Research Solutions, Inc. (OTCQB:RSSS) Q4 2016 Earnings Conference Call September 20, 2016 4:30 PM ET
Peter Derycz - CEO
Alan Urban - CFO
Scott Billeadeau - Walrus Partners, LLC
Good afternoon, everyone. Welcome to Research Solutions Fiscal Fourth Quarter and Full-Year 2016 Earnings Call for the period ended March 31, 2016. My name is Getika [ph], 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’d 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 Web site.
Now, I’d like to turn the call over to Research Solutions’ President and CEO, Mr. Peter Derycz. Sir, please proceed.
Thank you all for joining us today to discuss our results for our fourth fiscal quarter and year-end 2016. Throughout the year, platform deployments and transactions related to Article Galaxy, our cloud-based SaaS solution for efficient access to full-text scholarly research continue to gain momentum.
In fact, total Article Galaxy revenue increased by 13% to a record $24.1 million in fiscal 2016, which was driven by a 23% growth in transactions and a 210% increase in the number of Article Galaxy's SaaS platform deployments.
Our strong results reflect an increasing focus on deploying higher margin subscription based Article Galaxy SaaS platforms that provide premium features and functionality to our customers. By year-end, we had 59 premium platform deployments or nearly three times more than last year. And they were generating an annual run rate of 581,000 in recurring subscription based billings.
When it comes to reporting our results, historically we’ve combined Article Galaxy transactions and SaaS platforms into one line. But given the growing amount of recurring subscription based revenue and a significantly greater gross margin, it seemed appropriate to begin breaking out this portion of our revenue.
We are also excited about how this new business line is developing. While revenue from Article Galaxy transactions is still many times greater than revenue from Article Galaxy SaaS platforms, Article Galaxy SaaS platforms gross margin has been at 82% or about four times Article Galaxy transactions at 22%.
Further, while Article Galaxy transactions represent repeat revenue, Article Galaxy SaaS platforms generate even more predictable recurring revenue, which moreover reflects the strengthening leverage in our business model. We’ve also continued to see our customer acquisition efforts, maintaining 90% plus closing rate when our solutions evaluated against the competition. And we’re finding that in most instances when it comes to platform sales, we've virtually no competition except for a customer's home-grown system which typically inefficient, costly and far less useful and capable than Article Galaxy.
Before I talk more about our operational progress during the quarter, and discuss our outlook for the new fiscal year, I'd like to turn over the call to our CFO, Alan Urban, to walk us through the financial details for the quarter and the year. Alan?
Thank you, Peter, and good afternoon, everyone. Earlier today we issued a press release with the results for our fourth quarter and year-end June 30, 2016. A copy of the release is available via the Investor Relations section of our Web site. Please note that all quarterly comparisons I will be making today are to the same year-ago quarter in 2015.
Starting with our income statement, our total revenue in the fourth quarter was up 10% to $8.3 million and for the year it was up 8% to $34.4 million. As Peter mentioned, beginning this quarter, we began to break out our Article Galaxy results according to platform subscriptions and transactions.
What we now call Article Galaxy SaaS platforms represents customer deployments that provide premium access to Article Galaxy on an annual subscription basis. And what we call Article Galaxy Transactions represent all customer transactions conducted via premium and standard Article Galaxy platform access.
So for the fourth quarter, total Article Galaxy transaction revenue increased 12% to $6 million and for the year it was up 12% to $23.7 million. For the year, we realized a 127% increase in Article Galaxy SaaS platform subscription-based revenue, which totaled $402,000.
Article Galaxy SaaS platform deployments that provide premium access to Article Galaxy on a subscription basis increased by 210% to 59 for the fiscal year. The annual billing run rate of subscription Article Galaxy SaaS platforms at year-end totaled $581,000, which was up 146% from the end of the prior year.
Underpinning these results was a 12% increase in Article Galaxy active customer accounts conducting transactions, which totaled 909 in the quarter. Active corporate accounts increased by 7% to 756, while academic accounts increased by 43% to 153.
For the fiscal year 2016, Article Galaxy active customer accounts conducting transactions was up 14% to 873, with corporate accounts increasing 9% to 733 and academic accounts up 48% to 140. Article Galaxy Transactions were up 17% to approximately 190,000 in the fourth quarter, and in the full-year they were up 23% to approximately 742,000.
To account for the variable use of Article Galaxy, we define total active Article Galaxy customer accounts as the sum of the average whole and partial customers during the quarter. A whole customer generates at least one Article Galaxy 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.
Article Galaxy transactional order volume tends to be consistent from month-to-month. This is in part due to repeat orders from our larger customers that require the implementation of our services into their workflow. While Article Galaxy revenue is currently mostly transactional, it increasingly have a subscription-based component. So, we see Article Galaxy as generating both repeat revenue and recurring revenue.
Revenue generated by our legacy business, Reprints and ePrints, declined 2.4% to $10.3 million for the year. The decrease was primarily due to a net decrease in orders from existing customers. For those new to our story, I should note that Reprints and ePrints is our legacy business, which helps the marketing departments of pharma companies obtain both physical and electronic copies of articles that features their products.
These customers look to us as 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 a newly published journal article fits the customer requirements, and if they have the marketing budget to support the purchase of Reprints.
Now in terms of our gross profit performance, total gross profit in the fourth quarter was up 2.7% to $1.6 million and up 5.3% to $6.5 million for the year. Gross profit from Article Galaxy transactions was up 8.4% to $1.3 million for the quarter and up 4.3% to $5.3 million for the year.
Gross profit from Article Galaxy platforms was approximately $106,000 for the quarter and approximately $328,000 for the fiscal year. Reprints and ePrints gross profit declined 29% to $155,000 in the fourth fiscal quarter and declined 9% to $866,000 in the fiscal year.
It's important to note that virtually all of the gross profits generated by Reprints and ePrints falls to our bottom line, given there is little related sales or administrative costs and all employee costs are included in cost of sales.
In regards to our gross profit as a percentage of revenue, overall gross margin in the fourth quarter was down 20 basis points from the year-ago quarter to 19.1% and declined 40 basis points to 18.9% for the full fiscal year. Article Galaxy transactions gross margin decreased 70 basis points to 22% in the fourth quarter and declined 1.6% to 22.4% for the fiscal year.
Gross margin for Article Galaxy SaaS platforms in the fourth quarter was 82% and 81.6% for the fiscal year. Reprints and ePrints gross margin in the fourth quarter was down 2.8% to 7.3% and decreased 60 basis points to 8.4% for the fiscal year.
For overall operating expenses, our total operating expenses increased by 3.8% to $6.9 million for the full-year. The increase was primarily due to sales and marketing and administrative compensation and consulting fees.
Now to the bottom line. In the fourth quarter, net loss from continuing operations totaled $53,000 or $0.0 per diluted share, which was an improvement from a net loss of $439,000 or $0.02 per diluted share in the same year-ago quarter. For the full-year, loss from continuing operations totaled $498,000 or $0.03 per diluted share improving from a net loss of $542,000 or $0.03 per diluted share in fiscal 2015.
Adjusted EBITDA for the fiscal fourth quarter was up 61% to $162,000 compared to the same year-ago quarter and was lower by 37% to $389,000 for the fiscal year compared to the prior year.
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 other 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.
Now to the balance sheet. Cash and equivalents at June 30, 2016 totaled $6.1 million versus $1.4 million at June 30, 2015. The increase in cash was primarily due to cash from our June 2016 financing. As of June 30, 2016, we had no outstanding borrowings under our revolving line of credit with Silicon Valley Bank, which provides the lesser of $4 million or 80% of eligible accounts receivable. This amount equaled approximately $3.6 million of available credit at June 30, 2016.
Overall, 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, and we have no long-term debt or liabilities.
At June 30, 2016, the Company had net operating loss carry forwards of approximately $8.7 million applicable to federal income tax expiring in 2030, and approximately $4.9 million applicable to state income tax expiring in 2020. This completes our financial summary.
I’d like to turn the call back over to Peter. Peter?
Thank you, Alan. Now from an operational perspective, throughout the last fiscal year we made tremendous progress enhancing Article Galaxy in terms of greater security, more time-saving and cost-saving features, and especially creating even easier access for researchers around the world.
And with our official summer release in August, that introduced numerous new features and capabilities, we’ve made Article Galaxy an even more engaging and indispensable tool for our customers in both the corporate world and academia. And this has helped to sustain our enviable position as far in the way, the world leader in our space.
While the improvements provide many new user benefits and ensure our competitive advantage, the growth in our numbers revealed, they’re also stimulating greater user engagement, with this naturally leading to more transactions per user and greater monetization within the platform.
Moreover, all of this is driving strong growth in our platform sales. And especially with an increasingly wider audience of small to medium-sized businesses, that is companies with up to 1,000 employees mostly have been using home-grown systems and methods for accessing STM information and managing their journal subscriptions.
Our SaaS platform, which provides premium access and custom feature sets, makes Article Galaxy extraordinarily powerful and unique and it creates a very compelling value proposition for these organizations. Our Article Galaxy customers include more than 70% of the world's top 25 pharma companies, as well as many leading academic institutions. But now with our subscription-based SaaS platform increasingly being adopted by a broader market of small to medium-sized corporations, we see it is beneficially reducing the concentration risk that is inherent in having mostly large customers.
But certainly having a marquee list of top pharma and other major corporations provide excellent references and assurances for smaller organizations and helps make them feel more confident about adopting Article Galaxy as their single source for STM research.
In reporting this last quarter and year, we finally revealed our growing success in these platform sales by breaking out these numbers. Our compelling value proposition has also continued to attract new partnerships that broaden our market share and global reach.
An example of such partnerships include a new distribution agreement with WorldWide Information Services that we signed at the beginning of the fourth quarter. WorldWide is a leading pre-article subscription agent for universities and corporations in South Africa with a client base that reportedly includes 90%. African academic institutions. They have committed to handle all sales and inquiries for Article Galaxy in the country, with a special focus on academic libraries in South Africa needing to supplement their pre-article subscriptions with on-demand content delivery.
WorldWide is well-positioned to represent us due to their strong regional network and knowledge of the local market. Their knowledge of local market reaches buyers and users across South Africa, providing us the opportunity to develop businesses in these hard to reach markets.
For customers in all our markets around the world, in July we beta launched a new information search and alerting service for researchers and scientists that is designed to collect, track, and deliver research retrieval requests. It includes an Ask an Expert feature that is powered by Article Galaxy's advanced workflow tools and staffed by a panel of subject matter experts with advanced degrees in science, technology, engineering, medicine, mathematics, and information science. It is available on-demand, 24 x 7 for select customers through the Article Galaxy platform.
This subject matter, search and alerting service, add significant value to Article Galaxy. When more than a simple Google search is needed, researchers can turn to Article Galaxy to locate mission-critical scientific information or get help in answering their research questions. For a researcher it's like having your own personal research assistant available anywhere, anytime. This new feature and our other recent enhancements are being well received by our current customers, as well as by prospective customers.
Article Galaxy have become a fast research service that is not only extraordinarily powerful, but also very unique and how it helps accelerate research being pursued by R&D based organizations worldwide.
Now looking ahead in all our ability to innovate with new features and enhancements have made Article Galaxy the clear choice for research intensive organizations looking for an easier and more cost-effective way to access scientific, technical, and medical information.
Paying careful attention to our clients needs and listening to their feedback has also helped us to create new ways to monetize Article Galaxy and increase greater use per user. We plan to continue to reinvest our available resources into enhancing our platform and preparing it for its next stage of growth and development.
In fact, as we announced in June, we are now focused on delivering new software as a service offerings in 2017 that will provide a best-in-class research platform for businesses and business professionals.
Our legacy transactional research retrieval services will continue to be one of the many integrated product features and service offerings within the new platform, and existing corporate and academic customers will be able to continue using transactional research retrieval services in their preferred research discovery environment.
Our new SaaS offerings will represent a natural evolution for us, enabling us to expand into multiple, new and lucrative market segments. We are confident that our existing blue-chip customer base will benefit from the new SaaS offerings and also help us to shape it into a blockbuster research intelligence platform.
In the meanwhile, given the already existing superiority of Article Galaxy and our great competitive lead, we believe our biggest challenge remains mainly and how we leverage and maximize our sales and marketing resources to drive growth, both domestically and internationally.
We also must expand and train up a sales force that’s oriented towards and skilled in platform sales and one that also as in international sales capabilities. We’ve been already making good progress in this regard. Broadening our international presence is an important aspect of our Article Galaxy business model and want to consider carefully when evaluating future prospects.
A key element driving this international expansion is at the core of Article Galaxy, which is a virtual store and cash register that is open 24 hours a day, seven days a week, and accessible on any device anywhere in the world. And reaching and servicing more international customers or domestic customers for that matter, does not require setting up new offices or deploying other regional resources.
So as we grow our sales and marketing team, we believe we can continue to state a very lean and efficient organization. All of this highlights, the strong leverage and scalability of our model and the few barriers we face in terms of achieving greater global expansion and revenue growth.
Now as we begin our new fiscal year, we expect to maintain our growth in Article Galaxy Transactions and SaaS platform deployments. With this continuing to be driven by the uniqueness of our Article Galaxy platform that attracts both increased customer usage and new customer wins.
Now with that, let's open the call to your questions. Operator?
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Scott Billeadeau from Walrus Partners. Please go ahead.
Hi, guys. Just wanted to dig in a little bit you raise some money here in the quarter, and I’m wondering if you could give us little detail on what the game plan is for putting that to work. I trust it's probably sales and marketing, but I’m just trying to maybe peel back the onion and kind of how many guys you are planning on? Are there quotas or what’s the game plan for deploying that capital?
Yes, there is – it’s sort of three-pronged. It's Peter. Hi, Scott. We find that we built a lot of technology out in the past in Article Galaxy like I said during the call, it's a pretty powerful platform now. So one of the main challenges we’ve is sales and marketing like we pointed out. We have built out a -- an internal sales management team, an account management team, and so that team is going to be reaching into our existing customer base, which is nearing a 1,000 customers now to upsell other Article Galaxy functionality and upsell our subscription platform to them. And external sales is another aspect of growing our sales team both in the U.S. and in Europe. So we’re really focused on growing and training up that sales team, as well as adding to our value-added reseller network. So, I’d say in terms of deploying capital, probably $0.80 out of every dollar is going to go into sales and marketing. And the third prong of our strategy is to continually improve the Article Galaxy platform. So, we’re doing enhancements to it all the time now and we’re planning to launch a new version of it in 2017 as we mentioned in the call. And so about $0.20 out of every dollar is really going into -- continuing to improve and enhance our technology.
Great. And then a follow-up would be you mentioned getting a fairly good win rate nearly 90% in off [ph] the platform level is really no one else involved other than some internal stuff. Do you lead with the platform or maybe are you shifting strategy as how you attack new customers, or is it go where the -- wherever the easiest, the point of least resistance?
Well, actually, historically we’ve gone after article transactions, right. So that’s our first question find -- when we found a new prospect or talking to an existing customers view. How many article transaction do you do every year? We are definitely reorienting our entire sales and marketing organization to ask questions like, hey what are your problems making your research more efficient? What are your problems in accelerating your research? So we’re definitely leading now with the platform sale. Its quadruple the gross margins of our article transaction sales. Article transaction sales are great lead in for us in many cases, but the emphasis of the sales and marketing strategy now is the platform sales. And like I said, it’s not only quadruple margin, but it's also our fastest growing business line. Really growing quite rapidly.
And is that taken new guys or different guys or has there been retraining or guys who do transactions let them do and then supplement that with new guys that have more of the platform selling capabilities?
Yes, I’d say that in our case when it comes to our sales organization, we identified which sales people are, let’s say better cold callers or better hunters, and which ones are little bit more relationship oriented. And so we’ve taken the people that are talented in talking to existing customers, and put them into the account management team and taking the people that are talented in hunting for new customers and sort of put them on the hunting side. And augmenting all of that with our distributor and reseller network that can generate new leads from their customer base, as well as new leads generated from our marketing efforts.
Okay, great. I will hop back. Thanks. Thanks, guys.
[Operator Instructions] This concludes the question-and-answer session. I’d now like to turn the conference back over to Mr. Derycz, for any closing remarks.
Yes, thanks to everyone for joining us on our call today. Really appreciate it. I’d also like to extend a special note of thanks to our customers, suppliers, and our internal teams who have all been essential contributors to our success. If we weren't able to address all of your questions today, please feel free to contact us directly, we are always available. We look -- really look forward to speaking with you soon. Thanks.
Before we conclude today’s call. I’d like to provide Research Solutions' Safe Harbor statement that includes important cautions regarding forward-looking statements made during today's call, as well as statements regarding the Company's use of non-GAAP financial information.
Statements made by 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 were based on information available at the time they are made and/or management's good faith beliefs as of that 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 interfering -- 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, including the financial statements and related information contained in the company's annual report on Form 10-K and interim quarterly reports on Form 10-Q. Examples of such forward-looking statements in this presentation includes statements regarding the expected continued improvement and market acceptance of the Galaxy -- Article Galaxy platform and the expected growth of Article Galaxy revenue, transactions, and customer that the company will continue to state a very lean and efficient organization and that the company faces few barriers in terms of achieving greater global expansion and revenue growth.
The 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 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 available on the company's Web site at www.researchsolutions.com.
Finally, I’d like to remind everyone that a recording of today's call will be available for replay immediately after the call and through October 14, 2016. Please refer to today's press release for dial-in instructions. Thank you for joining us today for the presentation. You may now disconnect.
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