Research Solutions Q2 FY26: ARR Growth Decelerates as Profitability Dips

What happened

Research Solutions reported Q2 FY26 results with Annual Recurring Revenue increasing 14% year-over-year to $21.8 million, a slowdown from the 21% growth in Q1. Net income fell to $547,000 from $749,387 in the previous quarter, highlighting potential strain on profitability despite the company's shift to higher-margin SaaS platforms. Adjusted EBITDA grew 36% year-over-year, indicating some operational efficiency, but this metric masks underlying challenges. The ARR deceleration and profit drop contrast with management's optimistic narratives and raise questions about sustained execution amid competitive and structural risks. Overall, the results suggest the transition to a vertical SaaS/AI model is progressing but with increased volatility in key financial metrics.

Implication

The moderation in ARR growth from 21% to 14% YoY could signal market saturation, competitive pressures, or challenges in scaling the Platforms segment, undermining the core growth narrative. Lower net income despite Adjusted EBITDA gains points to potential cost inefficiencies or revenue mix issues that may impact free cash flow, a critical factor given sizable earnout liabilities. While the net-cash balance sheet and DCF discount offer some downside protection, the mixed results heighten execution risks and dilute confidence in the company's ability to sustain high growth. For risk-tolerant investors, this necessitates a more cautious approach, with a focus on monitoring ARR trends, margin stability, and earnout coverage in upcoming quarters. Ultimately, the stock's appeal as a potential buy weakens unless future performance reverses these concerning signals.

Thesis delta

The Q2 results reveal a deceleration in ARR growth and a drop in net income, challenging the assumption of robust, sustained expansion and profitability improvement central to the potential buy thesis. This shifts the stance from cautiously optimistic to more neutral, emphasizing the need for clearer evidence of execution stability and risk mitigation before considering increased investment.