Research Solutions, Inc. Q3 FY2025 earnings call

Key Points

• Investments in sales and marketing are paying off with strong gross and net ARR bookings. Net new deployments reached 150 on a trailing twelve-month basis.
• ARR exceeded $20 million for the first time, with a $1.2 million incremental ARR in the quarter.
• AI-based products show strong growth, with B2B enterprise license segment up 180% year-over-year.
• SITE acquisition is fully anniversaried, making comparisons to prior year quarters organic.
• Revenue mix shift towards higher margin platforms contributed to gross margin improvement to 49.5%, a 430 basis point increase from the prior year quarter.
• Adjusted EBITDA set a new record at $1.4 million, with cash flow from operations strong at $2.9 million for the quarter.
• AI strategy focuses on combining research content with AI, with SITE Assistant having new models and smart citations to mitigate hallucinations. Sales teams are showing better results with improved average sales price and close ratios.

Total revenue for the third quarter of fiscal 2025 was $12.7 million compared to $12.1 million in the prior year quarter. Platform subscription revenue increased 22% to $4.8 million, accounting for about 38% of total revenue. Transaction revenue was $7.8 million, down 4% year-over-year. Annual recurring revenue (ARR) ended the quarter at $20.4 million, up 23% year over year. B2B ARR was $13.5 million, and normalized ARR associated with SITE's B2C subscribers was $6.9 million. Net incremental ARR for the quarter was approximately $1.2 million.

• Expect a strong finish in the final quarter of fiscal year 2025 despite potential transaction revenue decline.
• Aim to progress towards the rule of 40 metric (platform growth + EBITDA margin ≥ 40).
• Continued focus on ARR growth and strategic investments in sales, marketing, and AI.

• Potential longer-term trends in transaction revenue decline, possibly due to economic factors.
• Impact of budget cuts in government and academic institutions on business, though no material impact seen currently.
• Uncertainty around the final SITE earn-out amount and present value accounting for the earn-out.

Q: Richard Baldry asked about shifting gears in sales and marketing to drive faster growth and AI's impact on productivity.

A: Roy Olivier discussed predictable customer acquisition models on B2C (digital advertising driving trials to subscriptions) and aim to replicate on B2B with improved sales process. He also mentioned AI as a productivity enhancer, including potential for AI in software engineering to write new code.

Q: Jacob Stephan asked about sales performance and B2C seasonality.

A: Roy Olivier noted new logo teams did well, academic and corporate teams performed strongly, and B2C is seeing weakening trials and sign-ups due to seasonality but with improved conversion rates from marketing changes. Bill Nurthen added upsell and cross-sell teams had their best quarter in Q3, including cross-selling into AG customers.