Earnings Call Transcript - RSSS Q1 2020

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 First Quarter 2020 Ended September 30, 2019. 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’d 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.

Peter Derycz, President & CEO

Thank you, operator, and good afternoon everyone. We got off to a strong start in fiscal 2020 with record gross margin due to both continued progress in our high-margin, SaaS-based platform business and a return to growth in our transaction business. As we continue to expand the percentage of enterprise customers within our platform client base, we are cautiously optimistic that this trend in transaction revenue growth will continue. In fact, during our first quarter, we shifted all marketing resources to focus on growing our enterprise customer base through business-to-business campaigns. As we talked about on our last earnings call, we gained valuable knowledge on a daily basis regarding best sales and marketing practices to drive platform sales, and believe targeting specific organizations for our enterprise offering to be the most effective strategy at generating new, paying customers. We also implemented several new strategies to better optimize our lead nurturing practices, which have already been successful in driving conversion. Given that we have an innovative and state-of-the-art research platform, a fully optimized sales team, and a customer happiness group with an exceptional track record in retaining customers through best-in-class service, we remain confident in our foundation and believe our enhanced ability to get more leads in the door with our sales team will accelerate platform revenue growth going forward. I will provide updates on various platform enhancements; expand on upcoming initiatives and walk you through what we believe will lead to a better conversion rate. But first, I'd like to pass it over to Alan to walk through our fiscal first quarter 2020 financial results in detail. Alan?

Alan Urban, CFO

Thanks, Peter and good afternoon everyone. Jumping right into our fiscal first quarter 2020 results, compared to the prior year, our platform subscription revenue increased 45% to $856,000 in Q1, which was driven by continued up-selling of current platform customers, along with a 34% year-over-year increase in total platform deployments from 239 to 320. This translates into 19 net incremental deployments in Q1. The quarter ended with $3.5 million in annual recurring revenue, up 8% sequentially and 43% year-over-year. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms. Our transaction revenue increased by 6% to $6.7 million compared to $6.4 million in the same year-ago quarter. Transaction count increased from approximately 202,000 to 216,000 and total active customer count grew from 1,084 to 1,134. Within the total active customer count, the number of corporate customers was up slightly to 853, while academic customers were up 18% to 281. The improvement in transaction revenue was primarily a result of continued growth from new customers and the stabilization of historic decreases from large existing customers. While one quarter does not make a trend, as Peter said, we are cautiously optimistic that the stabilization of historic decreases from large existing customers will continue, resulting in continued transaction revenue growth. Together these businesses delivered consolidated revenue of $7.6 million, an increase of 9% compared to $7 million in the same year-ago quarter. Moving on to gross margin, our platform business saw gross margin increase by 80 basis points to 82.4% compared to the same year-ago quarter. This increase was driven by continued proportional decreases in third-party data costs. Our target gross margin in the platform segment remains in the high 70% to low 80% range. Gross margin in our transactions business was up 80 basis points to 23.9%, primarily due to proportionally lower personnel and copyright costs. As a result, consolidated gross margin increased 250 basis points to a quarterly record of 30.5%, compared to the same year-ago quarter. The increase was primarily driven by a continued revenue mix shift to our higher-margin platforms business and we expect this number to continue improving as our platform business becomes a higher percentage of our total revenue. Our total operating expenses were $2.4 million compared to $2.2 million in the same year-ago quarter. The increase was primarily a result of our commitment to investing in sales and marketing as we expand our platform business and greater professional service fees. Net loss from continuing operations totaled $108,000 or NIL per share compared to a net loss of $220,000 or negative $0.01 per share in the year-ago quarter. Adjusted EBITDA totaled negative $36,000 compared to negative $102,000 in the year-ago quarter. Now, moving on to the balance sheet, cash and equivalents at September 30, 2019 increased to $5.6 million versus $5.4 million at June 30, 2019. There were no outstanding borrowings under our revolving line of credit, and 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 Derycz, President & CEO

Thanks, Alan. First, I'd like to talk about the various updates we made to our platform during the quarter and our upcoming plans for fiscal 2020. We pride ourselves on providing our customers with an incredibly useful and innovative research platform that cannot be found anywhere else on the market. We also take pride in being heavily focused on listening to current and prospective customers regarding the type of tools they are looking for to make their research processes more efficient. As a result, our platform is consistently evolving with enhancements being made on a daily basis. But as we do every quarter, I would like to highlight some of the more notable initiatives that we completed during the quarter or are in progress for fiscal 2020, to show tangible examples of our commitment to providing a best-in-class product for our customers. With that being said, during the quarter in addition to various improvements to existing gadgets, we also increased the connectivity between many gadgets to our Reference Manager gadget. We remain super excited about our Reference Manager gadget, which is being upgraded this month in both functionality and robustness. In conjunction with this, we completed all coding and quality assurance checks on our new Microsoft Word plugin, compatible with both Microsoft and Apple operating systems. This MS Word plugin will be available to our customers as soon as it’s added to the Microsoft Apps Store, which we expect to happen this quarter. Going into Q2, we have a lot more updates coming, including security upgrades, UI/UX improvements and a host of gadget improvements and the launching of our search and discovery gadget, which will be fully integrated with the reference manager gadget, as well as our overall gadget ecosystem. We are also in full development mode on Article Galaxy Scholar, which is basically a dimension of Article Galaxy, particularly tailored to the university and academic markets, where we are seeing increased demand for our solutions. With regard to our product development strategy and roadmap, we have big years for what our enterprise customers and prospects want from us. So we will continue to be very market-focused in terms of prioritization and development, but will also do some unique experiments of our own to highlight the tremendous flexibility and capabilities of our platform, Article Galaxy. In addition to consistently upgrading our platform, we continue to explore various partnerships to expand our presence within the research community. Last fiscal year we entered into agreements with several notable companies and academic institutions, including Lean Library, OCLC, and the Big Ten Academic Alliance. Not only is our technology valuable to these companies' institutions, but it presents an opportunity to grow our brand awareness within their respective user bases. Most recently, a couple of weeks ago, we also announced our partnership with Evidence Partners. We are very excited about this, as their product DistillerSR and Article Galaxy are highly complementary. Continuing to pursue these mutually beneficial partnerships with other research-focused organizations is an increasingly important part of our growth strategy. Next, I wanted to touch on the improvements in conversion rates and what we believe will accelerate revenue growth for our platform business going forward. As I mentioned earlier in the call, we have narrowed our platform marketing focus to the enterprise level and are confident based on the various sales and marketing strategies we tested last fiscal year, that this is the best use of our resources to substantially grow our platform revenue. We have implemented a new system that has proven to be already much better and more efficient at nurturing cold leads to a point where they are willing to have a conversation with our sales teams. Once the lead is warm enough to speak with our sales team, we find our conversion rate to improve significantly. This tells us that our sales team is very good at showcasing our platform and all the benefits that it could provide a research-focused organization. We certainly look forward to this momentum continuing to gain traction. Lastly, I wanted to highlight our rebranding process that we announced via a blog post last week. We have begun to transition our three existing brands into one company name, Research Solutions, and one product name Article Galaxy. In doing so, ReprintsDesk, what we refer to as our transaction business, will fully integrate into Research Solutions over the coming months. The decision to rebrand was driven by the desire for simplification and because the main ReprintsDesk brand was causing confusion with new platform and transaction buyers that had never heard of us before. We will keep the ReprintsDesk name in our updated logo for a transition period so that customers familiar with that brand know it's still the same company. Our sales force will now pitch a name that makes sense to both new platform users and transaction buyers, while the updated logo will ensure our existing customers are not left in the dark and feeling confused. We're very excited to transition the company under our consolidated brand. Overall, a strong start to fiscal 2020 gives us the confidence that we are making the right decisions and our customers continue to find our platform valuable. As I mentioned earlier, we have a strong foundation that is fully equipped and ready to substantially increase our platform customer base, and we believe we have implemented the necessary sales, marketing, and platform enhancement strategies to expand our presence and further accelerate revenue growth. As these strategies continue to ramp up and become fully integrated into our day-to-day processes, we anticipate these initiatives will generate a meaningful increase in new users to our platform and fully expect fiscal 2020 to be another pivotal year for us. With that, I'd now like to turn the call back over to the operator for Q&A. Operator.

Operator, Operator

Thank you. [Operator Instructions] The first question comes from Peter Rabover who is with Artko Capital. Please go ahead, sir.

Peter Rabover, Analyst

Hey guys, congratulations on a nice quarter. I wanted to ask about the recently announced partnership with Evidence Partners. If you guys could elaborate how you think that's going to benefit your business and what it means to I guess both segments and anything - any color you could add would be great.

Peter Derycz, President & CEO

Yep, thank you, Peter; happy to talk about that. We first stumbled into each other as we had some shared customers. The platforms they offer are very highly complementary to what we do and vice versa, so we are pretty excited about that partnership. The companies are very similar in size and in history, so I’m just getting to know them, being with them, and learning more about those products and them learning more about our products just helps us understand that certainly it’s really awesome. So pretty excited about that. I think it falls into the context of partnerships in general. You know, over the last 10 to 12 years we've announced various types of partnerships, but there's a difference between the way we are doing partnerships now. We are really focusing on highly complementary ones like Evidence Partners and doing a bit of micro-management. So not just announcing a partnership and seeing what happens, but rather really diving into each other's customer base and figuring out how we can really help each other out. So we are being a little bit more selective. Evidence Partners is a great one, and we're also doing a lot of follow-up, joint marketing, and a whole bunch of other things with them and other partners that we decide to engage with. So you would probably see us doing fewer partnerships, but meaningful ones like this.

Peter Rabover, Analyst

Do you have any data in terms of the size of their customer base that you could share with us, so we kind of have an idea of the potential – how big this partnership really is?

Peter Derycz, President & CEO

Yeah, I think they don’t have exact numbers on their business, but I think the impression I have is that our platform customer base is very similar in size to their platform customer base. So I think, yeah, I’d assume they’ll have a few hundred customers on their side, and that’s sort of my understanding at this point.

Peter Rabover, Analyst

Okay. And maybe I guess if you could give a little more color regarding your sales team for a few quarters now and you know you guys are obviously growing the subscriptions. So maybe you could tell us what's working and what's not working and you know kind of as you gather more data in Evidence.

Peter Derycz, President & CEO

Yeah, I think we've mentioned in the past that we're really focusing on enterprises specifically. We had a bit of a broader net in the past where we were trying to just, you know, fight for users on the internet and try to get them up-sold. That part was not working that well, so we said okay, well, what did work was there were some free-to-enterprise conversions that were effective. So we really just focused on campaigns and marketing to enterprise directly. So, that’s in full swing now. We have historically been able to do what I would consider a stellar job in retention and up-selling; that’s also part of our revenue mix. I think we've got that process and those procedures down pretty well. The retention in up-selling is going very strong. The new sales team, part of them are new, and part of them are old, and we basically kept the good salespeople over the years and then trained up new ones. So we have some lead nurturing processes in place that we've been fine-tuning, and I’d say the key thing in there for us is really effective appointment setting. So, we know the companies that are out there that should be using our platform, and we know that they don't know us, because we don't have a brand recognition benefit with a lot of companies that we’re approaching. But if we can get them onto a demo with us, then our conversion goes way up. So the focus really now is sort of in that appointment setting arena, and that seems to be working for us.

Peter Rabover, Analyst

Great! Thanks, and you know I noticed your average ticket keeps going up, and is that more of a result of your upselling or are you raising prices, and I mean – do you think that maybe you're underpricing the product a little bit if you're able to get these sort of increases?

Peter Derycz, President & CEO

Oh, I'm absolutely sure we’re underpricing the product; I just believe in the product so strongly. I think on the pricing, you know like I mentioned, the one big issue is we are not IBM or Google or Microsoft, right? When we go talk to companies, they just don't have the brand recognition that people, if they like the products they buy it automatically. Therefore, pricing, I think we are probably underpricing it, but the upward trend you are seeing is primarily driven by upselling. So upon contract renewal, you know the retention rate is very high. Companies that use the product tend to stick with it for a long time. So, there is upselling going on there with our customer happiness group, and that’s one thing to keep in mind as you see that number continue to tick upwards. There will be an occasional larger deal that filters into the new sales that could partly play a role in there, but I think overall the main point is this product is just getting better every day. We are delivering more features, more functionality, and finding better ways to help customers save time and money and get their R&D done more efficiently. As long as we continue to do that, I think we’ll be able to increase that average price going forward.

Peter Rabover, Analyst

Great! And I guess I'll ask one more, but I guess any plans to try to get uplisted on NASDAQ or you know do more on the stocks, i.e., create more liquidity from the stocks. Any thoughts on that?

Peter Derycz, President & CEO

Yeah, we renewed our NASDAQ application. There are a couple of boxes that are still un-ticked. One of them, I believe – Alan can correct me if I’m wrong here, but one of my beliefs is we need the bid price to be above $2 continuously for 90 business days. We may have checked that box, but we renewed our application to ensure that we can have a continuous following of that trend. The other piece is we’re a little bit shy on equity, so I think we need to probably get another $1 million or $1.5 million or $2 million added to our balance sheet to tick off that section in the box. So we're moving in that direction, probably not as fast as we could or should, but definitely that is happening and it’s one of my objectives.

Peter Rabover, Analyst

Great! Hey, thank you so much for your time and the color.

Peter Derycz, President & CEO

Alan, do you want to add something to that?

Alan Urban, CFO

Yeah, I was just going to say we've already – the only outstanding item is the second item you spoke about, the equity item; towards the first, the bid price, we have satisfied that already, so really there's only one item.

Peter Rabover, Analyst

Okay, great! It sounds like you're on your way there, and I guess with the growth and operating profit, so thanks for sharing that.

Peter Derycz, President & CEO

Thank you! Thank you for your support.

Operator, Operator

The next question comes from George Melas who’s with MKH Management. Please go ahead, George.

George Melas, Analyst

Hello! Hi guys, a good start to the year. Can you sort of help me understand a bit how customers progress through your funnel? I mean, imagine you start, you identify 100 customers that you think are really well suited to use your platform. How many sort of get to a demo stage, and then of those, how many convert to a deal? Just trying to understand what's the progression through the funnel?

Peter Derycz, President & CEO

Yeah, I think on the nurturing side, you know there are – the more you get into understanding marketing for this type of product, the more you realize how many touch points are really involved. So I think in the early discovery phase, there are lots of touch points that customers go through. They’ll send our website around the company to each other, they’ll send a text message, ‘hey, check this solution out’ and be talking about it. There's a lot of touch points they check out; web pages, case studies, and see what we’re doing with other customers as well, read our blog posts, download white papers – just across the spectrum between targeted ads and other forms of outreach, there's a lot of exploration that goes on in the touch points. After a certain point they do reach a stage where we identify that they are the right size organization and we’d like to spend the resources to try to contact them and nurture them towards that phone call and demo. I think once we get there, that conversion – I'm not sure Alan if you want to quote a number there or give any guidance on that. I’m not sure if you’ve done that publicly, but we do keep track of that.

Alan Urban, CFO

Yeah, obviously it’s something we track internally and keep a close eye on, but as yet I don't think we've disclosed any of that data publicly.

George Melas, Analyst

Okay, okay. Maybe I can ask, does that conversion to sort of the middle of the funnel, moving it to the demo stage and then from the demo stage to a deal. First, how long does that – I'm sure there’s big ranges, but what will be the range of the average that it takes? And have the conversion sort of rates stayed roughly within a fairly narrow range over the last couple of years or has it improved or does it fluctuate a lot?

Peter Derycz, President & CEO

Yeah, there's a lot of numbers that play into that. I think in terms of what we call qualified leads, we've grown that quite a bit. If you’re closing the same number of deals and just added a bunch of new deals in the pipeline that you didn’t have before, then that conversion rate fluctuates a lot. So it's hard to give you a number at this point. We haven’t disclosed that publicly in any way, but I'd say in terms of trying to close, we've seen ranges of anywhere from a couple of weeks all the way to around six months.

George Melas, Analyst

Okay, yeah.

Peter Derycz, President & CEO

There have been larger deals that should have taken longer, just when the customer goes through some prolonged verification processes. But I'd say for the average size of the customers that we have, we’ve seen that go from two weeks to six months, sort of in that type of range. We are doing work to whatever the average is, which we haven’t disclosed. We are working to actually reduce the cycle time, and at some point, we will disclose what it looks like, but just know we are improving that number all the time.

George Melas, Analyst

Okay, great. And then maybe just one last quick question. Evidence Partners, what do they really do and what is so complimentary with your platform services?

Peter Derycz, President & CEO

Yes, so Evidence Partners, I am not an expert on their products, but basically they help organizations review scientific literature in a systematic way, and the reason organizations do that is because regulatory bodies like The European Medicines Agency and the Food and Drug Administration require companies with products on the market to systematically review scientific literature that mentions their product. They need to look for things like adverse events and report these to the regulatory bodies before it becomes a public issue. So they do that, and to do that, they have to review a lot of scientific literature. What we provide is actually all that scientific literature. Evidence Partners provides the tools to do the analysis, but they do not provide the literature. We provide the literature; we don't provide the tools to do the analysis. So it's a perfect complement, and we've found, just through that, we have some joint customers who use our products heavily when doing that kind of process.

George Melas, Analyst

Great! And the idea is to do some joint marketing and to open up your customer base to them and vice versa, is that the idea?

Peter Derycz, President & CEO

Correct! So they will be reaching out to their customer base to tell the customers, ‘hey, you plug in Article Galaxy and your whole process just got a lot simpler in doing that work.’ So that's a great message for their customers. They don’t have to step away from doing things and then go out and try to find literature somewhere else. So that messaging communicates to their customers. Just with that, we run into customers who have products in the market that are regulated. When we run into those, our customers also mention that Evidence Partners has a great tool to assist in that process.

George Melas, Analyst

Do they do that on a managed service basis or do they provide the tool to the customer and the customer does that analysis or that review of the literature?

Peter Derycz, President & CEO

No, the customer does the analysis. I believe they are heavily involved in the setup and training, as that just matters for the number of products being followed, but I believe they provide training and setup, and then the customers do the work on their own. So what we’re going to be doing is not just joint marketing, but over the next few months, they will be integrating Article Galaxy buttons into their product. So that's the ultimate goal, to have direct Article Galaxy access from within their product. That's definitely going to happen as well.

George Melas, Analyst

Great! Okay, thank you very much Peter, thank you Alan.

Peter Derycz, President & CEO

Thank you. Pleasure!

Operator, Operator

The next question comes from Greg Silvershein who is with Grand Equity Corp. Please go ahead, sir.

Greg Silvershein, Analyst

Hey guys, congratulations on a good quarter. I'm curious about your growth rates domestically versus internationally and if you could just speak to that; that would be very helpful.

Peter Derycz, President & CEO

Yeah, in general it depends on how you look at it, but I would say that our revenue, these are gross numbers. Alan, correct me if I’m wrong, but I’d say we probably get 40% to 45% of our business from the U.S. market and 40% to 45% from the European market, with the remainder coming from the rest of the world, with a bit of a heavier emphasis on Japan. And I'd say we tend to grow sort of equally across the board. We do find that selling into the U.S. market seems to be – the sales cycles are faster in the U.S. and slower in Europe. But I think overall if you look it’s probably across the board.

Greg Silvershein, Analyst

Okay. Do you have the sort of MD Andersons or Sloan Ketterings or other research hospitals as utilizers or users of the platform?

Peter Derycz, President & CEO

We are not that heavily involved in the hospital marketplace. I believe our tool is useful to them. We are used more by companies in healthcare, life sciences that have active R&D going on; that's sort of our sweet spot. The tool is, I think, useful for the hospital market; we just haven’t focused a lot on it, and I think it’s something to be explored on our side.

Greg Silvershein, Analyst

Got you! Okay, and then lastly, when new gadgets are released, how do users become aware of them?

Peter Derycz, President & CEO

Yeah, so we have – if you go to researchsolutions.com, you'll end up at our Article Galaxy sort of website, and in there, there is a link called Resources, and in there, there is a section called Release Notes. So we’ll typically put updates there. There are some other tools we have for existing customers that they can subscribe to some internal custom support channels, to get notified of things, but Release Notes is something that we're increasingly focused on, because we are making a lot of improvements. I think in the past we haven’t been too good at communicating what they are, so we created this Release Notes, and I'm particularly, personally involved in trying to get those Release Notes to be a more accurate reflection of the improvements we are making. So you will see more of them coming out over time just because, like I said, I'm personally focused on ensuring that the investor community, as well as the customer community and even our own employees know what we are releasing. So you’ll see a lot more activity there, and just feel free to subscribe to the release notes.

Greg Silvershein, Analyst

Great! Thank you.

Peter Derycz, President & CEO

You’re welcome.

Operator, Operator

At this time, this concludes our question and answer session. Before we conclude today's call, I would like to provide Research Solutions Safe Harbor statements that include 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 the management during today's call contain forward-looking statements that include information relating to future events and the 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 market acceptance of the company's products and services, and the expected continued growth in Transaction and Platform deployments and revenue that the company will be successful in executing its sales and marketing strategy, that the company will maintain and continue to develop its proprietary software 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 for future performance or results and will not necessarily be accurate indications of the times at or by which the performance of those results will be achieved. The forward-looking statements were based on information available at this time. They are made in our management's good faith belief as at that time with respect to 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 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, and all the risks and related information described from time-to-time in the company's filings with the SEC, including the financial statements and related information contained in the company's Annual Report on Form 10-K and 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 measures by the SEC. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared or presented in accordance with 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 the recording of today's call will be available for replay after 08:00 P.M. Eastern today and through December 5, 2019. Please refer to today's press release for dial-in instructions. Thank you for joining us for the presentation. You may now disconnect.