Okay, good morning. Our next presenting company is Research Solutions, trades on the Nasdaq under the symbol RSSS. Company is a key component in the scientific research space. They are a client of ThreePart, so if anybody in the room or anybody that's listening on the webcast wants to follow up with the company afterwards, please feel free to reach out to us, and we can help set that up for you. Here today to start the presentation is Roy Olivier, the company's CEO and Chairman. Joining him to finish the presentation and help with Q&A will be Bill Nurthen, the company's CFO. Roy?
Great, thanks, Scott. Thanks, John, and good morning. See if I can get the clicker to work. Nope. Okay, the slide doesn't work either. Good morning. I appreciate you guys taking the time to learn a little bit more about us. Some of you are recognized as shareholders, so I appreciate you coming for an update. We continue to be very focused on really research, the R and R&D. I'm going to skip a lot of slides today because our deck's generally available and just focus on kind of the highlights. I think the most important message here is that we're a business going through a pretty significant transformation. The business was originally founded to provide peer-reviewed scientific research articles primarily to corporate clients.
A corporate client would send us a list of what they need to do research, we would pull it, sell it to them, and we would pay the IP holder in the background. Seven or eight years ago, we created our first kind of SaaS software product called Article Galaxy. Think of it as an iTunes, but instead of music and albums, you had scientific research papers and journals. It allowed the researcher, instead of going to multiple locations to acquire what they needed, it allowed that researcher to do one search, find what they need, click to rent it, or click to buy it.
Over time, that product's become much more sophisticated in that it helps customers make decisions about where they should subscribe, where they should prepay for a block of articles to get a discount, and where they should pay per view or pay per document. We've also added rental capability, so now somebody can rent an article for three days. They can't print it, can't store it, but they can at least rent it, read it at a much lower cost than an acquisition cost. Really, the main driver of that product from an ROI perspective when we are selling it is twofold. Number one, it saves researchers a tremendous amount of time. Not surprisingly, we have research that supports that. I call that soft dollar savings because organizations don't get rid of researchers, just like we don't get rid of software engineers.
The second thing it does is it allows them to calibrate where they should subscribe, where they should prepay for discounts, and how they can maximize their spend. The other thing it does is it keeps track of rights, what actually rights came with articles that you acquired, and in many cases, gives the customer the ability to acquire rights that they need. Examples of that include I want to make 500 copies of something to hand it out to doctors. Those rights are not granted when you buy a single article. It includes AI rights now, which is articles that have been sold over the last 10, 15, 20 years. They typically do not come with any rights other than those expressly granted at the time of purchase.
Since AI didn't exist back then, our customers have large libraries of documents that they do not have AI rights for. Some of you, if you've watched our press releases, have seen some new products that we've come out with. We refer internally to the transactions business. Transactions is the term we use in our public filings. We refer to that business internally as DocDel, Document Delivery. When we think about rights, the new product we refer to internally is RightsDel, which is, okay, I'm a researcher, I've got 10 articles in a folder, they might come from five different copyright holders. What rights exist across those 10 articles? Can I throw them in an AI product, whether that's a Copilot, our product, or some other product, ask a bunch of questions, and extract a summary because I have a meeting in 15 minutes?
Our product allows you to do that in a copyright-compliant way. Big picture, when we talk about research, and I'm going to jump around a little bit, clicker still doesn't work. Big picture, research is broken into four key steps. The first step is discovery. How do I find what I'm looking for related to my research spike topic? The second is acquiring or accessing that information. The third is managing that content once I've acquired it. The fourth is creating something. I'm creating a new drug for submission for approval. I'm creating another article to be peer-reviewed and published. I'm creating a patent. I'm creating something. There's an underlying analysis layer that fits across those four pillars. Over the last five years, we have acquired two companies in the discovery space.
Our default discovery product today is called Scite, a company we acquired almost two years ago. Article Galaxy is the access product. We've been in that business since the inception of the company, and the software part of that business is seven or eight years old. References allows you to store articles, store a personal folder, a group folder, mark up those articles, and share them with a team. Think of it as a collaboration tool. Underlying that is the Scite AI Assistant product, which is an analysis product. Everywhere you see blue here, it's a recurring revenue, typically annual contract or longer product, meaning it's a vertical SaaS software product with AI in it. Anywhere where you see white, which is really only Article Galaxy, is a transactional business, which is where, when customers use Article Galaxy, they're clicking to buy documents.
That's transactions on our public filings as opposed to platform revenue. As we have transitioned the business, after I arrived in FY2021, we've tried to move the business into more vertical markets. We've added products. We've increased the size of our sales team and software engineering teams. As a result, we've seen a pretty nice transformation in terms of top-line growth, certainly EBITDA cash flows, number of markets we serve, and number of customers. We continue to see nice growth in the B2B platform business, and B2B is typically a library or a corporation. We typically have seen a little bit of headwinds in the transactional business, primarily it's churn caused by a single customer loss. We also have a B2C business.
The B2C business is defined as a student who's going to the University of Texas or SMU, and they're doing a master's or they're doing a PhD, and they're doing scientific research, and they want a tool to help them analyze and extract information out of articles. And that's a Scite product. We refer to that in our filings as B2C. We think about our software platform business as about a 20% growth business going forward. We think about our transactional business as it'll be a decline for the remainder of this fiscal year through June, and then we expect it to continue to be a flat-ish business as it has been for the last several years. I'm not going to bore you through a demo of the product at this point, other than to say our SaaS platform is really focused at researchers in R&D-intensive organizations.
What we mean by intensive is when we're calculating our total addressable market, we not only look for what is all the companies in this SIC code or what are all the universities in this geographic area, we look at how many of those universities have published peer-reviewed scientific research, or how many of those corporations have published peer-reviewed scientific research or filed patents on new research. If they have not done that, we don't consider them to be research-intensive, and they do not count in our TAM. We have about 1,500 customers today, and pharmaceutical companies, biotech, and medical device make up about half of our corporate revenue. The remaining revenue is derived from either academic libraries or about 50-some odd other vertical markets. Here's a scattering of some universities and some of the multinationals we do business with.
In terms of market opportunity, I did talk about TAM. I will say there is a deck underneath the investor page on our website that very, very fine print on the bottom represents all the links where you can go figure out or see how we calculated our TAM. We are very transparent about where those numbers came from. The B2C TAM is huge. The B2B business is $4 billion. The way we think about that, by the way, is B2C is majority month-to-month subscribers. B2B is one-year to three-year agreements. B2B for us is the sharper focus when we think about growing the business long-term. Here is a smattering of some of the vertical markets we serve today. We have a wide range: aerospace, automotive, cosmetics, oil and gas, legal. I am constantly surprised by some of the deals that we sign with companies that you would recognize the name.
We have some very, very—actually, I think it's the number two cosmetics company in the world, we just did a global deal with. They use our product to monitor for adverse effects: chemicals used in perfumes. Is there any chemicals or any articles about other things that have come out that are used on your body that are an adverse effect of the chemicals that are used there? There is a lot of interesting applications of our product, all of it related to scientific research. I'm going to go in the wrong way here. From a business model point of view, about 60% of our revenue is the transactions or DocDel business. Around 40% is the platform business. As we'll talk about a little bit later, the transactional business is about a 24.5% gross margin business because we're reselling an article that's owned by the publisher.
The platform business is an 85% gross margin vertical SaaS product. You can see the growth of the platform business here over the last several years. It's continued to be primarily an organic grower. We did a couple of acquisitions. You can see the step-up in ARR there that's helped us drive a lot of top-line growth in the business. The transactional business is typically flat-ish. We were able to grow it for several years, as you can see here, several quarters, as you can see here. We've seen a bit of a decline, as I mentioned earlier. That is primarily driven, as I mentioned in the earnings call, by one large customer that churned. I'm going to turn it over to Bill to kind of walk through the financials. Go ahead, Bill.
Thanks, Roy.
This chart here just shows the two revenue segments that we have, and really the shift that is underway in the business that has been underway for the past few years, that is really transforming profitability, cash flow of the business as well. The top part there is the ARR, which is now growing 20% organically. It is over $21 million. You can see it has been up and to the right as far as growth with respect to that business. Then you have the transaction business below that, which is more of a steady business. Again, the trade-off here is the platform business is an 85% plus gross margin business. Transaction is 24%-25% gross margin. As it becomes more and more part of the revenue mix, the profitability of the business changes.
If you look at a couple of years ago, platform revenue was about 26% of revenue. Now it's about 40%-42% of revenue. Our corporate blended gross margin in that time period over the last two years has gone from 40% to over 50%. It is a big transformation in the business. On the B2B side, that ARR has a 100% plus net retention rate, meaning we upsell more than we churn. That is also very sticky revenue. This slide really shows the payoff of the transformation. It basically shows what's happening in the business. The blue is adjusted EBITDA. The green is cash flow from operations. You can see how this has transformed over time. The mix shift of revenue has gone more to SaaS. We are now at $5.5 million of adjusted EBITDA and $7.3 million of cash flow from operations.
We're actually cash flowing more than we have in adjusted EBITDA. You can just see the transformation in the business. Again, fiscal 2023, those numbers were $2 million and $3.3 million, $3.4 million. Huge change in the business. This change will continue to the extent that we continue to execute on that mix shift. As we anniversary these numbers and continue to roll them forward for our fiscal year, we expect these numbers to continue to go up. This is our balance sheet. We are building cash as a result of that. We did an acquisition called Scite in December of 2023. That dropped our cash balance to $2.7 million. Less than two years later, we're up to $12 million in cash. That is with making a $1.3 million earnout payment last quarter.
You can see the cash is building. We do have enough cash flow, excuse me, to fund our organic growth. Unless we do something strategic, that cash balance should continue to build, even though we are paying an earnout related to the Scite acquisition. These are just some metrics on key stats of our business and some ownership disclosures. I won't go through all of these, as a lot of this is public information. We continue to believe that this is a compelling investment opportunity at the levels that we're trading at. We do have ARR, as I mentioned, is growing 20% organically. At the enterprise value we're at today, that's about 10 times trailing cash flow from operations. We think there's a lot of momentum in the business and expect to continue to execute on our plan.
I'll turn it back to Roy.
Thank you, Bill. Just to summarize, we do participate in a vertical market where research is going through a heavy innovation shift. In other words, five years ago, 10 years ago, there was a lot of independent software companies that provided solutions for one step in that research workflow. We've taken a strategy for a number of years to be the "Bloomberg terminal" for research to be able to provide all the steps of the research journey. At the same time, with our largest customers, we provide what they need when they need it in their internally developed workflow. When you think about a Bayer, BASF, AstraZeneca, they're typically developing very unique tool sets internally, but they need access to documents. They need access to rights information. They need to be able to buy rights when they need them.
They need a corporate library. They need a lot of the things that our products do, which we deliver to them today via APIs. The point is we participate in a very high TAM market, and we're single-digit market share. We've consistently delivered double-digit revenue growth on the platform side, which is in line with the revenue growth in worldwide R&D. I'm sorry, the investment growth in worldwide R&D. We do have a strong economic moat that protects our business, both in terms of long-term relationships with the IP holders, the publishers. We have long-term relationships with our customers. In fact, our typical lifetime value of customers is between six and eight years on the B2B side. We also have unique capability in Scite in that we can see behind the paywall.
In other words, if you do a search with our Scite product, you're not searching just the summary of the article, which you can find in Google Scholar or PubMed. You're searching behind the paywall and getting much better answers than you would otherwise. The shift has really been working in terms of layering in high-margin platform business on top of our document delivery business. In terms of capital allocation, this is an important question. Our business strategy since the beginning has been to grow the business organically and do tuck-in acquisitions that make sense. We've done that twice, and did a customer buy once. As we look forward, we expect to continue along that strategy. An increasing conversation is taking place internally about where share buyback fits into that, especially when we get to where we are today, where we're trading at two times revenue, roughly.
It's difficult to do acquisitions in this. You're not going to buy anybody that's a quality company at two times revenue, right? It's painful and really hard for me to get my head around buying something for four times when we're trading at two times. We need to get the stock back up, and share buyback is something that's being seriously considered again. We talk about it every time the stock goes down. Where we are today, it's a high priority to have that discussion internally and make a decision. I'll open it up for questions. No questions? In the back?
The acquisition you mentioned,
we did Scite and Resolute.
Similar in size?
Scite was larger. Scite was larger and, frankly, a much better UI. That's why Scite is today our default search engine.
We still have Resolute data that we deliver to customers. In fact, we're about to expand that data's participation inside of Scite, but it's in the background. It's a product that we still support for several customers, but the data in Resolute is really the value that we'll deliver through Scite.
[audio distortion] is there a lot of efficiencies. I would assume so.
Yeah, I think the efficiencies have already been realized for those businesses. We did not keep a lot of the management of Resolute. We did keep a lot of the management of Scite. In fact, the founder of Scite is our Chief Strategy Officer, who recently also picked up all the product. So he's responsible for strategy and product execution.
We've just kind of no more synergies on the cost side, but on the revenue side, there continues to be a compelling cross-sell synergy selling Scite into our existing Article Galaxy customer base.
I think trailing we're still up.
No, we're still up. Transaction revenue has come down a little bit, but overall revenue is still up. The ARR, as I said, has grown 20%. Overall growth, I think, 2% last quarter, but that's a mixed issue with the transactions declining about 7%, 78% last quarter.
The 85% margin stuff is 18%-20% growth. The transactional business, which is the 24.5% margin stuff, we've had some headwinds started January of last year. Expect that to continue until we anniversary that off.
I just don't understand why the stock
I think there's people out there that think we're going to get run over by AI. When people say, "Is AI a threat or is it a tailwind?" it's both for us. We have to be strategically right in how we're executing around AI. I agree with—yesterday I was in New York, at a different conference, and there was a panel discussion with an expert who talked about AI. The entire AI industry, per se, makes very little money. All the LLMs are spending billions, millions, millions of dollars. Nobody's making any money. The people that are making money are vertical SaaS companies like us, who are utilizing AI at parts of the workflow where it makes sense.
You could make the same argument that AI is going to wipe out Bloomberg because everything Bloomberg does is basically pulling public documents, which AI has access to. I think I personally believe long term, the winners are going to be those who apply AI correctly in the workflow from that user persona, right? What ChatGPT and those guys do really well is one small step within a long workflow. A lot of people do not ask this, but we do not have our own LLM. We utilize one of the big LLMs in the background of our software to do the work, but we do it in a copyright-compliant way. Meaning our intellectual property holders, the guy that owned the articles, they do not want the LLMs to learn that content that is behind the paywall.
We ask the questions in ways that they cannot learn from that article. Our customers want, if they ask a bunch of questions about 10 articles in a folder, that's IP the customer wants to own. They don't want the LLM to have that because then their competitors do. They don't want us to have that. We do that for them as well. I think we're uniquely positioned as long as we execute well. I believe it's a tailwind for us, certainly on the B2B side. On the B2C side, it's a little more competitive because everybody and their dog now is coming out saying they do research AI, even though they have access to only abstract information, the summary of the article.
We typically have—not typically, we have access, excuse me, to a vast majority of the articles behind and in front of the paywall. You pay the creator of that content, right? We do not pay them. We exchange information for them. The business model there is we developed a very unique citation index tool. For decades in this business, there was a citation counter that said, "Oh, this article has been cited 56 times." It does not tell you whether 56 times somebody agreed with that article, or they disagreed with the article, or they thought the article was out of a paper mill and was no good. It just said, "This article has been cited 56 times." We have a very unique badge that tells you how many times it has been supported, how many times it has not been supported, how many times it has just been mentioned.
There is a fourth category. We typically exchange that content for access to the publisher content, and they put our badge in their paywall. When somebody pulls up that article inside of their paywall, they see the Scite badge. It is basically a FICO score or a Rotten Tomatoes score for the article you are looking at. Yes, sir, in the back? Yep.
This year. Is the revenue decline 100% ?
No. Yeah.
To give you some puts and takes, think about transactional business as a bucket of water and there's holes in the bottom of the bucket. Two big holes in the bottom of the bucket. One is more and more content is being published, that's called OA or open access, and it's free. You go back 10 years, 15 years, the percentage of free content available in peer-reviewed scientific research was a low single-digit percentage of all the research available. Today, it's a 20-some-odd % number, might even be 30%. A larger and larger percentage of content that's being published is OA. You've got more free.
The second thing is, I mentioned earlier, the platform helps the customer make a better decision about where to buy on a pay-per-view basis, where to pre-buy 500 tokens at a discount because I buy enough content from that publisher to use these tokens, and where I should subscribe. If we were—we've done a bunch of cohort analysis. If you look at our oldest customers, before they used our platform, they were paying for the article 90-some-odd % of the time. After implementing, that percentage has gone down every year for eight straight years. Because if you've got a library of a million articles, those articles have reuse rights. You can reuse them a certain number of times before you have to buy them again.
Because we store them and we store the rights, if a researcher on the other side of the globe asks for the same article that Bill bought a year ago, they can view it for free. They do not buy it again. The other hole on the bottom of that bucket is our platform doing what it does. We do layer in new customers, which is adding water to the top. We had one major customer got acquired that moved away from us, and it was a six-figure, five-figure, six-figure per month transactional customer, and that moved the needle down. There are some puts and takes in the research organization. It is not a flat-spend kind of a market. To give you some idea, some internal analysis I did on a cocktail now, we are down 7% year- over- year.
Four of the seven is that one customer that left. Two customers that are buying a bit less this year than last year make up the rest of it. We call both those customers. One of them I had a sit-down with in Germany when I was there last month. I was like, "Why are you guys buying less than last year?" The guy was like, "I don't know. I guess we're just doing less research." This is the guy that runs a 50-person team to support their 3,000 researchers. There's a little bit of put and take there. We have new customers coming in, some churn customers coming out, OA and other stuff leaking out of the bottom. A one big loss like that is what's driving a vast majority of that year-over-year decline. Yes, sir.
We've already mentioned about half of your revenues come from the healthcare industry, broadly speaking. Then you have another 50 or so verticals. Is there anything subscale about those other 50 that creates inefficiencies or issues that you all can or should be addressing? Is that not a factor at all? You could have 150 other verticals that wouldn't matter . You have an opinion on that?
No? No, I think when I think about more verticals, anybody that's doing the R and R&D is a candidate for the product. However, there are gaps in our portfolio that limit our ability to work into other verticals. For example, we don't do a lot with material sciences, right? We would need to go subscribe to additional data to be able to offer a full answer, kind of there.
We definitely could expand into additional verticals. For me, it's a matter of sales focus and sales experience, and training. I used to run a business where we were really big in construction, and then we went into another vertical, marine. Those businesses have a lot of similarities, but they're different enough that if you walk into a marine manufacturer and you talk about what you're doing in construction, they kind of roll their eyes and like, "What does this have to do with me?" I think marketing, messaging, sales focus, and sales experience in those verticals is important. Right now, we have enough TAM left to grow what we have in the 50 verticals. We're not planning on expanding into other verticals. I don't know if that answered your question, but let's put that question next to it.
Because there are 50 that represent , are you subscaling some of those that you should be buying?
Oh. I think the ongoing cost of remaining with a customer, renewing a customer year after year, is relatively low. We do not look at it that way. I mean, if that customer became a—you know how sometimes you hear stories, and I have had a few—where big customers, they think they are spending a lot of money, but they are also eating up 50% of your support time and 50% of your development time. That really does not happen here. Once a customer is in place, six to eight years is the life of that customer, depending on product. It is a relatively easy thing to keep that relationship moving forward. Other questions?
All right. I will pick up on your last comment. All right.
This is a little bit of an unfair question, but six to eight years for a customer, like it's very good for most businesses. If I think about your comment about an AstraZeneca or a Bayer and you're doing research, it seems like they would be customers for much, much longer than six to eight years, given the tenure of those organizations and the fact that . What leads to a customer?
Yeah. We have done a bunch of analysis on this because I have made several public comments. I'm not happy about where we are on renewal rates and churn. We do have low 90% renewal rates, and our net renewal rates are about 100%.
However, if you split our customers into top third, middle third, bottom third, renewal rates in that top third, which are those big accounts you mentioned, 97%-98%. In fact, one of the accounts you mentioned, we've had a relationship for 10 years. We just signed another three-year extension with them. One of the other ones you mentioned, we're about to sign a two-year extension with them, and we've been with them for, I think, 11 years. Once we sign the big ones, they're 97%-98%. That mid-tier is more in the mid-90%, and that bottom third is where we see a vast majority of our churn. One of the things we're implementing this year is a software called Gainsight, which, think of it as a CRM, but it connects into usage data, connects into support data, connects into billing data.
It'll connect into your transaction volume, and it'll give us leading indicators and a health score, if you will, where we can kind of shift our customer service organization from really being more reactive to being proactive because we can see leading indicators that we know are going to eventually lead to churn. The other thing we've done is we've tightened up significantly what we refer to internally as our ideal customer profile to spend more time qualifying the customer upfront to make sure we're not putting somebody in that bottom third that we know is going to churn out because we ask enough questions in advance to know we weren't a good fit for them. Any final questions? Yes, sir.
On that renewal process, tell me about price taking
You want to talk about price increase?
Yeah, sure.
Yeah. The vast majority of our contracts come with a 5% uplift built into them. Typically, the renewal is an auto- renewal. It's not necessarily a pricing discussion unless they're expanding or in more seats or there's some sort of upsell. That's traditionally how we look at it. We do look at pricing more on the new sale side. Annually, we update our pricing tools and everything. Typically, it's that 5% increase at renewal.
Plus, do you need extra seats? Do you want to move from standard product to pro? Do you want to add this feature? Do you want to add Scite? Do you want to add something else? Thanks again for your time this morning. Have a great day.