Research Solutions achieves record adjusted EBITDA and 50% gross margin, affirming positive outlook for fiscal 2026 despite challenges in transaction business.

OPERATOR - (00:00:00)

Due to the ongoing revenue mix shift towards our higher margin platforms business, which was also enhanced by expanding gross margins. In the platforms business. Platform revenue accounted for 42% of the revenue in the quarter compared to 36% in the prior year quarter. On a trailing 12 months basis, the company blended gross margin now stands at 50%. The platform business recorded gross margin of 88.1% a 70 basis point increase compared to the prior year quarter. We have been able to continue to expand gross margins in the platforms business as our labor and hosting costs continue to increase at a proportionally slower pace than our revenues. Gross margin in our transaction business was 23.8%, compared to 25.7% in the prior year quarter. The decrease was primarily attributable to lower copyright margins and lower fixed cost leverage. Due to the reduced revenue base. Total operating expenses in the quarter were 5.3 million, compared to 5.1 million in the prior year quarter. Higher sales and marketing expenses were partially offset by lower general and administrative expenses and lower stock based compensation expenses. We have made a concerted effort to keep general and administrative costs contained as we increase investment in other parts of the business. Net income for the quarter was 749,000 or $0.02 per diluted share compared to 669,000 or $0.02 per diluted share in the prior year quarter. Adjusted EBITDA for the quarter was 1.5 million compared to 1.3 million in the year ago quarter, a 16% increase. This was the second best adjusted EBITDA performance in company history and with Q3 and Q4 typically being our strongest quarters for adjusted EBITDA, we are off to a very strong start for the year. Turning to our balance sheet cash and cash equivalents as of September 30, 2025 were 12 million versus 12.2 million on June 30, 2025. It is important to note that during the quarter we made our first payment of the site earnout which consisted of 1.3 million in cash and the issuance of approximately 265,000 shares. Despite the cash outlay related to the earn out, we are almost back to where we ended Q4, which means our operational cash flow remains very healthy. Cash flow from operations was 1.1 million compared to 843,000 in the first quarter of fiscal 2025, a 31% increase. We continue to believe that we can grow our cash balance in fiscal year 2026 while also continuing to service the site earnout from operational cash flow. Further, there are no outstanding borrowings under. Our revolving line of credit. As we look ahead, we are off to a good start for fiscal year 2026. As you may recall from our prior earnings call, I discussed some of the seasonality in our business with respect to adjusted EBITDA. Typically, we see a dip in adjusted EBITDA between Q1 and Q2 before rebounding to higher levels of adjusted EBITDA in Q3 and Q4, with Q4 usually being our best quarter of performance. We think that it is likely that this seasonality will play out again in fiscal 2026, but we think the dip will be less pronounced in Q2 from where it was last year. And there's also a shot at some EBITDA growth sequentially between Q1 and Q2. All that said, our goal remains to experience outperformance compared to fiscal 2025 in each of the remaining quarters for the fiscal year. To the extent we can execute on that, it will be another record year for the company and we will continue to experience expansion in cash flows generated by the company. I'll now turn the call back to.

Roy - (00:04:13)

Roy Roy Thanks Phil. A few comments about the transaction business in last quarter's call we discussed that we thought the year over year decline was driven by zero click searches. Further research suggests that this may not be the case. Our academic segment is growing and the corporate segment is declining with about 60% of that decline coming from one churned account. The remaining churn dollars are primarily two customers who are very large and are buying less year over year. Both report that this is based primarily on the current economic environment or changes in their research priorities. In short, three customers are largely driving the year over year results. As you know, we started investing about this time last year in more to B2B sales resources. We continue to actively monitor these investments to ensure that we are seeing a return on them. In looking at the first half of FY25 actual results versus our current forecast for the same period in FY26, we expect to see new ARR growth to be materially higher than the incremental sales investments we made. We expect the new logo teams to generate over $1 in new ARR for every dollar invested. We expect to see the Churn upsell team generate a bit under $1 in new ARR for every dollar we've invested. This suggests a payback period of a little over one year on products that have a six to eight year lifetime value. In my view, we need to continue to show improvement on the Upsell Churn teams, but overall the investments we have made are working. As previously discussed, the new sales process is resulting in rising ASPs. We continue to set records in terms of total contract ARR and per seat ARR through better sales execution, especially with our AI based products. While we saw less than expected B2C net ARR growth in Q1, we are starting to see more traction toward B2B strategic revenues from B2C. As you know, B2C are primarily month to month subscribers who are attending school or researchers in a corporate account that are trying out the product. We are seeing an increasing number of those users try the product and then report back to their academic or corporate enterprise that it should consider an enterprise subscription. A year ago in Q1FY25, about 50,000 of our total sales pipeline came from this B2C to B2B channel. At the end of Q1FY26, over 1 million of our pipeline came from B2C. Now I'd like to turn the call over to Josh to talk a little bit about our current thinking on product strategy issues.

Josh - (00:07:35)

Josh thanks Roy, thanks Roy and hello everyone. I'm going to spend a few minutes connecting what we're seeing in the market to the strategic decisions we've been making over the last few quarters, especially around AI rights, site Article Galaxy and our role as publishers. So a few key trends worth calling out. One is enterprises want to use AI on their articles. Another is publishers are moving into AI licensing. And then a third one is the AI usage of articles is not being tracked. In response to these market trends, we have made various product additions tweaks to our go to market offerings and made sure we're aligned with where the market is going. On the first point, enterprises wanting to use AI on research articles. We've launched an AI rights offering in Article Galaxy called RightsDel, RightsDel allows the researcher to acquire AI rights for documents they already own. The revenue we charge for those rights is split between the publisher and Research Solutions in a similar manner to the transaction business we have today, This gives publishers a way to monetize AI usage of their content, either on an article by article basis or across a company's existing library. We believe this will grow platform seat revenues, lead to more cross sells, increase transactional purchases, and ultimately decrease churn on the second point, publishers moving into AI licensing, We are working with our publisher partners to offer an AI gateway product based on site in which customers can purchase the rights to use AI with all of that publisher's content to materially improve the productivity of their research teams. This would create an ARR upsell opportunity for publishers in their academic and corporate customers and as a revenue share with research solutions while deepening our role as their AI technology partner. This is a major challenge for our industry, especially the long tail of medium and small publishers, and as we solve this gap it could make sites smart citations a key part of AI infrastructure. And a key partner to publishers. On the third point, AI Usage of Articles not being tracked today, the industry standard is COUNTER compliant usage Metrics. These usage metrics show how many times articles have been downloaded or read and they're central to how libraries and publishers assess the value and ROI of subscription spending. There is no equivalent for AI usage today. By working with publishers to deploy our AI gateway, we can introduce AI specific usage metrics that play a similar role to counter for traditional usage, giving publishers visibility, creating a basis for pricing and value discussions and enabling a clear upsell and revenue share opportunity for AI analytics and rights on top of existing subscriptions. This would be a huge value to both the publisher and our corporate and academic users. Researchers expect tools like CiteAssistant and Article Galaxy to help them answer concrete questions, summarize bodies of work and find key insights across many articles using AI. We believe we're well positioned to do that in a copyright compliant way that delivers real value to customers while generating new sources of revenue for research solutions and our publisher partners. Thanks again for having me and I'll turn it back to Roy.

Roy - (00:10:57)

Thanks Josh. Looking forward, we expect to focus on several areas for the remainder of the year. First, improve site B2C net ARR growth through product improvements, the pace of delivering those improvements, the marketing and sales messaging around our unique capabilities in this segment. Second, continue to show improvements in overall ARR growth and ASP growth through better sales execution and improving our products. Third, demonstrate improvements in the retention and upsell part of the business by driving proactive versus reactive customer engagement through better health scoring and product improvements. Fourth, continue to innovate in the transaction or Doctel space to return that business to a flat to slow growth business. And lastly, manage our cost structure to continue progress toward our goal of a weighted rule of 40. With that, I'd like to turn the call back over to our operator for Q and A operator.

OPERATOR - (00:12:04)

At this time. If you would like to ask a question, please press Star one on your telephone keypad. You may remove yourself from the queue at any time by pressing Star two once again. That is Star one to ask a question. Our first question comes from Jacob Steffen with Lake Street Capital Markets. Please go ahead.

Jacob Steffen - Analyst - (00:12:26)

Yeah, thanks guys. Nice quarter on the B2B growth and on profitability as well. I just want to talk about the attach rate on the AI rights add on product. Maybe you could help us think, you know, think through the attach rate on kind of new logo deals versus kind of current customer add ons. And maybe just, you know, part B of that question would be how significant is that in the overall ASP uplift that we're seeing?

Bill - (00:12:57)

Yeah, I don't think we have a clear answer to either of those questions. The product is brand new, we've sold it only to some existing customers and we are currently signing up more and more publishers to participate in that product. So I think the next quarter or two we'll start to get better visibility on an attach rate. To your second question, there has been some industry chatter recently about what type of uplift on ARR, SAS or AI. Well, vertical SAS companies expect by adding AI to their vertical SaaS solution. And one of those studies suggests the uplift opportunity is about 50% of the arrow. You know, as a reminder, our kind of aggregate business is about 11 point something million dollars in ARR. So that could be a material uplift. However, you know, we have a long way to go before we really understand what the real rate is going to be. Bill or Josh, feel free to add to that. I think you caught it. I'll just say that it was Not a big contributor to the ASP increase for this quarter. That was more the larger new logo deals that Roy talked about earlier in the call.

Jacob Steffen - Analyst - (00:14:19)

Yeah, okay. Yeah, thanks for the color there. I'm wondering also maybe you could help us think through some of the overall product strategy shift in B2C. How are you planning to actually increase the attach rate and the net churn as well?

Roy - (00:14:40)

That would be helpful. Go ahead, Josh.

Josh - (00:14:47)

I think from the product perspective, you know, how we got to success was being pretty critical on every single aspect from sign up to completion of using say CiteSearch or site assistant. I think we lost a little bit of that and you know, slowed us down in kind of the velocity. And so we're back on pace and I think, you know, rigorously looking at every single metric from sign up to conversion and rigorously testing. Right. So a lot of testing to optimize and make sure that, you know, we're competitive with that. And I think that's, you know, maybe a little bit of a reflection of joining a company where it takes some time to kind of get into that fit or swing. But I think now the Velocity is, has really hit and I think, you know, product is starting to catch back up. Yeah.

Roy - (00:15:40)

I think just to comment on that further, you know, we have obviously much more competition today than we did a year ago and that is certainly impacting the, you know, conversion rate on the product. And I think Josh and the team are doing a lot of really great work now in terms of rolling out product improvements that we think will materially move that conversion rate back up to where we'd like it to be. Churn on that product has actually been improving. So churn's going up, lifetime value is going up. You know, the issue we're having is new subscriber sign up conversion from trial, which is not where we'd like it to be and not it's, it's below where it was last year. And I think that's partly product and partly messaging and being clear about the distinct advantages we have by having access to content behind the paywall.

Jacob Steffen - Analyst - (00:16:34)

Okay, interesting. I'm wondering if maybe you could help us think how long is the trial period on that product and are you seeing that, you know, maybe students sign up for, you know, just, just the trial and then cancel it? You know, basically to help them through one paper or something like that? Is that kind of what you're seeing?

Roy - (00:16:55)

Yeah, the trial, seven days. Hold on. Let me just mention a churn is improving. In other words, we have materially less churn this year than a year ago. So they're not signing up and they're not signing up for seven days and leaving lifetime value is going up. However, in the, in the, in the spring, people cancel because they're going to be out of school for summer and then they re sign up in the fall. And so the re signup process or attracting new people in the fall is where we go through a trial, which Josh just mentioned is seven days. And then we convert that to subscribers and our conversion rate's not where we'd like it to be. Sorry, Josh, go ahead.

Josh - (00:17:38)

Yeah, I was just going to say, yes, it is seven days and you know, in many cases the product has improved significantly in terms of the output you get out of it where it was. You can get a few paragraphs, you can get now a 15 page fully referenced report. So to your point, sometimes, you know, the success of the product means they're solving their problems quicker. And so we, you know, we think about all these different aspects, not just conversion rate, but how many queries are they doing? You know, what is the weekly active users, the Monthly active users. And I think again, you know, we need to be really disciplined, looking at those numbers across the board and then optimizing kind of the product decisions around what gets deployed. Does that increase the conversion rate? What does that do to the lifetime value of the customer? And then also the usage of various KPIs. We are, I would say, in a much better position now. We've also started to really leverage a lot of AI in our own development work, which has greatly accelerated the ability to deploy new features and a lot of UI UX changes that are necessary for testing. You know, you can easily run a test on this button moving here versus there and what does that do to conversion rates and things like that? Okay, got it.

Jacob Steffen - Analyst - (00:18:54)

Very helpful guys. Thank you. Nice work.

OPERATOR - (00:19:00)

Our next question comes from Richard Baldry with Roth Capital. Please go ahead.

Richard Baldry - Analyst - (00:19:07)

Thanks. Sort of I hope you could drill. A little more deeper into the non typical or non seasonal strengths you saw in ARR in the first quarter, then looked up versus prior years and it was multiples of what we've seen before. Could you sort of break down where you think that was coming from? Was there any sort of pull forwards that we have to be cautious about looking forward, or is there something sustainably higher going on there? Thanks.

Roy - (00:19:36)

Yeah, there was no pull forwards. You know, I would say over the last year we have, you know, upgraded well over half of our sales teams. We've spent, you know, well into six figures on training an entirely new sales process where we work with the customer closely to understand the problem we're solving and assess the value of solving that problem for the customer and then pricing accordingly. And I think just having a much more disciplined and focused sales process in addition to marketing is doing a great job. Driving top of the funnel leads into that sales team resulted in the, in the ARR we posted. Bill or Josh, you're welcome to add to that.

Bill - (00:20:25)

I'll just add that the, you know. Some of it also was again some of the larger deals, but I think that's not a one time thing. You know, we have again we started talking about it last quarter and then obviously some this quarter and the sales team is focused and I, and I know we have other deals in the pipeline now that are, you know, kind of some similar size to some of what we saw in Q1. So that definitely helps the situation when you can land, you know, 1 to 2 to 3 of those in a quarter. But I think that's something that, you know, we have a chance to do each quarter going forward as well.

Richard Baldry - Analyst - (00:21:01)

And switching to the expense side, the GNA is the lowest in almost two years, I think. Is there again, you know, anything one time oriented there or sort of out of pattern that would reverse itself or is this sort of a sustainable level? How do we think about that forward?

Roy - (00:21:21)

Yeah, as I said, we had some concerted effort to keep the costs down. I think in some prior quarters we. May have had some legal and stuff. There is, you know, we did have a executive departure at the end of last quarter, so some of that reduction. There is that that executive no longer being in the business. And we were sort of able to, you know, kind of replace that with some, some, some resources that are just more efficient from a cost perspective. So I do think it's, it's decent. You know, sort of to think about. It as a run rate with maybe. A little bit of exception here and there as being a little bit low. You know, barring some kind of something that drives legal expense or a runtime recruiting item of some sort, I think we can modestly increase that through the year.

Richard Baldry - Analyst - (00:22:15)

And then last for me, sort of. Switching gears to AI internally as opposed to just externally. This seems like the pace of new offerings from the companies increasing. How, how much is AI enabling sort of either efficiency gains or productivity gains, and how much more do you think you can do with that? We're sort of hearing that a lot of companies are really embracing it internally, not just externally now.

Roy - (00:22:47)

Yeah, on the internal side. Go ahead.

Josh - (00:22:51)

Yeah, I would say on the internal side, you know, we've made some changes. They're not fully kind of deployed across all of the team, but a lot of that is the AI to greatly speed up development. And it's pretty, you know, pretty inspiring to watch. And so a lot of this, you know, copilot and different AI coding tools are now part of the workflow from senior developers to junior developers. We've clearly put in guardrails in place and rules to use this AI. And so it's secure and it's largely done around light UI UX changes. So not large features. It's hard to quantify it, but it is dramatic. And I think that allows us to shift a lot of things that are important to the business that might seem superficial but matter a lot. Right. And again, that is the workflow of getting that PDF in a second, making sure you're AI compliant, using that PDF, asking the question and getting an answer from the literature. All those things built on that foundation of relationships and data that we have needs to be done seamlessly and I think the AI tools that we're now using primarily in development are greatly accelerating the pace. And I think we'll continue to see that pace as it rolls out to more teams and more people on the development team.

Roy - (00:24:18)

Yeah, the only thing I would add to that is I think in the next one to two quarters, we'll be implementing some AI on the support side of the business to improve that. I don't think the development AI impact that Josh talked about, or the support team impact, is going to result in cost structure reduction. You know, if anything, what it's going to do is free up software engineers to work on the more important stuff, or it's going to free up support people to do a better job covering our existing support workload. Unless we see an unusual percentage of our account base start to use the AI chat tools to solve their issues as opposed to sending in a ticket to us, if that makes sense.

Richard Baldry - Analyst - (00:25:03)

Yep, got it. Thanks.

OPERATOR - (00:25:10)

And as a reminder, ladies and gentlemen, if you'd like to ask a question, you may do so by pressing Star one. Our next question comes from Derek Greenberg with Maxim Group. Please go ahead.

Derek Greenberg - Analyst - (00:25:24)

Hi. Thanks for taking my questions. I wanted to touch on just the transaction segment. You guys had called out already that that was what you do to three customers churning and largely first half will be impacted. I was wondering if you had any visibility into the second half yet and if maybe we'll see potential relief due to just lapping when the initial declines had happened.

Roy - (00:25:54)

Yeah, just to be clear, it's. It's three customers, one churn, the other two are simply buying less year over year. So they didn't churn. They're just, it's just reduced spend on their side in terms of visibility in the second half. I don't, certainly don't think I do. Bill, do you have any comments on that?

Bill - (00:26:14)

We really don't. I think part of the reason we. Said that we think the second half will be better is we started experiencing these sharp declines in January of last year and it really sort of accelerated in February. So we are seeing a little bit of stabilization. As I mentioned, you know, the decline this quarter was a little bit less. Than last quarter, you know, and we're seeing some things that, you know, we're. Seeing growth in our academic business and we're obviously adding more platform customers. So, you know, when you look at that, you know, that's more of a hunch than anything at this point that, you know, we'll start to see improvement. I'm not saying it'll Necessarily, necessarily be. Growing in Q3 and 4, but, you. Know, hopefully we're seeing a reduction in that decline just given some of those factors.

Derek Greenberg - Analyst - (00:27:08)

Okay, thank you. That's helpful. Then in terms of second quarter, I was wondering if you saw any impact from the government shutdown regards to any of your end markets or customers.

Roy - (00:27:25)

No, we have not seen any material impact from. In government. Well, our government, in government, corporate or academic.

Derek Greenberg - Analyst - (00:27:35)

Got it. And then I was wondering if you could just give an update too. I know on the last call you kind of introduced this concept of a headless strategy, plugging directly into customers workflows. I was wondering if you had any updates there. That'd be great.

Roy - (00:27:54)

Yeah. Really no updates other than, you know, we continue to make product changes to, you know, be where the puck is going. We continue to support many large customers with that strategy today. And I would say I don't know what the percentage is, but a material part of our pipeline is headless work because more of our larger corporate clients are frankly building their own internal LLM or tool set. And so what they're looking to do is connect us into the parts of the workflow where they need specific problems solved, whether it's AI rights, document rights, site citation information, or something else.

Derek Greenberg - Analyst - (00:28:43)

Got it. And then just. My last question was just on M and A, you guys had previously said you were expecting at least one acquisition this year. I was just wondering how the pipeline's looking, how the market's looking, if there are any updates there.

Roy - (00:29:02)

Yeah, active pipeline, good discussions. I don't think we have something that'll close by the end of the year, but we have a lot of things that are pretty close.

Derek Greenberg - Analyst - (00:29:14)

Got it. Thank you.

OPERATOR - (00:29:19)

Thank you. This does conclude today's question and answer session. I will now turn the call back over to Roy for any additional or closing remarks.

Roy - (00:29:29)

Well, thanks everyone for joining us on our call today. Bill and I will participate in the Southwest Ideas conference on November 20th. Qualified investors interested in participating should contact three part advisors. We look forward to speaking with you in February to discuss our second quarter fiscal 2026 results. Have a great day.

Sam - Operator - (00:29:51)

This does conclude today's program. Thank you for your participation. You may disconnect at any time. Sam.