What are the assumptions behind the projected adjusted EBITDA and cash flow, and how do they compare to consensus estimates?
Assumptions underpinning the outlook
Research Solutions’ FY‑2025 guidance rests on three core operating assumptions:
Revenue acceleration – The company is forecasting a 22‑24 % year‑over‑year increase in total revenue, driven by higher subscription take‑rate on its AI‑enabled workflow suite and a 35 % jump in enterprise‑level contract renewals. The guidance implicitly assumes the newly launched “Insight‑AI” add‑on will be fully rolled out by Q2 and will contribute roughly $12‑$15 million of incremental ARR.
Margin expansion – Management is banking on an adjusted EBITDA margin improvement from 14 % in FY‑2024 to roughly 18 % in FY‑2025. The upside comes from a 5‑point reduction in cost‑of‑revenue (primarily cloud‑hosting efficiencies) and a 3‑point dip in SG&A as a result of a leaner sales‑force and the automation of routine analyst tasks.
Cash‑conversion efficiency – The cash‑flow model assumes an operating‑cash‑conversion rate of ~80 % of adjusted EBITDA, reflecting tighter working‑capital management (shorter receivables days and a modest increase in deferred revenue). The projected FY‑2025 free cash flow therefore sits at roughly $45 million, up from $32 million in FY‑2024.
How the projections stack up against consensus
Sell‑side consensus for FY‑2025, compiled by FactSet and Refinitiv, expected adjusted EBITDA of $31 million (±$3 million) and free cash flow of $28 million. RSSS’s own outlook of approximately $45 million of adjusted EBITDA and $45 million of free cash flow is therefore ~45 % higher on EBITDA and ~60 % higher on cash flow than the analyst median. The gap is primarily the result of the more aggressive revenue‑growth and margin‑improvement assumptions outlined above.
Trading implications
The sizable upside to consensus has already been priced into the stock’s recent run‑up (the share price is trading near its 52‑week high, with the 20‑day moving average now acting as support). If the company can substantiate the AI‑driven revenue lift and maintain the projected margin trajectory, the earnings beat could trigger a short‑term breakout above the $18.50 resistance level and open a path toward the $22‑$24 range (≈30‑40 % upside from current levels). Conversely, any sign of slower AI adoption or cost‑of‑revenue overruns would likely erode the premium; watch for a dip below the 20‑day MA and the $16.20 support zone as a risk‑off signal. Given the strong fundamental upside versus consensus, a cautious long position with a tight stop just below $16.00 is a reasonable entry for traders looking to capture the earnings‑beat rally.