Research Solutions - Q1 2024

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Research Solutions, Inc. First Quarter 2024 Earnings Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press Star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star and zero. I would now like to turn the conference over to John Beisler, Investor Relations. Please go ahead.

John Beisler (Investor Relations)

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for the Research Solutions first quarter fiscal 2024 earnings call. On the call today are Roy Olivier, President and Chief Executive Officer, and Bill Nurthen, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the first quarter of fiscal 2024. The release is available on the company's website at researchsolutions.com. Before Roy and Bill begin their prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors.

We refer you to Research Solutions' recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. Also, on today's call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. A reconciliation of those measures to GAAP measures is included in the earnings press release issued this afternoon. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link on the company's website. I would now like to turn the call over to Roy W. Olivier. Roy?

Roy W. Olivier (President and CEO)

Thank you, John, and thanks to everyone for joining us for our first quarter of fiscal 2024 results. During the quarter, we had some great things going on, including record ARR of over $11 million, 16% overall revenue growth, and completing the acquisition of ResoluteAI. This acquisition will help us launch an advanced discovery or search tool, which has been the number one requested tool by our customers. It will also help us create new sources of revenue, both in terms of new products and in new workflows that expand our total addressable market and represent a strong cross-sell opportunity for us. There's a lot of things good going on around the business, including in the marketing, sales, product, and M&A segments, which I'll discuss with you in more detail after Bill's comments.

The quarter is a bit messy in terms of our EBITDA performance, due to several costs that Bill will discuss in detail. I'm happy with the core business EBITDA performance in Q1. I'd like to pass the call over to Bill to walk through our fiscal first quarter 2024 financial results in detail, and then I'll wrap up with some comments. Bill?

Bill Nurthen (CFO)

Thank you, Roy, and good afternoon, everyone. Before I begin, I'd like to remind everyone that our first quarter results include the acquisition of ResoluteAI on July 28, and as such, are inclusive of approximately two months of results from ResoluteAI. Please note that we have integrated ResoluteAI's operations into our existing business, and as a result, it will not be practical to report on ResoluteAI as a separate entity. That said, given it was only part of our operations for two months this quarter, I am able to provide some insight for this quarter only as to how it affected our ARR and P&L performance. Lastly, it should be noted ResoluteAI's revenue is all captured on the platforms line of our P&L.

Total revenue for the first quarter of fiscal 2024 was $10.1 million, a 16% increase from the first quarter of fiscal 2023. The growth rate, excluding Resolute, was approximately 13%. Our platform subscription revenue increased 29% to $2.6 million. The growth was primarily driven by a net increase of platform deployments from last year and the contribution from Resolute, which added a little over $200,000 of platform revenue for the quarter. We ended the quarter with $11 million in annual recurring revenue, up 32% year over year, reflecting our continued sales and upselling efforts, low churn of existing platform subscribers, and approximately $1.35 million of new ARR associated with the Resolute transaction. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP items.

Our transaction revenue increased almost 12% from the first quarter of fiscal 2023 to $7.5 million, and our total active customer count for the quarter was 1,395, a net increase of 175 from the same period a year ago. The increases are primarily due to organic growth, with additional growth resulting from higher transaction volumes related to contracts transferred from the FIZ Karlsruhe transaction, effective on January 1, 2023.... Gross margin for the first quarter was 40.1%, a 150 basis point improvement over the first quarter of 2023. The increase is due to the ongoing revenue mix shift towards our higher-margin platforms business. The platform business recorded gross margin of 85.3%, a decrease compared to 88.6% in the prior year quarter.

The decrease is related to the inclusion of Resolute's platform revenues, which generate a lower margin. Going forward, as we consolidate Resolute into our business, I suspect our platform gross margin will decrease. However, it should remain in a range between 80% and 85%. Gross margin in our transaction business increased 90 basis points to 24.3%. The increase was primarily attributable to pricing initiatives, resulting in increased copyright margins. Total operating expenses in the quarter were $5.1 million, compared to $3.2 million in the prior year quarter.

This quarter's results include roughly $1.2 million related to a series of unique items, including $542,000 in proxy-related expenses, $339,000 in legal costs associated with our M&A activities, and $280,000 in costs associated with the termination of our former executive chairman. These costs all appear on the G&A line of the P&L, with the exception of about $80,000 of that cost, which is classified as stock compensation. In addition, Resolute added approximately $300,000 of operating costs in the quarter, most of which appear on the technology and product development line of the P&L.

Lastly, stock compensation was up, also up an additional amount of roughly $333,000, related to the expense from the long-term equity bonus plan, where restricted stock shares vest at higher stock prices, which was not implemented until Q2 of last year. Net loss for the quarter was -$988,000, or $0.04 per share, compared to net income of $215,000, or $0.01 per diluted share in the prior year quarter. Adjusted EBITDA for the quarter was -$441,000, compared to a positive $433,000 in the year-ago quarter. Excluding the unique items I previously noted, adjusted EBITDA would have been approximately $637,000.

Turning to our balance sheet, cash and cash equivalents as of September 30, 2023, were $9.9 million, versus $13.5 million on June 30, 2023. The decrease was primarily attributable to the cash used for the Resolute acquisition and payments related to the FIZ acquisition, which collectively totaled about $2.8 million. We did burn approximately $750,000 of cash in the quarter, primarily related to excess legal costs associated with the M&A activities and the proxy matter, and the fact that Resolute is presently in a cash burn situation. In addition, I will remind everyone that we pay our executive bonuses and sales commission overages for the prior fiscal year in Q1. As we look ahead, going forward, there are a few key items I would like to know.

First, our P&L should be less impacted by the items that affected us in Q1. The proxy costs and separation costs related to the former executive chairman have, for the most part, all been expensed. That said, we will continue to work heavily on M&A in Q2 and should expect higher than normal costs related to M&A through Q2 before it tails off from there, starting in Q3. Second, performance will still be hampered by a number of factors in Q2. Although expensed, we still have some bills to pay from the proxy matter. We'll pay out the separation costs of the former executive chairman over time. When you combine this with the high M&A costs and Resolute still being in a burn position, Q2 will be another quarter of cash burn.

Third, is that cash burn from Resolute, from Resolute will reduce over time and be offset by core cash flow performance as our business gets past the unique items affecting it in Q1 and Q2. Fourth, I will remind everyone that we have stated we are working on two other acquisitions, and both of these acquisitions are cash flow positive and will contribute to cash flow when they close. The net of all this is that I believe we will see improved P&L performance in Q2. However, cash flow will continue to be effective. Once we hit Q3, however, pass these items and see an improved, more normalized run rate for the business.

As I have stated in the past, number of unique items impacting the business currently, and indeed, these items are material, anything that represents a change to the profit and cash flow profile of the business that we saw as we exited fiscal year 2023. Additionally, we are working on acquisitions that I think will positively affect those numbers. I'll now turn the call back to Roy. Roy?

Roy W. Olivier (President and CEO)

Thanks, Bill. The quarter was promising in terms of new business, as our collective bookings of new, new existing, and Article Galaxy Scholar showed strong growth versus last year. All three of those areas overperformed expectation, which is a nice improvement over last year's results and speaks to the improvements we have made in sales process, sales materials, and marketing's lead generation efforts. We underperformed expectations in churn and in upsells. While our net churn rates continue to be over 100%, we remain concerned about our performance in those areas as some of our customers are downsizing or continue to operate with tight budgets. The good news is that we are seeing very strong lead generation results in the past two months, which leads us to believe that we will see continued strong performance in the new, new existing sales teams.

We've also not seen any material change in our competitive position. Very little churn is due to competitive takeaways, and the upsell headwinds continue to be a function of our customers tightening their spending. We did launch some new pricing bundles to drive additional upsells in Q2 that are generating a nice pipeline that we think will help in Q2 and Q3. Turning to product, we did several releases during the quarter, including expanding our AI-related offerings in the platform. We released our beta ChatGPT Assistant to expand our capability in the platform, allowing our customers to quickly create ChatGPT article reviews for supported publishers. This is in addition to our AI-based recommendation engine in Article Galaxy and our post-market surveillance tool, where we accelerate the re-review process using this technology. We had one small sale with the ResoluteAI product during the quarter.

As a reminder, most of the value creation with this product will be through cross-sell activities, which are dependent on product enhancements. We remain on track to include document delivery inside the ResoluteAI platform, advanced discovery or search tools in the Article Galaxy platform, and several new workflows in Q2 and Q3, which is when we can expect to start generating revenue, primarily in the back half of fiscal 2024. We did bring on a new enterprise sales professional that will focus on the ResoluteAI products, both new and upsells. He has extensive experience selling these products for publishers, and we remain excited about the possibilities as we move forward.

With the proxy matter largely behind us, we are focused on executing our plan and are closely monitoring employee morale and engagement, so we can make sure that there are no distractions to hitting our goals for Q2 and the remainder of the year. Regarding M&A, we continue to work on two additional acquisitions. Barring any diligence problems, we expect to close one of them shortly. As a reminder, both are accretive to our growth objectives and our EBITDA objectives. In addition, they both represent a strong cross-sell opportunity and line up with our long-term product strategy. Regarding our outlook for fiscal 2024, I have a mixed view. I do remain concerned about the economic headwinds impacting our upsell and churn rates, which in turn will affect our overall growth rate.

That said, the acquisitions we are working on, if and when they close, will result in strong ARR as we roll into fiscal 2025, and they will result in nice EBITDA growth as well. I'm also confident that we will produce respectable bottom-line performance versus last year from our base business as we put the proxy matter behind us and wind down our M&A activities. In my mind, our biggest challenge for fiscal 2024 and the beginning of 2025 will be to effectively integrate the products we have acquired and transition our sales and marketing efforts to successfully cross-sell those products. In short, we will be focused on integrating what we have acquired, resulting in us being much more selective about what other acquisitions we make in the future. I am excited about the months ahead for our business.

As we execute on our plans, I think it will give investors a much clearer picture regarding what we are trying to build. I think we have a great opportunity to finish the back half of the year with a great deal of momentum, which will be evident both in our integrated product suite and our financial performance. We will be presenting at the Roth Technology Conference in New York next week on November fifteenth and the Southwest IDEAS Conference in Dallas on November sixteenth. Qualified investors that would like to attend or schedule a meeting should contact Three Part Advisors. With that, I'd like to turn it over to the operator for Q&A. Operator?

Operator (participant)

Thank you. We will now begin the question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. Our first question comes from Richard Baldry of Roth MKM. Please go ahead.

Richard Baldry (Senior Research Analyst)

Thanks. When I back out the one-time items from the OpEx side, it's well below your recent trends, and even looks like a little bit down year-over-year. Can you talk? Was there any sort of one-time things that held back the sort of normalized spend? I might have thought it would go up a little bit, even given Resolute's integration.

Roy W. Olivier (President and CEO)

Bill, you want to touch that?

Bill Nurthen (CFO)

Yeah. Yeah, no, I think we basically, if I understand your question correctly, Rich, we basically held tight on a lot of other spend, just given some of what we knew was coming with the proxy cost and the M&A-related cost. I'll also say, sort of as we budget, you know, for a fiscal year, at times we'll put a few new heads in the budget, but it does take some time to get them on board and hired. And so that might have affected things a little bit as well. But yeah, we tried to run it pretty tight, knowing we were going to have some of these costs hit us in the quarter.

Richard Baldry (Senior Research Analyst)

Okay. Then, when you talk about customers have been asking for a search feature, sort of top of their list, can you walk through some of the what you need to do to integrate Resolute and its technologies into the core platform? Are there meaningful challenges to that, or is it just sort of blocking and tackling APIs, basic stuff? Thanks.

Roy W. Olivier (President and CEO)

I would say it's probably somewhere in between basic and complex. However, we expect that integration to be complete, and the first version of that product to be released late Q2, early Q3, and then we'll continue to enhance it from there. And what I mean by that is we have two different platforms that in the first version will kind of link to each other. So you would do the search in Resolute and then jump over to Article Galaxy. Where we want to go ultimately is that the platform is completely integrated into Article Galaxy, so you don't have two things talking to each other, you have one seamless experience. But, you know, V1, which gets us to cross-sell capability, is, you know, sometime between very late this quarter and very early in Q3.

Richard Baldry (Senior Research Analyst)

And last for me, you know, the cash came down a little bit. You do the acquisition in the quarter. Talk about, you know, when you're looking at other acquisitions, how comfortable are you with the cash position or how comfortable carrying debt for at least an intermediate period of time? Would you look to use more equity, you know, as the cash balance comes down? Just sort of let us understand sort of the funding backdrop to those M&As. Thanks.

Roy W. Olivier (President and CEO)

Yeah, I'll let Bill comment further. I think, you know, I will say Bill and I have had a number of conversations about what our cash floor is. And, you know, our cash floor is $3 million-$4 million, so we're not going to run this thing with $1 million in the bank. We're going to minimally have $3 million, preferably $4 million in the bank. And Bill, you want to address the remainder of that question?

Bill Nurthen (CFO)

Yeah, I think, you know, as we, as we start to announce, some of these, Rich, you'll get a little more, flavor for how we intend to, to finance it. But, you know, obviously, it's the larger some of these deals get, there's, you know... Our, our first, you know, thing we want to do is try to use cash, but we, we will likely need to use some equity, to complete some of these transactions. And, you know, we continue to basically look at all sorts of options. If you look at kind of what, what Roy and I have done in the past, you know, we've used seller notes, we used earn-outs, things like that. So I think that'll also be, be part of the structure.

While at the same time, as Roy mentioned, making sure we, you know, keep a reserve amount of liquidity in the business to make sure that we can execute on our plans and don't run into any issues.

Richard Baldry (Senior Research Analyst)

Last one. The ASP kind of jumped more meaningfully than we've seen in a while. Is that really an impact of Resolute coming in, or is there more to it than that? Thanks.

Roy W. Olivier (President and CEO)

That's primarily-

Bill Nurthen (CFO)

Yes, it is yeah, Resolute. Yes.

Richard Baldry (Senior Research Analyst)

Great. Thanks. Congrats on a good quarter.

Roy W. Olivier (President and CEO)

Thank you.

Bill Nurthen (CFO)

Thank you.

Operator (participant)

Once again, if you have a question, please press Star, then One. Our next question comes from Alan Klee of Maxim Group. Please go ahead.

Allen Klee (Senior Research Analyst)

Yes. Hi. Could you give us a sense of how much of the incremental ARR that was added in the quarter came from the core business excluding Resolute?

Bill Nurthen (CFO)

Yeah. So I mentioned in my script, you know, Resolute brought about $1.35 million of ARR. So there's, I think we had about not quite one-sixth of incremental in the quarter, and $1.35 million of that came from Resolute.

Allen Klee (Senior Research Analyst)

Great. Thank you. And then if we're going to think about, there's still a little leftover, incremental one-time, well, not recurring type spending related to the things you mentioned mostly next quarter, is there a way to think of what the magnitude of that might be compared to what you just had in the fiscal first quarter?

Bill Nurthen (CFO)

Yeah, I think, you know, we sort of, we sort of itemized those costs out that affected this quarter, and of that, the proxy stuff goes away pretty much, and the chairman stuff goes away pretty much. So it's really around $350-ish of legal, I would say, is probably a legal over and above normal related to M&A type stuff would be the impact.

Allen Klee (Senior Research Analyst)

Okay, great. And on the M&A that you're looking at, could you remind us kind of what are, like, in terms of what you're looking for, what these new businesses will be doing, what they'll be contributing to the type of stuff that you offer compared to what you offer today?

Roy W. Olivier (President and CEO)

Well, yeah, I mean, obviously, we have to narrow our comments on this, but, you know, we're looking for unique capability that we do not have today that allows us to provide a unique value proposition to our user base. We also are highly interested in, you know, complementary adjacent markets where we're not as successful as others in. For example, we're very strong in corporate and not as strong in academic or government. So people that are strong in academic or government and maybe not in corporate would be of interest to us. And then, you know, if I point you back to the investor deck that we've used over the last 30 or 60 days, there's a number of capability that the slides that point out, here's where we were when we just had Article Galaxy.

Here's where we were three months ago with Article Galaxy, CureData, and References, and here's what Resolute does for us. But even with that Resolute deck, there are a few empty boxes. So the way that we think about it is: Is there a capability that we can acquire that also has strong cross-sell capability, may also have strength in a segment of the market that we're not necessarily strong in, that we can acquire, that'll fill out that product portfolio, allows it to have another strong cross-sell opportunity, both ways? So I would just point you to the currently filed investor deck, which an updated version will be filed probably tomorrow, if not today.

You know, if you go to the slide titled Innovation Value Chain, there are three empty boxes there that, you know, are interesting to us in terms of M&A targets, as long as they meet the other requirements, which is got to have cross-sell capability, got to have some strengths we don't have, and they've got to be accretive to our organic growth and EBITDA targets.

Allen Klee (Senior Research Analyst)

Great. Thank you very much.

Roy W. Olivier (President and CEO)

Thank you.

Operator (participant)

Once again, if you have a question, please press Star, then one. This concludes the question-and-answer session. I would like to turn the conference back over to Roy Olivier for any closing remarks.

Roy W. Olivier (President and CEO)

Yeah, thanks, everyone, for joining us today. As a reminder, we will again be presenting at the Roth Tech Conference in New York on November fifteenth and the Southwest IDEAS Conference in Dallas on the sixteenth. If you'd like to attend, please reach out to Three Part Advisors. We look forward to speaking to you at the, in February, and have a great day.

Operator (participant)

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.