Updated: Jan 16, 2021
Research Solutions (NASDAQ:RSSS) has a high margin high growth (NASDAQ:SAAS) segment that has so far been obscured by its larger low margin segment. It is currently nearing an inflection in which incremental revenue will flow directly to the bottom line. At the current valuation, one is almost getting a free option on potentially a 1B dollar SAAS play in the R&D space. Combined with its recent up-listing to the Nasdaq and partnerships, we believe the market will soon realize RSSS's potential.
Research solutions provides companies (e.g. researchers and regulatory personnel) with a digital offering in which it takes a fee for every article delivered. It acts as a middleman between publishers and end users in that it sources and delivers digital content almost immediately. RSSS has distribution agreements with content publishers which allows them to act in this capacity. Recently, Research Solutions has expanded with the addition of its SAAS offering (Article Galaxy). What this service is geared towards are small and medium sized businesses (25-500 employees) that have a substantial R&D segment. Article Galaxy provides SMEs with three main offerings:
RSSS has workflow solutions to streamline the R&D process (this includes tasks such as querying and procuring lowest cost articles to creating bibliographies of pertinent articles that can be shared easily throughout an organization). R&D organizations have hundreds of items (e.g. molecules, drugs) they are researching and being able to curate and share pertinent references for each item is convenient. Customers note that this cuts their time spent doing these tasks in half and their cost per article is significantly decreased. AG also has an extensive “app” store that assists in the research cycle such as their altimetric app which allows researchers to view which articles are trending in their field by searching feeds such as twitter for this data. RSSS so far has developed these gadgets in house and plans to open this up to third party developers to establish a platform in this space. Below is an illustration of what a user would see on Article Galaxy.
AG provides SMEs with access to journals they previously could not afford. For example, AG’s recent partnership with Springer Nature allows SMEs to access 35 percent of the world’s science, technology, and medical content. The increase in cost of the subscription for this access is a fraction of what it would cost to subscribe to the entire Springer Nature journal. The increase in revenue is shared between both Springer Nature and AG. Springer Nature gets access to SMEs demand, AG receives higher demand due to its product offerings, and the SMEs benefit by getting access to discounted material that they did not have before.
AG also offers copyright compliant solutions so that there is no illegal distribution of article throughout the company. Generally, when an article is purchased, it is only intended for personal use and not for distribution. Using AG’s automated copyright solutions prevents accidental misuse of articles and prevents litigious consequences.
Research Solutions has almost 400 customers subscribed to their Article Galaxy platform. This segment has been growing at >30% CAGR for the last 4 years. With the estimated TAM to be around 800k customers, AG has a long runway ahead of it. With a negative churn rate and upselling, which has raised prices roughly 10 percent in two years, AG seems well poised to continue to expand in this space.
Competitors are present in some of their segments (e.g. Papers for accessing articles, or copyright clearance for compliance solution) however none of their competitors are a one stop shop like RSSS which helps save time and is more convenient. This field is still very immature and so the threat of competition is not looming.
Why the discount?
The primary reason RSSS is undervalued is because of its obscure SAAS segment. Its business is primarily composed of its transactional business(reprints) which makes up about 85% of its revenue stream. This is the lower margin business and obscures the high growth and high margin business of its platform offering.
With the internet, there is always the ever-present potential of piracy and the R&D field is no exception. The threat of piracy (namely websites such as scihub and research gate in which researchers can view articles for free), at first glance appears to be a serious threat to RSSS and its offerings however upon further examination it is impotent. The reason RSSS is insulated against piracy risks is because their core customers are SMEs. Piracy mostly effects revenue derived from academic users. Traditionally, academia is more relaxed about usage of pirated content whereas corporations take copyright laws more seriously.
As AG grows at >30% a year, the platform segment will become a meaningful contributor to both top and bottom line. The revenue from AG flows right to the bottom line and the company has just reported its first profitable quarter. As this trend continues, investors will take notice of this as the RSSS starts producing serious cash. The reason we believe RSSS can continue to grow at these rates is because they provide the widest offering of R&D workflow solutions, no near term risks, and the negative churn shows the value that their offering provides. AG is a work in progress and acts as a workflow solutions provider and platform as the same time. As long as they continue to provide value to the end customers they will continue to grow and upsell. Although it is taking some time for their brand to be more recognized, recent partnerships with globally recognized brands such as Springer Nature is beginning to provide them with social proof. It is a guessing game to estimate the potential market size for this platform as it targets a fuzzy customer base. By our estimates, about 20k companies worldwide would make a good fit for this product. Although this number is a fraction of the estimate provided by management, it would provide them with an enormous runway.
The platform segment continues to grow at 30% plus and the subsequent cash flows will reveal how cheap this company is. As for near term catalysts, possible partnerships with other major publishers will increase content availability to SMEs incentivizing them to get Article Galaxy.
The more realistic headwind is the push towards open access publication. What this means is that the publisher charges researchers for article submittals as opposed to charging the users to read their content. Examples seen today are the UC system revising their contracts with Springer Nature to begin phasing in open access. This represents the first major push for this however the phasing of Open Access is still ambiguous as it depends on future funding and may not include the more prestigious journal of Springer Nature. The UC system has serious bargaining power as they produce ten percent of the publications in the United States hence why Springer Nature can change business models for them. This is a risk albeit a small one for the moment.
The other possible risk would be the TAM is more limited than originally estimated which shortens the AG runway considerably.
Research Solutions has two different segments that are distinct from one another. It is helpful to decouple the two in separate valuations. The first and larger segment is the transactions business. This is a very stable segment that is growing at the same rate as inflation. It brings in about 27mm per year with an operating margin of about 20 percent. Given its stability and low opex, based on a DCF with a discount rate of 11% and assuming no growth, the value of this segment alone is around 40mm dollars. With cash of about 8 mm and no debt, this adds up to about 50 mm dollars, which is about seventy percent of the market cap of RSSS today.
The Article Galaxy platform segment is a bit harder to value as it is probabilistic and depends more heavily on growth. A logical base rate would be to assume that RSSS can achieve its current growth rate (30% CAGR( for the next four years. Given this and 80% margins yields a valuation of 60 mm dollars. Combined with the other segment yields a total valuation of 110mm dollars, roughly fifty percent upside to its current valuation of 70 mm dollars.
It is also helpful to think about best and worst case scenarios for this valuation to put things in perspective. Worst case scenario AG does not grow and RSSS phases it out. keeping their core business which represents around a 30% downside. However, if RSSS does continue to return value to R&D customers and is able to become the next “Bloomberg terminal” for R&D, this company represent serious multi-bagger potential. Given the limited downside and possible multiples upside, Research Solutions is a compelling investment. It is a great way to play the growing R&D space and represents the potential to get in at the beginning of the next Bloomberg terminal. Heads we lose a little, Tails we win big.