Description

Thesis: A cheap but fast growing SaaS company in information services (like FactSet, CoStar and Lexus Nexus) is growing its high retention rate (100%+) Platforms segment at 20%+ organic revenues, bolstered by two recent AI acquisitions whose impact on the company is currently underappreciated by the market, trading at at least 50% discount to its peer group, at 8-9x Free Cash Flow, while likely to be acquired in next 6 to 12 months, due to a recent proxy battle and board reshuffle. 

My goal here is to refresh this investment that I wrote this up 5 years ago and since then the stock is up only 30% while the ARR is up 600% with another likely doubling from here in next 3 years. While the stock has been volatile the fundamentals and revenues have continued to grow substantially. The company has grown overall revenues by 10% annually without a down year, and more importantly, gross profit at 19% CAGR. Most of that growth has come in the last 3 years with the addition of an excellent CEO, Roy Oliver.  I'll try to frame this write up as a refresh to the 2019 one with perpectives on near and intermediate term future. 

Platforms - Revenues (6/30/XX Year End Numbers) - The key to this story.

2019 - $2.8mm; Gross margin 82%

2021 - $5.1mm; Gross margin 82%  ... Roy joins company from board in Fall of 2021, where he previously ran ARI Software which he took from $5mm to $20mm ARR and sold for 10x revenues. Promises to run same playbook with same goals. 

6/30/24 - Estimate $14.5mm/ Gross margin 85% - 9/30 ARR Estimate $19mm-$20mm*

6/30/26 - Estimate $25mm/Gross margin 86-87%

*on the last two quarterly calls Roy said that they will get pretty close to $20mm ARR goal on 9/30/24 and introduced a 9/30/26 "goal" (which is guidance, I don't care what anyone says) of $30mm ARR which is an organic revenue growth rate of 22-23% without acqusitions. 

In late 2023 RSSS completed two acqusitions in the Artificial Intellegence space - Resolute AI and scite. Two different but very complimentary product suites to the overall Article Galaxy franchise. While Resolute has ARR of low single digit millions, maybe $1-2mm and had some expected churn from big contracts, I believe it was mostly acquired for its technology. Management has communicated that the expected churn from big annual contract renewals is now over. I believe the scite acquisition is the more important one (with growth ~$3.3mm ARR from acquisition to $5.5mm as of last call). I believe scite is an excellent vertical product acquisition and our channel checks from customers show an extremely high satisfaction with the product. However, the scite acquisition is more important as it has the holy grail: access to most publisher databases which greatly enhanced the value proposition of Article Galaxy as a high ROI information management product in the R&D space. 

There may be more acqusitions forthcoming but for now we believe Roy stayed patient in 2021-2022 not overpaying when valuations were extreme and we believe cross selling of products, having a more efficient vertical product suite with better pricing and upsell opportunities, a highly expanded TAM and a sales team that is finally hitting its stride gives me confidence that platforms can continue to grow organically at 20-25% CAGR with 86-87% gross margins in the intermediate term.

Transactions - Revenues

2019 - $26mm - Gross Margins - 23.2%

6/30/2024 - $32mm - Gross Margins - 25%

6/30/2026 - $33mm - Gross margins - 25%

Transactions, a commoditized business of distributing academic papers, has done nicely benefiting from complimentary growth in Platforms as well an opportunistic $300k acqusition in 2022-23 of a European customer list. This has been a pleasant surprise as there were a few negative growth quarters but we believe that this business can continue to grow 1-2% a year and contribute $8.0-$9.0mm a year in gross profit. If the overall sale of a company does not happen I believe this segment should be sold for $30mm (1x Revs, 5x estimated cash flow) to make RSSS a pure play whose growth is not masked by a high revenue, low margin business. This makes more sense today than a few years ago as the Platforms business now accounts for 60% of gross profit and the company can self fund without the transactions segment.

Combined Financials: 

2019 - Revenues $28.8mm/Gross Profit $8.3mm

2021 - $31.8mm/$12.3mm

2024 - $46.5mm/$21mm

2026 - $58mm/$31mm

Opex has grown from about $15mm a year to about $19mm cash run rate. I believe this most recent quarter of $4.5mm cash expenses is likely to be $5mm/$20mm annual by 6/30/2026 for $11mm Free Cash Flow/EBITDA number 24 months from now. These are the estimates I will use for a potential sale in the next year which would be used by bankers to value the company in the next 12 months. 

*in case the company does not get sold I'll say that Platforms will continue to grow at 23% to $46.5mm/$40.5mm in 2029; Transactions stay flat at $33.5/$8.5; Cash opex grows to $26mm at 6%; 2029 EBITDA/Cash Flow of $23mm

I will also note that this company has terrible sell side coverage. Despite the CEO hitting his goals and being vocal about it on last two calls with his $30mm 2026 target the new initiation report from Lake Street has 2025 estimates at $49.8mm/$3.3mm EBITDA. There is one estimate out there (I think maybe Maxim ... meh) for 2026 at $56mm and $7.5mm EBITDA. I believe there is an opportunity for Wall Street to upgrade its estimates as the company continues to absorb scite and Resolute and its clean earning power and operating leverage is shown next few quarters. 

The Board Situation - Potential Sale

As a brief history this company was founded by Peter Derycz, originally as a Transactions segment only company, which then self funded via those low growth cash flows and a $5mm investment from a NYC family office and Peter's brother in law (Bristol Capital) into growing the Platform's software. Peter did ok getting the ARR to $5mm and has a good head for product but zero idea what it means to be a public company CEO. During this time, what I like to call "amateur hour 1" Peter's BIL was continously selling small share lots into the open market and filing insider sales forms every day. About two years. It was infuriating and most potential investors I've spoke to then were scared off by massive number of insider sales. In 2021 it was highly suggested by a few big shareholders that Peter should get a real CEO and he acquiesed and put Roy Oliver on as CEO from the board and took a $500k/year "Executive Chairman" position. Roy had incredibly done the exact same thing at ARI Software, growing its SaaS business from $5mm to $20mm and engineering a sale. In a way, unofficially, it was always implied that this was the goal here too.  

The nuance of that "5 to 20" was that it would be done with at least half in acquisitions. Roy had invested some dollars into Opex from $9mm to $15mm ish ($19mm now) in short order. At the same time the biotech bubble of 2021 popped and R&D budgets were getting slashed so organic growth slowed from 30s to 20s for Platforms. But Platforms was still growing double digits and getting the product right. Then in the summer of 2023, Peter, whose CFO was also immediately let go by Roy, launched a very weird public proxy battle against his own board where he was getting increasingly sidelined. It was a ridicolous naked power grab attempt with his board slate including his former CFO and his BIL. Insulting. He complained about high Opex which included his $500k fee and no acqusitions being done despite knowing full well that the company was in final stages on 3 acqusitions at that moment. It was embarrasing, expensive, and embarassingly expensive in added SG&A in 2023. It was communicated to Peter very strongly by everyone I knew involved to drop this. In the end he was forced to resign his seat, his BIL sold his shares to Cove Street which now owns 10.5%. There are two new board members. We're close to $20mm ARR mark. We're at an inflection point of 50%+ marginal contribution of new sales with a substantially expanded TAM to $4b+ (scite's BtoC biz seems to be extra popular this past quarter). This company is either ripe for a sale as its been strongly implied for years "look at what Roy did previously" or for a stock break out into the echelons of its InfoServ peers.

So whats the Valuation? 

I believe in the near term (12 months) the company is worth $7.00 to $10.00 per share in a sale/market appreciation scenario and $30-40 in 5 years. 

As I mentioned its been maddening with the BIL sales and Covid whiplashes which RSSS did not catch the stock is only up 30% since 2019 while as I mentioned the very sticky high growth high margin ARR is up 600%.  For purposes of this discussion, I am giving a 12 month Price Target on forward 12 month estimates (ie 6/30/2026). I believe this target is achievable either via a sale in next 12 months or market beggining to see clean organic growth of combined companies and marginal contribution of high gross margin Platform's revenues.

I think one of the challenges facing this company is the combination of 1% growth $32mm Transaction Revenues and 23% growth $14.5mm revenues? You get a CAGR of 10% thats not very sexy by Wall Street standards. So I believe its important to view RSSS as a Platforms business and Transactions as a "cash cow" separate part. Underwriting $5-6mm of Transactions stand alone operating profit to ~$30mm or 5x-6x or about $1.00 per share. Balance sheet is clean with $3-4mm of cash on hand with no debt. Last quarter the company generated $2mm Operating Cash Flow. 

So to restate. Platforms Revenue estimates:

6/30/2024 -$14.5mm/ARR $18mm

6/30/2025 - $18.5mm/ARR $22.5mm

6/30/2026 - $23mm/ARR $28mm

6/30/2029 - $46.5mm/ARR $50mm/EBITDA $23mm

Comps FTM 

Most obvious acquierer is RELX formerly known as Reed Elsevier which is currently trading at 7.2x FTM revenues and 20x FTM Free Cash Flow. I believe RSSS caries $9mm-$10mm of "cuttable SG&A" which should be considered in a strategic acquisition scenario. Below I included a comp table of 8 information services providers in BtoB space. All are mostly above the rule of 40 (Revenue Growth + EBITDA Margin) as is RSSS, have high sticky business with high margin, high barriers. I included both current and historical medians to see that 10x is conveniently a correct revenue multiple which would discount higher RSSS growth to medians because of its size and I believe 20x forward EBITDA multiples are appropriate.

If RSSS can get 10x multiple on $23mm in 6/30/2026 revenues 12 months from now plus $1.00 for Transactions and a few cents for cash its an $8.50 Price Target*. At 20x-22x my 6/30/2026 EBITDA/FCF estimate of $10-11mm you get approximately the same (32mm shares outstanding/dilution has a small effect). If you don't think this company gets acquired and continues to grow at 20-25% to $50mm ARR into a $500mm company with $15.00 to $20.00 Price Targets by mid 2028. 

Risks

- Article Galaxy are long lead sales and are dependent on R&D budgets. These assumptions are CAGR not steady state growth based so there may be cyclical volatility in the intermediate results.

- I don't know if its a risk per se, but a risk to "for sale" thesis, in that the company gets a little aggresive about growth and instead of selling acquires more opportunistically and issues shares. Roy knows capital allocation and doesn't dilute unless its a good deal but still. This whole thesis can go in another direction. But whatever gets you to high enough revenues for market to finally take notice and value the company appropriately. 

- Peter is potentially selling his shares but his antics could still be a risk. It was really embarassing this past quarter. But between him and his BIL they own 15%+ still. 

- I think SG&A is under control but will probably need to grow and I've never seen a market go "yeay SG&A growth!" so missteps or excess there could kill the marginal contribution story. 

Catalyst

- Near term sale of company

- 2-3 quarters of consistent inflection profitability showing high contribution margins and growth of combined Article Galaxy/scite/Resolute product