Research Solutions Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 13, 2023

There are 7 speakers on the call.

Operator

Please note, this event is being recorded. I would now like to turn the conference over to Steven Hoosier, Investor Relations. Please go ahead.

Speaker 1

Thank you, Gary, and good afternoon, everyone. Thank you for joining us today for Research Solutions' 4th quarter and full year fiscal 2023 during this call. On the call with me today are Roy W. Olivier, President and Chief Executive Officer and Bill Nervin, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the Q4 and full year fiscal 2023.

Speaker 1

The release is available on the company's website Research solutions.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 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.

Speaker 1

I would now like to turn the call over to Roy W. Olivier. Roy?

Speaker 2

Thank you, Stephen, and thanks to everyone joining us for our Q4 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 FY or fiscal 'twenty four 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 31, we announced the acquisition of Resolute AI, an advanced search platform with knowledge management tools powered by AI and NLP technologies.

Speaker 2

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 TAM and growing ARR through cross selling Resolute AI'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 Q4 and 2023 year end financial results in detail. Bill?

Speaker 3

Thank you, Roy, and good afternoon, everyone. I will begin with a recap of our results for the Q4 of fiscal 2023, our total revenue was approximately $10,000,000 a 16% increase from the Q4 of fiscal 2022. In the last two quarters, we have now generated over $20,000,000 in total revenue. Our platform subscription revenue increased 20 percent to $2,300,000 primarily driven by upsells in our existing customer base and a net increase of platform deployments from last year, Including a net gain of $20,000,000 in the 4th quarter, we ended the quarter with $9,400,000 in annual recurring revenue or ARR, Up approximately 4% sequentially and 19% year over year, reflecting continued But slower growth in our 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 Our transaction revenue increased 15% to approximately $7,700,000 From $6,700,000 in the Q4 of 2022.

Speaker 3

A little over 9% of that growth was organic And the rest of it was coming from customers acquired as part of the Fizz transaction. Our total active customer count for the quarter was 1404 compared to 1213 from the same period a year ago. The increase in customer count is Primarily related to the acquisition of certain customer contracts from the Fizz transaction in the Q2 fiscal 2023, which became effective in our Q3 of fiscal 2023. Gross margin for the Q4 was 39.4 percent, a 110 basis point improvement over the Q4 of 2022. The increase was due to the ongoing revenue mix shift towards our higher margin Platforms business.

Speaker 3

The Platform business recorded gross margin of 88 0.1%, an 80 basis point improvement from the prior year quarter as we continue to be able to service more customers with proportionately lower labor costs. Gross margin in our transaction business increased 20 basis points from the prior year 4th quarter to 24.7 percent. The increase was primarily related to again our ability to And a slight decrease from the prior year quarter. We experienced lower cost 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 Q2 of this fiscal year. Recall that the long term stock plan is one which restricted shares only best if higher market prices for the company's stock are attained.

Speaker 3

Net income for the quarter was $376,000 or 0 point 0 $1 per diluted share compared to a loss quarters of positive GAAP net income and 3 quarters in the last four was such a result. Adjusted EBITDA for the quarter was $825,000 to a negative 121,000 results in the year ago quarter. Now turning to the full fiscal year 2023, Total revenue increased 14.5 percent to $37,700,000 compared to $32,900,000 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 1st double digit growth rate since that time as well. Our platform subscription revenue for the full year increased 28% year over year to 8,700,000 ARR was $9,400,000 compared to $7,900,000 at the end of fiscal 2022.

Speaker 3

Total platform deployments as of June 30 were 8 and 35, 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 move through the fiscal year, primarily due to elevated churn, 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, we're simply choosing to do without a third party product to manage their research process. Transaction revenue for the fiscal year was $29,000,000 an 11% increase from fiscal 2022. The Fizz acquisition contributed to this growth. However, the growth was primarily organic.

Speaker 3

This is exciting as we've been speaking about an inflection point in our business where the amount of new platform customers onboarded will 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 experienced 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 2 50 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.

Speaker 3

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 proportionately 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 this revenue as well as some pricing initiatives, which serve to expand our copyright margins. Total operating expenses in fiscal 2023 were $14,500,000 compared to $13,700,000 in the prior fiscal year.

Speaker 3

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 $1,600,000 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 some unique or one type items. Adjusted EBITDA in fiscal 2023 was $2,000,000 compared to a negative $374,000 in the previous fiscal year. The result of over $2,000,000 in adjusted EBITDA for fiscal year 2023 is a company record.

Speaker 3

Turning to our balance sheet, the aforementioned profit and cash flow did lead to an increase in cash. Company generated $3,400,000 in cash flow from operations in fiscal year 2023, which is also a company high achievement. Cash and cash equivalents as of June 30, 2023 was $13,500,000 versus $10,600,000 on June 30, 2022. There were no outstanding borrowings under a $2,500,000 revolving line of credit and we have no long term debt or liabilities. On July 31, we announced the acquisition of Resolute AI for a total closing consideration of $2,900,000 which includes certain holdback items related to working capital.

Speaker 3

The transaction had an earn out based upon 3.5 times the level ARR on the date that is 18 months from the close date, less an enterprise value of 3,200,000 At close, they had $1,300,000 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, 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.

Speaker 3

And last year, we only had 100,000 M and A related expenses to help give a clear picture of our operational performance. All of that said, I do not see anything that has fundamentally Change 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, Thank you. We did 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 and 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.

Speaker 3

I'll now turn the call back to Roy. Roy?

Speaker 2

Thanks, Bill. As mentioned in my comments a few moments ago, there's been a tremendous amount of progress in several areas of the business over the past Some show up in our results and some are laying the strategic groundwork for future results. I'll quickly walk you through some of those. On the transactional or DockDell side of the business, We completed the customer acquisition of Fizz, which helped to build on an already strong and profitable transaction business And is laying a foundation for new platform customers via cross and upsell. Fizz had about 400 customers, 300 agreed to move over to Research Solutions and over 200 of those have purchased documents from us in the past 6 months.

Speaker 2

As a reminder, that acquisition was a small upfront payment and is primarily funded through an earn out, which essentially pays for itself. In addition, the incremental revenue from those customers is being serviced by our existing Dock Bell team. Our overall headcount in that area has declined As revenues have gone up, we recently reported the Royal Danish Library customer win, which is a symbolic academic libraries worldwide expect to provide documents not covered by their entitlements and to reduce their overall costs. The increase in hybrid OA or open access publishing titles may be partly responsible for opening this market niche for us And we are working on several other opportunities in this segment. As a reminder, this will increase our DocDell revenue in the short term And provides a platform upsell opportunity to the participating libraries in the long term.

Speaker 2

Over the past year, we've also focused on building our B2C capability directly and through partnership to drive traffic to Article Galaxy. We believe this is a key step along our product led growth strategy to onboard individuals And leverage them as top of funnel for enterprise deals and as a growing user base for up sells, Cross sells of new individual and enterprise relevant products in both the corporate and academic space. We have approximately 20,000 B2C users landing on the platform monthly and are working to convert them to A Dockdale sale and eventually a platform customer. We recently upgraded our guest checkout work which have increased Dockdale revenue and have helped us identify those guest users. We believe that over time, a material percentage of those B2C users We'll upgrade to our SaaS product based on the conversion rates we have seen in fiscal year 2023.

Speaker 2

Regarding the platform products, we continue to make progress on the product side delivering new features including several new AI based features. Over the past year, we have added PICO label recognition and AI based recommendation engine to accelerate screening of documents by searching and highlighting PECO terms in the documents. As a reminder, PECO stands for Patient See a list of documents like the one they are reviewing without them doing manual screening. Finally, our recently released Chat GPT solution allows for users to ask for summaries of an article or a group of articles in a few seconds, We will continue to see headwinds in the new sales, upsells and churn parts of our business, but we have continued to invest in sales believing that the economy will recover in the foreseeable future and we want to be positioned to take advantage of that upswing. In late fiscal year 2022, we invested in rebuilding the marketing department and have seen some impressive improvements, including Doubling our website traffic from fiscal 2022 to 2023, doubling our B2C DocDell revenue from 2022 to 2023, Reducing our platform average days to sale from 79 days at the beginning of the year to 34 days at the end of the year, We increased our email open rates by over 8x during the year.

Speaker 2

We improved our sales funnel conversion from a lead to a book demo by 48 percentage We grew demo requests by 68% during the year. We also improved our demos attended by double during the year. And lastly, we increased our B2C sign ups by 87%, our social media following by 22% and traffic to our blog by 130%. While we continue to see a challenging environment in terms of platform sales related spending, We think the groundwork and progress we're making in these areas will help us bounce back as the economy improves. We also made several investments in operational improvements During the year that we think line us up well to grow ARR in the future.

Speaker 2

Some of those are, we move the company into 1 CRM platform tool or CPQ tool for the new sales team and expect to launch that for the upsell and churn teams in October. We expect that tool to improve our close rates and the software acquisition journey for our customers. We also moved to a single more flexible software engineering team, while also increasing our development capacity. We formally moved the company to a scrum agile methodology for both product development and software engineering teams. And this has resulted in increasing the number of software releases we do per year and will allow us greater flexibility and adaptability when needed.

Speaker 2

For FY 2023, we also implemented OKRs for the full year for the first time to make sure The entire company is aligned around executing our operational plan. FYI, we've been working under Andy Grove's OKR framework. On the acquisition front, we've also stayed very active. As mentioned above, we successfully completed the Fizz customer acquisition And in July, announced the acquisition of Resolute AI. This will bring a variety of AI technologies and expertise to research solutions, Growing product ecosystem that will increase our ability to provide solutions to a much larger range of users In the entire innovation value chain in our current markets, as well as new markets that we have typically not pursued.

Speaker 2

In addition to providing solutions in the verticals we do not serve today, the Resolute AI solution can provide solutions in the as we roll out these solutions. In the short term, which we define as 6 months post closing, We plan on integrating document delivery into the Resolute AI platform, integrating Resolute's advanced search into our platform And rolling out 5 new or improved workflows to cross sell into our customer base. Those include clinical trial, Key opinion leader, competitive landscaping and technology landscaping modules along with enhancing our capability with our critical to our ability to execute our long term strategy. As mentioned in our press release a few weeks ago, we have 2 additional acquisitions in the LOI stage, And we'll deepen our ability to serve search and discovery as well as knowledge management use cases, while extending market in both corporate and academic markets. We expect to have more to report on those soon.

Speaker 2

While we continue to see what we think are short term headwinds in the business, we're excited about the progress we are making in many areas that will result in continued improvements in the business Regarding the proxy issue, other than Bill's comments earlier, we have no news to report at this time. Management and the independent board members believe in our strategy and we are continuing to make excellent progress in many areas. I remain very excited about our future. With that, I'd like to turn the call back over to the operator for Q and A.

Operator

Our first question is from Richard Baldry with ROTH Capital. Please go ahead.

Speaker 4

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

Speaker 5

Bill, do you

Speaker 2

want to address that one?

Speaker 3

Yes, sure. I think we will see the same seasonal trends that we have seen in prior years with respect to each 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 still get We can still 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.

Speaker 2

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

Speaker 4

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

Speaker 2

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

Speaker 3

Yes. So I would not use Q4 as kind of a run rate, Rich. Yes, we definitely, As we go through the year, conservatively accrue for a number of our reps to hit over attainment and accelerators and things like that. And we just this year with some of the slowness in the back half of the year on the platform sales, they did not hit those accelerators. And so A number of those cools reversed in the Q4.

Speaker 3

I will say this as Roy said, there's nothing fundamentally changed there. So it's not like

Speaker 4

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

Speaker 2

I think if you we did a 3 part advisor Conference about a month ago, there's a webcast of my presentation, which kind of reflects the new strategy and explains this in a little more detail. But Basically, it will add some new capability we do not have even post Resolute. It will Enhance the capability that we have today with Research Solutions products and Resolute's products. And at least in one case, it expands us into another segment materially. And when I say segment, I mean, we typically derive a majority of our revenue in corporate, but there is also an academic and a government segment, both of which are Combined less than 10% of our revenue, and one of these has a fairly significant academic footprint, which is very interesting to us Because of the cross sell opportunity, not only of their product into corporate, but our product into their academic base.

Speaker 4

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

Speaker 3

Thank you. Thanks.

Operator

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

Speaker 6

Yes. Hi, good afternoon. Starting with Resolute AI, you said It does around $1,300,000 in ARR. Should we be assuming that it's going to be Overall losing money that will have a negative impact on the bottom line? And if so, How should we think about that?

Speaker 6

And second, when you were talking about the earn out, did you say While it's around $1,000,000 now that they get the earn out if it gets to around $3,500,000 is that what you meant or did you mean something else? Thank you.

Speaker 2

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

Speaker 3

Yes, I'll just start with the acquisition terms question just real quick just to clarify something. So yes, it's basically 3.5 times their earn out is basically 3.5 times their ARR 18 months after the close, less And assumed enterprise value of $3,200,000 So that's how the math will work on the earn out for Resolute. With respect to how it will impact performance, I do think as we put in that 8 ks that Roy We should expect it to be a drag on performance in the near term. We did disclose in there that when we did do the acquisition, they were burning about 125,000 Cash per month, I would say 2 things about that. 1, we're working to basically improve that.

Speaker 3

On the cost side, there's already a number of steps that we've taken. We've cut about $130,000 sort of in the 1st week of the transaction, we cut about $130,000 of discretionary Costs out of the business. And then there's a big component of their costs related to how they service their revenue in the cloud That we think we have some ideas to bring down that we'll be working on as well. The other important aspect of this is we are, as Roy mentioned, working to get our cross Sell activity up. Those cross sell products will not be ready probably for 6 months.

Speaker 3

You're talking about January, February timeframe To start selling them, but again, that is another piece we are working on and that is where we really feel the value And the transaction is, the last thing I would say is that that transaction is one of sort of an acquisition Strategy, which involves the other 2 deals that Roy discussed, and those deals are, as you mentioned, Profitable and cash flow positive. So this one just sort of happened to come first. We do have some other steps that we think we can execute on That in addition to our operational improvement of Resolute's performance will also accretively from a cash flow and profit

Speaker 6

In terms of so the other Okay. How do you think about how you're budgeting how you would like to think about operating expense growth In fiscal 'twenty four relative to revenues, excluding what I'm viewing is kind of one time cost Related to the proxy and acquisitions?

Speaker 3

Sure. Yes. The answer to that is we're basically not in the core business budgeting high growth rates and expenses. We Essentially give our employees raises, which on average amount to about 5%. So payroll will probably go up 5%.

Speaker 3

But otherwise in the core business, there is not sort of new investments we're launching The costs related to getting acquisitions done from a legal perspective as well as the all the costs associated with the proxy issue we're dealing with are very material. And so we will when we report Q1, we'll itemize This stuff out and give everybody a clear picture and be transparent about sort of what is operational versus what we think is unique. But it kind of goes back to my comments in the script. Core business really hasn't changed, but there are some material things we're dealing with. On the acquisition side, I think that will prove out to be wise investment in the legal spend in the long term to get these deals done and in house, But they will impact us in the short term.

Speaker 6

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 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.

Speaker 2

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 a number of seats and that sort of thing. I'm concerned about that, but I don't know that I have any data to support a specific number.

Speaker 6

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 4th quarter?

Speaker 3

Yes, sure. Current share count is It was 29.5 at quarter end. We'll put our K out for filing Shortly and that will it should probably show about 29,600,000 shares outstanding. As far as the average, I think that is around for the Basically for the year, I think it was around 29.1 on a diluted basis, 29,100,000 shares.

Speaker 6

Okay, great. Okay, thank you so much.

Speaker 2

Thank you.

Operator

The next question is from Peter Rehbovar with Artko Capital. Please go ahead.

Speaker 5

Hey, guys. I'd like to make a kind of a statement on the proxy battle. I think it's incredibly embarrassing for Peter and Paul for to even engage in this. And Paul's presence as a shareholder has And more negative than positive. And so Paul, if you're listening, we're more than happy to help buy out your stake.

Speaker 5

So I would highly encourage for this matter to be settled as soon as possible and to stop the Very expensive stuff that's going on. So, like I said, very embarrassing and I hope you guys stop there. With respect to questions, Bill, you had mentioned that there was an inflection point With new platform customers increasing transaction growth and I was wondering if you could elaborate on that a little bit.

Speaker 3

Side of the business is pretty low growth, and sometimes even negative growth rate on transactions. And that was Basically, historically, again, the company moving a lot of its existing transaction customers to the platform. And then when they go on the platform, They are typically experiencing cost savings, which is one of the huge sort of benefits of our that the platform offers to savings on their transaction spend. And so basically transactions have been a headwind for us to overall company growth because typically Each year they're flat to down. The analysis that we did was basically saying, hey, if we continue To onboard new customers at material rates, which we did, especially in fiscal year 2022 and then again to a lesser extent, but still In fiscal year 2023, that those transactions who tend those customers who tend to spend 3 times their annual fee on transactions are going to start to That's the transaction savings that the older customers are getting.

Speaker 3

And I think that's what we're seeing here As we look at the growth, now that growth as we see in Q3 and Q4 is a little bit exaggerated because of Fizz, Which I talked about, but more of the growth rather than less of that growth is organic. And we expect that organic growth can continue as we move into this fiscal year. So that's just a trend where I think we sort of have turned the quarter whereas in the past, it's always been hard to predict that and in some cases We've been again like down or flat.

Speaker 5

Okay, great. That was very helpful. I'll jump off now. Thanks.

Operator

The conference back over to Roy Olivier for any closing remarks.

Speaker 2

No, thank you. And thanks everyone for joining us on our call today. We look forward to speaking to you in November

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Key Takeaways

  • In Q4 fiscal 2023, total revenue rose 16% y-o-y to $10.0 M and full-year revenue climbed 14.5% to $37.7 M, marking the first double-digit annual growth in over a decade.
  • Platform subscription revenue grew 20% in Q4 to $2.3 M, boosting ARR 19% y-o-y to $9.4 M and driving gross margin up to 39.4% in Q4 and 39.0% for the full year.
  • The company achieved its first GAAP net income since 2015 with Q4 net income of $376 K and full-year net income of $573 K, alongside a record $2.0 M in adjusted EBITDA.
  • On July 31, Research Solutions acquired Resolute AI for $2.9 M, adding an AI/NLP search platform expected to expand the total addressable market and cross-sell opportunities.
  • Management warned of near-term headwinds—including proxy battle expenses, acquisition integration costs and customer budget tightening—keeping Q1 fiscal 2024 adjusted EBITDA and cash flow negative.
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Earnings Conference Call
Research Solutions Q4 2023
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