success in obtaining new customers and new platform deployments, the company's success in technology and product development, the company's ability to execute its business model and strategic plans, the company's success in integrating acquired entities and assets, and all the risks and related information described from time to time in the company's filings with the SEC, that is the Securities and Exchange Commission, including the financial statements and related information contained in the company's Annual Report on Form 10-K and the interim quarterly report on Form 10-Q.

The company undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. The company also assumes no obligation to update the cautionary information provided in the presentation.

Today's presentation also included financial measures defined as non-GAAP financial measure by the SEC. The presentation of this financial information is not intended to be considered in isolation or as substitute for the financial information prepared or presented in accordance with the generally accepted accounting principles accepted in the U.S., otherwise referred to as GAAP.

Please refer to more detailed discussion about the company's use of non-GAAP measures and their reconciliation to the nearest GAAP measures in today's earnings press release.

Finally, I would like to remind everyone that a recording of today's call will be available for replay after 8:00 p.m. Eastern today and through February 28, 2018. Please refer to today's press release for dial-in instructions.

Thank you for joining us for the presentation. You may now disconnect.