Research Solutions, Inc. (RSSS) Q3 2024 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to this Research Solutions, Inc. Conference Call. At this time, all participants are in a listen-only mode, and later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn today's program over to John Beisler with Investor Relations.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Research Solutions' third quarter fiscal 2024 earnings call. On the call today are Roy W. Olivier, President and Chief Executive Officer; and Bill Nurthen, Chief Financial Officer. After the market closed this afternoon, the Company issued a press release announcing its results for the third quarter of fiscal 2024. The release is available on the Company's website at researchsolutions.com. Before Roy and Bill begin their prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Research Solutions' recent filings with the SEC for a more detailed discussion of the risks that could impact the Company's future operating results and financial conditions. Also on today's call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. A reconciliation of those measures to GAAP measures is included in the earnings release issued earlier this afternoon. Finally, I would like to remind everyone this call will be recorded and made available for replay via a link on the Company's website. I would now like to turn the call over to Roy W. Olivier. Roy?

Roy, you may be on mute.

I'm on mute. You think I haven't done this before? Thank you, John, and thank you, Bill. As we've discussed on previous calls, it is our strategy to reimagine and improve the research workflow. Our recent acquisitions are a big part of that journey's success. After a few months of performance from Scite and Resolute, I remain excited and committed to the vision and how Scite and Resolute fit into that. We had strong quarterly results in terms of overall growth, adjusted EBITDA, and cash flow from operations. The results are starting to show the ability of the business to scale as we continue this journey. The quarter represents a run rate of more than $48 million in revenue, with $16 million in SaaS platform revenue and approximately $32 million in document delivery or transaction revenue. I'm excited about the strategic and product progress we are making and what it means for our future growth. That said, I'm very excited about the financial transformation the business will undertake as we continue this journey and how it will translate into shareholder value creation. There's lots of moving pieces in the numbers. So, I'd like to pass it over to Bill to walk through our fiscal third quarter 2024 financial results in detail, and then I'll be back to discuss the business's progress and quarterly accomplishments in more detail. Bill?

Thank you, Roy, and good afternoon, everyone. Before I begin, I'd like to remind everyone that our third quarter results now include a full quarter's contribution from both the acquisition of ResoluteAI, which closed on July 28 of last year, and the Scite acquisition, which closed on December 1, 2023. For fiscal year-to-date numbers, there are approximately eight months of ResoluteAI and four months of Scite factored into the numbers. Total revenue for the third quarter of fiscal 2024 was $12.1 million, a 17% increase from the third quarter of fiscal 2023. Our platform subscription revenue increased 76% to approximately $4 million. The growth was primarily driven by revenue contributed from the Scite acquisition, as well as a net increase of platform deployments from last year and the addition of platform revenue from the ResoluteAI acquisition. We ended the quarter with $16.6 million in annual recurring revenue, or ARR, up 82% year-over-year and about 6% sequentially. We added about $1 million of incremental ARR in the quarter, the vast majority of which was in the Scite B2C business. I wanted to take a few minutes to discuss the limited sequential increase we experienced in B2B ARR in the quarter. We did, in fact, grow both Scite B2B and Article Galaxy in the quarter. However, the vast majority of that growth was offset by churn in the ResoluteAI business. While this churn was material, it was not completely unexpected and was concentrated across three large customers, all of which had renewal dates in Q3. The downside of this is the effect that it had on ARR in the quarter. The upside is that we have now cycled through most of the ResoluteAI customers from a renewal perspective, and a good portion of the churn risk is behind us. This does not mean that we will not have future churn in ResoluteAI. However, we believe the worst is largely behind us, and we are rolling out new products using the Resolute technology. On a positive note, Scite growth in both B2B and B2C ARR in the quarter was strong and above expectations. Additionally, we had some large cross-sell successes of Scite within our Article Galaxy customer base, which Roy will speak about in more detail. When we announced the Scite acquisition, we noted that they had about $3.6 million of ARR. Today, they are at roughly $5.5 million, and we continue to believe there's a lot of upside in both the B2B and B2C side of the business. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms. Transaction revenue for the third quarter was $8.2 million, a 1% increase from the prior year quarter. This quarter represents our first year-over-year comparison that includes the customer contracts acquired from the FIZ Karlsruhe acquisition, which was effective January 1, 2023. While the year-over-year increase was modest, Q3 is typically our seasonally best time for transaction revenue, and this quarter represented a company high mark for quarterly transaction revenue. Further, the year-over-year comparison was largely affected by a normal slowdown we experienced during the week of Easter, which was in March this year and was in April of last year. In looking at early returns for April, the opposite effect is happening, and we are up significantly year-over-year with a strong start for the quarter. Our total active customer count for the quarter was 1,426 compared to 1,417 in the same period a year ago. Gross margin for the third quarter was 45.2%, a 630 basis point improvement over the third quarter of 2023. The increase is due to the ongoing revenue mix shift towards our higher-margin platform business. The platform business recorded gross margin of 85.5%, a decrease compared to 88.1% in the prior year quarter, but within the range of our gross margin expectations for platform revenue. The decrease is also related to the inclusion of Resolute's platform revenues, which generate a lower margin. Gross margin on Article Galaxy remained consistent with recent history, and the gross margin of Scite's products are similar to that of Article Galaxy. Gross margin in our transaction business increased 40 basis points to 25.7%. The increase was primarily attributable to increased copyright margins. This result was a little higher than we normally expect. And going forward, margins will likely fall back into a range between 24% and 25%. We remain confident in our ability to increase the Company's blended gross margin as the revenue mix continues to be more heavily weighted with platform revenues. Platform revenues are now about one-third of the business but contribute over 60% of the gross profit. Total operating expenses in the quarter were $5.4 million compared to $3.9 million in the prior year quarter. The increase is primarily attributable to the addition of ResoluteAI and Scite in the current quarter's results, as well as approximately $300,000 of non-cash depreciation and amortization expense, largely associated with the amortization of intangible assets associated with the acquisitions. Turning to profitability. I mentioned on our last call that I thought the back half of our year would be much cleaner from a one-time expense perspective, allowing us an opportunity to demonstrate the profitability of the business. Recall that in the first half of the year, we experienced roughly $1.3 million in expenses related to the proxy matter and M&A activities. In Q3, with those expenses largely behind us, we were able to post an operating profit and positive net income. Net income was $76,000 or breakeven on a diluted per-share basis compared to net income of $230,000, or $0.01 per share in the prior year quarter. This profitability also translated into a strong adjusted EBITDA performance. We generated a company record of $961,000 of adjusted EBITDA for the quarter compared to $559,000 in the year-ago quarter. Turning to our balance sheet. We also experienced a new company record with respect to cash flow from operations in the quarter. In the quarter, we generated over $2 million in cash flow from operations compared to $0.8 million in the year-ago quarter. Cash and cash equivalents as of March 31, 2024 was $4.2 million compared to $2.7 million in the prior quarter, and that is where we stood at the end of Q2 after the cash spent for the Scite acquisition. We also entered into a new $500,000 line of credit with PNC Bank that remains untapped. This line is flexible from both a covenant and cash diversification perspective, and we think it is a good fit for our needs and where we stand with the business today. As we look ahead, I think Q4 has the potential to be very similar to Q3 with some exceptions. First, with Q3 seasonally being our strongest period for transaction revenue, I would expect transaction revenue to be down sequentially but up modestly year-over-year. Second, we are seeing very positive returns on our advertising spend related to B2C customer acquisition. As a result, we will be experimenting with increased advertising spend in Q4. So, our sales and marketing expenses will likely be higher. All that said, I think the quarter will be relatively clean, and we should experience another strong adjusted EBITDA performance with cash flow behind it.

Thanks, Bill. In our last earnings call, I discussed our BHAG or big goal of $30 million in ARR by the end of FY '26. Our ARR at the end of Q3 is $16.6 million, which means we're pacing a little behind that goal. However, this was largely due to the churn Bill mentioned within the ResoluteAI business. Overall, our progress toward the BHAG will not be straight line, but I remain comfortable with where we stand today. In addition, I'm very pleased with our revenue, adjusted EBITDA, cash flow from operations performance in the quarter, but we have several areas we need to continue to work on. My top three priorities are as follows. First, integration across the new products that we've acquired as part of the Resolute and Scite acquisitions. We have completed the first phase of the Scite-Article Galaxy or AG integration. We now support single sign-on, so users can seamlessly jump between AG and the Scite product. We also have added the Scite badge to the Article Galaxy product. As a reminder, this unique feature of the Scite product allows for a FICO or Rotten Tomatoes score for articles, so the user can more quickly judge the quality of the article or articles, while an AG user can click on that badge and jump to the Scite product to see detailed results, and all users in Scite can see pricing and availability of the articles in the Scite platform. The second is Article Galaxy growth. As a reminder, we have four drivers of Article Galaxy growth. The team will refer to as the new-new team, sells new logos and is on track to beat last year. The new existing team, which sells transaction-only customers, Article Galaxy, is also on track to beat last year. We continue to see challenges with the upsell team who historically has delivered strong performance through moving customers up to more advanced features or software versions in addition to adding seats and licenses. We continue to see that our customers are more careful with spend versus previous years. The fourth driver of churn, which continues to remain higher than we have historically seen. That said, we have not seen any material increase in churn due to competition. A majority of our churn is uncontrollable and that it is due to the customer being acquired or going out of business. There is a block of controllable churn that we need to work on, and we brought in new leadership for that group, who's doing a nice job setting up new workflows and increasing our customer outreach to get ahead of this problem. My third priority is, where we invest in growth? As we enter the next phase of our growth, we need to be thoughtful about how and where we will make investments to drive that growth. I think it's time we move forward building out a more focused sales approach around verticals or products to accelerate new logo onboarding. We are in our FY '25 planning now, and I'll report back on this in our next call. We have seen a lot of exciting activity with the new Scite product. From a B2B perspective, I reported in our last call that Scite B2B ARR was around $400,000. We closed over $200,000 in new Scite deals in Q3 alone, some of which were cross-sell into our existing customer base. We have a very strong pipeline and expect to see strong results in the next couple of quarters. As part of the aforementioned cross-sells, we closed the largest Scite deal ever to a large pharma customer, which is a three-year contract. We closed our second deal in India, our first deal in Mainland China, and two more first for that country deals in the Middle East. On the Article Galaxy side, we've seen some good progress in the new-new teams in terms of competitive takeaways and in closing larger deals. We closed a large Article Galaxy deal to a top 10 pharma customer during the quarter. I'm excited to see the progress here, as in the past, we've had more success with SMB. While SMB remains a majority of our new logos, our competitiveness in large deals is great for the business long term. On the Resolute side, we saw unprecedented churn in Q3. As Bill mentioned, we do not expect that churn to return to remain and expect it to return to more historic levels going forward. On the positive side, we did close a contract with an existing AG client, and we leased two new solutions around the technology landscape and clinical trial reporting based on Resolute's software and datasets. The B2B Scite products continue to show great progress. At the end of Q2, we reported B2C ARR to be $4 million. We ended Q3 at $4.9 million. We continue to experiment with ad spend and monitor conversion to trials and then to subscribers. We have also seen some success in our B2C to B2B cross-sell efforts. We've seen a few individual B2C subscribers move into the B2B sales pipeline and close. We are entering the typical slow season in the summer months for B2C, but we remain excited about this business' contribution as we move into FY '25. Moving to document delivery or DocDel. In our reported transaction revenue, we experienced a material slowdown in transaction sales in late March due to Easter this year. Last year, Easter was in April. I can report that we've seen strong rebound in DocDel sales in early April. I can also report that due to some work in the platform and through agreements to manage the publishers' paywall, we're seeing some nice DocDel growth over FY '23. In addition, we're starting to see some B2C sales as we integrate pricing and availability into the Scite product and due to UX improvements in Article Galaxy. You may recall we had some concerns about the impact of the proxy matter on our employee base. We also recently completed our second Gallup Employee Engagement Survey, and I'm pleased to report that we showed a nice improvement from a year ago. Our engaged versus actively disengaged ratio has improved significantly. While we have and we will always have more work to do, I'm very pleased with the progress in the Gallup results. As many of you know, I'm typically very measured in my comments about the business. When we did the diligence on Scite, we believed that its combination with our business had the potential to be very exciting and a transformational event. After a few months, I'm even more convinced that this is a path that can lead to something much greater than a simple one plus one. Our employees and customers are excited about what we can do to help research. And while I'm happy with the Q3 results, I'm also very excited about our overall direction and the long-term potential of what we are building here, how we can help improve research and what that means for long-term shareholder value creation. With that, I'd like to turn the call back over to the operator for Q&A.

We'll hear first from Jacob Stephan at Lake Street.

Appreciate you. Congrats on the quarter as well. Roy, you made a comment regarding churn and how it's usually not due to competition. I'm just curious how you're kind of seeing the opportunity to win market share from some of your competitors and kind of how you're positioning yourself there?

Yes. That's a great question. I think our strategy is to have a superior product in the categories that we participate in, which include discovery tools, which is where Scite and Resolute come in. We continue to add functionality to Article Galaxy, which is our core access or document delivery platform. And we continue to add functionality to the references product, which is the reference management software. So moving forward, as we more tightly integrate these tools together, we think that's a competitive advantage in that you're not exporting from one tool and importing into the next tool. Integrating some of the unique features like the Scite badge and additional AI capability into the platforms, we believe adds real value. In addition to the fact that our objective is to simply be the easiest and fastest research tool out there today. So it's a much longer conversation with that, but I feel like we have made progress and continue to have a good strategy to be competitive and take share as we move forward.

Got it. Understood. And maybe just one more. You guys had a solid quarter and kind of B2C expansion. You noted kind of sales and marketing efforts are going to be implemented kind of in Q4 here. But I guess, how should we think about kind of sales and marketing moving forward? We saw your first quarter over $1 million in expense here in Q3. But maybe just any sense on how we can see that trending over the near term here.

Yes. I'll let Bill comment on the numbers. I mean, big picture, as Bill mentioned, we will invest a bit more in digital ad spend as we continue to experiment with the right spend that drives trials and subscribers on the B2C side. On the B2B side, we don't expect any big changes as we roll into Q4. We may add some additional costs as we go into next year, but I think it will be negligible. But Bill, any comments?

Yes, we fully accounted for Scite's costs in this quarter, which contributed to the $1.1 million we reported. I believe this is a reasonable run rate, except for our marketing expenses. We plan to experiment with an additional $150,000 to $200,000 in marketing this quarter. We'll be monitoring metrics to assess the return on this spending and to decide if we will continue it in the future. This allows us to quickly evaluate its effectiveness and adjust our approach as necessary. That's my perspective on how we should approach this aspect of our financials moving forward.

I appreciate that. Can you help us understand the overall B2C opportunity? It was a strong quarter for ARR growth. What are your thoughts on the overall opportunity and your growth expectations?

Yes. B2C is new for us, and we are still learning what the ideal churn rates should be. Comparing this to our B2B business, the churn rates differ significantly, as does the onboarding rate for new customers. Regarding the total addressable market for this segment, we estimate there are about 25 million to 50 million researchers who subscribe to research-focused platforms. This suggests a substantial total addressable market, especially when compared to our current user base. The key question is whether we can continue to provide value to extend the lifetime value of new customers while onboarding more customers. So far, despite increasing our spending, we have not observed a significant change in the cost per trial or the subscriber conversion rate. That's why, as mentioned by both Bill and myself, we plan to increase our spending and identify any points where we can see material changes in those metrics. It is important to note that this segment exhibits more seasonality compared to the rest of our business. Therefore, while we are increasing spending this month, we will be cautious during June, July, and August, and then increase spending again as the back-to-school season approaches. Bill, would you like to add anything?

No, I think that covers it, Roy.

We'll hear next from Allen Klee at Maxim Group.

You gave your fiscal 2026 guidance for annual recurring revenue. How do you think about how it ramps up over the next two-plus years to get there? Does it kind of accelerate in your mind? Or is it kind of a steady Eddie? Or how do you think about that?

Yes. Just to clarify, I wouldn't refer to our $30 million target as guidance. For me, it's a big hairy goal that we're pursuing. Typically, we don’t provide specific guidance on either end, but three years ago, I set a big hairy goal of $20 million, which we were aiming for, and now I've raised that to $30 million. Regarding your question, I believe we will see an increase in the number. It's important to note that we haven't fully integrated the products or developed all the new products that will result from merging Research Solutions, Scite, and Resolute. Additionally, we haven't completed the implementation of many initiatives that we believe will drive future growth. So while I am being somewhat conservative, I'm anticipating $1.5 million or $1.44 million in net annual recurring revenue growth per quarter. We may not reach that target in these initial quarters, but I am confident we will exceed it as we move into the second half of fiscal year 2025 and throughout 2026.

That's great. Just a housekeeping question. What's your current share count?

Bill?

Yes. It's around $32.3 million roughly.

And you announced two new products or features recently. Can you talk about those features and if you can give any sense of the opportunity from them?

Yes. We think within the organizations we serve, there's typically departments that are focused on clinical trial or tech landscape. And the way those products work is we're basically using one of our search engines to allow you to put in criteria. It will then gather together a tremendous amount of information. Some of it is in the peer-reviewed scientific articles. Some of it is in the external datasets that Resolute has, and it will literally write a summary of the tech landscape for the subject matter you search for or write a summary of the clinical trial research that you ask it to run. So effectively, what it does is it dramatically reduces the amount of time it takes to do those functions within heavy research-intensive organizations. These tools, we don't expect to be tens of millions, but we do expect them to grow over time. However, I think the TAM for that is certainly smaller than Article Galaxy or Scite. Any of the versions of Scite's simply because the research organizations in the companies that are our targets are typically tens, hundreds, even thousands of researchers, whereas the departments that are doing that type of work are much smaller. So, they're exciting products. They line up with our strategy of helping all the various steps and departments involved in the research process. But I would not think of them as an opportunity anywhere near the size of Scite, SciPro, or Article Galaxy or Article Galaxy references.

Last question on your increase in sales and marketing as you've gotten good results for that. How do you think about like the hopeful, the cost to acquire, if you spend an extra dollar in sales and marketing, what you hope to get for that?

Yes. I can provide some context here. Bill, would you like to discuss the B2C aspect, while I share a few thoughts on the B2B side?

Yes. On the B2C side, we generally focus on two key metrics: customer acquisition cost and the payback time for that cost, along with the lifetime value of the customer in relation to the acquisition cost. As we increase our spending, we're monitoring whether these metrics are improving or deteriorating and identifying ways to optimize them. Ideally, we aim for a payback period of under six months, with 12 months being more standard, but we are looking to be more aggressive in that area, aiming for a lifetime value to customer acquisition cost ratio of at least 3x. Ultimately, we're interested in whether these trends are showing improvement as we increase our spending.

Yes, we have a similar approach on the B2B side, although the numbers differ slightly. Typically, we experience a payback period of 12 to 18 months, and we tend to have a high lifetime value since customer churn is relatively low. Our customer acquisition cost to lifetime value ratios are solid in this area, and we have made significant progress in calibrating spend to enhance traffic that converts into sales pipeline. I believe this will begin to reflect positively in our numbers as we enter the beginning of FY '25.

And this does conclude our Q&A session for today's conference. I'm happy to turn the floor back to Mr. Olivier for any additional or closing remarks.

Well, thank you, and thanks, everyone, for joining in the call today. We will be participating in the Three Part Advisors IDEAS Conference in New York City on June 12. Hope to see you there. Qualified investors that would like to attend or schedule a meeting should contact Three Part Advisors, and we look forward to speaking with you again in September to discuss our full-year and fourth quarter fiscal 2024 results. Have a great day.

This does conclude today's teleconference, ladies and gentlemen, and we thank you for your participation. You may now disconnect your lines.