Research Solutions, Inc. (OTCQB:RSSS) Q3 2016 Results Earnings Conference Call May 16, 2016 4:30 PM ET
Peter Derycz – Chief Executive Officer
Alan Urban – Chief Financial Officer
Walter Ramsley – Southwest Capital
Good afternoon, everyone. Welcome to Research Solutions Fiscal Third Quarter 2016 Earnings Call for the period ended March 31st, 2016. My name is Cassandra, and I will be your operator today.
Joining us for today’s presentation is Research Solutions’ President and CEO, Peter Derycz; and the Company CFO, Alan Urban. Following their remarks, we will open the call for your questions. Then, before we conclude today’s call, I'll provide the necessary cautions regarding the forward-looking statements made by management. I will also provide information regarding the company’s use of non-GAAP financial information.
I would like to remind everyone that today's call will be recorded and it will be made available for replay via a link in the Investors section of the company’s website.
Now, I would like to turn the call over to Research Solutions’ President and CEO, Mr. Peter Derycz. Sir, please proceed.
Thank you, Cassandra. And thank you all for joining us today to discuss our results for our fiscal third quarter of 2016.
During the quarter, Article Galaxy, our cloud based SaaS Solution for low cost access to full-text scholarly research continued to gain momentum across the board. Revenue and new customer acquisitions were up, which was reflected in a 24% increase in Article Galaxy transactions over the same year ago quarter to a record of 198,000. In fact, this phenomenal number marked our sixth consecutive quarter of more than 20% year-over-year growth in transactions.
Our continuing push in academia, a new area of focus for us, resulted in a 43% increase in academic customer accounts. Academia now represents more than 15% of our total Article Galaxy customer accounts. For both corporate and academia our customer acquisition efforts continue to maintain a 90 plus percent closing rate when our solutions evaluated against the competition.
Before I talk more about operational progress during the quarter and discuss our outlook for the rest of the year, I'd like to turn the call over to our CFO, Alan Urban to walk us through the financial details for the quarter. Alan?
Thank you, Peter. And good afternoon, everyone. Earlier today, we issued a press release with the results for our fiscal third quarter 2016, the quarter that ended March 31, 2016. A copy of this release is available in the Investors’ section of our website.
Starting with our income statement for the third quarter, revenue totaled $8.7 million, which was off by about 1% from the same year ago quarter and year-to-date that’s for the nine months ended March 31, 2016, revenue was up 7% to $26.1 million.
The marginal decrease in total revenue for the quarter was primarily due to a net decrease in orders from existing Reprints and ePrints customers. This was mostly offset by revenue generated by new Article Galaxy customers with overall Article Galaxy transaction up 24% to more than 198,000.
This activity increased Article Galaxy's revenue by 15% versus the year ago quarter, reaching record revenue of $6.5 million or about 75% of our total revenue. The number of active Article Galaxy accounts also increased in the third quarter up 16% to 902 versus 775 active in the year ago quarter.
To account for the variable use of Article Galaxy, we defined total active Article Galaxy customer accounts as the sum of the average whole and partial customers during the quarter, a whole customers generates at least one article transaction in every month of the respective quarter, with a partial customer generating at least one transaction in one or more months during the respective quarter, but not in every month of the quarter.
While Article Galaxy services are charged on a transactional basis, customer order volume tends to be consistent from month-to-month. This impart due to repeat orders from our largest customers that require the implementation of our services into their work-flow. So while Article Galaxy revenue is transactional, we see it as repeat transactional revenue.
Revenue generated by Reprints and ePrints business declined 30% over the same year ago quarter to $2.2 million and represented about 25% of our total revenue. For those new to our story, I should note that Reprints and ePrints is our legacy business which has a revenue model that is very different from Article Galaxy.
Article Galaxy is a SaaS web based solution that provides on-demand access to scientific, technical and medical information to life science companies, academic institutions and other research intensive organization.
Our Article Galaxy customers include more than 70% of the world’s top 25 pharma companies, as well as many leading academic institutions. Reprints and ePrints on the other hand helps the marketing department of pharma companies obtain mostly both and sometimes electronic copies of articles that feature their products. These customers look to us a proven, high quality source that fits this special need.
While the Reprints and ePrints business is also conducted on a transactional basis, order volumes can fluctuate substantially from quarter-to-quarter based on two key factors, whether or not newly published journal articles fit customer requirements and if the customer has the marketing budget to support their purchase.
Until this quarter, our Reprints revenue had climbed over the previous few quarters. In fact, in the previous quarter Reprints and ePrints revenue was up 23% year-over-year. However, this fluctuation demonstrates the inherent of this business and how we have little visibility into whether Reprints and ePrints growth will be sustained or for how long.
This contrasts sharply with Article Galaxy which has a completely different type of customer base and generates repeat transaction which have consistently increased year-over-year.
Now in terms of our overall gross profit for the third quarter, it climbed 4% to$1.8 million, while total gross profit as a percentage of revenue increased 90 basis points to 20.2%.
Gross profit generated by Article Galaxy, which accounts for approximately 85% of total gross profit was $1.6 million in the third quarter, or up a 11%. Article Galaxy’s gross profit as a percentage of its revenue decreased 80 basis points to 24.2 in the third quarter. This decrease versus the year ago quarter was primarily due to a reduction in average service fee revenue per transaction on some newly acquired large customer accounts.
Gross profit from our Reprints and ePrints business declined 33% to 190,000, with its gross profit as a percentage of revenue decreasing marginally by 40 basis points to 8.6% in the third quarter. This slight decrease was primarily due to increased content acquisition cost during the quarter which typically varies from quarter-to-quarter.
In terms of our overall operating expenses, total operating expenses were $1.7 in the third quarter, that is basically flat compared to the year ago quarter. Year-to-date, overall operating expenses were $5.3 million, up about a 11% or $525,000 compared to the same year ago period. This increase was primarily due to higher selling, general and administrative consulting and compensation cost and stock based compensation expenses.
Net income in the third quarter totaled 32,000 versus a net loss of 2,000 in the same year ago quarter – in the same year ago quarter last year, with a per share amounts in each period amounting to zero.
Year-to-date net loss totaled 445,000 versus a net loss of 103,000 in the same year ago period, amounting to a loss of $0.03 and $0.01 respectively. These amounts exclude discontinued operations.
Adjusted EBITDA for the quarter totaled 228,000 compared to 208,000 in the year ago quarter and year-to-date adjusted EBITDA totaled 227,000 compared to 530,000 in the same year ago period. In both periods the variances were primarily due to changes in income from operations.
We define adjusted EBITDA as net income or loss, plus interest expense, other income or expenses, foreign currency transaction loss, provision for income taxes, depreciation and amortization, stock based compensation, foreign currency translation adjustments and income or loss from discontinued operations.
We use this non-GAAP measure because we believe it provides useful information in comparing our performance across multiple periods on a consistent basis, by excluding items that we believe are not indicative of our core operating performance.
At the end of the fiscal quarter, we had cash and cash equivalents totaling $1.9 million compared to $1.4 million at June 30, 2015. This increase was primarily due to cash provided by operating activities.
As of March 31, 2016, we had no outstanding borrowings under our revolving line of credit with Silicon Valley Bank. The amount of the line is lesser of $4 million or 80% of eligible accounts receivable. This amount equaled approximately $3.2 million of available credit at March 31, 2016.
Our balance sheet continues to remain very clean, with cash receivables and prepaid expenses comprising nearly all of our assets and accounts payable and accrued expenses representing nearly all of our liabilities, we have no long-term liabilities or debt.
We believe that our current cash resources, borrowing availability under our existing line of credit and expected cash flows from operations will be more than sufficient to sustain our operations and growth outlook for the next 12 months and beyond.
This completes our financial summary for the quarter. I'd like to turn the call back over Peter. Peter?
Thank you, Alan. Now, from an operational perspective, earlier this fiscal year, we made tremendous progress enhancing Article Galaxy in terms of better security, more time saving and cost saving features, as well as creating even easier access to researchers.
Altogether, these additions have made Article Galaxy an even more engaging and indispensable tool for our customers around the world, while sustaining our enviable position as the world leader in our space.
While these new features provide many user benefits and competitive advantages, we also see them stimulating greater user engagement which in turn leads to more transactions per user and greater monetization within the platform.
This quarters record results demonstrated our success with this approach and we have continued to attract new partnerships that broaden our market share. For example, during the quarter we announced the integration of BrowZine web addition, a service provider by Third Iron that simplifies researcher access to journal content. This initial Article Galaxy BrowZine integration has taken the simplification of research personalization and acquisition to a new level.
Our mutual customers can now enjoy custom views for the scholarly content they care the most about and they can now quickly navigate from BrowZine directly to subscribed content or quickly request non-subscribed content via Article Galaxy for near instantaneous access.
Article Galaxy integrations by BrowZine along with many other new features present an even greater value proposition to our potential customers, as well as creating even greater competitive barriers to entry. These enhancements are being well received by our current customers, as well as with prospective customers.
Article Galaxy has become a SaaS research service that is only extraordinarily powerful, but also very unique and how it helps to accelerate research being pursued by R&D based organizations worldwide.
Our unrivaled competitive advantages were highlighted during the third quarter when we were selected by Access Copyright as preferred vendor of document delivery services for their Canadian customers.
This collaboration will help Canadian organizations realize real improvement in both research efficiency and copyright to clients, while maximizing their return on copyright license investments.
Also during the quarter we expanded our global market share, with on-boarding of customers we acquired from the research investments or TRI. As a leading provider of research retrieval services, TRI has been one of our oldest and closest industry partners. As part of this project we also enhanced our document research capability.
The TRI customers we acquired comprise several Fortune 500 companies, including two of the Fortune 10. They increased our market penetration of the energy and chemical sectors and also improved our greater than 70% penetration of the world’s top 25 pharma companies.
As a cloud based software as a service solution, Article Galaxy provides one stop shopping and the lowest cost acquisition of full-text journal articles from publishers, all without requiring the use of credit cards for each transaction. These features have been further enhanced with the integration of TRIs unique research capabilities that supports the sourcing of the most difficult sign documents.
So now our value proposition to our existing and prospective customers has been strengthened accordingly, making our offering even more of a one stop shop for all the researching.
During the quarter, we also continued to gain solid traction in our push into academia by ending the quarter with the signing of LYRASIS, a consortium of 1,200 libraries and cultural institutions.
These organizations gained access to Article Galaxy's A-Z Academic documents delivery collection which comprised – which is comprised of specially prized scholarly journal articles for more than 40,000 academic publications or thousands of book titles. And as is typically the case there were a number of major wins during the quarter that we could not disclose the details around due the clients request for confidentiality.
However, I can say that among them was a top 30 pharma company and with another major win we expanded the global deployment of Article Galaxy for an existing top 20 global partner client.
Soon after the end of the quarter, we also made strive in enhancing our corporate governance, with the appointment of Chad Cooper of DO Capital Management to our Board of Directors. We expect to benefit from the significant knowledge and experience in the capital market, as well as his insights into being - building shareholder value. Welcome, Chad.
Now looking ahead, our ability to listen to our customers and continuing to innovate with new features and enhancements has been what is made Article Galaxy the clear choice for research intensive organization looking for an easier and more cost-effective way to access scientific, technical and medical information.
Addressing their needs has also helped us to create new ways to monetize Article Galaxy and increase greater use per user. So, we plan to continue to reinvest our available resources into enhancing our platform and preparing it for its next and new stage of growth and development.
However, given the already existing superiority of our Article Galaxy platform and our great competitive lead, we believe our biggest challenge is mainly in how we leverage and maximize our sales and marketing resources to drive growth, both domestically and internationally.
And to be sure, our broadening international presence is perhaps one of the most important aspects to consider when evaluating our Article Galaxy business model. In fact this last quarter international revenue exceeded domestic revenue.
What makes us possible is at the core of Article Galaxy is a virtual store and cash register that is always open 24 hours a day, sevens day a week and accessible on any device anywhere in the world.
But in terms of reaching and servicing more international customers or domestic customers for that matter, this does not require setting up new offices or deploying other regional resources. We can continue to stay a very lean and efficient organization. All of this highlights a tremendous leverage and scalability in our model, and the few barriers we face in terms of achieving greater global expansion and reach.
Now, as we enter the last quarter of our fiscal year, we expect to maintain our double-digit growth in Article Galaxy transactions, this quarter and into the new fiscal year. This will continue to be fueled by the uniqueness of our Article Galaxy platform that is practical, [ph] increased customer usage and new customer wins.
Now with that, let's open the call to your questions. Operator?
Thank you. [Operator Instructions] And we'll take our first question from Walter Ramsley of Southwest Capital. Please proceed.
Congratulations, it looks like things are going very well. I had a couple of follow-ups, I guess, and from an accounting standpoint the deferred revenues that’s starting to increase pretty significantly.
Can you explain what's going on there and what do you think that number is going to continue to you know, that’s kind of keep going up or its going to level off or what's behind that?
Sure. Hi, Walter, this is Alan. How are you?
Good. Thanks, Alan.
Yes, let me explain that number a bit. I believe the number is about 600,000 and for our December quarter ended, December 31, I believe it was about 500,000. And that number consists - about 45% of that number is the deferred revenue on our platform sales. So when we sell platforms, we build the customer an annual license fee upfront and obviously we only record the revenue as we earn it and the amount that has not been reported as revenue yet, is classified as deferred revenue.
So that’s about 45% of that number and about 55% of that number it actually deposits that are Article Galaxy customers or transactional customers have given us. Some of our customers simply like to pay upfront or they have PO that may be expiring, so they will send us the amount of the entire PO, so that they don’t lose that PO balance. And that number has been growing, actually as of the end of our last fiscal year, the number was immaterial.
So we treated it as an offset to accounts receivable, but since that number has been getting a little bigger, we’re actually putting it into deferred revenue now where it should be.
So that’s the answer to what is – what actually comprises the amounts in the account and then to answer your question about will it keep growing? Yes, we are continuing to sell platforms and more we sell, the bigger the deferred revenue number will get.
Okay. Thanks. Thanks for clarifying that one. The Reprints, obviously to kind of a nosedive in the current quarter, do you have any kind of handle on what the outlook for that part of the business is?
Yes, so that’s the - we always point out that that business line is little bit difficult to predict, it goes up and down based on former marketing budgets, new drug launches and so on.
So we don’t have a handle on it, particularly on a go forward basis we just sort of look at the going back numbers and it’s been sort of stable year-over-year. So we’re not - but those quarterly fluctuations sometimes just revenue gets pushed into another quarter. So we expect it to be sort of stable, but there is no guarantee of that because of the amount of fluctuations.
And just let me follow up, if you look at the year-to-date number we’re actually about 2.7% off for Reprints, if you look at the nine months, so I know that the current quarter was a nosedive as you said, but you look at it year-to-date we're up about 2.7% and if you look at the gross margin its actually flat at about 8.7%.
So yes, Peter said if you look at any one quarter, you know, think variances maybe large, but if you look at a year-to-date approach it seems - it seems to be more stable.
Okay. That’s good to hear. And just circling back to your comments about the platform, can you tell us in how much more work you - like you need to do to make it completely ready to take off or what would you think the inflection point looks like on that part of the business?
Yes. The platform has just been getting stronger and stronger. We really - most of our available resources now have been put into - strengthening the platform. So we think that on a go forward basis, the platform sales going to be big part of our focus. We sold probably over 50 platforms so far, since we got started and the average sales for the platforms is been probably around $10,000 level. They go anywhere from low four digits up to six figures sometimes on these.
So its really definitely part of our focus and from the technology perspective we’ve made lot of good strides building up the platform. We think the biggest challenge or let’s say 70% or 80% of the challenge on a go forward basis really the selling and marketing of it.
We know the platform is great, we know it’s winning nine out of 10 RFPs when it’s evaluated against any competition. So we know the tool is good and getting better. Our focus really is on okay well, if it’s that good, how do we get the world to find out about it, there is no word of mouth growth, but we really need to focus on the sales and marketing and really getting word about, it’s fantastic platform that we built. So that’s where the challenge is, not so much on the technology side, but more on the sales and marketing side.
Okay. That sounds good too. And as far as the sales and marketing is concerned, the – in the past I mean, the basic game plan was to essentially reinvest any incremental profit and more sales efforts, that’s still the general idea or have you changed that?
That’s we're going to be focused on that big time.
And in terms of competition and just the business in general, as the company have been successful at all in rising prices or kind of solidifying the pricing environment in some way or is there any kind of change going on in that area?
Yes, definitely the competitive landscape is changed, now that we’re sort of emerging as leaders, we think we have a little bit of leverage now in that regard. So we’re starting to look at our pricing and make adjustments to it on a go forward basis. So that’s something we are looking at.
We mentioned earlier in the call that we acquired one of the small shops TRI. We acquired their customer base. We’re seeing other customers migrate from other competitors. And then we’re seeing a lot of people moving away from do-it-yourselfers where organization try to set up their own processes, procedures and systems that are just not scalable. And so we're seeing on a competitive landscape that we’re able to compete really effectively with do-it-yourselfers which is good.
So I think that all of that, you know, fact that we’re emerging as leader, fact that we can do it more efficiently than do-it-yourselfers that we can beat any small or large competitor out there on RFPs, I think its going to give us some pricing advantage over the long-haul.
All right, does it appear that way? Okay, that’s great. And just one last question I guess, concerning the academic segment, it sounds like you’re making pretty good inroads there, initially you weren’t sure how it was going to go, but can you give us kind of an update on how it feels and how is the market is responding to your products and services?
Yes, the academic market in this space, because its just – we operate on these annual budgets that have been sort of [indiscernible] long time ago, so it’s tough to get them to move and change, but we have seen a lot of – a lot of academic institutions come on and try out our services.
And there have been some documented success stories, some presentations that are being given, different sort of academic library institutions, that these library institutions they get together in the academic world and they talk about their experiments and what they’ve been doing and new ways of doing things and we’ve been getting favorable mention at these sort of presentation.
So we think these accounts that we’re adding which now number about 139 academic institutions will turn into more business as their experiments get documented and are successful and the rate of growth on those academic counts about 43%. So we’re seeing pretty strong growth rate number of account set up.
The key is that we got to make sure that these experiments get only documented and communicated, but that these new accounts actually turn into real customers over the long-haul and that we really become part of their budgets.
So I think the - there is lot of excitement there for us and we’re pretty optimistic and we have dedicated exclusively some of our sales resources to that market. It’s just been little bit slower, probably go about changing their budgets and changing the ways they do things which is little bit slower than let’s say the corporate sector, but we think it’s setting in the right direction.
Now it looks like you’re penetrating that thing pretty effectively, all things considered. Well, I thank Peter, Alan, nice talking to you again.
Yes thank you, Walter. Thank you so much.
[Operator Instructions] At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Peter Derycz for his closing remarks.
All right, well thanks everyone for joining us today on the call. I'd like to extend a special note of thanks to our customers, suppliers and internal teams. They've all been essential contributors to our success. If you were not able to address all of your questions today, please feel free to contact us directly. We really look forward to speaking with you soon. Operator?
Before we conclude today’s call, I would like to provide Research Solutions' Safe Harbor statement that includes important cautions regarding forward-looking statements made during today's call, as well as a statement regarding the company's use of non-GAAP financial information.
Statements made by management during today's call contain forward-looking statements that include information relating to future events and future financial and operating performance.
Such forward-looking statements should not be interpreted as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which that performance or those results will be achieved.
The forward-looking statements are based on information available at the time they are made and/or management's good faith beliefs as of the time with respect to future events and they are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.
Important factors that could cause these differences include but are not limited to changes in economic conditions, general competitive factors, acceptance of the company's products in the market, the company's success in obtaining new customers, the company's success in technology and product development, the company's ability to execute its business model and strategic plans, the company's success in integrating acquired entities and assets and all the risks and related information described from time-to-time in the company's filings with the Securities and Exchange Commission or SEC, including the financial statements and related information contained in the company's annual report on the Form 10-K and interim quarterly reports on Form 10-Q.
Examples of such forward-looking statements in this release includes statements regarding the expected continued improvement and market acceptance of the Article Galaxy platform and the expected growth of Article Galaxy revenue, transactions, and customers.
This company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. The company assumes no obligation to update the cautionary information in this 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 and presented in accordance with the Generally Accepted Accounting Principles accepted in the U.S., otherwise referred to as GAAP.
Please refer to a more detailed discussion of the company's use of non-GAAP measures and their reconciliation to the nearest GAAP measures in today's earnings press release, which is also available on the company's website at www.researchsolutions.com.
Finally, I would like to remind everyone that a recording of today's call will be available for replay immediately after the call and through May 3oth, 2016. Please refer to today's press release for dial-in instructions.
Thank you for joining us today. You may now disconnect.
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