Research Solutions is nanocap that is thinly traded. It’s an investment thesis that has worked before: a growing, high-margin business (Article Galaxy, a SaaS) somewhat masked by a declining, low-margin business (Reprints and ePrints). What caught our attention was that Article Galaxy has 23% revenue growth since F09 (from $6.2 m in F09 to $21.4 m in F15). If that growth persists for another five years (and cost structure is little changed), then there is significant upside potential to EPS.
RSSS provides on-demand access to scientific, technical and medical (STM) information for science/pharma companies and academic institutions.
Globally, STM information sales were $32.5 B in 2013, growing around 4% a year. By comparison, credit/financial information sales were $52.8 B in 2013 (growing around 5%) and legal/regulatory information sales were $20.4 B in 2013 (growing around 4%). Globally, information industry sales continue to transition from print to digital (around 65% of sales, up from 35% ten years ago).
Globally, STM subscription/syndication services are about $5 B a year ($0.5 B for corporate and $4.5 B for academic). There are 70+ million STM articles (about 2 m published a year) and 10,000+ STM publishers. So, at $21.4 m in TTM sales, RSSS’ Article Galaxy has about 4% market share of the corporate market and negligible market share of the academia market.
Legacy business - Reprints and ePrints:
The legacy business of bulk reprints and ePrints has been flatish in the last few years. It’s a low margin, lumpy business. Sales were $8.5 m in F09, $15.2 m in F10, $18.0 m in F11, $16.0 m in F12, $18.4 m in F13, only $9.8 m in F14, $10.5 m in F15 and $10.6 m for TTM (9/15). Gross profit is around $1 m a year.
SaaS business - Article Galaxy:
Article Galaxy is a SaaS with tens of millions of published research articles. In 1QF16, Article Galaxy revenue was $5.6 m (up 8% y/y) and gross profit $1.3 m (up 2%) Article Galaxy customer accounts increased to 819 (up 9% from 752) with academic accounts of 126 (up 52% from 83) and corporate accounts at 693 (up 4%). Academia is now 15% of Article Galaxy customer accounts. Article Galaxy customers include 70% of the top 25 global pharma companies. The top ten customers are ~25% of sales, and the top 35 customers are ~50% of sales.
We know the value of various “information sharing” platforms:
Financial research (plus news, market data, etc.)
$9 B (2014)
$22.5 B (2008)
RELX NV (formerly Reed Elsevier)
Legal, STM research
$2.9 B for Elsevier (2014)
$17 B for RELX NV
Research Solutions (RSSS): Article Galaxy
$21.4 m (F15)
Source: Company reports.
RSSS’ platform (Article Galaxy) is starting to be seen as valuable:
· - Stickiness: Showing its “stickiness”, Article Galaxy transactions were 171,178 (up 22% from 141,000), the fourth consecutive quarter of 20+% y/y growth. However, sales were only up 8% due to the increase in small volume transactions (e.g. $1, $3, $5). Average sales per transaction is ~$35.
· - Customer satisfaction: highest ranked document delivery provider (per Outsell, 2012), beating Linda Hall Library, The British Library, The Research Investment, Information Express, Infotrieve, and Thomson Reuters. Also, the company indicates competitive success in recent quarters, especially in academia.
· - Academia penetration: Academic account growth was 52% last quarter. The company says it enjoys a 90+% closing rate when academia potential clients evaluate Article Galaxy against competitors.
· - Recent enhancements to platform: recently added features such as bookmark; securely export and share; make citations from Google Scholar and PubMed; Library Help Desk; copyright reuse right information; and, a more granular search function.
· - Growth in Europe: 41% of sales are from Europe and the company recently hired its first sales engineer based in Europe.
CEO Peter Derycz founded RSSS in 2006. He founded Infotrieve in 1989 (which was acquired by private equity investors in 2003 and then acquired by Copyright Clearance Center (CCC) in November 2014). He has 9 patents and started his career running around the UCLA library. Chairman John Regazzi (former CEO of Elsevier, the world’s largest STM publisher; has 40 years of experience). He is new and it’s unclear to me how, if at all, he will impact the company (he received 150k stock options at $0.70).
Management and insiders own 56%. The CEO owns 4.2 m shares (23%) and the CEO’s brother-in-law (through a fund) owns 4.8 m shares (26%). There are 2.5 m options (average exercise price of $1.22) and 305k warrants (average exercise price of $1.35). Total FDS is 21.2 m (as of November 2015).
A big concern is executive pay. In F15, the CEO made $527k in total compensation, the CFO made $391k, and the COO made $369k. Executive pay is rising another ~10% in F16. With the CEO effectively controlling over 50% of the equity, the executive pay is unlikely to change.
Another concern is the recent increase in operating expenses. The company added 4 sales reps (from 6 to 10) in 3QF15. Excluding stock compensation, run-rate SG&A is $6.2 m in F16, up from $5.6 in F15 and $5.9 m in F14. The company is currently running small quarterly losses.
The valuation looks cheap looking out 5+ years with continued growth from Article Galaxy. With a doubling of Article Galaxy sales (to $41.8 m), per the recent company presentation, EPS (untaxed) would be $0.25. The stock is at $0.54, or 2x that potential EPS. 20x implies a $5 stock (up roughly 10x from here).
Cash is $1.5 m and no debt (unused line of credit). Federal NOLs are $6.8 m (expire in 2030) and state NOLs are $5.0 m (expire in 2020)
Unactionable except for PA, unless a block can be found (thinly traded)