Research Solutions (RSSS)

Legacy business masks SaaS transformation

Summary: Research Solutions (Nasdaq:RSSS) is an under-covered microcap that is the leader among their competition in a niche market in need of disruption. As the business shifts to a high margin and growing SaaS based offering, the margins will improve and the value will increase. It is led by an experienced owner-operator with significant skin in the game. Using any sort of valuation measure, the business is undervalued.

Business: Research Solutions is a enterprise software business that helps connect businesses and universities to science, technical, and medical (STM) research articles. There are numerous issues within the research process(anyone who has served in an R&D role knows this) and RSSS is attempting to solve these issues with a better user interface and tools for research access. They are aiming to be the one stop shop for access and consolidation of the over 2.5 million new research articles published each year.

Source: October Presentation

Article galaxy is the tool sold to customers and is operated through two segments: a transactions business and a SaaS platform. The transactions business is a legacy business where they are paid for each research article they deliver. Their platform business is an add-on SaaS offering sold on a per seat basis to businesses as a way to unify all research documents, internal and external. Customers use the platform to improve workflows when doing research to save money and time. The value proposition stems from the use of proper copyright laws and the user interface of the platform. Typically, people may have to google the paper, buy from a unique publisher, and keep track of all the papers on their own. Research Solutions cuts down on the time spend searching and saving documents. They aim to be the Bloomberg of science, technical, and medical (STM) information: a one stop shop to buy, organize, and use research articles. Their products are for professional researchers, not the individual person, similar to Bloomberg. Imagine if the finance industry didn't have Bloomberg terminals and had to jerry-rig together all the information from independent sources like the individual investor. Currently professional researchers have this issue: they are using the same tools as the individual for STM research, in an extremely inefficient manner.

Source: October presentation

The SaaS platform is composed of their original article galaxy offering to buy research with additional features. They also sell article galaxy+ which has access to journal articles from publishers such as Springer and other partnerships at a decreased cost.

Industry and competition: Research Solutions faces competition a few places: direct from publisher document purchase, open access research, and pirated research

1) Other Document Delivery methods: Within the research document delivery space, there are no direct publicly traded competitors, but other companies may serve a similar purpose such as Pubmed for searching and saving medical articles, or Reed Elsevier (Ticker: RELX) to purchase journal articles directly from the journal. The issue with doing that is the friction for researchers of using multiple platforms and collating the right documents and permissions to distribute the paper. By creating one place for researchers to go, Research Solutions has an advantage.

2) Open access research (researchers allow anyone free access): With regards to open access, there are two mitigating factors. 1) Scientific Journals and the current way of publishing via journal is an entrenched system that will take a significant, unified effort to overhaul. Since institutions and scientists receive prestige based on the journal they publish in, the incentives are nonexistent for an immediate overhaul even if the industry will eventually shift. 2) This shift primarily affects their legacy business which makes money off of the paid transactions. The platform side of the business relies on business adoption of the SaaS offering rather than the number of documents bought. In fact, in the most recent quarter, management noted that "in the past, as we were building up the company, was focused solely on finding people that bought transactions. And then as the platform emerged and we had the higher gross margin business, we pretty much shifted all of our sales and marketing activity over to seeking out new platform customers". I would argue that more unpaid transactions is a positive thing signaling adoption from customers for platform tools beyond document delivery.

3) Pirated scientific research: Regarding pirated research, people often gain access to research behind paywalls via sites like scihub, but for official business research, there are copyright regulations that have to be followed for redistribution. In addition, downloading a PDF and taking the time to send it to people who might already have it is messy and destroys productivity. RSSS solves this with all in one platform. For a worker who is on the company credit card, they might as well pay to obtain access through Article Galaxy (or for the company to pay for the SaaS offering or Article Galaxy+).

Competitive Advantage: Research Solutions' advantage stems from the ability to be the fastest, most comprehensive one stop shop for Science, Technical, and Medical articles. They have a wide ranging network with an increasing number of partnerships. With their Article Galaxy+ offering, they cover 35% of all STM research through SpringerNature, a journal. In addition, they recently partnered with Evidence Partners to reduce the time to produce literature reviews.

They are the by far the best solution for document delivery in the STM space.

Management: Insider ownership and strong management is important with any microcap company where the business relies on a few people. Peter Dercyz, the CEO, checks all of the boxes. He owns 15% of the company and has experience in the document delivery business as he founded (1989) and sold Infotrieve (2003), another document delivery business. Research Solutions (created after a merger in 2006) is his second attempt at building a successful document delivery business, giving him a leg up over new entrants. He knows how to build for the future, evidenced by his nimbleness in creating a SaaS business and selling off the declining Reprints and Eprints business in 2017. He is customer focused and obsessed with making the customer interface the best it can be. In fact, they recently piloted a program for customers to provide feedback to make continuous improvements (20 enterprise customers have sign up so far). Regarding that program, management on the Q2FY2021 earnings call noted "We are receiving additional applications and are looking very much forward to receiving direct feedback and advice from our customers to determine ways to improve our products." A customer-focused CEO who gets another chance to build a better platform who has significant skin in the game? Sign me up.

Financial Results: Going back to the two business segments, the transactions business has been relatively flat and has 23% gross margins with any further growth dependent on more articles being bought. The SaaS offering is growing at 35% and has 80% gross margins.

While management hasn't broken out churn numbers specifically, They noted 'Negative churn' as the retention rate is >100% based on "people wanting to keep it and even willing to pay more" with product improvements. Even though logo churn (people leaving the platform) isn't 0%, "logo churn at this point is in the single-digits in terms of number of logos with churns" with pretty much no churn from top customers. As revenue shifts to the platforms business, the margins of the business will continue to improve. Management estimates there are 772,000 research focused businesses that they can target and with <1000 deployments, they have a long runway for growth even if they grossly overestimate their TAM. 1% penetration with the current $11k ASP leads to $84 million in revenue. They are hovering around breakeven with 0 debt and $9mil in cash compared to a ~60 mil Market Cap.

Valuation: First the eye test: how much do you pay for a SaaS platform growing at 35% with a large TAM, low churn, and negative net debt? Before you answer, let me show you this chart. It plots the expected 2 year revenue growth rate vs EV/TTM gross profit.

Circled in red is just the SaaS offering of RSSS on TTM basis. For the business to be appropriately valued compared to other companies in the space, it would have to grow at ~11% a year. To be relatively fairly valued, it would be worth 3x more at 30x Sales. Keep in mind, this is just the SaaS offering. Eye test passed, it sure seems like it should be worth more.

Now what if we use a more robust model for the next five years. For the following sensitivity analysis in Excel, I model out sales growth based on revenue growth of the SaaS platform and the EBIT multiple in the final year 2025. I use a discount rate of 10%, assume 13% final year EBIT margins, and 0% growth in the legacy transactions business. I also assume a consistent ASP of $10,900.

With reasonable assumptions, the upside is high and the downside is limited.

Last way to value it: we can also try to value just the SaaS business. If we assign the transactions a 1x sales multiple(stable business with 8% margins with no reinvestment) and take out the cash, the value for the SaaS business is a mere 5.8x Sales for a business growing at 35%.

Risks: Sales Risks: The upside of the valuation is dependent on the SaaS offering continuing to grow. One headwind could be the go to market strategy. Peter Thiel, in his book, ' Zero to One' defined the 'Dead Space of Sales' as the middle zone between a consumer focused offering(<$1000$ a year) and a business focused on huge contracts(>$100,000). This type of product can't have the CEO on every sales call like a large contract would, but requires more sales than a consumer product. Research Solutions' product fits into this deadspace as they sell to SMBs a product that costs ~10k, significant but not lifechanging. This could hinder the sales rollout> However, there is a point where scale effects kick in and word of mouth advertising between business starts to help sales. In fact, their average CAC(marketing spend over deployments in the next year) actually decreased in 2019 from 27k to 20k, evidence of improving sales efficiency.

Institutional selling: Recently, there has been some selling from institutional investors which has led to a depressed share price and could continue. However, this is a short term head wind and would provide even more of opportunity to accumulate shares while the business chugs along.

Shift to complete open access: This issue was discussed earlier as a shift to open access would kill their transactions revenue. However, as noted before, this shift is unlikely to occur and there are preliminary signs the company is more than just a transactions based business.

Lack of further partnerships: The company has had some momentum in signing new partners and journals to their platform, but they could fail to further sign more partners to improve their article galaxy+ offering. This risk exists, but is already being priced into the stock. If they do continue to sign journals and eventually sign a larger one such as Elsevier, the stock would likely shoot up since it is underpriced.

Future Growth: Decreasing CAC: For the last year, their CAC for new customers is ~20,000, an improvement from $29,000 in the prior year due to more efficient selling. If management can continue to drive tis number down with improvements to the platform and word of mouth leads to lower selling costs, this would be an extremely positive sign for the future growth of the company. We can calculate LTV as ARPU*Gross Margin/Churn. Assuming an 8% churn on the high end of management's comments, the LTV = 10,900*82%/8% = 111,725. This leads to a high LTV/CAC of 5.55. If add in a 10% discount rate to the denominator for any additional costs as the following Credit Suisse report does, the CLTV/CAC = 2.5 and is above average.

Increasing partners: By partnering with more journals, Article Galaxy + can be even more comprehensive and all papers can be run through that platform. In my opinion, if they can hit 50% of all research, they will have scaled to the point where other publishers will join their platform eventually to consolidate operations and access.

International expansion: They company has an operating segment in Latin America, but there is still an explored market in other countries, especially Asia. Another smaller but existent problem with current research is the language barrier. Even though 80% of publishers are English language, there is a lot of research done internationally hidden behind a language barrier. Research Solutions can expand their offering into helping produce research in English for those who don't speak it and translate research to English for articles published in other languages.

Conclusion: Research Solutions is a hidden gem undergoing a transformation to a higher margin SaaS offering. It is led by an owner operator with a significant stake in the business who is customer focused and has experience in the business. The SaaS business is growing fast and undervalued with a large runway to continue growing. It is a best in class offering in a niche that desperately need innovation.