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

Research Solutions, Inc. (NASDAQ:RSSS) Q3 2024 Earnings Call Transcript May 11, 2024

Research Solutions, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

John Beisler: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Research Solutions’ third quarter fiscal 2024 earnings call. On the call today are Roy W. Olivier, President and Chief Executive Officer; and Bill Nurthen, Chief Financial Officer. After the market closed this afternoon, the Company issued a press release announcing its results for the third quarter of fiscal 2024. The release is available on the Company’s website at researchsolutions.com. Before Roy and Bill begin their prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors.

We refer you to Research Solutions’ recent filings with the SEC for a more detailed discussion of the risks that could impact the Company’s future operating results and financial conditions. Also on today’s call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. A reconciliation of those measures to GAAP measures is included in the earnings release issued earlier this afternoon. Finally, I would like to remind everyone this call will be recorded and made available for replay via a link on the Company’s website. I would now like to turn the call over to Roy W. Olivier. Roy?

Bill Nurthen: Roy, you may be on mute.

Roy Olivier: I’m on mute. You think I haven’t done this before? Thank you, John, and thank you, Bill. As we’ve discussed on previous calls, it is our strategy to reimagine and improve the research workflow. Our recent acquisitions are a big part of that journey’s success. After a few months of performance from Scite and Resolute, I remain excited and committed to the vision and how Scite and Resolute fits into that. We had strong quarterly results in terms of overall growth, adjusted EBITDA and cash flow from operations. The results are starting to show the ability of the business to scale as we continue this journey. The quarter represents a run rate of more than $48 million in revenue, with $16 million in SaaS platform revenue and approximately $32 million in document delivery or transaction revenue.

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Q&A Session

I’m excited about the strategic and product progress we are making and what it means for our future growth. That said, I’m very excited about the financial transformation the business will undertake as we continue this journey and how it will translate to shareholder value creation. There’s lots of moving pieces in the numbers. So, I’d like to pass it over to Bill to walk through our fiscal third quarter 2024 financial results in detail, and then I’ll be back to discuss the businesses progress and quarterly accomplishments in more detail. Bill?

Bill Nurthen: Thank you, Roy, and good afternoon, everyone. Before I begin, I’d like to remind everyone that our third quarter results now include a full quarter’s contribution from both the acquisition of ResoluteAI, which closed on July 28 of last year, and the Scite acquisition, which closed on December 1, 2023. For fiscal year-to-date numbers, there are approximately eight months of ResoluteAI and four months of Scite factored into the numbers. Total revenue for the third quarter of fiscal 2024 was $12.1 million, a 17% increase from the third quarter of fiscal 2023. Our platform subscription revenue increased 76% to approximately $4 million. The growth was primarily driven by revenue contributed from the Scite acquisition, as well as a net increase of platform deployments from last year and the addition of platform revenue from the ResoluteAI acquisition.

We ended the quarter with $16.6 million in annual recurring revenue, or ARR, up 82% year-over-year and about 6% sequentially. We added about $1 million of incremental ARR in the quarter, the vast majority of which was in the Scite B2C business. I wanted to take a few minutes to discuss the limited sequential increase we experienced in B2B ARR in the quarter. We did, in fact, grow both Scite B2B and Article Galaxy in the quarter. However, the vast majority of that growth was offset by churn in the ResoluteAI business. While this churn was material, it was not completely unexpected and was concentrated across three large customers, all of which had renewal dates in Q3. The downside of this is the effect that it had on ARR in the quarter. The upside is that we have now cycled through most of the ResoluteAI customers from a renewal perspective, and a good portion of the churn risk is behind us.

This does not mean that we will not have future churn in ResoluteAI. However, we believe the worst is largely behind us, and we are rolling out new products using the Resolute technology. On a positive note, Scite growth in both B2B and B2C ARR in the quarter was strong and above expectations. Additionally, we had some large cross-sell successes of Scite within our Article Galaxy customer base, which Roy will speak about in more detail. When we announced the Scite acquisition, we noted that they had about $3.6 million of ARR. Today, they are at roughly $5.5 million, and we continue to believe there’s a lot of upside in both the B2B and B2C side of the business. Please see today’s press release for how we define and use annual recurring revenue and other non-GAAP terms.

Transaction revenue for the third quarter was $8.2 million, a 1% increase from the prior year quarter. This quarter represents our first year-over-year comparison that includes the customer contracts acquired from the FIZ Karlsruhe acquisition, which was effective January 1, 2023. While the year-over-year increase was modest, Q3 is typically our seasonally best time for transaction revenue, and this quarter represented a company high mark for quarterly transaction revenue. Further, the year-over-year comparison was largely affected by a normal slowdown we experienced during the week of Easter, which was in March this year and was in April of last year. In looking at early returns for April, the opposite effect is happening, and we are up significantly year-over-year with a strong start for the quarter.

Our total active customer count for the quarter was 1,426 compared to 1,417 in the same period a year ago. Gross margin for the third quarter was 45.2%, a 630 basis point improvement over the third quarter of 2023. The increase is due to the ongoing revenue mix shift towards our higher-margin platforms business. The platform business recorded gross margin of 85.5%, a decrease compared to 88.1% in the prior year quarter, but within the range of our gross margin expectations for platform revenue. The decrease is also related to the inclusion of Resolute’s platform revenues, which generate a lower margin. Gross margin on Article Galaxy remained consistent with recent history, and the gross margin of Scite’s products are similar to that of Article Galaxy.

Gross margin in our transaction business increased 40 basis points to 25.7%. The increase was primarily attributable to increased copyright margins. This result was a little higher than we normally expect. And going forward, margins will likely fall back into a range between 24% and 25%. We remain confident in our ability to increase the Company’s blended gross margin as the revenue mix continues to be more heavily weighted with platform revenues. Platform revenues are now about 1/3 of the business, but contributing over 60% of the gross profit. Total operating expenses in the quarter were $5.4 million compared to $3.9 million in the prior year quarter. The increase is primarily attributable to the addition of ResoluteAI and Scite in the current quarter’s results, as well as approximately $300,000 of non-cash depreciation and amortization expense, largely associated with the amortization of intangible assets associated with the acquisitions.

Turning to profitability. I mentioned on our last call that I thought the back half of our year would be much cleaner from a one-time expense perspective, allowing us an opportunity to demonstrate the profitability of the business. Recall that in the first half of the year, we experienced roughly $1.3 million in expenses related to the proxy matter and M&A activities. In Q3, with those expenses largely behind us, we were able to post an operating profit and positive net income. Net income was $76,000 or breakeven on a diluted per share basis compared to net income of $230,000, or $0.01 per share in the prior year quarter. This profitability also translated into a strong adjusted EBITDA performance. We generated a company record of $961,000 of adjusted EBITDA for the quarter compared to $559,000 in the year ago quarter.

Turning to our balance sheet. We also experienced a new company record with respect to cash flow from operations in the quarter. In the quarter, we generated over $2 million in cash flow from operations compared to $0.8 million in the year ago quarter. Cash and cash equivalents as of March 31, 2024 was $4.2 million compared to $2.7 million in the prior quarter, and that is where we stood at the end of Q2 after the cash spent for the Scite acquisition. We also entered into a new $500,000 line of credit with PNC Bank that remains untapped. This line is flexible from both a covenant and cash diversification perspective, and we think it is a good fit for our needs and where we stand with the business today. As we look ahead, I think Q4 has the potential to be very similar to Q3 with some exceptions.

First, with Q3 seasonally being our strongest period for transaction revenue, I would expect transaction revenue to be down sequentially, but up modestly year-over-year. Second, we are seeing very positive returns on our advertising spend related to B2C customer acquisition. As a result, we will be experimenting with increased advertising spend in Q4. So, our sales and marketing expenses will likely be higher. All that said, I think the quarter will be relatively clean, and we should experience another strong adjusted EBITDA performance with cash flow behind it. I’ll now turn the call back to Roy. Roy?

Roy Olivier: Thanks, Bill. In our last earnings call, I discussed our BHAG or big goal of $30 million in ARR by the end of FY ’26. Our ARR at the end of Q3 is $16.6 million, which means we’re pacing a little behind that goal. However, this was largely due to the churn Bill mentioned within the ResoluteAI business. Overall, our progress toward the BHAG will not be straight line, but I remain comfortable with where we stand today. In addition, I’m very pleased with our revenue, adjusted EBITDA, cash flow from operations performance in the quarter, but we have several areas we need to continue to work on. My top three priorities are as follows. First, integration across the new products that we’ve acquired as part of the Resolute and Scite acquisitions.

We have completed the first phase of the Scite-Article Galaxy or AG integration. We now support single sign-on, so users can seamlessly jump between AG and the Scite product. We also have added the Scite badge to the Article Galaxy product. As a reminder, this unique feature of the Scite product allows for a FICO or Rotten Tomatoes score for articles, so the user can more quickly judge the quality of the article or articles, while an AG user can click on that badge and jump to the Scite product to see detailed results and all users in Scite can see pricing and availability of the articles in the Scite platform. The second is Article Galaxy growth. As a reminder, we have four drivers of Article Galaxy growth. The team will refer to as the new-new team, sells new logos and is on track to beat last year.

The new existing team, which sells transaction-only customers, Article Galaxy, is also on track to beat last year. We continue to see challenges with the upsell team who historically has delivered strong performance through moving customers up to more advanced features or software versions in addition to adding seats and licenses. We continue to see that our customers are more careful with spend versus previous years. The fourth driver of churn, which continues to remain high — higher, I’m sorry, than we have historically seen. That said, we have not seen any material increase in churn due to competition. A majority of our churn is uncontrollable and that it is due to the customer being acquired or going out of business. There is a block of controllable churn that we need to work on, and we brought in new leadership for that group, who’s doing a nice job setting up new workflows and increasing our customer outreach to get ahead of this problem.

My third priority is, where we invest in growth? As we enter the next phase of our growth, we need to be thoughtful about how and where we will make investments to drive that growth. I think it’s time we move forward building out a more focused sales approach around verticals or products to accelerate new logo onboarding. We are in our FY ’25 planning now, and I’ll report back on this in our next call. We have seen a lot of exciting activity with the new Scite product. From a B2B perspective, I reported in our last call that Scite B2B ARR was around $400,000. We closed over $200,000 in new Scite deals in Q3 alone, some of which were cross-sell into our existing customer base. We have a very strong pipeline and expect to see strong results in the next couple of quarters.

As part of the aforementioned cross-sells, we closed the largest Scite deal ever to a large pharma customer, which is a three-year contract. We closed our second deal in India, our first deal in Mainland China and two more first for that country deals in the Middle East. On the Article Galaxy side, we’ve seen some good progress in the new-new teams in terms of competitive takeaways and in closing larger deals. We closed the large Article Galaxy deal to a top 10 pharma customer during the quarter. I’m excited to see the progress here, as in the past, we’ve had more success with SMB. While SMB remains a majority of our new logos, our competitiveness in large deals is great for the business long term. On the Resolute side, we saw unprecedented churn in Q3.

As Bill mentioned, we do not expect that churn to return — I’m sorry, to remain and expect it to return to more historic levels going forward. On the positive side, we did close a contract with an existing AG client, and we leased two new solutions around the technology landscape and clinical trial reporting based on Resolute’s software and data sets. The B2B Scite products — sorry, the B2B Scite product continues to show great progress. At the end of Q2, we reported B2C ARR to be $4 million. We ended Q3 at $4.9 million. We continue to experiment with ad spend and monitor conversion to trials and then to subscribers. We have also seen some success in our B2C to B2B cross-sell efforts. We’ve seen a few individual B2C subscribers move into the B2B sales pipeline and close.

We are entering the season — the typical slow season in the summer months for B2C, but we remain excited about this business’ contribution as we move into FY ’25. Moving to document delivery or DocDel. Our reported transaction revenue, we experienced a material slowdown in transaction sales in late March due to Easter this year. Last year, Easter was in April. I can report that we’ve seen strong rebound in DocDel sales in early April. I can also report that due to some work in the platform and through agreements to manage the publishers’ paywall, we’re seeing some nice DocDel growth over FY ’23. In addition, we’re starting to see some B2C sales as we integrate pricing and availability into the Scite product and due to UX improvements in Article Galaxy.

You may recall we had some concerns about the impact of the proxy matter on our employee base. We also recently completed our second Gallup Employee Engagement Survey, and I’m pleased to report that we showed a nice improvement from a year ago. Our engaged versus actively disengaged ratio has improved significantly. While we have and we will always have more work to do, I’m very pleased with the progress in the Gallup results. As many of you know, I’m typically very measured in my comments about the business. When we did the diligence on Scite, we believe that its combination with our business had the potential to be very exciting and a transformational event. After a few months, I’m even more convinced that this is a path that can lead to something much greater than a simple one plus one.

Our employees and customers are excited about what we can do to help research. And while I’m happy with the Q3 results, I’m also very excited about our overall direction and the long-term potential of what we are building here, how we can help improve research and what that means for long-term shareholder value creation. With that, I’d like to turn the call back over to the operator for Q&A. Operator?

Operator: [Operator Instructions] We’ll hear first from Jacob Stephan at Lake Street.

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