Synacor: EBITDA Guidance For 2014 Below Expectations

Mar. 7.14 | About: Synacor (SYNC)

Summary

Synacor trades at an unattractive 11x EV/EBITDA driven by a disappointing 2014 business outlook of $2-5 million EBITDA versus analysts' consensus of $8 million.

Deterioration in key business metrics: unique visitors, search queries and advertising impressions.

Growth potential in mobile and international expansion, notably China.

Editor’s Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Inspired by the possibility of Verizon expanding its online TV services, I researched further into Synacor (NASDAQ:SYNC), whose software is utilized to support FiOS' existing TV Everywhere services. Below I share both the pros and cons of investing in SYNC.

Company Description

SYNC provides web portals for cable and telecom operators. SYNC generates approximately 50% revenues from search, 30% from advertising, and the remaining 20% from subscriptions. SYNC provides the authentication services for its cable partners by verifying the subscriber ID with the cable operator's subscriber database.

Stock Repurchase

With $36.4 million in cash and cash equivalents at the end of fiscal 2013, SYNC announced that it would repurchase up to $5 million of its outstanding common stock, which represents around 6.5% of total outstanding shares. This shareholder-friendly policy will help to alleviate some downward pressure resulting from the weak guidance in 2014.

2014 Business Outlook

The following is from the 4Q 2013 earning release:

  • Fiscal 2014 Guidance: Revenue for the full year of 2014 is projected to be in the range of $100.0 million to $105.0 million. For the full year of 2014, the company expects to report adjusted EBITDA of $2.0 million to $5.0 million.

2014 revenues are well below the Capital IQ consensus of $117.17 million, and 2014 adjusted EBITDA is below analysts' consensus of $7 million. This sub-par guidance drove SYNC to decline more than 10% after hours in Wednesday trading.

Deterioration in Key Business Metrics

Another excerpt from the 4Q 2013 earning release:

For fiscal 2013, Synacor averaged 19.8 million unique visitors per month, compared to 20.4 million in fiscal 2012. Search queries were 712 million for fiscal 2013, compared to 968 million in fiscal 2012. Advertising impressions were 41.0 billion, compared to 42.2 billion in fiscal 2012.

Combining these declining business metrics with below expectation 2014 revenues forecast, no doubt some investors have decided to hit the sell button before asking any questions.

Nevertheless, there are some pros left for SYNC investors below:

Investors May Underestimate the Impact of R&D investment

YTD 2013 2012 2011 2010 2009
Research and Development 21.6 25.6 20.2 18.5 13.6
Click to enlarge

Source: MSN Money

In the past five years, SYNC has already invested around $100 million in R&D. However, SYNC is valued at around $40 million on an Enterprise Value basis. In other words, prospective investors pay 40 cents on a dollar to buy all the R&D efforts paid by SYNC.

In addition, the significant R&D investment helps to create a great competitive advantage for SYNC to remain a leader in TV Everywhere services. This is a high-growth industry as more and more people would like to access their online TV programs anytime and anywhere.

Growth Opportunity in Mobile

SYNC targeted the mobile platform for its future growth. That is why it acquired Teknision, an Android development platform company, to extend its presence in mobile and provide a platform for developing custom Android launchers and intelligent home-screens for mobile and consumer electronics companies. I believe that this is the right strategic move to expand into mobile.

Time to Leverage the R&D Investment

The management team has already announced its intention to expand overseas, particularly in China. The following is an excerpt from the presentation at Noble Financial Capital Markets' Tenth Annual Equity Conference:

More advertising, especially video, is a great opportunity for us and frankly international is really a greenfield for us. We've got a fairly small amount of revenue coming from outside the U.S. today. We announced a joint venture earlier in 2013 in China. And as our partners over there said the first time I met with them everything that works in the U.S. works in China except it's 10 times bigger, but it takes a lot longer.

Have already invested $100 million in R&D, it is time for SYNC to leverage its technological lead in TV Everywhere in order to generate more advertising revenues in the international market. As the R&D budget will be spread against a bigger revenue base in the future, the profit margin should expand.

Valuation

Taking the mid-point of 2014 adjusted EBITDA announced today, SYNC is valued at about 11x EV/EBITDA. On a P/E ratio, SYNC is valued at 28x. Currently, both EV/EBITDA and P/E do not indicate much value for prospective investors.

Bottom Line

Although I found that Renaissance Technologies held 227,300 shares as of December 31, 2013, while previous analyst consensus EBITDA of $8 million made the investment reasonable, yesterday's released 2014 guidance of $2-5 million EBITDA drove investors to dial down their bullish assumptions. Based on the revised unattractive valuation of SYNC, investors should be wise to stay on the sideline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.