Liberated Syndication (LSYN) – cheap, growing, with catalysts on the horizon
Liberated Syndication (disclosure: long) is most likely not a secret among investors, as the growth of the podcast industry has forced everyone to pay attention to the relevant players. However, the opportunity here appears to be ‘hiding in plain sight’ as LSYN is a solid business that generates a lot of cash, has historically reported earnings well below what I believe to be the true earning power of the business, cleaned up much of the ‘hair’ around the company, and is now at what I believe to be an inflection point. With increased IR efforts in place to help communicate the story, a right-sizing of the cost structure, and continued market share gains as the leading podcast hosting platform in the industry, investors could see the stock rise significantly within the next 12-18 months.
However, all of that aside, investors are currently able to buy shares of this recurring revenue business, growing the top line 20%+, at a low double digit multiple of free cash flow. Investors should do well if LSYN just continues to execute, but with a defensible competitive position, new management team, and multiple catalysts on the horizon, we could see the opportunity for higher revenue growth, margin expansion and multiple expansion. Although LSYN doesn’t quite have the SaaS level of growth rates to garner a 10x revenue multiple (or 30x FCF multiple), the company trades at a discount to every relevant SaaS peer in addition to recent podcast industry M&A transactions that typically take place at 4.5-7x revenues. Oh, and unlike Anchor, Megaphone and Wondery, LSYN is profitable, and highly cash generative.
While Libsyn’s installed podcast base, net cash balance sheet, 80% gross profit margins and higher than necessary SG&A costs would provide plenty of strategic and financial value to an acquirer, absent M&A, this is a solid business that will continue to generate cash into the foreseeable future with the potential to reach $10mm+ in FCF in the next 12-18 months. With an enterprise value of around $95mm, 9.5x FCF is way too low for the industry leader, growing podcast revenue 20%+ with strong competitive positioning, high margins and a clean balance sheet.
In addition, investor excitement (as well as ability to analyze) the name has been dampened given no analyst coverage or sell side reports, limited IR efforts or desire to communicate the story, and until very recently no conference calls or guidance given by the old management team. While the stock has fared well over the past five years, I would have been incredibly frustrated with the old management team if I were a shareholder during that period. I’d argue that the business performance and share price appreciation under the former management team is reflective of LSYN’s business quality and strength of their competitive positioning. This should bode well for future results as a new – and hopefully better – management team takes aim at growing shareholder value.
The opportunity exists due to the company’s small size, lack of analyst coverage, historical issues in the C-suite, elevated costs relative to the size of the business, and a recent acquisition that left investors with a bad taste in their mouths. Over the next year, as one-time elevated costs roll off the income statement, a new CEO is put in place and the company has the option to plow free cash flow into growing their core podcast hosting business, I expect shares to re-rate higher with the potential to compound in value over the next several years.
I like the setup here, as Libsyn is a good business with a strong competitive position growing their core offering 20% per year on the back of favorable industry tailwinds. Historically the business was managed by people who paid themselves too much and under-invested in sales, marketing and advertising offerings. As a new CEO is put in place and growth continues, it shouldn’t take much for LSYN to continue to generate cash, put excess capital to work, and re-rate in line with some SaaS businesses which includes M&A deals taking place in the space. In addition, you aren’t paying much for the business today or future growth potential, nor are you paying for any uptick in ad revenue if LSYN can figure out how to scale their advertising platform. In addition, there are incentivized parties who have done a lot of work to right the ship here, and who own a lot of equity wanting to see a good outcome for the business. The major risk is that we are at ‘peak podcasting’ with growth set to slow over the next few years, and bigger more powerful platforms (Spotify) set to take much more share and become the host of choice for new producers. If all goes well I believe there is the opportunity here for revenue growth, margin expansion and multiple expansion in addition to acquisition potential. Lastly, near term catalysts for the share price include increased IR efforts and investor communication (including the disclosing of unit economics) and a potential uplisting from the OTC exchange.
Let’s get into the business.
Libsyn is a podcast hosting platform that provides a number of services to podcast hosts, creators and producers. In general, podcast hosting services:
Create an easy method to upload audio files
Generate an RSS feed to describe the files as well as establishes file locations for download
Distributes your podcast RSS feed to iTunes (Apple Podcasts), Google Podcasts, Spotify, Stitcher, and more
Provides a server where listeners can go and find the audio files
Another way to look at hosting is it serves as a vehicle that transports the show from its upload to its storage to its distribution and finally to its analytics as well as potential money-making opportunities. The host helps simplify everything in the creation and management process.
Libsyn is one of the most established businesses in the podcast industry with a focus on podcast creators, and providing the tools necessary to help podcasters improve listener engagement. Libsyn was founded in 2004, and was the first company to offer storage, bandwidth, RSS creation tools, and distribution in a single platform. In 2019, Libsyn delivered over 6.2 billion unique podcast downloads. Today, the Company is one of the largest paid hosting platforms with over 70,000 podcasts in their network.
Libsyn generates the majority of revenues from podcast hosting fees (76%), advertising revenue (4%) and the balance being made up of LibsynPro hosting and bandwidth fees (17%) and app subscriptions (3%). Libsyn has seen the number of podcast shows hosted on their platform grow quite fast, from 28,000 in 2015 to over 70,000 today which has allowed them to post an 18% revenue CAGR since 2016 in their core podcast hosting platform. From 2018-2019, podcast hosting revenue grew 24% year over year on the back of increased listenership, new show creation and strong customer subscription growth.
Libsyn also consists of an acquired business, Pair Networks, which is a website hosting and domain registration company that dates back to the dot com boom. Pair was responsible for 40% of LSYN revenues during FY19. Until recently, Pair Networks revenues were in decline (they are not even in the top five when it comes to web hosting businesses), but they do generate a decent amount of cash, and LSYN prior management didn’t pay too much for the company, with the acquisition taking place at less than 6x EBITDA. More on Pair below.
As a quick background, LSYN was spun off from FAB Universal – a digital media distribution company – in 2016. At a high level, FAB was going through some issues at the time including accusations of fraud in one of their Chinese subsidiaries, and the spin was conducted in order to isolate Libsyn from the rest of the business. Prior to the spin, Libsyn had pro-forma net income of around $3.0mm on revenue of $7.2 million in 2015. Information about the spinoff can be found here, and plenty has been written about FAB over the past few years, so I’ll spare you the details. Following the spinoff, CEO Chris Spencer and CFO John Busshaus, also FAB executives, transitioned to running Libsyn full time. Both execs have been historically over-compensated, and did very little to help drive the business forward since the spin, in part contributing to the current undervaluation. One funny anecdote from 2018 is that following a very strong Q3 for the business, management stated that they did not hold a Q3 conference call because “there was nothing new to say”. They were similarly surprised the stock was trading so weakly, and offered their view on what might change…They said: “We thought investors would see the cash build up.” These are the guys who were holding the dominant podcast hosting platform in their hands during a period of explosive industry growth! Not great. Compensation for CEO Chris Spencer and John Busshaus during 2015 was $800k and $700k. Both have since left the company, which is part of the reason for the current opportunity.
While none of the podcast hosting platforms (and there are plenty) possess any real competitive advantages (free options, low barriers to entry etc.), LSYN has at least developed an entrenched competitive positioning due to their first mover advantage as an early podcast hosting platform. Most of their early user growth was a result of word of mouth and referrals for those in need of a reliable platform, and a few well-known users such as Rob Walch built a community of people who now help new users grow their shows and audiences, hold big industry events, and offer plenty of resources to producers and creators. While Spotify is attempting to become the new platform for all things podcasting, conversations with industry insiders point to LSYN still holding a commanding lead in terms of being the preferred hosting platform. In addition, there do remain some high switching costs in the form of embedded code tied to a show’s website. Most podcasts with greater than 50 shows (let’s call that a baseline for active creators / staying power), have websites and a social media presence that would all have to be re-created following the move to another hosting platform. While it remains easy to switch hosting platforms in a vacuum, it would be difficult and frustrating to re-create all that code, social media posts and website details (where an audio player could be embedded from the hosting platform). What’s more is that LSYN remains competitive on pricing, even for their Libsyn Pro platform, so for shows doing well and making some money, they are unlikely to factor in high costs as a reason to switch hosting platforms.
I’d love to get into the unit economics of subscribers, but unfortunately they aren’t and have never been disclosed. This is something I believe the company is actively working on, and I’d imagine the CEO search is being centered around someone who understands the importance of these metrics and how to communicate them. For what its worth, churn remains very low, and conversations with customers point to this as well.
While no one has quite figured out a way to scale podcast advertising just yet (Megaphone has an effective ad-insertion tool which is part of the reason Spotify scooped them up), Libsyn gave this side of the business a shot in 2016, probably a little bit too early in hindsight. Many now believe the technology is available for hosts to scale their monetization efforts and advertising tools, and although advertising represents less than 4% of Libsyn’s revenue, this could be part of their plan moving forward.
While there are some who may point to ‘peak podcasts’ in 2020 (there are over 800,000 podcasts after all), I would argue that there still remains a decent percentage of the population that hasn’t discovered the world of podcasting (either as a listener or show creator). From 2012 to today, the industry has seen an explosion in new listeners from 29% of the US population to over 50% today (or 150mm-ish people). The distribution method has changed rapidly as well, where podcast downloads via smartphones made up 43% of downloads in 2012, and today make up over 90%. The ease of access and convenience have contributed to the growth in listeners, and I’d argue that the growth can continue as more people discover shows they enjoy and have them ready to go at their fingertips (in a recent survey titled ‘The Podcast Listener in 2019‘, Edison research surveyed over 4,000 people, 35% of which said the reason they don’t listen to podcasts is because they don’t know where to find them or aren’t sure how to listen to them). In addition, the lower penetration rate leaves room for additional podcast creators and listeners moving forward.
Aside from a slight dip in 2013, the number of podcast listeners in the US has pretty much been on the rise for more than a decade. A recent survey by Statista conducted in 2019 found that more than half (51 percent, to be exact) of consumers above the age of 12 in the US listen to podcasts. That’s a massive jump from the 44 percent registered in 2018, which is the biggest increase (in terms of percentage points) from the 13-year period from 2006 to 2019. This is also more than double the number of podcast listeners (22%) there were a decade ago in 2009.
Libsyn’s recent partnership with Gaana, one of India’s largest music streaming services with over 150 million active users is another good example of how distribution can increase moving forward with Gaana listeners now having access to all 74,000 shows hosted by Libsyn. As mentioned above, Spotify has made it their mission to shift consumer listening preferences toward podcasts, by making some very large and attractive acquisitions in the space consisting of media companies (The Ringer), podcasts (Joe Rogan Experience), hosting companies (Anchor) and most recently Megaphone. I’m going to go out on a limb and say that this is a bullish view of the podcasting industry moving forward.
Notably, ad spending on podcasts grew 48% year-over-year in 2019 and is expected to grow at a CAGR of 23% through 2022, with several industry analysts estimating over a billion-dollar advertising market for podcasting by 2021, a large addressable market that has only recently emerged.
The podcast hosting space – like website hosting – is competitive and consists of low barriers to entry for new shows and plenty of free options for podcasters available. Some of the more well-known podcast hosting platforms including Anchor and Soundcloud have gained their share of the market over the last few years (with Anchor dubbing themselves ‘the easiest way to start and record a podcast) but the comparisons of share and new podcast growth isn’t exactly apples to apples.
Libsyn has more top 400 shows – made up of mostly professionals interested in paying more for professional hosting services – than any other podcast hosting platform. In fact, Anchor and Soundcloud are notorious for capturing new and early stage podcasters, but Libsyn measures their data by shows that have recorded at least one new episode within the last 90 days. In addition, conversations with podcasters and industry insiders all point to the idea that these free and less sophisticated platforms aren’t the best options for users as they scale. Scale, and big shows are what a podcast host really wants as they drive the majority of subscription revenue.
In addition, despite a large amount of competition springing up from both paid and free services, Libsyn has still been able to maintain their high growth rates and low churn given the stickiness of their platform and relatively high switching costs as a podcast creator.
I read a writeup from a few years ago about Libsyn that stated: ‘management is the biggest risk to this stock in my opinion.‘ I had to laugh at the truth in that statement, but I think today it’s partly why the opportunity exists. I’ll just come out and say that this stock would have been untouchable for me under the former management team. In addition to many other negatives, prior to LSYN being spun off from FAB Universal in 2016, the former CEO and CFO Chris Spencer and John Busshaus were in charge of FAB when fraud was discovered within their Chinese subsidiary.
Plenty has been written about the spinoff, including FAB isolating LSYN from an FAB class action lawsuit, former management kicking cash from LSYN to FAB to help pay off creditors, incestual board relationships between FAB and LSYN and the like. I’m happy to answer any questions about these prior incidents, but as mentioned above, will exclude them here for the purpose of brevity.
Basically the former management team came from a business that was committing fraud through one of their subsidiaries, hired their cronies to the board, paid themselves too much money in options and bonuses at the expense of shareholders and profitability, were incredibly difficult to reach for conversations about the business, put little to no strategic thought into what they were doing, never broke out favorable unit economics, held too much cash, limited investor communication and didn’t do anything to take advantage of the strong competitive positioning of the business during a time when secular / industry growth was set to explode. Some pretty low hanging fruit to address by an activist…
Enter Camac Partners and Eric Shahanian.
I won’t re-hash the details here, but at a high level, after a multi-year proxy fight, Camac was able to extract significant concessions from the company as part of their settlement, which can be found here:
Among the highlights, on February 18, 2020 the Company modified and extended the Stock Agreements dated December 28, 2017 for four key employees. The Company modified and extended certain milestones which include the up-listing of the common stock to the Nasdaq or NYSE and increasing the average closing price per share for any 10 consecutive trading days to $5.50 per share. In addition, both Christopher Spencer and John Busshaus were let go (Spencer more recently) opening the doors for a new CEO hire and a push toward strengthening the business, communicating the story and – get this – creating value for shareholders.
As it stands today, Camac has some pretty lofty goals for the business (evidenced by their strategic review ending with the board deciding to continue to grow the core business as opposed to seeking a sale), and my guess would given the amount of work they’ve put in and time it’s taken that they aren’t playing for a 20-30% return.
Libsyn is not the most difficult business to model given their few point gain in market share per year, high teens / low twenty percent revenue growth over the past four years, and somewhat stable EBITDA margins / free cash flow conversion. However, with plenty of operational details up in the air including new CEO strategy and capital allocation, potential increased marketing spend moving forward, and potential tweaks to the product / service and/or pricing, it becomes less straightforward. Having said that, if an uplisting is on the table at some point within the next 12-18 months, and LSYN is granted a market multiple (conservative given their competitive position and growth rates), shares have a path to trade higher than today’s price in the short term.
From a back of the napkin standpoint, if LSYN can grow their podcast hosting revenues at 15% through 2022 (four year revenue CAGR is 18%) on the back of 3% growth in Pair Networks revenues, and can achieve 20% net margins due to reduced SG&A, they should be able to continue generating decent amounts of free cash flow. At the average FCF conversion ratio over the past four years, LSYN should be able to generate anywhere from $8-10mm in FCF for 2022, which would put the multiple around 10-12x FCF. I’d argue – again – this is too low for a business of LSYN’s quality, with the growth, competitive advantages and balance sheet. This is inexpensive for any business, but especially so for a business of LSYN’s quality (recurring revenue, non-cyclical, minimal capex requirements, EBITDA margins of 30.0% and high returns on equity). In addition, I don’t believe any heroic assumptions are being made either. Again, at 15x 2022E FCF, shares would trade north of $5.00, or nearly 40% above today’s prices. While there are no direct comps or peers here, businesses in the internet content and information industries (many with slower growth rates, worse balance sheets and less cash generation) trade at lofty multiples of around 30x earnings and 20x EBITDA. In addition, there remains the potential for increased investor interest and communication of the fundamentals following a new CEO hire, simple disclosures of unit economics, an uplisting and potential buybacks or partnerships to help grow the core business further.
As mentioned above, moving forward, the company should see a large reduction in SG&A as one-time costs (which I estimate to be around $2-2.5mm) roll off the income statement in the form of legal expenses, bonus accruals and severance pay. As a sanity test, G&A was up 40% in 2019 on the back of 10% revenue growth – with none of those expenses stemming from actual operating expenses.
So what about Pair Networks?
In 2017, Libsyn acquired Pair Networks, which as mentioned above, is a domain name registration and web hosting platform. Pair is also based in Pittsburgh, PA and is a 25 year old business founded during the dot com boom that currently has 140,000+ registered domains and competitive web hosting pricing plans. At first glance I figured the idea behind this was to vertically integrate podcast creation and the need for websites tied to the shows. However, upon further examination it appears as though the Pair acquisition was made in part to increase the market cap of the company (by issuing new shares) so that management could hit on some performance bonus targets (Management and the board of directors issued themselves 6.3 million shares of restricted stock in 2017, diluting equity holders by 30%! Some of the awards were tied to an eventual NASDAQ up-listing and some were tied to split adjusted share price targets but 2.7 million shares issued earlier in the year were tied to market cap goals which looked good at first, but could easily be achieved by issuing additional restricted stock for equity compensation (which management did later in the year) and by issuing shares to make an acquisition). Great stuff.
As of FY19, Pair represented around 40% of total revenues for Libsyn and grew about 4.0% YoY, mostly made up of growth in domain registration as Pair website hosting revenues were flat. While the Pair acquisition added a large number of subscribers in 2018, I’m not sure how much a part of the strategy this business will be moving forward. I’d say that if the decline in Pair revenues reverses, that would only help add to the valuation upside.
Advertising revenue currently makes up 3% of total revenues for Libsyn. The company is currently building an automated advertising platform capable of helping podcast creators better monetize their shows. I thought management’s 2019 commentary on the state of podcast advertising and the opportunities that lie ahead was interesting.
From the Q4 2019 call:
“We believe podcast advertising is still in the early stages and has a lot of room to mature and grow. Getting our IAB certification in 2019 was a big step in advancing our advertising initiatives because adhering to an industry standard for measurement gives advertisers confidence in the ROI potential for podcast advertising. Once the ROI measurement and metrics are established, we believe the larger, more consistent advertisers will enter the space. In order to attract the large brand advertisers, we need to offer scale for their campaigns. In order to do this, you have to aggregate a lot of smaller podcasts within — with similar demographics or psychographics to make it worthwhile for the large brands to invest in podcast advertising. Advertisers want to reach a lot of people as easily as possible. If we’re able to do these things, which we are working diligently to accomplish, we can offer our customers a strong monetization opportunity if monetization of their podcast is what they’re looking for, for some it is, for some it isn’t. Finally, in order for us to make it worthwhile to Libsyn, we need to do this in a way where we have an opportunity to grow profits, not just top line advertising revenues, which has long been a problem in the advertising industry for podcasts. In order to scale podcast advertising, we need effective automation. This automation is the foundation of the new advertising system we are building and remain very excited about.”
If the industry is indeed in it’s nascent stages and Libsyn can figure out a way to share in the advertising profits generated from their users, there could be material additional revenue / income potential for the business. I currently assign zero value to this option.
Lower podcast consumption leads to lower ad revenue overall – decrease in new podcast formation. Yet more time at home may mean more people start side projects and as a result, podcasts
Execution risk – no guarantee the company can accelerate hosting growth, ad growth or podcast growth let alone margins
Declines in travel may lead to declines in consumption (planes, trains, cars, at the office etc.)
New CEO doesn’t work
Libsyn has no ad network and doesn’t own any of their content
At the end of the day, LibSyn’s value seems to come from helping independent podcasters generate podcast content for multiple podcast platforms. LibSyn’s value is therefore dependent on continuing to generate content for Apple, Spotify and other platforms. How does vertical integration with a platform creates value for the acquirer? If not, are there better non-platform acquirers?
Similarly, competitors like Podbean, Buzzsprout and Anchor all seem to be growing quickly, while LSYN’s growth has slowed down to 7-8% over the last two quarters
Lack of transparency, calls, pre-vetted questions, no disclosures of unit economics
Accelerated ad spend
Improved coverage / analysts / media