RSSS - NASDAQ

Good afternoon, and welcome to the Research Solutions Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Steven Hooser, Investor Relations. Please go ahead.

Thank you, Gary, and good afternoon, everyone. Thank you for joining us today for Research Solutions' fourth quarter and full year fiscal 2023 earnings call. On the call with me today are Roy W. 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 fourth quarter and full year of fiscal 2023. 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 the link on the company's website. I would now like to turn the call over to Roy W. Olivier. Roy?

Thank you, Steven, and thanks to everyone joining us for our fourth quarter and fiscal 2023 results. Our results for the full year were positive in several respects, and we accomplished several things that lay the groundwork for continued progress in FY or fiscal ‘24 and beyond. I'll review these in detail after Bill's full report on our financial results. I'm proud of the team's efforts in generating nice organic growth, completing and integrating an acquisition, generating GAAP profitability, and generating record adjusted EBITDA and cash, all while continuing to deliver new products and new features to our customers. In addition, on July 31st, we announced the acquisition of ResoluteAI, an advanced search platform with knowledge management tools powered by AI and NLP technologies. We're excited about the medium and long-term prospects of this acquisition in terms of expanding the number of solutions we can sell to our customers, expanding our TAM and growing ARR through cross-selling ResoluteAI's capabilities into our broad base of customers. I'll speak more about our accomplishments and the unique opportunities this acquisition provides shortly. But first, I'd like to pass it over to Bill to walk through our fiscal fourth quarter and 2023 year-end financial results in detail. Bill?

Thank you, Roy, and good afternoon, everyone. I will begin with a recap of our results for the fourth quarter of fiscal 2023. Our total revenue was approximately $10 million, a 16% increase from the fourth quarter of fiscal 2022. In the last two quarters, we have now generated over $20 million in total revenue. Our platform subscription revenue increased 22% to $2.3 million, primarily driven by upsells in our existing customer base and a net increase of platform deployments from last year, including a net gain of 20 in the fourth quarter. We ended the quarter with $9.4 million in annual recurring revenue, or ARR, up approximately 4% sequentially and 19% year-over-year, reflecting continued but slower growth in the economic environment where we are currently experiencing a few customers tightening their budgets and some elevated churn within our existing customer base. Please see today's press release for how we define and use annual recurring revenue and other non-GAAP terms. Our transaction revenue increased 15% to approximately $7.7 million from $6.7 million in the fourth quarter of 2022. A little over 9% of that growth was organic, and the rest of it was coming from customers acquired as part of the FI

Thanks, Bill. As mentioned in my comments a few moments ago, there's been a tremendous amount of progress in several areas of the business over the past year. Some show up in our results, and some are laying the strategic groundwork for future results. I'll quickly walk you through some of those. On the transactional or DocDel side of the business, we completed the customer acquisition of FI

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Richard Baldry with Roth Capital. Please go ahead.

Thanks. In the recent past, the seasonality in Q1 revenues has oscillated from a little bit up to a little bit down. Can you talk to, given the acquisition impact and sort of macro backdrop, how should we think about the likely sequential seasonality impact on the revenue side?

Bill, do you want to address that one?

Yeah, sure. I think we will see the same seasonal trends that we have seen in prior years with respect to each quarter. But I think our expectation is, from a transaction perspective, the growth rates we've seen sort of in Q3 and Q4, I still think we'll still get -- we can still achieve double digit growth rates on transactions. But those double digit growth rates will just be off what they were in the prior year Q1, which as you know is usually a little bit of a step down from Q3 and Q4 just due to being in the summer.

In terms of acquisitions, the Resolute product is much more expensive than our typical Article Galaxy product, so it's a larger lumpier sale. We don't a expect material impact from Resolute in Q1 in terms of new logos or new sales. So I wouldn't expect a big uptick on Resolute in our Q1.

Then in terms of modeling on the sales and marketing side, it came down sequentially, fairly materially. Was that more productivity-driven, bonus type driven, over-accruals, any reversals, or was there a meaningful change to headcount or marketing strategies that drove that, that we should factor in going forward?

Yeah, there wasn't a meaningful change to headcount and strategy, but Bill can comment on the accruals.

Yeah, so I would not use Q4 as kind of a run rate, Rich. We definitely, as we go through the year, conservatively accrue for a number of our reps to hit over-attainment and accelerators and things like that. And we just -- this year with some of the slowness in the back half of the year on the platform sales, they did not hit those accelerators. And so a number of those accruals reversed in the fourth quarter. I will say this, as Roy said, there's nothing fundamentally changed there. So it's not like expenses are going to go back up above where you've seen them before. But the effect in Q4 was more [accrual] (ph) reversal.

Thanks. And then, without obviously talking too directly about what you're looking at under the LOIs, would they be market extensions or TAM expansions again or more similar to what you're doing now, more consolidation oriented?

I think if you -- we did a three-part advisor conference about a month ago. There's a webcast of my presentation which kind of reflects the new strategy and explains this in a little more detail. But basically it will add some new capability we do not have, even post-Resolute. It will materially enhance the capability that we have today with Research Solutions products and Resolute’s products. And at least in one case, it expands us into another segment materially. And when I say segment, I mean we typically derive a majority of our revenue in corporate, but there is also an academic and a government segment, both of which are combined, less than 10% of our revenue. And one of these has a fairly significant academic footprint, which is very interesting to us because of the cross-sell opportunity, not only of their product into corporate, but our product into their academic base.

Got it. Thanks for your help and congrats on the record adjusted EBITDA numbers.

Thank you.

Thanks.

The next question is from Allen Klee with Maxim Group. Please go ahead.

Yes, hi. Good afternoon. Starting with ResoluteAI, you said it does around $1.3 million in ARR. Should we be assuming that it's going to be overall losing money, that it will have a negative impact on the bottom line? And if so, how should we think about that? And second, when you were talking about the earn-out, did you say that while it's around $1 million now, that they get the earn-out, if it gets to around $3.5 million? Is that what you meant or did you mean something else? Thank you.

By the way, before I turn it over to Bill, FYI, we did file an 8-K that has an FAQ attached that goes into a bit more detail about the ResoluteAI acquisition and addresses some of your questions. But Bill, do you want to go ahead and take those?

Yeah, I'll just start with the acquisition terms question just real quick just to clarify something. So yeah, it's basically 3.5 times, the earn-out is basically 3.5 times their ARR, 18 months after the close, less an assumed enterprise value of $3.2 million. So that's how the math will work on the earn-out for Resolute. With respect to how it will impact performance, I do think as we put in that 8-K that Roy disclosed, we should expect it to be a drag on performance in the near term. We did disclose in there that when we did do the acquisition, they were burning about $125,000 cash per month. I would say two things about that. One, we are working to basically improve that. On the cost side, there is already a number of steps that we have taken. We have cut about $130,000 sort of -- in the first week of the transaction, we cut about $130,000 of discretionary costs out of the business. And then there's a big component of their costs related to how they service their revenue in the cloud that we think we have some ideas to bring down that we will be working on as well. The other important aspect of this is we are, as Roy mentioned, working to get our cross-sell activity up. Those cross-sell products will not be ready probably for six months. You are talking about January, February timeframe to start selling them. But again, that is another piece we are working on, and that is where we really feel the value in the transaction is. The last thing I would say is that that transaction is one of, sort of, an acquisition strategy which involves the other two deals that Roy discussed. And those deals are, as you mentioned, profitable and cash flow positive. So this one just sort of happened to come first. We do have some other steps that we think we can execute on, that in addition to our operational improvement of Resolute’s performance was, accretively from a cash flow and profit standpoint as well.

Thank you. In terms of -- so the other -- okay, how do you think about how you're budgeting -- how you would like to think about operating expense growth in fiscal ‘24 relative to revenues, like, excluding what I'm viewing as kind of one-time costs related to the proxy and acquisitions?

Sure. Yeah, the answer to that is we're basically not in the core business budgeting high growth rates and expenses. We essentially give our employees raises which on average amount to about 5%, so payroll would probably go up 5%. But otherwise in the core business, there is not sort of new investments we're launching or additional expenditures of headcount that are material to the business. What I will say is, the costs related to getting the acquisitions done from a legal perspective as well as all the costs associated with the proxy issue we're dealing with are very material. And so, we will -- when we report Q1, we'll itemize this stuff out and give everybody a clear picture and be transparent about sort of what is operational versus what we think is unique. But it kind of goes back to my comments in the script. Core business really hasn't changed, but there are some material things we're dealing with on the acquisition side. I think that will prove out to be wise investment in the legal spend in the long term to get these deals done and in-house. But they will impact us in the short term.

Okay, great. And then in terms of quarterly adding of ARR, how do you think about the actions you're taking? Do you think that's kind of the run rate for the last two quarters of incrementally added ARR, that's probably a reasonable rate going forward, or is there any reason to think that either macro or things that you've done might change that?

Well, I don't know how to answer that. We do remain concerned about some of the macro environment we're seeing. We are continuing to see a lot of companies that have spending freezes in place, others that want to reduce their spend through reducing number of seats and that sort of thing. So, I am concerned about that, but I don't know that I have any data to support a specific number.

Okay, I have a housekeeping question. Can you tell us what your current share count is and maybe what the average share count was for the fourth quarter?

Bill?

Yeah, sure. Current share count is probably, it was 29.5 million at quarter end. We'll put our K out for filing shortly, and that will probably show about 29.6 million shares outstanding. As far as the average, I think that is -- for the -- basically for the year, I think it was around 29.1 million on a diluted basis -- 29.1 million shares.

Okay, great. Okay, thank you so much.

Thank you.

[Operator Instructions] The next question is from Peter Rabover with Artko Capital. Please go ahead.

Hey, guys. Well, first I'd like to make kind of a statement on the proxy battle. I think it's incredibly embarrassing for Peter and Paul to even engage in this. And Paul's presence as a shareholder has been more negative than positive. And so, Paul, if you're listening, we're more than happy to help buy out your stake. So I would highly encourage for this matter to be settled as soon as possible and to stop the very expensive stuff that's going on. So like I said, very embarrassing and I hope you guys stop it. With respect to questions, Bill, you have mentioned that there was an inflection point with new platform customers increasing transaction growth. And I was wondering if you could elaborate on that a little bit.

Yeah, so I mean, and I think -- what we've historically seen on the transaction side of the business is pretty low growth and sometimes even negative growth rate on transactions. And that was basically historically, again, the company moving a lot of its existing transaction customers to the platform. And then when they go on the platform, they are typically experiencing cost savings which is one of the huge sort of benefits of our -- that the platform offers to customers, a savings on their transaction spend. And so basically, transactions have been a headwind for us to overall company growth because typically each year they are flat to down. The analysis that we did was basically saying, hey, if we continue to onboard new customers at material rates which we did, especially in fiscal year 2022, and then again to a lesser extent, but still materially in fiscal year 2023, that those transactions -- those customers who tend to spend three times their annual fee on transactions are going to start to offset the transaction savings that the older customers are getting. And I think that's what we're seeing here as we look at the growth. Now that growth as we see in Q3, Q4 is a little bit exaggerated because of FI

Okay, great. That was very helpful. I'll jump off now. Thanks.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Roy Olivier for any closing remarks.

Well, thank you. And thanks, everyone, for joining us on our call today. We look forward to speaking to you in November to discuss our first quarter fiscal 2024 results. Have a great day.