Research Solutions, Inc. (OTCQB:RSSS) Q1 2017 Earnings Conference Call November 14, 2016 12:00 PM ET
Peter Derycz - President and Chief Executive Officer
Alan Urban - Chief Financial Officer
Scott Billeadeau - Walrus Partners
Good afternoon, everyone. Welcome to Research Solutions Fiscal First Quarter 2017 Earnings Call for the quarter ended September 30, 2016. My name is [Ben], 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 on the company’s website.
Now, I’d like to turn the call over to Research Solutions’ President and CEO, Mr. Peter Derycz. Please proceed, sir.
Thank you everyone for joining us today to discuss our results for our first quarter of fiscal 2017. During the quarter we continue to focus on selling and delivering SaaS platform deployments of our cloud-based research intelligence products and services.
Our progress with platforms continued to gain momentum. In fact we realized a substantial increase in the number of platform deployments. By quarter end our premium platform deployments totaled 75, which were up 27% from the previous quarter and nearly three times more than the same quarter last year, and in addition to transaction revenue, they generate high-margin annual recurring subscription revenue.
Our annual recurring revenue from platform subscriptions was $751,000, up by nearly a third over the previous quarter and more than double over the same year ago quarter. So, we are very excited about how this new business line is developing and the direction it is taking us.
While our transaction revenue is still many times greater than platform revenue, platform gross margin ticked up even higher this quarter to 82.6%, which is about four times that of transactions at 21.5%.
I should also point out, that while transactions represent fairly reliable repeat revenue platforms generate even more predicable recurring revenue. So our growth in platform deployments and subscriptions is demonstrating stronger leverage in our business model.
During the quarter, we also continued to see our customer acquisition efforts maintain a 90-plus percent closing rate when our solution is evaluated against the competition. Further, in most instances, when it comes to platform sales, we have virtually no competition except for a customer's home-grown system, and these systems are inefficient and costly, and certainly far less useful and capable than our offerings.
Now, before I delve more into our operational progress for the quarter and our outlook for the new fiscal year, I'd like to turn the call over to our CFO, Alan Urban, who will walk us through some of 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 first quarter 2017 ended September 30, 2016. A copy of the release is available for viewing and can be downloaded from the Investor Relations section of our website. Please note that all quarterly comparisons I will be making today are to the same year-ago quarter in fiscal 2016 unless otherwise noted.
As of our last reporting period, we began reporting results from Article Galaxy SaaS platform subscriptions and Article Galaxy transactions separately. Platform subscriptions provide premium access to our research intelligence products and services on an annual commitment basis, while transactions primarily represent customer article purchases conducted via both paid premium subscriptions and free standard platform access.
So now looking on to our income statement. Our platform subscription revenue increased 194% to $172,000 which was driven primarily by 167% increase in platform deployments. The quarter ended with platform annual recurring revenue up 133% to $751,000.
Please see today's press release for how we define and how we use this non-GAAP term. Transaction revenue increased 8% to $6 million driven primarily by a 14% increase in active customer accounts.
Underpinning these results was a 14% increase in customer accounts to 936 with the number of corporate customer up 10% to 763 and academic customers up 37% to 173. All together these customers drove Article Galaxy transactions up 12% to more than 191,000.
Revenue generated by our legacy business reprints and ePrints, declined 38% to $1.5 million in the quarter. The decrease was primarily due to a net decrease in order volume which typically fluctuates from period-to-period depending upon customer marketing budgets and the publication of journal articles that match customer requirements. Total revenue in the quarter declined 4.6% to $7.7 million, and this was primarily due to the decline in Reprints and ePrints revenue.
Now in terms of our gross profit and margin performance. Gross profit from platform subscriptions was up 204% to $142,000, with related gross margin increasing from 79.9% to 82.6%. Gross profit from transactions was up 1% to $1.3 million for the quarter, with related gross margin declining from 22.9% to 21.5%.
Reprints and ePrints gross profit declined 58% to $96,000 for the quarter, with related gross margin declining from 9.6% to 6.5%. Total gross profit in the first fiscal quarter declined 1.6% to $1.5 million with total gross margin increasing from 19.4% to 20%.
Our total operating expenses increased by 12% to $1.9 million for the quarter. The increase was primarily due to greater personnel costs, travel expenses and consulting fees as we further expand our sales force and technology personnel to support increased platform, sales and deployments.
Now in terms of the bottom line, our net loss totaled $411,000 or negative $0.02 per diluted share, as compared to a net loss of $179,000 or negative $0.01 per diluted share in the same year ago quarter. The increase in net loss was largely due to increased operating expenses in support of our platform sales and deployments as previously described.
Negative adjusted EBITDA totaled $262,000 versus a negative adjusted EBITDA of $6,000 in the same year ago quarter. Please see today's press release for how we define and use this non-GAAP term.
Now moving on to the balance sheet. Cash and equivalents at quarter end totaled $6.6 million, versus $6.1 million at June 30, 2016. There were no outstanding borrowings under our revolving line of credit with Silicon Valley Bank, which provides for the lesser of $4 million or 80% of eligible accounts receivable.
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 liabilities or debt. Now, with that, 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, over the course of the last year we have continue to make strong and steady progress enhancing our cloud-based SaaS research intelligence platform.
Numerous new features and capabilities have made our platform a more engaging and indispensable tool for corporate and academic researchers and scientists around the world.
Our relentless drive for improvements and enhancements has sustained our enviable position as far and away the world-class leader in our space. The growth in our customer numbers and platform deployments reveals that everything we're doing is also stimulating greater user engagement, with this leading to more transactions and more valuable transactions per user, as well as greater monetization within the platform.
More importantly, all of this is driving strong growth in our high margin platform sales, which has the effect of making our solutions even that much more stickier. We're also now appealing to an increasingly wider audience of small to medium-sized businesses.
That is companies with up to 1,000 employees and particularly firms who have been using home-grown systems and methods for accessing STM information and managing their journal subscriptions.
Our cloud-based SaaS research intelligence platform, which provides premium access and custom feature sets is extraordinarily powerful and unique. It offers a very compelling value proposition for these organizations.
While our customers have long included more than 70% of the world's Top 25 pharma companies, we are seeing our subscription-based platform increasingly being adopted by this broader market of small to medium-sized corporations. This trend is beneficially reducing our concentration risks in terms of having mostly large customers.
Although to be sure maintaining a marquee customer list of top pharma and other major corporations help to provide excellent references and assurances for smaller organization and helps them feel confident in adopting our platform as a single source for STM research.
Our compelling value proposition is also continue to attract new industry partnerships. In the first quarter this included a new partnership with the leading research metrics provider, Altmetric.
We have integrated Altmetric badges to the scholarly content delivered by our paid add-on Article Galaxy widget. The badges provide at-a-glance indication of the attention individual journal articles are receiving from the mainstream and social media, public policy documents, blogs, Wikipedia, scholarly forums and like.
We believe being able to see who is saying what about a piece of research will be incredibly valuable to our platform users who are trying to understand how an items of scholarly work is being received by the research community.
The addition of Altmetric badges will make our platform not only more powerful, but also more unique and how it help accelerate research being pursued by R&D based organization.
Their adoption of our platform also reaffirms how our ability to innovate with new features and enhancement have made it the clear choice for any research intensive organizations working 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 help us to create new ways to monetize our platform and increase greater use per user, as well as deliver new ways of information access that build upon our core strength and proprietary IP.
So, looking ahead we plan to continue to reinvest our available resources into enhancing our platform and preparing it for its next stage of growth and development. As we announced earlier this year, we focused on developing and delivering new software-as-a-service offerings in calendar year 2017 that will provide a best-in-class research platform for businesses and business professionals.
Our existing transactional research retrieval services will continue to be available as one of the many new integrated product features and service offerings within the new platform.
These new SaaS offerings will represent a natural evolution for us. They will allow us to expand into multiple new and lucrative market segments, including further tapping the larger SMB market.
Our existing blue chip customer base will also benefit from the new SaaS offerings, allowing us to further build upon these valuable relationships, which will help us to shape a blockbuster research intelligence platform.
But to be sure given the already existing superiority of our research intelligence platform and our great competitive lead, how we leverage and maximize our sales and marketing resources to drive growth both domestically and internationally continue to be our most important challenge.
We have to build out and train up sales forces, that's more oriented towards platform sales and which have international sales capabilities. In the first quarter we made good progress in this regard, and this effort will continue throughout the fiscal year.
We are also making progress and expanding our reseller or VAR network, which our platform offering is helping to support since its offers them like us an attractive recurring revenue stream.
Such valued-added reseller relationships can also be a first multiplier for us not only in terms of sales and upsells and renewals but also in terms of after sales support and training.
This can be especially helpful to us as we look to penetrate certain international regional markets where local language support is important and not only for localized sales and support but also for future localized product development.
Certainly broadening our international presence is an important aspect to our subscription business model and one that is important to consider when evaluating our future prospects.
This is because at the core of our platform is a virtual store that is open 24 hours a day, seven days a week, and accessible on virtually any computer or mobile device by anyone anywhere in the world.
But to be sure, reaching out and servicing more international customers and VARs does not require setting up offices or deploying other regional resources. So, as we grow our sales and marketing teams and support staff, we believe we can continue to stay a relatively lean and efficient organization.
All of this highlights the strong leverage and scalability in our model and the few barriers we face in terms of achieving greater global expansion and revenue growth. Now as we continue throughout the fiscal year, we expect to maintain healthy growth in transactions and SaaS platform deployments.
With this continuing to be driven by our uniqueness which attracts both increased customer usage and new customer wins. We are very excited by our growth prospects and by the technology we are bringing to market.
Now with that, let's open the call to your questions.
Thank you. We will now begin the question and answer session. [Operator Instructions] The first question comes from Scott Billeadeau of Walrus Partners. Please go ahead.
Hi, guys. In your press release you show that the ASP on the platform sales was down 13%, I'm wondering if you could give us a little feel for what we should expect further trend of that and kind of what is the ASP for that or what's your expectations going forward?
Yes. It dropped a bit on average, it was more than made up by the number of platforms being deployed. I think the reason for that is we have been expanding our sales and marketing team and with one of the objectives being go get some platform sold and do it in the smaller medium-sized business market.
So with that I think some of sales came in little bit lower than average on price, but we expect it to continue the same as it was before or even grow as we add more features to the platform.
Okay. And then, you did mentioned to maybe engage some VARs to help you and will the VARs help on platform sales as well and kind of what do you have to get up to – what you have give up to engage in the VARs or what can we expect in terms of what nets back to you guys?
Yes. I think there are some pros and cons in VARs, but the reality of the matter is, we have a limited sales and marketing force, we're expanding it a lot, but we want to have multiplier effect and that what some of these VARs bring to the table. So we're going to be basically adding lot more feet on the ground that are really focused on selling the platform and along with that sort of comes more transaction.
Another benefit to that is it doesn't cost a penny to add a VAR. We spend some time training, recruiting and helping them, reach out to their customers in their market, but other that we were not hiring people to work at these VARs, we are not paying them any kind of advanced royalties or fees for that. So that's a good point.
We are giving commissions, but we have a high gross margin product now that we can actually pay decent commissions from. But yes, so I think there are some more pros than cons in that and the objective here is to really expand our presence in the market.
Okay, great. And then, one last question, just on what you expect on the transaction side for kind of sustainable gross margins there over time. I think kind of been running 20-ish or so. Is that kind of what you should expect as more goes through the platform, is it better for transaction gross margin or about the same. What's your sense there?
Hi, Scott. This is Alan. Yes, we expect that to stay floating around the 20% level at the 20% mark as you indicated. The more transactions that flow through the better because we do get to scale some of those fixed cost in there. And there are few different components in the transaction section that affect margin. Basically there is our labor cost and that tends to perform relatively well, we are not concerned there.
Then there is the discount we receive from publishers and that has been trending down over time. And then there is the sort of one-time implementation fees that we sometime get when we implement larger accounts and those can -- in a quarter can add up maybe $50,000, $60,000.
So sometimes those are transactional and sometime we see them one quarter and we don’t see them in another quarter and that tends to affect the number as well. But probably the biggest of those three would be the publisher discount and that is trending down -- has trended down over time. So now that we have some more cash to work with we're going to see if we can get that number back up again by offering prepayments to our publishing partners and usually when that happens we get an associated discount. So we are going to see – we're going to trying to work on that, trying to get a backup again.
And then one follow-up, as you have success again we're early here with platform, when can you -- if or when can you kind of benefit or go back to publishers and go look where to put platform in these big places that you may have any leverage whatsoever with them. Is that a pipe dream? If you get a big enough footprint that you can -- you got publishers coming to you to get access, or is that kind of pie in the sky stuff?
I don’t think that's all pie in the sky, I think there is a couple of points to leverage as we grow and become standard solution in the market place. One is what you mentioned I think our publisher partners are looking for us to help them actually reach new markets and the SMB market has been a difficult market for a lot of publishers to get into. So they're pretty excited about that and I think we may have some leverage on that side. The other point of leverage on pricing on transaction is that as we become more of a standard solution I think we'll have a little bit of leverage on just how we price product to our customers.
And then of course as the -- really great -- really great thing about this whole thing is that the platforms -- the trends there are positive and I think and as we improve that platform we’ll have some leverage to actually affect the pricing of the platform as well.
Thank you, Scott.
[Operator Instructions] We have a follow-up question also from Scott Billeadeau of Walrus Partners. Please go ahead.
I guess it is just us guys, so, just one other question on, you mentioned and I know its broader market you're going to, but you mentioned to businesses, the SMB world. Is there something else you're thinking of in 2017 in terms of what you're going to put on the platform or is that just based on using VARs you can spread what you have to a lot more, maybe you could flush that out just a touch?
Yes. So, we are doing a lot of – going into calendar 2017, we're going to doing a lot more marketing to SMBs. The VARs are going to help there because they're going to be reaching out with the same campaigns out to their customers. We have a planned redesign of our user interface, so we're taking – what we have now is account level customization and really taking that to the user level. So that we think is going to help penetrate some of these SMBs because there's going to be lot more flexibility in the platform to accommodate the needs of the smaller organization.
And kind of keeping with the STM content or does that require any new content at all?
STM is our core and that's what one of the reason people come to us is that we provide efficient access to that kind of content. As we reach out to the SMBs we're finding that the same STM users have lot of different roles inside these companies, so we're finding that we're going to probably going to be adding things like news and patent information as well, so that we can help the platform useable to the management and other intellectual property or players in the knowledge space within these SMBs.
Is there any content, again I'm sure you're pretty early on here, but is there any feedback as we need to get this content to be successful there? Is there anything jumping up and down and we're going to need to go get this contents set to help on that market in that marketplace?
Well, I think the core and the most difficult part of the whole thing is the STM content.
We got there.
We sort of got that we'll figure out and are the sort of the solution for that type of content. I won't say there's anything like jumping up and down, but we do have a new front end coming out in the future, so like I mentioned there's going to be some other types of content or ways of delivering content that are going to be useful to us. Like I mentioned new updates altering that type of things is going to be a core part of the content -- of platform coming up in the next edition. It's more about alerts and helping people keep track of what's going on out there in terms of science or news about scientific trends or even companies within science.
Okay. All right. That's all I've got, guys. I appreciated. Thanks much.
There are no further questions at this time. [Operator Instructions] This concludes our question-answer-session. I'd now like to turn the call back over to Mr. Peter Derycz, for his closing remarks.
Thanks everyone for joining us today. I'd like to extend the special note of thanks to our customers, suppliers, and our internal teams all who have been and continue to be essential contributors to our success. If you weren't able to address all of your questions today, please feel free to contact us directly. We 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 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. Examples of such forward-looking statements in this presentation includes, but are not limited to statements regarding the expected continued improvement and market acceptance of the Company's product and services and the expected continued growth in transactions, and platform deployments 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
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 that 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 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, SEC, 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.
The company undertakes no obligation to publicly update or revise any forward-looking statements whether because of new information, future events, or otherwise. The company also assumes no obligation to update the cautionary information provided 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 about 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 made available for replay after 3 P.M. Eastern Time today and through November 28, 2016. Please refer to today's press release for dial-in instructions. Thank you for joining us for our presentation. You may now disconnect.
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