Summary
- Research Solutions stock swings were volatile but results continued to be steady and on forecast.
- RSSS grew its 2022 revenues by 7.9% and what we believe to be the more important metric, its gross profit, over 20%.
- With private market valuations on the decline, we expect a meaningful Platforms ARR boosting transaction in 2023 which should assist the CEO’s goal of $20mm ARR in 24 months.
The following segment was excerpted from this fund letter .
Research Solutions ( RSSS )
Our investment in Research Solutions, originally at sub $1.00 in 2017, though with substantial additions over the years, our cost basis has drifted higher, was down 22% in 2022, up 21% in 2023, and down about 5% since year-end 2021.
While the stock swings were volatile the results continued to be steady and on forecast. The provider of information services for the scientific industry, not unlike Bloomberg is for finance and Lexus Nexus is for law, grew its 2022 revenues by 7.9% and what we believe to be the more important metric, its gross profit, over 20%. This is not by accident and is something we are very excited about.
As a reminder, Research Solutions has a legacy Transactions business, the sale of scientific articles to over 1,200 customers, including 70% of the top 25 pharma companies.
This business has been a steady $26mm to $27mm revenue generator for as long as we’ve been shareholders and with its 23%-24% gross margins has been a consistent provider of $6.0 to $6.5mm in gross profit. There have been concerns that this business has been cannibalized by the Platforms segment and a few worrisome negative revenue growth quarters were offset by 6.9% and 5.4% growth in the final quarters of 2022.
The two main points about this business are that it has been a nice source of funding for growth of Platforms and that its large revenue base’s 0-1% growth rate has masked the growth of the more important segment.
Platforms, a SaaS solution to the scientific research community, which has an average price of $11,100 grew its revenues 32.5% to $7.8mm (and Annual Recurring Revenues i.e. ARR to $8.8mm) which as we can see, despite an impressive growth rate, is dwarfed by its Transactions counterpart. However, in a complete flip of the margins, Platforms gross margins are 88% and its gross profit, at $6.9mm is now bigger than Transactions and represents 55% of total Gross Profit of over $13mm. This was due to a 22% growth in subscriptions to 790 and a 5% increase in average sales price.
The company had a busy year in 2022, including revamping its sales and marketing teams which we expect big things from in 2023. While we had hoped the market would take notice of this company earlier we believe the combination of higher growing Platforms revenues beginning to be a bigger part of the company’s revenue base (growing 10.7% combined in the 4 th calendar quarter of 2022) and crossing the somewhat arbitrary but important $10mm ARR mark in 2023 will finally put this $70mm market cap gem on the radar of more managers.
The company has close to $12mm in cash on its balance sheet and is currently in the process of looking for complimentary acquisitions. In the fall of 2022, the company acquired approximately 400 active customers from FIZ Karlsruhe's AutoDoc for a de minimis price which we expect will finally boost Transactions’ revenue growth and present substantial Platforms cross-selling opportunities. With private market valuations on the decline, we expect a meaningful Platforms ARR boosting transaction in 2023 which should assist the CEO’s goal of $20mm ARR in 24 months.
We have not seen any reason to change our price targets as our near-term price target for the company is close to $5.00 with a three-year price target at $10.00+ as the company ARR continues to expand and it begins to generate double-digit millions operating profitability which tend to have 20-30x comparable multiples among comparable companies.
Legal DisclosureThe Partnership’s performance is based on operations during a period of general market growth and extraordinary market volatility during part of the period, and is not necessarily indicative of results the Partnership may achieve in the future. In addition, the results are based on the periods as a whole, but results for individual months or quarters within each period have been more favorable or less favorable than the average, as the case may be. The foregoing data have been prepared by the General Partner and have not been compiled, reviewed or audited by an independent accountant and non-year end results are subject to adjustment. The results portrayed are for an investor since inception in the Partnership and the results reflect the reinvestment of dividends and other earnings and the deduction of costs, the management fees charged to the Partnership and a pro forma reduction of the General Partner’s special profit allocation, if applicable. The General Partner believes that the comparison of Partnership performance to any single market index is inappropriate. The Partnership’s portfolio may contain options and other derivative securities, fixed income investments, may include short sales of securities and margin trading and is not as diversified as the indices, shown. The Standard & Poor's 500 Index contains 500 industrial, transportation, utility and financial companies and is generally representative of the large capitalization US stock market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index and is generally representative of the small capitalization U.S. stock market. The Russell Microcap Index is comprised of the smallest 1,000 securities in the Russell 2000 Index plus the next 1,000 securities (traded on national exchanges). The Russell Microcap is generally representative of the microcap segment of the U.S. stock market. All of the indices are unmanaged, market weighted and reflect the reinvestment of dividends. Due to the differences among the Partnership’s portfolio and the performance of the equity market indices shown above, however, the General Partner cautions potential investors that no such index is directly comparable to the investment strategy of the Partnership. While the General Partner believes that to date the Partnership has been managed with an investment philosophy and methodology similar to that described in the Partnership’s Offering Circular and to that which will be used to manage the Partnership in the future, future investments will be made under different economic conditions and in different securities. Further, the performance discussed herein does not reflect the General Partner’s performance in all different economic cycles. It should not be assumed that investors will experience returns in the future, if any, comparable to those discussed above. The information given above is historic and should not be taken as any indication of future performance. It should not be assumed that recommendations made in the future will be profitable, or will equal, the performance of the securities discussed in this material. Upon request, the General Partner will provide to you a list of all the recommendations made by it within the past year. This document is not intended as and does not constitute an offer to sell any securities to any person or a solicitation of any person of any offer to purchase any securities. Such an offer or solicitation can only be made by the confidential Offering Circular of the Partnership. This information omits most of the information material to a decision whether to invest in the Partnership. No person should rely on any information in this document, but should rely exclusively on the Offering Circular in considering whether to invest in the Partnership. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Artko Capital - Research Solutions: The Bloomberg / Lexus Nexus Of The Scientific Industry