Research Solutions (RSSS): The Scientific Research Platform
A nano-cap offering low downside risk and huge upside potential
Recently uplisted to the Nasdaq but still thinly-traded, RSSS is a software business flying under the radar. With a market cap of ~$70mm and a fast-growing SaaS segment, the stock trades at only ~2x P/S.
RSSS is at a turning point. The company recently broke even as operating leverage started to work its magic. Sustainable and growing profits will attract institutional investors, thus increasing liquidity and expanding valuation multiples. Sell-side coverage may follow, serving as an additional catalyst.
With a comfortable cash position (~$10mm), no debt, and an asset-light business model, RSSS offers low downside risk and enormous upside potential. The investment set-up is attractive and may breed a 5-bagger.
A Workflow Platform for Researchers
Research Solutions (Nasdaq: RSSS) owns Article Galaxy, a platform that facilitates searching, buying, and tracking scientific articles and their data. The company has two segments: transactions and subscriptions.
Transactions
RSSS derives 87% (~$27mm) of its revenue from transactions. In this case, Article Galaxy functions as a marketplace, giving access to +70mm scientific, technical, and medical (STM) articles published worldwide, and +1mm new STM articles published each year. RSSS has agreements with publishers, guaranteeing that its customers comply with copyright laws.
RSSS collects fees for every article purchased or rented through its platform. Articles cost ~$30 on average, and RSSS gets ~$7 in gross profit (~23% margin). Last year, the company brokered almost 900,000 single-article transactions. More than 70% of the world’s top 25 pharmaceutical companies transact within RSSS’s platform. The company has a <5% share of the single-article transaction market, estimated to be worth ~$800mm.
Subscriptions
Since 2016, RSSS is transitioning to a SaaS model by offering subscriptions to a premium version of Article Galaxy.
More than 400 customers have already subscribed to Article Galaxy, and RSSS is adding ~25 new subscribers each quarter. With an average selling price (ASP) of ~$11,000, annual recurring revenue (ARR) sits at $4.4mm, with ~$1mm in ARR added each year.
The typical Article Galaxy subscriber is a growing SMB life sciences organization, but the company is also targeting the academic sector with the recent launching of Article Galaxy Academia. Article Galaxy has a long runway for growth: management points to ~700,000 organizations worldwide which are R&D driven and potential Article Galaxy customers.
Operating Leverage and a Fly-Wheel
The transition to a subscription-based model presents incredible opportunities.
Subscriptions offer an ~80% gross margin vs. a ~23% gross margin for transactions. Due to a fixed cost base, gross profit from additional subscriptions flow-through to RSSS’s bottom line at a high rate. In addition, growth in subscribers creates a fly-wheel by driving transaction-based sales, helping the company generate cash to invest in platform upgrades, ultimately making the platform more valuable to customers and attracting more subscribers.
Accelerating Subscription Growth
I think there’s a good chance subscription growth will accelerate. Here’s why:
Track-Record Of ASP Growth
ASP increased from $9,881 in Q1/FY18 to $11,008 in Q4/FY20 due to up-selling (as opposed to price increases). In addition, though an exact number isn’t disclosed, management commented that churn rates are low and net revenue retention is +100%. These facts indicate Article Galaxy is valuable to customers.
The platform is still largely unknown, so RSSS could be leaving money on the table to grow its customer base. This untapped pricing power may be leveraged to accelerate growth in the future.
New Features Increase Article Galaxy’s Value
RSSS is adding features to Article Galaxy based on customers’ feedback (here). New features increase Article Galaxy’s value to customers and make the product stickier. The more useful and unique the features provided by Article Galaxy, the more the platform can become an essential part of a researcher’s workflow, thus increasing switching costs to other platforms.
An interesting feature of Article Galaxy is the gadget store, a concept introduced in 2018. The gadget store is like an app store, where subscribers can choose among more than 100 gadgets the ones they think will help their workflow. Gadgets make a researcher’s life easier. I have tested some. While many are simple (like a Pomodoro timer), others are more complex, such as a 3D protein visualizer and a DNA sequence annotator.
With the gadget store, RSSS has the flexibility to develop different applications based on customer suggestions, and customers have the freedom to organize their workspace the way they see fit. Management is also studying adding a software development kit to Article Galaxy, so other developers can make gadgets for the platform.
Sales Processes Are Improving
Subscriptions are a new segment. RSSS is still improving its knowledge over Article Galaxy’s product-market fit and adapting its go-to-market strategy.
Some examples are the introduction of self-registration in Q1/FY19, the simplification of pricing and plan tiers (shifted focus to enterprise and academia), and the restructuring of RSSS’s sales team, which was completed in Q3/FY19.
Competition
RSSS’s main competitor is the Copyright Clearance Center (CCC). CCC is a private company formed over 40 years ago. They offer a product called RightFind, which competes directly with Article Galaxy in many features but is focused more on copyright clearance. The go-to-market approach is also different, as CCC offers more specialized solutions and there’s no freemium plan for individual use. With six offices around the world, CCC is larger than RSSS.
RSSS also faces competition from software providers focused on specialized toolkits for researchers—such as Benchling, Genomenon, and Molsoft—, reference management applications—such as Evidence Partners, with which RSSS recently closed a partnership—, as well as publishers’ in-house capabilities.
In this environment, I think Article Galaxy has a differentiated value proposition by offering a platform for single-article transactions with premium features that integrate some functions of specialized toolkits. Competition increases execution risk, but RSSS seems to be on the right track to growing its subscriber base.
Importantly, as a public company listed on the Nasdaq with a clean balance sheet, I think RSSS is in a good position to strategically acquire smaller, private competitors. Acquisitions could accelerate the introduction of new features into Article Galaxy and the expansion of RSSS’s customer base. Management talked about this possibility over the last couple of earnings calls.
Management
Peter Derycz is the founder, CEO, and Chairman. He owns ~14% of the company, and his brother-in-law owns ~13% through a fund. Employees and Directors own another ~8%.
Peter seems to know the industry very well. His previous company, Infotrieve, which did something similar to RSSS, was sold in 2003 to private equity investors. Infotrieve was acquired by CCC in 2014. Other RSSS’s senior executives have experience either in Infotrieve or in Elsevier, one of the largest publishers of scientific content in the world.
RSSS is a founder-led company with a management team that’s experienced in the industry and invested in the stock (high insider ownership). This is generally a good sign.
Valuation
RSSS has a debt-free balance sheet with ~$10mm in cash. The company is incredibly asset-light, demanding no CapEx (employees work remotely and most of them are based in Mexico) and no working capital (excluding cash, it’s negative). At this point, the company doesn’t lose money (it’s break-even) and doesn’t burn cash.
Transactions produce ~$27mm in annual sales and a gross profit of ~$6.2mm. RSSS spends ~$10mm in operating expenses per year, but most expenses (e.g. sales and marketing, technology and product development) are associated with growing the subscription segment. Considering a proper allocation of operating expenses, and excluding public company costs and share-based compensation for management, transactions should generate ~$3-4mm in sustainable operating earnings as a private company.
Over the last four years, transaction sales have grown at a CAGR of ~2.5%. This number seems to be accelerating (5% growth last year) as more customers use Article Galaxy (either the free or paid version). Regardless, even with no growth, the transactions segment should be worth $30-$40mm, which is half RSSS’s fully diluted market cap of $70mm.
I think RSSS’s cash position and the value of the company’s platform and transactions business provide downside protection. In a worst-case scenario, I don’t see the stock going under $1/share.
Considering the value of the transactions segment, the subscription segment is being sold for an EV of $20-30mm (~5x sales). That’s cheap for a business that demands no additional capital to grow, increased sales by 38% last year, maintains an +80% gross margin, and has very low churn rates. Assuming the company doesn’t accelerate subscriber addition, subscriptions should still generate $9-10mm in gross profit five years from now. In this base-case scenario, I think the stock would be worth +$3.50/share today.
In a blue-sky scenario in which growth accelerates and RSSS adds +150 subscribers per year, with increasing ASP, I think the stock could be worth +$12/share, a 5-bagger from today.
Risks
Open-source articles (might kill transactions business); shareholder concentration; low liquidity; competition; execution (growth in platform business may not materialize).
Next Steps
I’ll keep an eye on the following:
Absent any unforeseen event, over the next quarters I expect RSSS to post positive earnings
Subscriber additions per quarter, ASP, and ARR
Growth in transactions
Where did you find the information that they're adding 25 new subscribers each quarter?