Research Solutions, Inc. (NASDAQ:RSSS) Q3 2023 Earnings Call Transcript May 11, 2023

Research Solutions, Inc. beats earnings expectations. Reported EPS is $0.01, expectations were $0.00375.

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 Third Year Ended March 31, 2023. As a reminder, this conference is being recorded. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to your host John Beisler, Investor Relations. Please go ahead.

John Beisler: Thank you, operator, and good afternoon everyone. Thank you for joining us today for Research Solutions’ third quarter 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 third quarter 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 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 earlier this afternoon. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link on the company’s website. With that, I’d now like to turn the call over to Roy.

Roy W. Olivier: Thank you, John, and thanks to everyone joining us today. I’m highly encouraged and excited about breaking the $10 million revenue for the quarter, our year-to-year revenue growth rate, our net income, EPS, and adjusted EBITDA results. These results spotlight the outstanding efforts our team puts in every day, helping our customers optimize their research costs and the efficiency of their research teams. It is truly a reflection of all the hard work that went into migrating several hundred new customers without requiring us to onboard new support or operations resources. I think it reflects positively on the scalability of our model and the diverse nature of our revenue streams that we are able to show strong year-over-year growth combined with a strong bottom line in this challenging economic environment. After Bill takes you through the results in detail, I’ll be back with more details about the quarter. Bill?

Bill Nurthen: Thank you, Roy, and good afternoon everyone. Total revenue for the third quarter of fiscal 2023 was $10.3 million. This was the company’s first ever quarter over $10 million in revenue, and it represents an 18.1% increase compared to the third quarter of fiscal 2022. Platform revenue increased 26% to $2.2 million, primarily driven by both upselling of current platform customers and a net increase of platform deployments from last year, including 25 net new deployments in the third quarter. Annual recurring revenue, or ARR, at the end of the quarter stood at $9.1 million, up 4% sequentially and 24% year-over-year reflecting our continued sales and upselling efforts and low churn of existing platform customers.

Please see today’s press release for our definition and use of annual recurring revenue and other non-GAAP items. Transaction revenue for the quarter was $8.1 million compared to $7 million from the prior year quarter, a 16% increase. I will remind everyone that our fiscal Q3 is typically seasonally the best time for our transaction revenue, and this quarter in particular was really strong. The increase is due primarily to organic growth complemented by the transaction revenue associated with the assumption and transfer of contracts from FIZ Karlsruhe, which took effect on January 1st, 2023. In the quarter, we had a little over 200 former FIZ customers do a transaction with us resulting in approximately $400,000 of transaction revenue. It is hard to say if this is a run rate for this set of customers at this time as on one hand Q3 is seasonably our best time for transactions, and on the other hand, there are a number of FIZ customers that have come over that did not do a transaction in the quarter.

That said, we view the economics of the FIZ transaction as very favorable to us, and that is before you take into account any upside that may come from upgrading these customers to our software platform. On our balance sheet, we have booked under accrued expenses our estimated payment to FIZ for the total customers that have converted as well as for the first of our quarterly earnout payments. Transaction customer count for the quarter was 1,417 versus 1,193 in the third quarter of fiscal 2022. The increase was driven by an increase in corporate customers related to the FIZ acquisition discussed previously. One final note on transactions is to keep in mind that we prepay a portion of our copyright expenses in advance. The strong performance in transactions means that we are having to re-up some of those prepays sooner than normal and at higher amounts.

This may have some impact on cash flow in Q4 and Q1 next year. However, it is not something that fundamentally alters the trajectory in cash flow we have experienced in recent quarters. Gross margin for the first quarter was 38.9%, 190 basis point improvement over the third quarter of fiscal 2022. The increases due to the revenue mix shift towards our higher margin platforms business. I will note that on a sequential basis, the gross margin was down slightly by 10 basis points, and this is really due to the strength of the transaction revenue in the quarter. The strength resulted in transactions producing 51% of the gross profit and causing the overall gross margin to dip down slightly. This should not be viewed as a trend, and I still expect that over time our gross margin will continue to increase as we continue to experience the long-term mix shift between our platform revenue and transaction revenue.

The platform business recorded gross margin of 88.1%, a 40 basis point increase from the prior year quarter. I continue to expect that for the foreseeable future that we can continue to maintain platform gross margin at 85% or above. Gross margin in our Transaction business was 25.3%, 130 basis point increase from the prior year quarter. We were able to successfully onboard and service the new FIZ customers without adding headcount to our operations and customer support teams. As a result, with the uptick in volumes, our service fee margins increased. In addition, we also experienced the slight uptick in our copyright margins. Total operating expenses in the quarter were $3.9 million compared to $3.6 million in the prior year quarter, due primarily to higher general and administrative costs, as well as increased expenses in sales and marketing and stock compensation.

The increase in general and administrative expense was primarily related to $180,000 in recruiting fees related to onboarding two new positions in the quarter. These fees were unique this quarter and we do not expect them to continue. The sales and marketing expense is related to our ramp up in marketing year-over-year, which includes increased in – increases in both headcount and discretionary marketing spend. Lastly, the stock compensation expense is related to our long-term equity bonus plan, which I discussed in full detail in our Q2 conference call. Net income for the quarter was $237,000 or $0.01 per diluted share compared to a net loss of $341,000 for $0.01 per share in the prior year quarter. Adjusted EBITDA was $559,000 compared to $94,000 in the year ago quarter.

The net income and adjusted EBITDA performance in the quarter both represent new company records and this includes the expense impacts of our Mexico direct-hire program, which took effect on January 1, 2023. We have now generated almost $1.2 million of adjusted EBITDA in the first nine months of the fiscal year compared to a loss of approximately $250,000 in the first six months of our prior fiscal year. Turning to our balance sheet. Our increase in profitability continues to drive increased cash flow. Cash and cash equivalents as of March 31, 2023, were $12.1 million versus $10.6 million on June 30, 2022. We have now generated $1.9 million of cash flow from operations in the first nine months of our fiscal year. There were no outstanding borrowings under our $2.5 million revolving line of credit, and we have no long-term debt or liabilities.

I would like to take a moment to talk about our relationship with Silicon Valley Bank, which is now a division of First Citizens Bank. As some of you may know, we have and for the time being continue to have a line of credit with SVB that required us to maintain 85% of our cash deposits with the bank. As a result, [indiscernible] collapsed, we had substantially all of our cash position in the bank. We also disclosed on March 28 that we had access to all of our deposits with the bank, access to substantially all of our services, including the line of credit, and that we had open accounts with two new banks as part of exploring the overall banking diversification strategy and new lending relationships. More recently, we have taken steps to reduce the allocation of our cash position with SVB and have worked with them to lower the cash threshold requirement in our line of credit agreement.

At this time, our cash position with SVB represents approximately 60%, 6-0, of our total cash position with the remaining balances being held with PNC Bank and Bank of America. We will potentially take that down in the near-term to as low as 50% of our total position as we work to further define our new banking strategy. Our new strategy will include balancing the safety of our deposits with operational efficiencies as well as access to lending facilities that will allow us to execute on our M&A. All that said, I’m happy to state that we were able to get through the SVB crisis without any material impacts to our employees, vendors, or customers, and have a number of good options for how we handle banking going forward. As we look ahead to Q4, we remain on track for a very strong finish to our fiscal year.

We will likely see a sequential dip at adjusted EBITDA related to the seasonality and transactions. However, I expect our results to be similar to what we have seen in prior quarters this fiscal year. In conclusion, while the economic environment has contributed to slowing our platform growth this fiscal year, the fundamentals and scale of our business have started to emerge as evidenced by our strong profit and cash flow growth. We have achieved this growth while continuing to invest in our business, which excites us about the prospects ahead. I’ll now turn the call back to Roy.

Roy W. Olivier: Thanks, Bill. As I stated previously, there’s a lot of great news in this quarter’s results and we continue to believe that we will end the year on a strong note. That said, I remain frustrated by the slowing in our platform growth. As a reminder, we have multiple areas involved in sales and upsells. We continue to see market headwinds associated with the general economic situation that shows up in slower onboarding of new customers, fewer upsells than we have seen in the past and more churn than we have seen in the past. Only one logo was lost to a competitor during the quarter. The remaining churn was due to our customers being acquired bankruptcy or cancellation or downsizing, the spend due to the overall economic pressures in their business.

As I will discuss in a minute, we continue to release enhancements and continue to have strong NPS scores with our customers. We’re focused on improving our sales process, our sales teams, and our overall sales activity levels to capitalize on the upswing as the economy starts to recover. I continue to expect that we can grow the platform business at greater than 30% year-over-year, and I’m confident that we will return to those levels as the economy improves. In the meantime, the actions we took over the past year to impact our transaction growth is driving material improvements in our revenue growth, profitability, and cash flow. We continue to make great progress in many areas of the business. During the quarter, we dropped three release updates to the product, adding many new features including RSS feeds, updated search capability, save searches, dual currency invoices, and much more.

All of these updates have been well received and are generating pipeline opportunities for upgrades. You can learn more about our releases on our website under the resources tab in release notes. Some of our recent releases are utilizing AI in our workflow for the first time. As a reminder, we use AI, NLP or Natural Language Processing in our Cure Data’s product today. That products allows a user to set up a search and then use our AI, NLP technology to read and score documents in the search results. Our April release included an AI tool to recommend scientific articles that are related to articles the user is viewing. For example, if you are reviewing an article related to peanut allergy, our recommendation tool will show you other articles that are related to that article.

We will be releasing some additional AI technology in our late May release, and we will continue to focus on integrating AI and NLP into our workflow to help researchers to the extent that the results are accurate. As we all know, many of the AI tools generally available today are learning from publicly available content, which is in many cases not accurate. We’ll continue to focus on tools that provide accurate and relevant results to our users. On the sales front, we’re working on several exciting opportunities that we think will materializes revenue in the near future. As Bill reported, we are excited about the impact that the FIZ customer base is having on our business, and a key go forward initiative is related to upgrading those customers to platform customers.

As a reminder, we upgraded about 60% of the research solutions customers to the platform after it launched. In the past year, we’ve worked hard to develop referral partners with publishers and other related products that are not directly competitive. Those relationships are resulting in a material amount of traffic to Article Galaxy, our core product. Going forward, converting that traffic to transaction sales and ultimately platform sales is key and part of our sales and marketing priorities. The sales team have also been working on what I would call larger opportunities around the world. A few examples are, we signed a publisher deal where we will manage their paywall for customers buying articles directly from the publisher. In other words, we will deliver all the transactions that are purchased through our platform and all the transactions purchased directly from the publisher’s website or publisher’s paywall.

We were recently awarded a country deal to service all the libraries in that country. This deal includes both platform and transactions within the country. We will report more on this deal in the future as we onboard the customers and get a feel for the actual revenue run rate. It is early days, but the upside of a deal like this has the potential impact to our annual revenue of up to $1 million per year. We are working on a large partnership opportunity that would expose our platform and transaction business to many customers in Asia. I’m excited about what this may do for us in the second half of this calendar year. On the marketing front, we continue to make great progress in driving marketing qualified leads or NQLs through a variety of activities including digital marketing, webinars, new sources of content, and improving our sales process.

As a result of this, we’re seeing massive improvements in generating MQLs, which are resulting in sales pipeline growth, which we expect to drive sales in future quarters. The new content, as an example, has improved our LinkedIn followers by 34% year-over-year. And our total impressions are up 8x year-over-year. While there are always process and operational improvement opportunities, we remain confident about these things translated into continued top line and bottom-line performance as we go forward. On the M&A front, we continue to work several opportunities and hope to have something to report soon. That said, we will only execute on a deal that is in alignment with our long-term financial and strategic goals. With that, I’d like to turn the call back over to the operator for Q&A.

Operator?

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Allen Klee with Maxim. Please go ahead.

Operator: [Operator Instructions] At this time, there are no further questions. This concludes our question-and-answer session.. I would like to turn the conference back over to Roy Olivier for any closing remarks.

Roy W. Olivier: Well, thanks everyone for joining us today. As a reminder, we will be participating in the Three Part Advisors virtual conference in June. For more info on this event, please contact Three Part Advisors. We look forward to speaking to you in September to discuss our fourth quarter and full year results, and hope you have a great evening.

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