Research Solutions' (RSSS) CEO Peter Derycz on Q3 2017 Results - Earnings Call Transcript

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Research Solutions Inc (OTCQB:RSSS) Q3 2017 Earnings Conference Call May 15, 2017 5:00 PM ET

Executives

Peter Derycz - CEO

Alan Urban - CFO

Analysts

Operator

Good afternoon, everyone and thank you for participating in today's conference call to discuss Research Solutions Financial Results for its Fiscal Third Quarter Ended March 31, 2017.

Earlier today, the Company issued a press release discussing these results and a copy of the release is available for viewing and can be downloaded from the Investor Relations section of the company's website.

Joining us today are Research Solutions' President and CEO, Peter Derycz; and the Company’s CFO, Alan Urban. Following their remarks, we will open the call for your questions. Then, before we conclude today's call, I will provide the necessary cautions regarding any forward-looking statements made by the management. I will also provide information regarding the company's use of non-GAAP financial information.

Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Section of the company’s website.

I will now turn the call over to Peter Derycz, Research Solutions' President and CEO.

Peter Derycz

Thank you, operator and good afternoon everyone. I’ll open the call with a brief state of our business and then pass the call to Alan to speak about our financial results. Finally, I will return to address other details of the business and our outlook.

Our third quarter was yet again highlighted by rapid growth in our platform business, triple-digit growth in both revenue and deployments. Our platform subscription revenue increased 124% year-over-year driven by a 152% increase in total deployments. Further, 70% of our fiscal year-to-date deployments are with new customers, evidence of our large market opportunity.

While transactions and customer count in our transaction business accelerated from prior year, revenue was essentially flat due to declining orders from existing customers that were mostly offset by orders from new customers.

At the end of the quarter, we launched the latest version of our cloud-based Platform solution. The upgrade showcases full mobile responsiveness, design enhancements, and the introduction of 'gadgets,' or powerful apps that allow for sophisticated data augmentation of content. We believe the gadget concept will revolutionize the way research is done today.

Like mobile apps, gadgets are flexible, customizable tools for scientific research that are capable of augmenting scientific documents with data, streamlining cumbersome research processes. Early customer response has been encouraging and we look forward to our expanded sales force introducing the enhanced product to an even wider audience of customers in need of this unique solution.

But now, 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?

Alan Urban

Thank you, Peter, and good afternoon everyone.

Before I begin, a quick reminder that platforms provide premium access through our research intelligence products and services on an annual subscription basis, while transactions primarily represent customer article purchases conducted via both paid premium platform access and free-standard platform access.

Now, a few comments on our Q2 results compared to the same prior year period. Our platform subscription revenue increased 124% to approximately 271,000 compared to the year ago quarter, which was driven by a 152% increase in total platform deployments to 116. This translates into 23 incremental deployments in Q3.

With total platform deployment up over 20% over the previous quarter, the quarter ended with platform annual recurring revenue up 127% on a year-over-year basis to $1.1 million and up 24% sequentially.

Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms. Transaction revenue was essentially unchanged at $6.4 million compared to the same year ago quarter as declining orders from existing customers offset an increase in orders from new customers. However, total customer count was up 9% to 985. The number of corporate customers was up 5% to 802, and academic customers were up 32% to 183. Together, this drove a 7% increase in transactions to approximately 213,000.

Total revenue was $8.6 million compared to $8.7 million in the same year-ago quarter. The slight decrease was primarily attributable to a $200,000 decline in our legacy Reprints and ePrints businesses.

As we have stated, Reprints and ePrints order volumes often fluctuate from period to period depending upon customer marketing budgets and the publication of journal articles matching their requirements. While this segment is cash flow positive, it continues to be a low margin business that requires limited resources and time.

Moving on to gross margins, our platform business saw gross margins decline by 370 basis points to 78.5%, driven by the addition of new data sources to further bolster our technology offering. While the addition of new data sources improves its platform cost of revenue in the short term, rapidly growing platform revenue should lessen this impact over the long run.

Gross margin in our transactions business was down 150 basis points to 21.6% due to a reduction in publisher copyright discounts. We are taking action including price increases to mitigate this pressure and have other cost reduction initiatives to offset this margin pressure forthcoming in fiscal 2018.

Total gross margin was 20.0% compared to 20.2% in the same year-ago quarter. The slight decrease was primarily driven by the lower transaction margin as well as lower Reprints and ePrints margins, primarily due to increased content costs.

Our total operating expenses increased to $2.4 million compared to $1.7 million in the same year-ago quarter, driven primarily by our planned investment in sales and marketing and technology personnel.

Net loss totaled approximately $600,000 or negative $0.03 per share compared to net income of $32,000 or $0.00 per share in the same year-ago quarter. Adjusted EBITDA totaled negative $500,000 compared to $200,000 in the same year-ago quarter.

Both net loss and adjusted EBITDA reflect the personnel investments in our fast growing platform business.

Moving on to the balance sheet, cash and equivalents at March 31, 2017 were $5.2 million versus $6.1 million at June 30, 2016. There were no outstanding borrowings under our revolving line of credit, and our balance sheet continues to remain clean with cash and receivables comprising nearly all of our assets and accounts payable and accrued expenses representing nearly all of our liabilities.

This completes our financial summary. I would now turn the call back to Peter.

Peter Derycz

Thanks, Alan. So now, more details on the progress of our Platform business. Our third quarter was another step forward in our development and enhancement of the product. We continued to build out our sales and marketing team to support the vast market potential we see for this product.

As I mentioned, 70% of our new platform customers represented company’s brand new [indiscernible] Research Solutions. Our Company has been effective in acquiring these customers through content generation, digital and inbound marketing, and traditional sales prospecting.

We have initiatives in place to increase market awareness and engagement, lead generation and sales conversions. As for the upselling of current customers, we are currently working to train our teams on how to best accomplish the upsell process.

In fact, we’ve created an account management group that is now dedicated to it. We will be doing other things to shorten sales cycle like the pretrials with a self-sign-up option. As I mentioned in my opening remarks, in April we launched a new version of our platform what we are calling Article Galaxy 1.5. The new version has been introduced to selected customers in a faint approach, which we began in late March.

Initially, immediate migration is absolute and we will continue to support the current legacy platform until September 2017. The new platform delivers a completely redesigned user interface with more friendly navigation capabilities and enhanced technology infrastructure, improved order history, and new functionalities enabling quick lookup of reuse rights, availability options, and online mentions of journal articles.

The new platform switch from a multi-page application to a single page application allows for faster response times, improved user experience, and full global responsiveness across devices for seamless use on smart phones and tablets regardless of operating system.

Debuting this new version, our ecosystem of gadgets was a truly gather and enhanced data from a variety of formats such as bibliographic citations, tables of contents, RSS feeds, PDF files, XML feeds, web content, and much more.

An alternative to manual data filtering and extraction, gadgets are powerful apps capable of performing a particular function. For example, identifying protein structures from bibliographic information and internally sourcing 3D visuals, saving time for users and making data dramatically more useable.

Gadgets can be dragged and dropped across user screen removed the desired and customized in a matter of minutes. The first flagship gadgets include a 3D protein viewer, which visualizes protein structures extracted from any good bibliographic citation.

Journal table of contents gadgets, which follows the newest journal in 24,000 publications; and product news, which helps users, follow any product mentioned online. Going forward, many more gadgets for a multitude of functions will be deployed weekly and can be custom developed on demand by the tech team in our gadget factory within days.

This is ultimately a huge competitive advantage as it positions us to be much more highly responsive to customers and to stay on the cutting edge of scientific software development.

As a follow-up to this launch, we expect to introduce Version 2.0 of our platform in the first fiscal half of 2018. Some of the enhanced features to expect include an array of content management gadgets, personal and corporate libraries, as well as the host of scientific and information productivity gadgets.

Given our continued momentum in our platform growth, the successful launch and a completely upgraded Version 1.5 and an expanding sales team covering most of our regional markets both domestically and aboard, we certainly believe the outlook for business is strong.

With that, I’d now like to turn the call back over to the operator for Q&A. Operator?

Question-and-Answer Session

[Operator Instructions] Our first question will come from [Glen Elberton]. I’m sorry, the questioner went offline. There are no more at this time. This concludes the question and answer session. I would like to turn the conference back over Peter Derycz for any closing remarks.

Peter Derycz

Okay. Well, thank you for attending today’s earnings call. We look forward to reporting our annual results sometime in the summer. Thanks so much.

Operator

At this time, this concludes our question and answer session. Before we conclude today’s call, I would like to provide Research Solutions' Safe Harbor statements that include 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 include, 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 transaction and platform deployment that the company will continue to stay a very lean and efficient organization, 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 be 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 this time. They are made in our management's good faith belief as at that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed 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 company's products in the market, the company's success in obtaining new customers, new platform deployments, 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 SEC that is 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 report 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 the 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 or 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 about the company's use of non-GAAP measures and their reconciliation to the nearest GAAP measures in today's earnings press release.

Finally, I would like to remind everyone that the recording of today's call will be available for replay after 8 P.M. Eastern today and through May 29, 2017. Please refer to today's press release for dial-in instructions. Thank you for joining us for the presentation. You may now disconnect.

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