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Liberated Syndication (OTCQB:LSYN) is a long because it is in the middle of much-needed corporate governance and operational reform, the search for a new CEO, and a renewed focus on its bread and butter-podcasting. While the past few years have been discouraging for micro-cap investors, we believe that recent activist involvement will help unlock significant value for LSYN shareholders.
LSYN is a mainstay of the podcasting world, having helped podcasters host and distribute their shows since 2004. Yet while the company was ahead of the curve in recognizing the power of podcasting, poor governance has harmed the company’s reputation in the public markets.
That story is beginning to change. A recent proxy campaign has shaken up a stagnant board, with activist investors starting to clean up governance issues. Critically, the long-standing CEO and CFO have either left or have been removed from their management duties.
Simply put, years of poor capital allocation and excessive executive compensation made the company an excellent candidate for activist involvement. Now that it has happened, the company is in a great place to raise operating income margins, improve the core Libsyn product, and return free cash flow to shareholders.
LSYN’s story is one of a company that has made self-imposed mistakes, yet has had real staying power in a rapidly growing sector. A positive free cash flow SaaS business trading at around 12x EBITDA, we believe that the company has intriguing upside potential as a reinvigorated board and new management take the reins.
One plus latest mobile exciting offers Company Overview
The company is made up of two primary divisions: Webmayhem Inc. (Libsyn) and Pair Networks. Libsyn is the company’s podcast hosting division while Pair is focused on web hosting and domain registration.
Libsyn has been serving podcasters since 2004. The core of its value proposition is relatively the same then as it is today. The company offers tools like hosting, storage, bandwidth, and RSS creation tools, effectively letting podcasters release and distribute episodes to their viewers. The core technology of podcasting is relatively simple and hasn’t changed much. Podcasters upload their edited shows to Libsyn and Libsyn provides the hosting, storage, and other tools needed to distribute their episodes to major podcast directories like Apple Podcasts, Google Podcasts, Spotify, Pandora, and more.
Essentially, without using a hosting company like Libsyn or one of its competitors, podcast producers aren’t able to access these crucial podcast directories.
Hosting fees are persistent and made up around 76% of Libsyn’s revenue in FY 2019 (70% in 2018). These hosting fees vary, with the lowest being $5 per month and the largest being around $150 per month. Like other SaaS tools, Libsyn’s hosting plans offer different features, including those found below:
Source: LSYN Investor Presentation.
The main difference between these basic plans relates to storage limits. For podcasters who push episodes at least once per week, the Classic 50 and Classic 250 plans likely won’t provide enough sufficient storage. For those podcasters who need even more storage, Libsyn offers two additional hosting plans.
LibsynPro, which is an enterprise solution that includes more sophisticated network features and dedicated support, comprised around 17% of revenues in FY 2019. LibsynPro offers features like multi-user account management, unlimited uploads of new content, advertising campaign management tools, and more. Some of the more well-known shows that use LibsynPro include the following:
Libsyn’s remaining revenue sources come from app subscriptions (3%) and advertising (4%).
The basic value proposition behind app subscriptions is that podcast creators can get a custom app and website. From there, podcasters can offer subscriptions to their episodes and offer premium content. Subscriptions are offered on a one-month, six-month, or yearly basis, and the company takes a cut of the subscription revenue.
Then, there is advertising. Libsyn’s Ad Sales team works with agencies and advertisers to provide advertising opportunities for podcasters. That being said, Libsyn is still trying to figure it out. Year-over-year, advertising revenue fell from 10% to 3% of overall revenue due to decreased advertiser spending. This has been especially true during COVID-19, as advertisers have decided to cut back spending on ad campaigns. Ultimately, creating a compelling advertising product could attract even more podcasters to the platform, which will consequently lead to more sticky hosting fees.
Pair is actually older than Libsyn. Founded in 1996, it was one of the earlier companies that provided Internet hosting services. LSYN acquired Pair in December 2017 for about $16 million in cash and stock. While Libsyn gets the lion’s share of the company’s attention, Pair makes up around 40% of the company’s sales.
Similar to those in the podcasting space, designers and creators need a website host so that users can visit their websites. Web hosting companies like Pair rent out servers so that customers can easily and securely get their websites online. Not only that, but Pair and its competitors consistently monitor their servers so that customers’ websites experience little (if any) downtime.
Like Libsyn, Pair offers different types of hosting plans as part of monthly subscriptions. Its most popular hosting plan is its Managed WordPress plan, which makes it easy for customers to quickly design and host their WordPress websites.
Source: Pair Pricing.
Pair’s more expensive plans offer virtual private servers or dedicated servers. These are more personalized plans that let users have servers specifically allocated for their use. They are specifically catered for businesses or fast-growing websites that need higher levels of security and performance.
Source: LSYN Investor Presentation.
Pair’s bread and butter is Internet hosting. It made up 90% of Pair’s revenue in FY 2019. That said, Pair also offers custom domains for Top Level Domains. This means that a user can visit Pair and obtain domains ending in dot-com, dot-org, dot-net, or other variants. Users purchase their domain for one to ten years and the price range of domain purchases varies from $4 to $70 per year.
The Internet hosting and domain registration spaces are extremely competitive. Pair has plenty of competitors, ranging from hosting companies like Bluehost, HostGator, and Wix (WIX) to GoDaddy (GDDY) and Namecheap in the domain registration space. Hosting and domain registration are essentially commodities, yet Pair tries to differentiate itself through its focus on customer service and reliability.
One plus latest mobile exciting offers A Checkered Past Led to Much-Needed Activist Involvement
Upon first glance at the company’s stock chart, you’d think that all has been smooth sailing since the spin.
The company has around a $93 million market cap, an enterprise value of around $82 million, and has around 87% gross margins (LTM). On its first day of trading in August 2016, the company had a market cap of only $3 million. There are plenty of tailwinds in the podcasting industry, from eye-popping acquisitions of hosting companies and individual shows to increasing numbers of shows and listeners year over year.
Will all of that said, Camac Partners recently began a campaign against the company, eventually winning three board seats on the six-director board. In its initial correspondence with the company, the activist argued that “It is long-past time for meaningful improvements at Libsyn.”
So what gives? Much of the turbulence and criticism of the company comes down to management behavior, shareholder, dilution, excessive executive compensation, and poor capital allocation. You can read some of the commentary here, but the activist essentially argued that management has been significantly hampering the company’s growth potential.
In April 2019, Camac announced a special meeting request to propose the removal of all four existing directors. Camac has held around 6.5% of outstanding shares since 2017. After successfully gaining enough stockholder support to call for a special meeting, Camac and the company entered into a settlement agreement.
Among the settlement terms included the formation of a strategic review committee (chaired by Camac’s founder Eric Shahinian), the appointment of three independent directors (Shahinian, Bradley Tirpak, and Brian Kibby), the cancellation of restricted shares previously issued to Spencer and Busshaus and the reimbursement of $600,000 of Camac’s expenses related to its activist campaign. Several days ago, Tirpak was appointed board chairman.
One plus latest mobile exciting offers The New Directors Have Started Course Correcting the Company
Already, the newly constituted board has made progress in cleaning up some of the company’s governance issues.
Pared Back Executive Compensation
No discretionary bonuses were granted to executive officers in FY 2019, and the board did not adopt a long-term executive incentive compensation plan. In addition, any future incentive long-term incentive plans will be based on ROIC, free cash flow generation, and total shareholder return. With executive compensation being such a significant issue in the activist campaign, the new board members have moved swiftly to pare back excessive executive compensation. Long-term focus on ROIC and free cash flow generation is also an extremely positive step so that management’s future incentives are aligned with shareholders.
Correcting Financial Statement Errors
The new board members have also worked to fix the damage from some undiscovered errors. In late April 2020, an IRS audit revealed material errors from the FY 2018 financial statements. Specifically, the company miscalculated its NOL carryforward. Its $14 million NOL was overstated by $12.5 million, and the company should have been recording tax expenses in FY 2018. Along with amending the company’s 2018 financial statements, the company owes its pending tax balance this year (which is around $585,000). Essentially, this error required the company to revise its net income number upward in FY 2018. While bookkeeping errors are never great, it’s encouraging to see the new directors and CFO quickly fix these issues.
A Renewed Focus on Podcasting
Then, there is the strategic review committee. This is arguably the most compelling question for investors, as the podcasting industry has been home to many significant acquisitions in the past few years. The most notable is Anchor. In February 2019, Spotify (SPOT) acquired Anchor for €136 million (about $150 million). Anchor is one of the closer comps to the company and arguably its greatest competitor. Most notably, it offers podcast hosting services for free and offers monetization opportunities for its podcasting case. This was the most prominent acquisition of a podcasting hosting company in recent years.
After spending several months on the strategic review process, the company announced that it would be pursuing organic growth opportunities in the podcasting space. It also appointed a merchant bank called West Arrow to act as a strategic advisor in evaluating potential M&A and growth activities. While an acquisition appears off the table for now, a renewed focus on podcasting and cleaning up internal governance issues may increase the odds of a potential acquisition in the future.
Finally, one of the most important developments in the company’s story is that it is looking for a new CEO. Chris Spencer’s resignation only occurred days ago and marks an end to Spencer’s tenure at the company. Since 2001, Spencer was the CEO and President of FAB Universal, which was the former parent company of Libsyn.
Simply put, we believe this is a positive step forward for the company. Yet while Spencer is out as CEO, the company is retaining him as an advisor to, among other things, assist the company with the strategic review and transition plan. He is still being paid his current year’s salary and a $215,000 yearly salary for his consulting work through 2023, but he is also surrendering around 550,000 shares for failing to hit several milestones as CEO. Last quarter, the company also purchased approximately 1.35 million of Spencer’s shares for around $3 per share.
The board is beginning its search for new leadership. We’re excited about the company’s opportunity for the board to find a highly motivated CEO that can improve the Libsyn product, increase operating income margins, and return free cash to shareholders. Considering the newly constituted board, we are confident that the new CEO will be attuned to these concerns as the company continues to grow.
In the meantime, company president Laurie Sims has taken on the additional role of COO. The company also announced that Richard P. Heyse would be its new CFO. While he has served as CFO for three publicly traded companies, Heyse has most recently been an interim CFO and consultant for private companies (like ACA Compliance Group). Heyse has a two-year employment term which can be renewed every year thereafter.
One plus latest mobile exciting offers Libsyn’s Core Business is Attractive
The company was a great candidate for activist involvement. The governance problems were all too real. Putting these important governance considerations to the side, however, we believe that the pure economics and growth prospects are promising.
Central to Libsyn’s growth thesis is (1) bringing more podcasters onto its hosting platform and (2) keeping them on the platform.
New User Growth
As for the first objective, Libsyn is doing a great job. Looking at podcast show creation, growth has been promising. In the past three fiscal years, podcast show growth has increased by more than 20% year-over-year. Covid-19 has actually been relatively positive for podcasting. According to the company, April 2020 was even the second-largest increase in new podcast signups on record. In June, mobile listening for Libsyn podcasts hit an all-time high.
Yes, there are major competitors (like Anchor) that offer free hosting. Libsyns’s user interface, to put it lightly, is in need of an upgrade. Yet Libsyn still has positive name recognition and is known for its reliability. Well-known podcasters like Pat Flynn have spoken highly of the company.
Libsyn was started many, many, many years ago. It’s one of the oldest, and most reliable, podcast hosts out there, and I use Libsyn myself too, and I definitely recommend them.
To address the outdated user interface, management is promoting Libsyn 5. It is the company’s “biggest project to date” and is set to be rolled out later this year. Along with an updated user interface, the company is building out additional advertising tools for podcasters. This is an important opportunity for the company’s new CEO, as some of the company’s fiercest podcasting competitors are investing in monetization opportunities for their creators.
In terms of overall growth, strong podcasting tailwinds will likely keep the growth story intact. Simply put, more individuals and companies are creating podcasts. It is estimated that there are over 1,000,000 podcasts. While niche creators and podcasters were at the forefront of podcasting, more SMEs and larger companies are participating. These larger enterprise clients are promising for Libsyn’s growth story. They offer stickier revenue compared to individual podcasters who produce a few episodes and then give up.
Not only are more consumers listening to podcasts, but those consumers are loyal and affluent. 45% of monthly podcast listeners have household incomes of over $75,000 and podcast listeners skew younger. We are still in the early innings of podcasting, yet individual creators and large companies are bullish on its potential. Simply put, the medium isn’t going away anytime soon-especially because it has not yet been fully monetized.
As far as the second objective, the company doesn’t break out specific figures related to user churn and user retention. That being said, we believe that the quality of Libsyn’s podcast roster is much greater than its competitors. By this, we mean that Libsyn podcasters are more active and are less likely to give up podcasting compared to free hosting platforms.
The data isn’t ideal, as it is from December 2018. However, a study from Daniel J. Lewis from The Audacity to Podcast is insightful. While free-to-use tools like Anchor and SoundCloud host more podcasts, they also host more inactive podcasts.
According to Lewis, “A shockingly high number of Anchor users have three or fewer episodes, indicating very new shows or very uncommitted podcasters.”
Lewis found that 38% of Libsyn’s podcasts were inactive and 8.1% had three or fewer episodes. This is significantly less than Anchor (58.3% inactive and 57.7% with three or fewer episodes), SoundCloud (59.5% inactive and 32.4% with three or fewer episodes), and Podbean (44.7% inactive and 24.7% with three or fewer episodes). Another 2018 study by Chartable found that Libsyn powered around 28% of the top 400 podcasts in the United States. This leads other notable competitors like Anchor and SoundCloud.
While the data isn’t as recent as we’d like, it raises the important point that Libsyn’s quality of users remains very high. Libsyn is leading the field in retaining users while having a very active creator base.
Then there is the question of user retention related to migration. The simple act of moving a podcast from one hosting company to another isn’t overly complicated. Libsyn and its competitors offer pretty seamless migration options. However, there are risks.
As users of the Libsyn platform ourselves, we can say firsthand that there are subtle switching costs. Not only may there be technical challenges in making the switch, but podcasters may see a drop in their download numbers. Along with this, switching to a less-reliable podcast host can lead to broken promises, technical challenges, and subpar support.
A sign of Libsyn’s stickiness is from user feedback. Some recent user commentary is below:
We believe that Libsyn has some semblance of a hosting moat. While nothing is actually stopping podcast hosts from switching to another provider, inertia often rules the day. The main concerns for Libsyn would be customers moving away from Libsyn due to (1) extreme price sensitivity or (2) more features or monetization opportunities.
It’s hard to compete with free. Some of Libsyn’s most cost-sensitive customers may find it compelling to switch to Buzzsprout, Anchor, or another free podcast host to avoid $15 or $20 monthly fees. The larger danger, however, is the fact that some of these free alternatives provide better statistics and monetization opportunities. A hosting company that offers hosting, in-depth statistics, and plenty of advertising opportunities-all for free-is arguably Libsyn’s biggest threat.
We’ll see if Libsyn can respond through Libsyn 5 and more advertising opportunities for creators. That said, this isn’t a winner-take-all market. The new CEO will need to focus on this opportunity as creators are looking for easy ways to monetize their work.
One plus latest mobile exciting offers Pair Has Been Overshadowing Libsyn’s Growth
Libsyn is clearly the most important asset at the company. It’s a mainstay in a high-growth industry and will be the primary catalyst behind any potential acquisition.
Like Libsyn, Pair’s hosting and domain sales represent subscription sales (often for about one year, although they can be longer). While these sales are often sticky, Pair differs from Libsyn in that it can’t rely on brand name recognition. Pair doesn’t crack the top 30 in web hosting market share and domain name registration. Domains and web hosting services are cutthroat markets, and it’s unclear whether Pair is going to break through the noise.
In the meantime, Pair is overshadowing Libsyn’s growth. The first six months of 2020 have shown slight revenue decreases in Pair revenue compared to the prior year. Yes, Pair is contributing fewer costs and operating expenses YoY. It is also generating some modest cash for the company. That said, the new management team needs to carefully consider Pair’s next steps-especially with the company’s renewed focus on podcasting.
One plus latest mobile exciting offers While There is Room For Improvement, the Financials Are Still Strong for a Podcast Hosting Company
Notwithstanding the turmoil over corporate governance, the company’s financials are still strong. In the selected annual financials below, you can also see that the company’s financials look dramatically different after the Pair acquisition in late 2017.
Source: Company financials and SOR estimates.
Here is more recent quarterly data from Q1 2019. The company announced its Q2 earnings on August 14.
Source: Company financials and SOR estimates.
One of the most notable things is that the company’s largest operating expenses are G&A expenses. Specifically, there was a 40% increase in SG&A expenses from FY 2018 to FY 2019 alone, primarily due to bonus accruals and legal and advisory fees.
The good news is that the activist and new board members have made it a priority to substantially pare back executive compensation. Along with this, litigation fees-especially those related to the activist campaign-will dramatically decrease. We have already started to see this play out, as operating income YoY increased by over 100%. Last quarter’s SG&A spend declined to 26.6% of sales, which is a major improvement compared to even last quarter. We expect SG&A expenses to continue normalizing, thereby increasing the company’s operating income and operating margins.
Along with this, the company has a solid balance sheet and generates significant free cash flow. The company’s $19.4 million in cash represents around 21% of the company’s market cap. Net debt is negative and capex is relatively stable year-over-year, representing about 1.5% to 2% of sales. Free cash flow was over $7 million in FY 2019. With such small capex requirements and persistent operating cash flow, the company has been able to build a solid cash balance notwithstanding prior management’s poor capital allocation decisions.
The company’s ROC has also been very high in the past few years. We subscribe to Greenblatt’s definition of ROC as EBIT divided by capital employed (net working capital plus net fixed assets minus excess cash). In FY 2018 and 2019, the company respectively had 4.08 and 3.68 million in EBIT and 3.87 and 4.5 million of capital employed, leading to ROC north of 80% for both years.
In the end, what we have here is a small, promising business that has continued to grow amidst many self-imposed headwinds. In all likelihood, the new management team will commit fewer unforced errors and trim some of the bloated SG&A expenses that have occurred for years.
One plus latest mobile exciting offers Valuation
LSYN is a small and often overlooked stock. As with many micro-caps, the company’s stock is quite illiquid. There is no analyst coverage of the stock and the company does not provide guidance. An uplisting to NASDAQ or NYSE would be positive, yet the company has been talking about this for several years. We hope that the company more seriously pursues this idea in the near future.
LSYN currently trades at around 12x EBITDA, 34x earnings, and a little more than 3x EV/sales (all numbers LTM). Historically, the company has received a discount due to its poor corporate governance, checkered past, extremely small size, and presence on the pink sheets.
Most of the company’s purest comps are privately held or are consolidated within a much larger company (like Anchor). The purest publicly traded comp is Audioboom Group plc (BOOM). Audioboom is a self-described “leading spoken‐word audio platform for hosting, distributing and monetizing content.” It has a market cap of £27 million, trades at an EV/sales of 1.14 and generated around $22 million in revenue in FY 2019. That said, Audioboom delivered an extremely low 22% gross margin and has around negative $7 million in EBITDA. Acast (OTCPK:CAST), another LSYN competitor based in Sweden, consistently generates losses.
LSYN is clearly on another level, as has almost always generated positive net income and positive free cash flow. There is a good argument to be made that the company should be trading at a multiple equivalent to a smaller cap SaaS company, due to the company’s recurring revenue streams, asset-light structure, and growth opportunities. Per data from Aswath Damodaran, the standard SaaS company trades at around 20x EBITDA, 67x earnings, and 7.5x EV/sales (only positive EBITDA firms were included). While these were pre-COVID numbers, they are insightful to show the opportunity for multiple expansion. Even with a size and liquidity discount, LSYN should see higher multiples with new management and more disciplined operators.
We can see Libsyn’s potential through an extremely simple, back-of-the-envelope valuation. To date, the company has generated around $12.6 million in revenue. Being conservative, we are assuming similar revenue figures in Q3 and Q4-even though Libsyn 5 is expected to launch in the second half of this year. Operating margins will continue to expand, as the new board and management team focus on reducing SG&A expenses and eliminating one-time costs (like litigation fees) that existed in FY 2019. In the first half of 2020, operating margins have totaled 26.5%. For the sake of argument, we are assuming operating margins will equate 25% for the FY 2020.
In FY 2021, we then expect the company’s revenue growth rate to expand due to the full rollout of Libsyn 5, a higher-quality user base paying reliable hosting fees, improved execution by the new management team, and sustained tailwinds in the podcasting industry as a whole. While we expect operating margins to continue increasing, even sustained 25% operating margins are significant. Using these assumptions and modest EBITDA multiple expansion, we get to a price that is substantially higher than the company’s current price.
Source: Company financials and SOR estimates.
Another way that we can look at the company is to use a precedent transaction analysis. We can compare its price to the price Spotify paid for Anchor (approximately $150 million). While the data is hard to come by, Chartable reported that Anchor powered 15% of all podcasts on the market at the time of the acquisition. It was estimated that there were around 700,000 podcasts at that time, meaning that Spotify paid about $1,428 per show.
There are now around 1,000,000 podcasts and Libsyn, according to its latest 10Q, hosts approximately 74,000 of them. Using these figures, Libsyn’s price would be around $106 million (about 14% above its current market cap and 30% above its enterprise value). That said, the comparison doesn’t count for Libsyn’s higher-quality podcaster base, the increased value of the podcasting space since the Anchor acquisition, the fact that Libsyn generates sticky hosting revenue from its users (where Anchor doesn’t), and that you would be getting Pair for free.
One plus latest mobile exciting offers Risk Factors
There are several risks to the thesis.
First, there is the risk that the board appoints an ineffective CEO that fails to execute. We feel that this risk is mitigated because of the activists’ presence on the board. In all likelihood, they are going to find a CEO that buys into their focus on increasing growth, cutting bloated SG&A expenses, and increasing shareholder value.
Next, the company may not be able to capture new podcast and web hosting growth. New podcasters and website creators have plenty of hosting options. Acquiring new customers can be difficult, especially as Libsyn is competing against free. Yet Libsyn has been competing against free offerings for some time now. Libsyn’s brand name and reputation, along with a much-needed product upgrade, will continue to attract creators. As for Pair, the new CEO will need to develop a growth strategy to capture more market share in the web hosting and domain verticals. The task will be difficult, but it isn’t impossible.
Next, podcasters could leave the platform for other hosting companies. This is especially true if those users are cost-sensitive and/or want to leverage features (like advertising opportunities) that they currently can’t find on Libsyn’s platform. Nonetheless, Libsyn continues to be known as a reliable hosting service that has underrated switching costs. While all podcast hosting companies have churn, we believe that Libsyn’s reliability and great customer service will minimize churn.
Finally, podcasting may be a fad. There is always the risk that we are in a podcasting bubble. Ultimately, we believe that the podcasting industry is just getting started. Recent M&A deals (particularly from Spotify) show that some of the largest tech companies are voting with their feet. Going forward, it’s hard to see podcasting not being an essential medium for creators to connect with their audiences.
One plus latest mobile exciting offers Conclusion
The past few years have been extremely exciting for creators, entrepreneurs, and startups in the podcasting world. Rapid listener growth, a consistent increase in the number of shows, and eye-popping acquisitions have signaled the arrival of this important medium. Yet even amongst greater enthusiasm for the podcasting industry as a whole, LSYN hasn’t experienced similar enthusiasm among investors.
While the company has suffered many self-inflicted wounds over the past several years, we believe that much brighter days are ahead. Much of it comes down to people. We believe that LSYN will be an excellent example of how activist involvement can turn the tides of a company with underrated potential.
Even putting aside a future acquisition, LSYN has an opportunity to see significant price appreciation. More disciplined spending, product improvements, and an increasing emphasis on shareholder value foreshadow exciting times for the company. In the end, we eagerly anticipate this new chapter in the company’s history.
Disclosure: I am/we are long LSYN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This research report solely expresses and contains the opinions of Second Order Research LLC (“SOR”). It is not investment advice and should not be construed as such. Use SOR’s research reports at your own risk. As of the publication date of this report, you should assume that SOR has a long interest in LSYN and stands to realize gains in the event that the price increases. All opinions expressed herein are subject to change without notice, and SOR does not undertake to update this report or any information described in the report. Read our full disclaimer at www.secondorderresearch.com