Earnings Call Transcript - RSSS Q4 2023

Operator, Operator

Good afternoon, and welcome to the Research Solutions Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Steven Hooser, Investor Relations. Please go ahead.

Steven Hooser, Investor Relations

Thank you, Gary, and good afternoon, everyone. Thank you for joining us today for Research Solutions' fourth quarter and full year fiscal 2023 earnings call. On the call with me 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 fourth quarter and full year of fiscal 2023. 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 are 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 condition. Also on today's call, management will reference certain non-GAAP financial measures which we believe provide useful information for investors. A reconciliation of those measures to GAAP measures is included in the earnings press release 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 Roy W. Olivier. Roy?

Roy W. Olivier, CEO

Thank you, Steven, and thanks to everyone joining us for our fourth quarter and fiscal 2023 results. Our results for the full year were positive in several respects, and we accomplished several things that lay the groundwork for continued progress in fiscal 2024 and beyond. I'll review these in detail after Bill's full report on our financial results. I'm proud of the team's efforts in generating nice organic growth, completing and integrating an acquisition, generating GAAP profitability, and generating record adjusted EBITDA and cash, all while continuing to deliver new products and new features to our customers. In addition, on July 31st, we announced the acquisition of ResoluteAI, an advanced search platform with knowledge management tools powered by AI and NLP technologies. We're excited about the medium and long-term prospects of this acquisition in terms of expanding the number of solutions we can sell to our customers, expanding our total addressable market and growing annual recurring revenue through cross-selling ResoluteAI's capabilities into our broad base of customers. I'll speak more about our accomplishments and the unique opportunities this acquisition provides shortly. But first, I'd like to pass it over to Bill to walk through our fiscal fourth quarter and 2023 year-end financial results in detail. Bill?

Bill Nurthen, CFO

Thank you, Roy, and good afternoon, everyone. I will begin with a recap of our results for the fourth quarter of fiscal 2023. Our total revenue was approximately $10 million, a 16% increase from the fourth quarter of fiscal 2022. In the last two quarters, we have now generated over $20 million in total revenue. Our platform subscription revenue increased 22% to $2.3 million, primarily driven by upsells in our existing customer base and a net increase of platform deployments from last year, including a net gain of 20 in the fourth quarter. We ended the quarter with $9.4 million in annual recurring revenue, or ARR, up approximately 4% sequentially and 19% year-over-year, reflecting continued but slower growth in the economic environment where we are currently experiencing a few customers tightening their budgets and some elevated churn within our existing customer base. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms. Our transaction revenue increased 15% to approximately $7.7 million from $6.7 million in the fourth quarter of 2022. A little over 9% of that growth was organic, and the rest of it was coming from customers acquired as part of the FIZ transaction. Our total active customer count for the quarter was 1,404 compared to 1,213 from the same period a year ago. The increase in customer count is primarily related to the acquisition of certain customer contracts from the FIZ transaction in the second quarter of fiscal 2023, which became effective in our third quarter of fiscal 2023. Gross margin for the fourth quarter was 39.4%, a 110 basis point improvement over the fourth quarter of 2022. The increase was due to the ongoing revenue mix shift towards our higher margin platforms business. The platform business recorded gross margin of 88.1%, an 80 basis point improvement from the prior year quarter as we continue to be able to service more customers with proportionally lower labor costs. Gross margin in our transaction business increased 20 basis points from the prior year fourth quarter to 24.7%. The increase was primarily related to our ability to service more transaction revenue with proportionately lower labor costs. Total operating expenses in the quarter were $3.7 million, a slight decrease from the prior year quarter. We experienced lower costs in pretty much all operating expense categories, which were offset by an increase in stock compensation expense related to the new long-term executive restricted stock plan implemented in the second quarter of this fiscal year. Recall that the long-term stock plan is one which restricted shares only vest if higher market prices for the company's stock are attained. Net income for the quarter was $376,000 or $0.01 per diluted share compared to a loss of $438,000 or $0.01 per share in the prior year quarter. This represents two consecutive quarters of positive GAAP net income and three quarters in the last four with such a result. Adjusted EBITDA for the quarter was $825,000 compared to a negative $121,000 result in the year-ago quarter. Now turning to the full fiscal year 2023, total revenue increased 14.5% to $37.7 million compared to $32.9 million in fiscal 2022. As mentioned in the press release, this growth rate is the highest the company has experienced in over a decade and is the first double-digit growth rate since that time as well. Our platform subscription revenue for the full year increased 28% year-over-year to $8.7 million. ARR was $9.4 million compared to $7.9 million at the end of fiscal 2022. Total platform deployments as of June 30, were 835, a net increase of 102 deployments or 14% from a year ago. As I mentioned in my remarks regarding Q4, we did experience some slowing in overall platform growth as we moved through the fiscal year, primarily due to elevated churn, which was more pronounced in certain customer segments like biotech. However, we continue to believe that this is more macroeconomic related as we are not experiencing a material change in losses to competitors. It is more situations where customers are either being acquired, going out of business, or simply choosing to do without a third-party product to manage their research process. Transaction revenue for the fiscal year was $29 million, an 11% increase from fiscal 2022. The FIZ acquisition contributed to this growth; however, the growth was primarily organic. This is exciting as we've been speaking about an inflection point in our business where the amount of new platform customers onboarded would be such that our transaction revenues, which have been flat to down historically, would start to grow again. We appear to be in a place now where transactions can grow, and as we experience that growth, we are doing it at slightly better margins. As we look at gross margin, for the full fiscal year 2023, gross margin was 39%, a 250 basis point increase from the previous year. The result was due to the ongoing mix shift of platform revenue. However, it was also due to expansion in gross margin in both our platform and transaction business lines. Gross margin for the platform business was 88.2% compared to 86.2% in fiscal 2022. This was primarily due to lower software costs and proportionally lower labor costs in servicing this revenue. Gross margin in our transaction business was 24.3% compared to 23.6% in fiscal 2022. This was due to lower labor costs to service revenue as well as some pricing initiatives which serve to expand our copyright margins. Total operating expenses in fiscal 2023 were $14.5 million compared to $13.7 million in the prior fiscal year. Excluding stock compensation expense, operating expenses were essentially flat compared to fiscal 2022, and this includes roughly $200,000 in recruiting expenses in fiscal year 2023 that are not likely to repeat going forward. Net income for fiscal 2023 was $573,000, or $0.02 per diluted share compared to a loss of $1.6 million or $0.06 per share in the prior year. This was the first time since 2015 the company recorded a GAAP profit and it was a true operational profit, whereas in the past, such profit typically related to unique or one-time items. Adjusted EBITDA in fiscal 2023 was $2 million compared to a negative $374,000 in the previous fiscal year. The result of over $2 million in adjusted EBITDA for fiscal year 2023 is a company record. Turning to our balance sheet, the aforementioned profit and cash flow did lead to an increase in cash. The company generated $3.4 million in cash flow from operations in fiscal year 2023, which is also a company high achievement. Cash and cash equivalents as of June 30th, 2023 was $13.5 million versus $10.6 million on June 30, 2022. There were no outstanding borrowings under our $2.5 million revolving line of credit, and we have no long-term debt or liabilities. On July 31st, we announced the acquisition of ResoluteAI for a total closing consideration of $2.9 million, which includes certain holdback items related to working capital. The transaction had an earn-out based upon 3.5 times the level of ARR on the date that is 18 months from the close date, less than enterprise value of $3.2 million. At close, they had $1.3 million of ARR. As we look ahead, the proxy matter we are presently navigating through is definitely clouding our near-term outlook, as the expenses related to it are material and, to some extent, hard to quantify at this time. In addition, we closed the Resolute transaction in July and as previously disclosed, we are continuing to work on two additional pending transactions. These items will all serve to increase our legal and professional service-related expenses quite materially in Q1. As a result, I would not expect us to be adjusted EBITDA positive or cash flow positive in Q1. Keep in mind, we also pay our executive bonuses for the prior fiscal year in our Q1 and last year we only had $100,000 of positive cash flow in the first quarter. When we report our Q1 numbers, we will provide a breakdown of proxy-related and M&A-related expenses to help give a clearer picture of our operational performance. All of that said, I do not see anything that has fundamentally changed the profit or cash flow profile of our business. The things that I have mentioned are unique items impacting our business, and while material and expensive, they do not change the core of what we do or alter the long-term momentum of the business that we saw as we exited fiscal year 2023. We will put the proxy issues behind us and feel strongly that the foundation we are building through M&A in the early part of fiscal year 2024 will serve the business well as we move in the back half of that fiscal year and beyond.

Roy W. Olivier, CEO

Thanks, Bill. As I mentioned earlier, we've made significant progress in various areas of our business over the past year. Some of this progress is reflected in our results, while other efforts are setting the stage for future success. I will briefly highlight some key developments. In our transactional or DocDel segment, we acquired FIZ, enhancing our already robust and profitable transaction business and paving the way for new platform customers through cross-selling and upselling. FIZ initially had around 400 customers, with 300 agreeing to transition to Research Solutions, and over 200 of them have purchased documents from us in the last six months. This acquisition involved a small upfront payment and is largely financed through an earn-out. Additionally, the incremental revenue from these customers is being managed by our existing DocDel team, even as our overall headcount in that area has decreased alongside rising revenues. We recently secured a customer win with the Royal Danish Library, which highlights the success of our Article Galaxy Scholar workflow solution, expected to provide documents that academic libraries are not entitled to and help reduce their overall costs. The rise of hybrid open-access publishing titles may be partly contributing to this new market opportunity, and we are exploring several other prospects in this area. This development will boost our DocDel revenue in the short term and offer future upsell opportunities for participating libraries. Over the past year, we have also concentrated on enhancing our B2C capabilities through direct initiatives and partnerships to drive traffic to Article Galaxy. We believe this is a crucial step in our product-led growth strategy, aiming to onboard individual users who can then serve as a valuable funnel for enterprise deals and a growing base for individual and enterprise product upsells and cross-sells in both corporate and academic sectors. Currently, we have about 20,000 B2C users visiting our platform each month and we are focusing on converting them into DocDel sales and ultimately platform customers. We have recently improved our guest checkout processes, which have led to an increase in DocDel revenue and helped us identify these guest users. Over time, we anticipate that a significant portion of our B2C users will transition to our SaaS product, based on the conversion rates observed in fiscal year 2023. Regarding our platform products, we continue to make headway, delivering new features like various AI capabilities. In the past year, we've introduced PICO label recognition, an AI-based recommendation engine, and integrated ChatGPT into our platforms. PICO label recognition enables users to quickly screen documents by searching and highlighting PICO terms. The AI recommendation engine provides users with a list of similar documents without the need for manual screening. Our ChatGPT feature allows users to request summaries of articles swiftly, offering a quick way to verify that the accessed articles meet their needs. We anticipate challenges in the areas of new sales, upsells, and customer churn, but we have continued to invest in sales and marketing, believing that the economy will rebound in the near future, positioning us well for that upswing. In late fiscal year 2022, we invested in revamping the marketing department and have seen impressive results, including a doubling of our website traffic and B2C DocDel revenue, as well as a reduction in our platform's average days to sale. We significantly increased our email open rates, improved our sales funnel conversion, and grew demo requests and demos attended considerably. Our B2C signups also rose substantially, along with social media following and blog traffic. Despite the prevailing challenges in platform sales spending, we believe that the initiatives we are undertaking will enable us to recover as the economy improves. We have also made multiple operational improvements that we believe will enhance our annual recurring revenue moving forward. For instance, we consolidated the company onto a single CRM platform that caters to our new sales, upsell, churn, and marketing teams. We implemented a configure price and quote tool for our new sales team, expecting to roll it out for the upsell and churn teams soon. This is aimed at improving our close rates and streamlining the customer acquisition experience. We have transitioned to a unified, flexible software engineering team, adopted a Scrum Agile methodology, and increased our development capacity, resulting in more frequent software releases and greater adaptability. For fiscal year 2023, we also established objectives and key results for the whole year for the first time to ensure alignment across the company with our operational goals. On the acquisition front, we have remained very active, completing the FIZ acquisition and announcing the ResoluteAI acquisition. This will introduce various AI technologies to our research solutions, expanding our product ecosystem and enhancing our ability to serve a broader range of users in the innovation value chain across our current and new markets. ResoluteAI’s solutions will allow us to address 13 areas of the innovation value chain, compared to just four that we serve now, significantly broadening our total addressable market. In the immediate term, we plan to integrate document delivery with the ResoluteAI platform, combine Resolute's advanced search features with our platform, and roll out several new and improved workflows to cross-sell into our existing customer base. These developments include clinical trial, key opinion leader, competitive landscaping, and technology landscaping modules, as well as enhancements to our systematic literature review product, Curedatis. Overall, ResoluteAI sets the stage for expanding our SaaS offerings, AI capabilities, and advanced search functionality, all of which are essential to executing our long-term strategy. As we mentioned in our recent press release, we have two more acquisitions in the letter of intent stage, which could add about $4 million in recurring revenue. Both are growing, generating positive EBITDA and cash flow, and will enhance our ability to address search and discovery, as well as knowledge management needs, expanding our market share in both corporate and academic sectors. We expect to share more updates on these soon. While we are aware of short-term challenges facing the business, we are encouraged by the advancements we are making that will lead to ongoing improvements in the future. Regarding the proxy matter, apart from Bill's earlier comments, we have no new updates at this time. Management and independent board members stand firmly behind our strategy and are pleased with the progress we're achieving in various areas. I remain very optimistic about our future. With that, I will turn the call back over to the operator for questions and answers.

Operator, Operator

We will now begin the question-and-answer session. Our first question is from Richard Baldry with Roth Capital. Please go ahead.

Richard Baldry, Analyst

Thanks. In the recent past, the seasonality in Q1 revenues has oscillated from a little bit up to a little bit down. Can you talk to, given the acquisition impact and sort of macro backdrop, how should we think about the likely sequential seasonality impact on the revenue side?

Roy W. Olivier, CEO

Bill, do you want to address that one?

Bill Nurthen, CFO

Yeah, sure. I think we will see the same seasonal trends that we have seen in prior years with respect to each quarter. But I think our expectation is, from a transaction perspective, the growth rates we've seen sort of in Q3 and Q4, I still think we'll achieve double-digit growth rates on transactions. But those double-digit growth rates will just be off what they were in the prior year Q1, which, as you know, is usually a little bit of a step down from Q3 and Q4 just due to being in the summer.

Roy W. Olivier, CEO

In terms of acquisitions, the Resolute product is much more expensive than our typical Article Galaxy product, so it's a larger lumpier sale. We don't expect material impact from Resolute in Q1 in terms of new logos or new sales. So I wouldn't expect a big uptick on Resolute in our Q1.

Richard Baldry, Analyst

Then in terms of modeling on the sales and marketing side, it came down sequentially, fairly materially. Was that more productivity-driven, bonus type driven, over-accruals, any reversals, or was there a meaningful change to headcount or marketing strategies that drove that, that we should factor in going forward?

Roy W. Olivier, CEO

Yeah, there wasn't a meaningful change to headcount and strategy, but Bill can comment on the accruals.

Bill Nurthen, CFO

I wouldn’t use Q4 as a benchmark, Rich. Throughout the year, we conservatively account for our reps to achieve over-attainment and accelerators. However, due to some slowdown in platform sales during the second half of the year, they did not reach those accelerators. As a result, several of those accruals were reversed in Q4. As Roy mentioned, nothing fundamentally has changed, so expenses aren’t expected to rise above previous levels. The impact in Q4 was primarily due to accrual reversals.

Richard Baldry, Analyst

Thanks. And then, without obviously talking too directly about what you're looking at under the LOIs, would they be market extensions or TAM expansions again or more similar to what you're doing now, more consolidation oriented?

Roy W. Olivier, CEO

I recently participated in a three-part advisor conference about a month ago. There is a webcast of my presentation that outlines the new strategy and provides further details. Essentially, this strategy will introduce capabilities that we currently lack, even after Resolute. It will significantly enhance our existing capabilities with Research Solutions products and Resolute’s offerings. In at least one instance, it will substantially expand our presence in another market segment. Typically, we generate most of our revenue from the corporate segment, but there are also academic and government segments, which together make up less than 10% of our revenue. One of these segments has a considerable academic presence, which intrigues us due to the opportunities for cross-selling, allowing us to market their product within the corporate sector and vice versa.

Richard Baldry, Analyst

Got it. Thanks for your help, and congrats on the record adjusted EBITDA numbers.

Roy W. Olivier, CEO

Thank you.

Bill Nurthen, CFO

Thanks.

Operator, Operator

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

Allen Klee, Analyst

Yes, hi. Good afternoon. Starting with ResoluteAI, you said it does around $1.3 million in ARR. Should we be assuming that it's going to be overall losing money, that it will have a negative impact on the bottom line? And if so, how should we think about that? And second, when you were talking about the earn-out, did you say that while it's around $1 million now, that they get the earn-out, if it gets to around $3.5 million? Is that what you meant, or did you mean something else? Thank you.

Roy W. Olivier, CEO

By the way, before I turn it over to Bill, FYI, we did file an 8-K that has an FAQ attached that goes into a bit more detail about the ResoluteAI acquisition and addresses some of your questions. But Bill, do you want to go ahead and take those?

Bill Nurthen, CFO

I want to clarify the terms of the acquisition quickly. It is essentially 3.5 times their annual recurring revenue, with the earn-out occurring 18 months after the close, minus an assumed enterprise value of $3.2 million. This is how the earn-out for Resolute is calculated. Regarding performance, as mentioned in the 8-K that Roy disclosed, we should anticipate a short-term drag on performance. At the time of acquisition, they were burning approximately $125,000 in cash each month. We are actively working to address this. In terms of costs, we've already eliminated about $130,000 in discretionary expenses within the first week of the transaction, and we have plans to reduce costs associated with how they generate revenue in the cloud. Additionally, we are focusing on increasing our cross-sell activities, although these products likely won't be ready for six months, around January or February, to begin sales. This aspect is where we believe the transaction’s true value lies. It's also important to note that this acquisition is part of a broader strategy, which includes two other deals discussed by Roy that are already profitable and cash flow positive. This particular transaction happened to come first, and we have further steps we can take that we believe will enhance Resolute’s performance and contribute positively to cash flow and profitability.

Allen Klee, Analyst

Thank you. How do you view your budgeting for operating expense growth in fiscal 2024 compared to revenues, excluding what I see as one-time costs related to the proxy and acquisitions?

Bill Nurthen, CFO

Sure. The response to that is that we are not focusing on high growth rates and expenses in our core business budgeting. We generally provide our employees with raises that average around 5%, so payroll will likely increase by that amount. However, in our core operations, we are not making significant new investments or additional hires that would substantially affect the business. I should mention that the expenses related to completing the acquisitions, particularly legal costs and those associated with the proxy issue we are addressing, are quite significant. When we report Q1, we will break these costs down and provide everyone with a clear understanding of what is operational versus what we consider unique. As I mentioned earlier, the core business remains unchanged, but we are facing some substantial challenges on the acquisition front. I believe that the legal expenditures we’re making now will be a wise investment for finalizing these deals and managing them internally in the long run, but they will have a short-term impact on us.

Allen Klee, Analyst

Okay, great. And then in terms of quarterly adding of ARR, how do you think about the actions you're taking? Do you think that's kind of the run rate for the last two quarters of incrementally added ARR, that's probably a reasonable rate going forward, or is there any reason to think that either macro or things that you've done might change that?

Roy W. Olivier, CEO

Well, I don't know how to answer that. We do remain concerned about some of the macro environment we're seeing. We are continuing to see a lot of companies that have spending freezes in place, others that want to reduce their spend through reducing the number of seats and that sort of thing. So, I am concerned about that, but I don't know that I have any data to support a specific number.

Allen Klee, Analyst

Okay, I have a housekeeping question. Can you tell us what your current share count is and maybe what the average share count was for the fourth quarter?

Roy W. Olivier, CEO

Bill?

Bill Nurthen, CFO

The current share count is approximately 29.5 million at the end of the quarter. We will be filing our K soon, which will likely show around 29.6 million shares outstanding. Regarding the average, it was around 29.1 million on a diluted basis.

Allen Klee, Analyst

Okay, great. Okay, thank you so much.

Roy W. Olivier, CEO

Thank you.

Operator, Operator

We will now conclude the question-and-answer session. I would like to turn the conference back over to Roy Olivier for any closing remarks.

Roy W. Olivier, CEO

Well, thank you. And thanks, everyone, for joining us on our call today. We look forward to speaking to you in November to discuss our first quarter fiscal 2024 results. Have a great day.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.