Earnings Call Transcript - RSSS Q4 2021

Operator, Operator

Good afternoon, everyone. And thank you for participating in today’s conference call to discuss Research Solutions Financial and Operating Results for its Fiscal Fourth Quarter and Full Year ended June 30, 2021. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Beisler, Investor Relations. Please go ahead, sir.

John Beisler, Investor Relations

Thank you, Carl, and good afternoon, everyone. Thank you for joining us today for Research Solutions' fourth quarter and full year fiscal 2021 earnings call. With us today we have Roy W. Olivier, Interim Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the fourth quarter and full year fiscal 2021. That release is available on the company’s website, researchsolutions.com. Before Roy and Alan begin their prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and made under the Private Securities Litigation Reform Act of 1995. Actual results may differ significantly from those expressed or implied due to various factors. We refer you to Research Solutions’ filings with the SEC for a more detailed discussion of the risks that could affect the call and 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 will be helpful for investors. A reconciliation of those measures to GAAP measures is included in the earnings press release issued this afternoon. Finally, I would like to remind everyone this call will be recorded and made available for replay via a link on the company’s website. I would now like to turn the call over to Roy W. Olivier. Roy?

Roy Olivier, Interim CEO

Thank you, John. And thanks to everyone for joining us and for our fourth quarter and fiscal 2021 results. Our fourth quarter results reflect the continued momentum in our business. Overall, we met or exceeded our targets for the quarter and the year regarding new customer platform deployments, platform upsells from existing transaction customers and upsells of existing platform contract renewals, as well as churn. Over the past two years, we have added more than 250 net new platform deployments, including 152 in fiscal 2021. Net new deployments for the quarter were the second highest ever trailing only the prior quarter and deployments from customers completely new to Research Solutions was the highest in the company’s history. I’d like to start by taking a few minutes to provide an update on the key priorities that were part of my first 100-day review when I became Interim CEO. I described those items during several investor calls and the two separate conferences earlier in the year. Those items were; first, complete strategic planning exercise, focus on how to accelerate growth. This was the most expansive priority in terms of the review. It included addressing questions around accelerating growth, addressing transaction churn, looking at new markets, expanding our product value proposition and developing a strategic acquisition strategy. We have completed the review in each of those areas, and in the short-term, much of our efforts to accelerate growth organically will be targeted at adding additional sales and development resources to improve sales results and accelerate product development. While we have taken steps to address transaction churn, we expect this to continue to be a headwind on overall results. There are many reasons for this, one of which is that the platform works very well and our customers see a material decline in their transaction costs year-over-year. Our primary focus will be on growing recurring revenues from where they are today to over $20 million in three years and keeping transaction revenues relatively flat. From a markets perspective, our historic focus with platforms has been in the Corporate segment. We will continue to focus in this area and we’ll be expanding the number of vertical markets we serve in this segment, which drives much of our growth currently. In mid-fiscal 2022, we will be launching a new product focused on the academic space. That product is in soft launch now and we are getting good traction with it. From a product perspective, we are also expanding our offering in two ways. As a reminder, we consider the high level research process to be discover, acquire, manage, and create. So, first, we are moving to a good, better, best offering with our Article Galaxy platform, and second, we’re expanding from a primary focus on Document Delivery or acquire to offering tools at various points in the research cycle. Those include improving our value in the discovery and management phases in fiscal 2022, followed by functionality to help create intellectual property in fiscal 2023. Regarding acquisitions, we have made good progress and have had several productive conversations with exciting opportunities that would fit well into our business and product strategy. I’ll report more on that later in the call. Second, we reviewed the current business with an eye toward growth, operational efficiency and to position the company to integrate acquisitions quickly. We have completed this review and are in the process of implementing several initiatives intended to eliminate silos and improve productivity across the business. Those include updating our accounting systems, rolling out Office 365, improving our CRM systems and developing improved internal reporting around platform usage in analytics. The platform usage and analytics reporting will also be a feature available to customers in a future release. Third, I indicated we wanted to review and update the vision, mission, and company values in order to attract and retain the talent we need to accelerate growth. We have completed that work and we are starting to release the updated vision, mission, and we’ll complete the work on updated company values shortly. You will start to see some of those changes reflected on our company website and other external marketing materials in the coming weeks. And lastly, we indicated that we wanted to review and update our investor relations plan, with a focus on expanding our shareholder base and working to garner additional analyst coverage. We have completed our initial review and have two firms providing analyst coverage at this time and we will continue to focus on executing a proactive investor relations strategy going forward. Overall, I consider fiscal 2021 to be a successful year for Research Solutions, with many pieces in place that will set up the company well for fiscal 2022. I will give additional detail on the various initiatives we are implementing in a moment, but first, I’d like to pass it over to Alan to walk you through our fiscal fourth quarter and 2021 year-end financial results in detail. Alan?

Alan Urban, CFO

Thanks, Roy, and good afternoon, everyone. For the fourth quarter fiscal 2021, total revenue was $8.2 million, a 4.2% increase from the fourth quarter of fiscal 2020. Our platform subscription revenue increased 34% to $1.4 million, primarily driven by a net increase of platform deployments from last year, including 41 net new in the fourth quarter and upselling current platform customers. The quarter ended with $5.9 million in annual recurring revenue, up 6% sequentially and 32% year-over-year, reflecting our continued sales and upselling efforts and low churn of existing platform customers. Please see today’s press release for how we define and use annual recurring revenue and other non-GAAP terms. Our transaction revenue for the quarter was $6.8 million, relatively unchanged from the prior year quarter. Transaction customer count for the quarter was 1,132 versus 1,108 in the third quarter of fiscal 2021. The increase was primarily due to more academic customers. Gross margin for the fourth quarter was 33.4%, a 160-basis-point improvement over the fourth quarter of 2020. The increase is due to the ongoing revenue mix shift towards our higher margin platform business. The platform business recorded gross margin of 82% within our total gross margin range of high 70% to low 80%. Gross margin in our transaction business decreased 30 basis points to 23.1%. The decrease was primarily attributable to a proportional increase in labor costs. Total operating expenses in the quarter were $2.8 million, compared to $2.5 million in the prior year quarter, due primarily to higher technology and product development and administrative personnel costs. Net loss for the quarter was $89,000 or nil on a per share basis, compared to a loss of $1,000, also nil on a per share basis in the prior year quarter. Adjusted EBITDA was $134,000, compared to $146,000 in the year-ago quarter. Now moving on to the full year of fiscal 2021. Total revenue increased 2.2% to $31.8 million, compared to $31.1 million in fiscal 2020. Our platform subscription revenue increased 32% year-over-year to $5.1 million and ARR was $5.9 million, compared to $4.4 million at the end of fiscal 2020. Total platform deployments as of June 30th were 553, a net increase of 152 deployments or 38% from a year ago. Our full year transaction revenue was $26.6 million, a 2% decrease from fiscal 2020. Moving on to gross margins. For the full year fiscal 2021, gross margin was 32.4%, a 140-basis-point increase from the previous fiscal year. Gross margin for the platform business was 82.2%, compared to 83.4% in fiscal 2020. Gross margin in our transactions business was 22.8%, compared to 23.5% in fiscal 2020. Proportionally higher copyrights and personnel costs were the primary factors behind the decrease. Total operating expenses in fiscal 2021 were $10.6 million, compared to $10.5 million in the prior fiscal year. The increase was primarily due to greater technology and product development personnel costs. Net loss for fiscal 2021 was $285,000 or $0.01 per share. This represents a $495,000 improvement from fiscal 2020 when adjusting for last year’s $117,000 gain on the sale of discontinued operations. Adjusted EBITDA was a positive $700,000 in fiscal 2021, compared to $143,000 in the previous fiscal year. Turning to our balance sheet. Cash and cash equivalents as of June 30, 2021 increased to $11 million versus $9.3 million on June 30, 2020. The increase was primarily attributable to cash generated from operating activities. There were no outstanding borrowings under our $2.5 million revolving line of credit and we have no long-term debt or long-term liabilities. I’ll now turn the call back to Roy.

Roy Olivier, Interim CEO

Thank you, Alan. I’d like to take this opportunity to discuss our strategy moving forward and some short-term operational objectives. Our immediate focus includes continuing to provide tools that enhance knowledge creation, particularly in the global R&D sector within STM. We will strategically focus on the global Corporate and Academic markets. Our goal is to increase our recurring revenues from current levels to over $20 million by accelerating organic growth and acquiring companies aligned with our product and business strategy. We plan to invest in driving additional sales growth while aiming to maintain the SaaS Rule of 40, where the growth rate plus EBITDA margin exceeds 40. We expect to prioritize delivering two products: Article Galaxy for both Corporate and Academic needs, along with a new unannounced product. We are committed to being leaders in customer service, support, and product innovation in our markets. To achieve these goals, we will need to execute our current operating plan and improve execution in key business areas, including sales activity and our product roadmap, as well as enhance human resources, particularly in employee and management training. We also need to improve our internal operating and reporting systems. Furthermore, we aim to implement a business development strategy that adds $3 million to $4 million in acquired ARR annually over the next three years, focusing on opportunities that align with our strategic vision and financial objectives. We will require reasonable multiples in acquisitions, as this presents a challenge for executing deals in the short-term. We will not proceed with any opportunity unless it makes financial sense. Additional investments will be required in several areas, particularly in sales, product, and software engineering resources. Many investments are already in progress, and while they may negatively impact our EBITDA in fiscal 2022, we expect these will contribute to traditional sales growth by late 2022 and reach full effect in fiscal 2023 and beyond. One of the key drivers of our future organic growth will be successfully delivering on our product roadmap. Recently, we launched the upgrade to our platform known as Article Galaxy 3.0, which has been deployed to 99% of our customers with minimal issues and positive feedback. This upgrade offers a more modern interface and improved search functionality, enhancing the value we provide to our customers and forming the basis for potential new versions of the platform. Article Galaxy+ has secured several new publishers this quarter, and it now covers about one-third of the world’s STM content. We are actively engaging more publishers to expand this offering. Additionally, we extended our platform sales beyond our core life sciences market, with a large fragrance company and a major mining engineering firm in the Nordics choosing our platform. They believe the reporting and analytics provided will help them manage their business more effectively. We continue to progress with Article Galaxy’s Scholar, our Academic-focused product, currently in soft launch and gearing up for a full launch early in 2022. In Q1 of fiscal 2022, we signed a top five pharmaceutical company that selected Article Galaxy 3.0, successfully competing against other solutions. Currently, around 70% of the top 25 pharmaceutical companies are using Research Solutions. Thank you for your time and interest in Research Solutions. We have a dedicated team committed to providing tools and services that empower research and knowledge creation for leading organizations worldwide. I am optimistic about our future and look forward to speaking with you soon. Now, I’d like to turn the call back to the Operator for Q&A.

Operator, Operator

Thank you. The first question comes from Richard Baldry from ROTH Capital. Please go ahead.

Richard Baldry, Analyst

Thanks. Hey, to the extent you’re able, can you talk about whether you’ve looked at sort of any preliminary pipeline of M&A targets and any color on sort of reasonableness of what you think their expectations are for valuations, obviously, the markets are pretty frothy, so I’m curious whether the M&A market thinks it should be too or if you think things are fairly rational? And sort of maybe from a high level where the priorities for M&A might be along that sort of discover, acquire, manage creates spectrum? Thanks.

Roy Olivier, Interim CEO

Yeah. Good question. Yeah. We’ve created a list of 200 plus targets. We have a resource whose only role it is to reach out, contact those targets and start a dialogue. We’ve had dialogue with, I’d have to count on, but 10 to 20 targets we’ve had face-to-face meetings with, face-to-face or Zoom meetings with probably half a dozen targets. We’ve provided a few IOIs and in terms of your question about valuations, we see, frankly, a material difference between valuation expectations in the United States and Europe. U.S. valuation expectations are very high and we’ve had a number of conversations stop when we get to the valuation question, because they may read an article about somebody that’s worth 14 times revenue, but we don’t think that’s realistic nor would we pay that. In Europe, however, we have had some very good conversations with folks that have more realistic expectations, who are also more focused on becoming part of a bigger team to grow their business faster. And those are the acquisitions that historically have worked well for me, where key executives want to roll some of their equity and continue to be part of the team and grow that business over a matter of time. So definitely seen a lot of valuation expectations, which I think are not realistic and we’ve seen some primarily overseas that are realistic. And when I say realistic, I’m talking about a teen multiple of EBITDA or a single-digit multiple of revenue if it’s high-quality recurring revenue with extremely low churn. Does that help?

Richard Baldry, Analyst

Yes. And then, when you think about the investments you want to make in the sales and marketing, as I looked at the last two years, you’d spent about $2.5 million in fiscal 2020 and maybe a little over $2 million in fiscal 2021. Do you think of getting back to that fiscal 2020 level or in 2022 or do you think it goes above that, with conditions normalized, I think, maybe fiscal 2021 is a little below trend, because there’s not a lot of travel or expenses like that and then because of COVID stuff? So how do we think about what normalized current may sales and marketing would be and what you think it’ll be, as you look out, after the investments are made in fiscal 2022? Thanks.

Roy Olivier, Interim CEO

I forgot to address the second part of your acquisition question regarding our priorities. Currently, we are very interested in acquiring a direct competitor, specifically in the Document Delivery space, although there are not many opportunities available. We haven’t had significant discussions in that area. Our primary focus right now is on the discovery and management segments, where we have engaged in numerous discussions. Additionally, we have explored opportunities within the Government and Academic segments, as there may be chances for cross-selling there, which we find appealing. If we can leverage our product in these segments and create mutual benefits, it often leads to long-term synergies that we value. Regarding sales and marketing, we have not specified how much our investment will increase. We have previously mentioned that we plan to add five to seven new salespeople focused exclusively on new customers. We also have a similar number of salespeople managing existing customer transactions and trying to up-sell, as well as handle churn. Both teams are supported by prospecting and marketing teams. In the short term, particularly for FY 2022, our investments will primarily focus on hiring new salespeople in the new customer segment and enhancing marketing efforts to generate more marketing qualified leads. Currently, the majority of our sales come from sales qualified leads driven by our sales team or prospecting team. We are implementing a new marketing strategy and making adjustments to our internal systems to better assess the effectiveness of these investments, with the goal of aligning the proportion of sales from marketing qualified leads with that of sales qualified leads, which presently is heavily skewed towards the latter. We are not adding a large number of personnel, but we are increasing our headcount modestly. Additionally, we previously brought on two individuals in FY 2021, one focused on Japan and the other on German-speaking regions, both of whom are performing well. We will continue to hire based on our TAM research and aim for more growth, as we believe there is justification for more salespeople. However, our challenge lies in ramping these new hires to productivity within a year, which has historically been tough for us. We are implementing measures from a sales management perspective to try to expedite this process. My apologies for the lengthy response.

Richard Baldry, Analyst

That's okay. Maybe one last question from me. You have a strong cash balance, so I'm curious about how you differentiate between developing a new product internally and acquiring one. With your resources, you could significantly increase your R&D staff if you wanted to. What factors influence that decision? Is it mainly time to market and the existing customer base, or are there additional considerations? How do we approach the level of R&D investments needed for internal support? Thank you.

Roy Olivier, Interim CEO

For me, it's about return on investment and time to market. If we consider the costs of acquiring a product versus developing it ourselves, we need to evaluate the time implications as well. I recently examined a potential product initiative, and honestly, by the time we develop it, we might find ourselves too far behind to compete effectively. Therefore, I prefer to speed up development, either by hiring a third-party firm to address our short-term limitations or by acquiring a company within that sector. However, for that to be feasible, we need a financial model that justifies the investment.

Richard Baldry, Analyst

Okay. Thanks. Congrats on a good year.

Roy Olivier, Interim CEO

Thank you.

Operator, Operator

The next question comes from Allen Klee from Maxim Group. Please go ahead.

Allen Klee, Analyst

Yes. Hello. I know you do rigorous analysis of opportunities and TAM analysis. So as you’ve done that, what conclusions did you come up with in terms of the new products that you’re offering the good, better, best Academics vertical and one that’s not yet disclosed, in terms of what they could theoretically represent compared to kind of the base of where you are now?

Roy Olivier, Interim CEO

Well, first off regarding the TAM research for our core business, which is the Corporate segment, I feel confident confirming that the 28,000 number we've been discussing publicly for several years is realistic. In terms of academics, there is, frankly, a larger TAM for the Library segment. We're learning a lot about our go-to-market strategy, the ARPU, and our expected monthly sales rate, and we haven't gathered enough information yet to provide a solid estimate for that. However, I can assure you it is a significant market, larger than the Corporate market, though the ARPU is lower. Therefore, I would say its TAM prospects are comparable in size to the Corporate market. As for the undisclosed product, it is driven partially by regulatory forces worldwide. Its TAM is also similar to the Corporate market, but there are a few verticals within the Corporate market that don't apply, such as mining or law where we have some legal customers. However, it is relevant in some of the large verticals, and I would need to calculate the specifics, but I’d estimate its size is comparable to the Corporate segment we currently pursue.

Allen Klee, Analyst

Thank you. You also mentioned that one of your focus areas related to productivity and other aspects was aimed at improving your systems and internal reporting on usage data and analytics, and exploring how these could be monetized. Could you elaborate on this to help us understand the current issues and your objectives?

Roy Olivier, Interim CEO

I believe there are two distinct issues at play. The first is related to internal productivity, which suffers from numerous data silos. These silos hold data without any analytics or reporting tools, making it difficult for us to understand our core business. Compiling reports requires navigating these silos, figuring out how to obtain the data, and creating extensive spreadsheets. Our goal is to eliminate some of these silos and reduce the number of systems we use, transitioning from a large array to a more manageable set. This will allow us to access our internal data quickly and react on a daily basis rather than waiting for monthly or quarterly updates. Additionally, we need to gain insights into our customers' use of the platform. Currently, our platform data exists in our accounting system, while our transaction data is on the platform and hard to access. Going forward, we want to integrate this data to conduct clear analyses, such as evaluating transaction revenue trends over time for different customer cohorts. We aim to leverage this internal reporting not only for ourselves but also to create valuable reporting analytics and dashboards for our customers. This will help them assess whether their subscription is beneficial and give them insights into their purchasing behavior and research activities. I see enhancing our internal productivity as crucial since many departments currently spend excessive time manually compiling reports, which we can streamline. Furthermore, we recognize the potential for reporting analytics and dashboards as a revenue opportunity for our platform, which requires some internal systems integration work that we are currently addressing.

Allen Klee, Analyst

Thank you. You have very low churn with your customers. So the way revenues increase are selling more customers like with the platform, I think, you said you added 41. But then also and very importantly, is upselling to current customers. Can you talk a little bit about that process and how you feel about that?

Roy Olivier, Interim CEO

I think there are several teams doing an excellent job. One of them focuses on existing upsells and reducing churn. They effectively increase ARPU each year by adding users and enhancing functionality on the platform. As our product improves with better analytics and more discovery tools, along with features to help manage acquired content, we expect to drive ARPU higher. While these teams perform well, they currently spend a great deal of time on manual reporting, and I want to change that so they can focus more on sales activities, which will ultimately help us generate additional revenue.

Allen Klee, Analyst

My last question is more long-term in nature. You have set a three-year goal to reach $20 million in recurring revenue, and I believe you mentioned that you aim to acquire between $3 million and $4 million each year. Do you think that internal growth will support that goal? What do you see as the main drivers for organic growth beyond that?

Roy Olivier, Interim CEO

I believe the primary factors contributing to organic growth will be expanding the sales team and enhancing our product strategy through upsells that add valuable features, which will also lead to an increase in annual recurring revenue when those features are activated. If I misunderstood the question, I apologize, but our organic growth strategy is straightforward: we need more salespeople to effectively implement our product strategy.

Allen Klee, Analyst

Okay. Great. Thank you so much.

Roy Olivier, Interim CEO

Thank you.

Operator, Operator

The next question comes from Adam Wilk from Greystone Capital. Please go ahead.

Adam Wilk, Analyst

Thank you for taking my question. I appreciate your insights. You've mostly covered it, but I would like to refine it a bit. I value the discussion on mergers and acquisitions and valuations. I'm curious if the projected annual recurring revenue growth of $3 million to $4 million over the next few years, which includes M&A, means that you might acquire the Document Delivery business or a competitor and then cross-sell or upsell to their customers on your platform. Am I understanding that correctly? Thank you.

Roy Olivier, Interim CEO

Yeah. I think in terms of numbers, our organic growth rate, if you just take our historic growth rate and you were to model it out, I think it suggests a number of $3 million or a little bit more than $3 million a year in ARR to get to $20 million. So I think it’s closer to $3 million than it is to $4 million, first off. Second off to your second question, yes, we would certainly love to have an opportunity to acquire Document Delivery a competitor and cross-sell platforms. But frankly, there might be one or two of those, there’s not very many of those. So when we think about driving additional ARR is looking at opportunities that are kind of close to us. And that may be tools that really help scientists or researchers discover what they want faster. And that may come along with a set of customers that we can cross-sell our platform in and we can take the discovery tools that that target has and integrate them into our platform to turn it on and raise ARR for our base of now 500 plus, almost 600 customers. Same on the other side, on the manage side. We have some Reference Manager Capability. We’ve developed over the years. But if we found somebody that had some interesting technology there, we would certainly take a look at adding that, especially if they had a set of customers, we have a set of customers and there’s a cross-sell opportunity on both sides for us. So I think the more likely scenario is that it’s either somebody on the discovery side or the manage side or the other option is we play primarily in Corporate. There are folks out there that are in a similar business to ours, but they serve as either Government or Academic and there also would be a cross-sell opportunity to take our product into Academic, which we’re already starting to do, but we’re in the infancy stage or taking our product in the Government, which we have, I don’t know, maybe a dozen Government customers today, but it’s not something we really focus on. So, it’s more about the segment level, which is Corporate, Government, Academic, and then when we get down underneath Corporate, it’s more about discovery tools, manage tools, and then ultimately, creation tools that are things you can turn on to add value to the platform and raise ARR.

Adam Wilk, Analyst

Great. Thank you. That’s very helpful. That’s it for me. Thanks again and great job.

Roy Olivier, Interim CEO

Thank you.

Operator, Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Roy Olivier for any closing remarks.

Roy Olivier, Interim CEO

Well, thanks again for everyone’s time and attention. And we look forward to catching up during the next quarters call.

Operator, Operator

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

Roy Olivier, Interim CEO

Thank you.