Research Solutions, Inc. (OTCQB:RSSS) Q2 2018 Earnings Conference Call February 14, 2018 5:00 PM ET
Peter Derycz - President & CEO
Alan Urban - CFO
Peter Rabover - Artko Capital
Scott Billeadeau - Walrus Partners
Good afternoon, everyone, and thank you for participating in today's conference call to discuss Research Solutions' Financial and Operating Results for its Fiscal Second Quarter Ended December 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 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 Investors section of the company's website.
I will now turn the call over to Peter Derycz, Research Solutions President and CEO. Please go ahead.
Thank you, operator and good afternoon, everyone. I'll open the call with a few brief comments about our business and then pass the call to Alan to speak about our financial results. Finally, I will return to address other details and our outlook.
Our second quarter showed continued robust revenue growth in our SaaS based platform's offering, growing 89% year over year and helping support a strong quarter in our transaction business. In fact, our transactions revenue grew by 9% in our second quarter with a 150 basis points of gross margin expansion and 12% growth in total transactions customers. A combination of this healthy customer growth and the proactive measures we put in place last year to improve gross margins continue to have their intended effect.
Version 2.0 of our Article Galaxy platform went live in December and the early feedback on user experiences has been quite positive. We look forward to completing the migration by March and implementing other major framework additions like self registration in the next several months. I will have more to say about platforms and forthcoming upgrades but first I'd like to pass the call to Alan who'll walk through our fiscal Q2 results in detail. Alan.
Thank you, Peter and good afternoon, everyone. Jumping right into the results, our platform subscription revenue increased 89% to 413,000 which was driven by a 92% increase in total platform deployments to 184. This translates into 23 net incremental deployments in Q2. The quarter ended with annual recurring platform revenue up 89% on a year over year basis to 1.7 million and up 7% sequentially. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms.
Transaction revenue was up 9% to 6.4 million compared to the same year ago quarter. This was driven by a 12% growth in customer count to 1044. In addition, the number of corporate customers was up 8% to 816 and academic customers were up 25% to 228. Together this drove a 6% increase in transaction count to approximately 205,000. Together we saw consolidated revenue growth of 12% to 6.8 million versus 6.1 million in the same year ago quarter.
Moving on to gross margins our platform business saw our gross margins decline by 110 basis points to 78.1%, this decline was driven by the addition of new data sources that further enhanced our platform. While the addition of new data sources increases our cost of revenue in the short term we believe these investments are necessary to create a highly valued and differentiated offering for our customers. Our target platform gross margin is in the high 70% to low 80% range.
As Peter mentioned, gross margin in our Transaction's business was up 150 basis points to 22%. Our ongoing actions to improve margins, including price increases and cost reductions, are a key driver of the year-over-year improvement.
Consolidated gross margin increased 280 basis points to 25.4% compared to the same year-ago quarter due to the margin growth in our Transaction business and a revenue mix shift to our higher margin Platforms business.
Our total operating expenses were unchanged at $2.4 million compared to the same year ago quarter, and the lines with our strategy to optimize our sales resources including the reallocation of expenses and more efficient ways of acquiring customers through content generation and digital and inbound marketing.
Net loss from continuing operations totaled $700,000 or negative $0.03 per share compared to a net loss of $1.1 million or negative $0.05 per share in the year ago quarter. Adjusted EBITDA totaled negative $300,000 compared to negative $700,000 in the year-ago quarter.
As we have noted today and in prior quarterly results, we have grown our platform business at a strong clip and believe significant opportunities remain. Given our momentum and the large opportunities ahead of us, we have decided to be more opportunistic in future growth opportunities, if we believe it can further accelerate customer adoption even at the expense of being adjusted EBITDA breakeven in fiscal 2019.
Now profitability will certainly remain a focus but we believe it's prudent to have the flexibility to invest in opportunities that may arise as we look to further our platform penetration.
Moving on to the balance sheet. Cash and equivalents at December 31, 2017 were $4.9 million versus $5.8 million at June 30, 2017. There were no outstanding borrowings under our revolving line of credit. Our balance sheet continues to remain clean with cash and receivables comprising nearly all of our assets and accounts payable, accrued expenses, and deferred revenue representing nearly all of our liabilities.
This completes my financial summary. I'll now turn the call back to Peter. Peter?
Thanks, Alan. I'd like to spend more time on our platforms business. As mentioned, Version 2.0 went live in December. Some of the features of launch include our customers getting an in-depth view of every one of our gadgets, which will help to improve the speed of adoption and roll out to intercompany work groups. It also features more administrator controls, tab gadget dashboards, instant article ordering, enhanced literature search tools and full screen gadgets, all deployed on a new and more scalable computing and data storage backbone.
The first wave of customer migration has gone smoothly and the feedback has been positive. We have two more ways of migration plans that will be completed by the end of March. It was complete this will set the stage for two additional framework improvements. We are calling them Version 2.1 and 2.2 coming in the spring and summer months.
Next quarter we will launch 2.1 which features powerful reference management tools for researchers. These tools will allow users to compel the geographies and list the scientific studies that a user or group users may be interested in, which fosters greater collaboration amongst more groups and colleagues. This tool combined with other gadgets will also help researchers accelerate the publishing of their research. Additionally, it will have super easy import and export features to improve the connectivity between Article Galaxy and external databases of tools researchers use in their daily work flows. This unique collaboration tool will be built into our system day one and is yet another unique differentiator of our cloud-based platform.
Version 2.2 will feature our self-registration capabilities and will go live in early summer. As previously discussed, power of self-registration will allow more efficient lead generation which we believe will drive even more deployments and transactions, versions 2.1 and 2.2 are major framework enhancements. Within this powerful frame work we're delivering a constant stream of innovation with weekly launches of new smart platform apps we call gadgets.
Our gadget factory is in full swing and is delivering new innovation daily. Our gadget-oriented systems architecture allows us to be super agile in response to customer request from new functionality. With Article Galaxy 2.0 we’re entering an entirely new era of being able to help our customers achieved new levels of restructure efficiency.
Now recurring to self-registration and version 2.2 with this capability we're looking to further improve our sales and marketing function. This will include the reorganization of our departs around focused path, each pod will have a discrete purpose or goal and we will measure their productivity and effectiveness based upon the return on each activity. We believe the segmentation is the best way to measure our efficiency and supports prior comments we’ve made about optimizing our sales and marketing resources to yield the greatest results.
Looking to the remainder of our year we began calendar 2018 with a particularly strong January in our platforms business. And look forward to building upon this momentum as the year unfold. We expect this will be driven not only by version 2.1 and 2.2 favorable conditions but also be at the powerful weakly improvements produced by our gadget factory. And a sales and marketing department we're refining to drive optimal efficiency and investment returns. With that I would now like to turn the call back to the operator for Q&A.
[Operator Instructions] The first question comes from Peter Rabover of Artko Capital. Please go-ahead Peter.
I will start with question; do you think you’re the migration to the new product kind make customers wait until you release a new version before they sign up.
Not at all, I don’t think its impact that at all.
Okay and then maybe you guys can elaborate on your -- you talked about some potential investments that you may see -- you may invest in before returning to breakeven, so can you may be elaborate on the types of investment you're thinking about.
What we're doing is, as you know with version 2.2 we're launching the ability for users to come sign up all on their own, and which is a big contrast to what we have going on today, right now we strictly do enterprise sales which means we have a process where a customer that’s interested now has to talk to a sales rep, has to get a contract written up, has to get sort of implemented on the system and then go live with our users and that's sort of a labor intensive process and we're going to streamline that with version 2.2 or any individual or workgroup can come on sign up on their own, put in their credit card, agree to terms online and self-configure.
And so, with that arises the opportunity to basically generate new demand for our products through marketing and so we are really looking at you know new marketing approaches to adapt ourselves to better create an inflow of new customers through this self-registration capabilities. That's what we talk about, that's what we mean when really talking about being open to ideas, or new investments that’s really sort of in the marketing front as we roll out version 2.2 learning what works, what doesn't work and maybe if we find something that really works we probably invest in it in a little bit more of an accelerated fashion.
Okay, so I guess just to double check what I'm hearing is you expect to get higher margins from the version 2.2 because there's less sales or stuff associated with it or you expect to get those savings and reinvest them into other market and activities is that what I'm hearing right?
Yeah correct, I think with the advent of digital marketing and social marketing we have a real ability to make metrics driven investments and how to market and sell. I guess the old way of marketing you ran ads and you committed to run full page ads in a particular journal or magazine for a few months and then saw what happened. In today's digital and social marketing environment you have such an ability to do testing and I think when we find -- if we find something that we test that works, we'd be foolish not to make additional investments in pursuing avenues that are working.
Fair enough and so where do you think we would see those investments going forward, would that just increase the 2.4 million run rate that you guys have had the last couple of quarters or is that more on the gross margin side.
Yeah, it'd be additional sales and marketing expense.
Okay, are we talking just high six figures, low seven figures what do you think those looks like those will be?
We don't know, all we know that is they'll -- if we make those type of additional investments that they will be sort of number driven and results driven.
Okay, and then sorry I keep asking but you mentioned you had a strong January, and if you could maybe parse that out with why you had it, where the strength came from?
Yeah, I think well obviously January comes after December and I think December you have some interruptions because of holidays and so on, so I think maybe if there's any contracts slowness in December probably January is a bit of a catch up month, so yeah things are looking really good in January in terms of signed contracts that had effective dates of January which is when we start recognizing the revenue and then with all this happening and in the pipeline the sales pipeline and our CRM system looks great and your contract request from sales reps look strong as well, so going into February we're feeling pretty good.
And is that kind of the same breakdown between corporate and academics that you have had in the past?
Yeah, I'd say most of the -- on the platform sales specifically it’s really corporate, we have a lot of academic additions but I think those fall mostly on the transaction side of the business.
Okay, and then I think you mentioned price increases on the transaction side, has that been successful, any push back, any loss of demand has that gone through pretty smoothly?
Yes, I would say we were done with it, I think we started the initial parts of that and we didn’t want to do sort of like across the board price increases all at once and so we're looking when contracts renew and so if they go 1/12 of the customer base at a time as we break it out over a year so yes so far so good. I think we're the best of what we do and in terms of the transaction business so there is no reason not to be able to pay more for more value, we do have a best transaction business out there and then that's increasingly supported by what you can do on the platform side. So now the platform is getting more powerful too, it just making more sense to pay for value and for us to figure out and how to get it for exchange.
[Operator Instructions] The next question comes from Scott Billeadeau of Walrus Partners.
Just a couple of things. One, can you talk a little bit about ASP especially as you are one of the platform business and I don’t know if it’s sea based and maybe talk a little bit about as you go into the self-sign-up, my understanding is you cannot do platforms for large organizations, will these just be kind of mom and pop shops or maybe fill me in on the difference there and would it just be kind of a proceed subscription that they would use on the credit card kind of bang on monthly until they so no or maybe give us a little heads-up on what you are thinking there?
Yes, right now our average ASPs are just under $10,000 and we tend to charge it all at once as soon as the customer signs contract, we invoice it. The going out to let's say smaller and medium size businesses it's certainly has been happening already so that's already factored into the platform slides on average. We are getting a lot of contracts with a lot of our organizations who remained we haven't product before. Of course, there is lot of the big names and the big scientific companies out there, there are customers and many are large scientific customers are staying with us and we love them and that's a big part of our customer base. But as we've been building up a platform we haven't seen a lot more activity from small and medium size enterprise which is one of the reasons we've been driven to office help registration as well.
So I think what you are going to see from you is that, the other sales price will fluctuate up and down a little bit but you will probably have to add new metrics because when we come up with self-registrations for individuals, professionals and work groups we will be doing on a feed -- not a feed basis but I will say user basis and so we are probably going to add a few new metrics to what we're reporting on in terms of number of users and so on as well, so they'll be the ASP that you are seeing reported on now but they'll be some new additional metrics that we will be adding on to as to get more clarity on who is signing up and close what they are paying.
For individual I'd certainly it's ASP, they want to get on so that they can do transactions, I mean certainly is that the game plan so it's a matter of you got a balance what the entry fee is to get on to the platform versus transaction once they are there, what's your thoughts there?
There is a lot of things going on around transaction, so the ability to just say let's say pull out a credit card to buy one study or one article that’s great in that transaction but the reality of the matter is work groups and organizations have a whole lot of work flows issues around obtain these transactions and so creating lists of studies that are important, managing, sharing, collaborating. And so, with the platform we’re saying okay, we understand the people need to buy the transaction to be able to get caught up on a subject or read about some research. But what else are they doing with their day, what else are t doing with that study. And so, we're offering in the platform that will help people get more efficient with other parts of their day, so in terms of platform development what we're looking at and saying okay, well we know all scientist around the world, all researches need to study and that's part of the reason to connect to the platform. But we also know that we have other things going on with there and we're looking at if those other things that are going on with their day, whether the involved studies or ancillary activities and building up the platform to, sort of be there for the larger part of their day.
So, some of that just more create the stickiness and incremental transactions as opposed to I guess if there is a huge value add piece or module that you add you can add to that. Is there a strategy for hey, if we introduce this to the platform, this is something we can get an incremental 100 a month or something like that, or is it mainly to drive the stickiness of the platform you have?
I think it's both, I think we’ve seen that deliver more value to customers that they are willing to pay more, so all this looking to deliver innovation into the platform that will help us provide more value and then in return be compensated for that. So, we're definitely that and then stickiness is another big thing for us, with all the new tools and end user driven gadgets we will see how end users are putting more and more data on to our platform and once you have data in collaboration going in the platform we will see a lot more stickiness we're seeing already which we already have a negative turn rate. So, its sticky already but we're really focused on making it more sticky which means in reality making it more useful to end users around the world.
As you are looking for 2.1, 2.2, any big thing, is there a big thing, hey we need this in the platform, everyone has been beating us on us for certain, couple of things that are just kind come out from the user base, hey got to solve these two things.
One of them is the revenue management tools that were coming out with 2.1 that is sort of a big development for us and we know that all of our customers and users they use a bunch of the reference management tools and they are looking to consolidate the platform that they are on. That’s a big one, that’s a very customer driven development for us and frankly that’s one such example.
And then I don’t think there are any other big stones out there but what we're seeing that within the scientific research community there are a lot of niches and lot of niche work flows and that’s why we sort of gadgetized our whole environment because we want to be able to deliver innovation to molecular biologists and genetics and so on, innovation that means something to them and we do that via gadgets, so that molecular biologist doesn’t have to have the gadget on the screen that the geneticists has and vice versa.
There are no more questions at this time. This concludes the 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 products and services and the expected continued growth in transaction and Platform deployments, 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 not be necessarily accurate indications of the times at or by which the performance or those results will be achieved. The forward-looking statements are based on information available at this time. They are made and are management's good faith belief as at the 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 and/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 and 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 includes 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 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 of 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 February 28, 2018. Please refer to today's press release for dial-in instructions.
Thank you for joining us for the presentation. You may now disconnect your lines.