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Based in Buffalo, New York, Synacor (NASDAQ:SYNC) scheduled a $75 million IPO with a market capitalization of $282 million at a price range mid-point of $11 for Friday, February 10, 2011

SYNC is one of nine IPOs scheduled for this week (see our IPO calendar).

SUMMARY

It looks like Synacor (SYNC) has established a critical mass in an emerging area: packaging and bundling content and services from content providers to branded Internet customers who have large customer bases.

SYNC provides this private label, "white box" behind the scenes services to companies who want to offer a broad range of steaming internet content, to compete with Google (NASDAQ:GOOG), Hulu, Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and others.

OBSERVATIONS

After a string of yearly losses SYNC finally achieved modest profitability in the March 2011 quarter, with significant sequential revenue increases in the September and December quarter respectively of 23% and 20% (quarter over quarter) to $29 million and $24million respectively.

CONCLUSION

Without taking the quarterly improvement since December 2010 SYNC seems overpriced. However, if the rate of top line revenue increases continues and SYNC continues to show quarterly profits the stock could do well over time.

We are, therefore, favorably inclined towards SYNC, although would not be surprised to see it price below range or at the bottom of the price range.

One drawback to an higher valuation is that SYNC does not have end user branding under its own name.

BUSINESS

Synacor's mission is to ensure that its customers are increasingly valuable to their end-consumers.

Synacor's customer-branded, integration and authentication platform enables cable, satellite, telecom and consumer electronics companies to deliver digital entertainment, services and apps to their own consumers, thereby strengthening those relationships while monetizing engagements.

With 45+ customers, 21 million high-speed Internet households, 81+ million average monthly search queries, 2.8 billion average monthly advertising impressions, and 70+ content partnerships, Synacor delivers a compelling consumer experience across multiple devices.

REVENUE MODEL

SYNC's customers direct consumers to their branded websites, which comprise the consumer-facing components of SYNC's platform, where consumers have access to the online content and services available to them at their respective subscription levels.

SYNC monetizes the online traffic generated by these consumers through search and display advertising. The company also charges fees for value added services delivered through SYNC's platform.

TRAFFIC STATS ARE UP

SYNC has historically experienced growth in the number of consumers whose online traffic can generate search and display advertising revenues through SYNC's platform.

The number of these consumers who are subscribers through SYNC's high-speed Internet customers has increased from 5.2 million in December 2006 to 9.5 million in December 2009 to 21.8 million in December 2011.

These subscribers, along with other consumers, such as those attributable to SYNC's consumer electronics manufacturer customer, have driven a 127% increase in average monthly unique visitors to customers' websites, a 118% increase in average monthly search queries by consumers on SYNC's platform and a 77% increase in average monthly advertising impressions, each on a comparative quarterly basis from the first quarter of 2010 through the end of 2011.

MARKET OVERVIEW

According to a June 2011 report published by PricewaterhouseCoopers LLP, or PwC, from 2006 through 2010, high-speed Internet penetration (measured on a household basis) has increased substantially both within the United States and globally, from 46% and 18% to 69% and 34%, respectively.

This represents an increase from 50 million subscribers with high-speed Internet to 79 million subscribers in the United States, and from 248 million subscribers to 490 million subscribers globally. Individuals are spending more time online driven by a growing selection of online services, higher bandwidth speeds, the increased amount of content available online and the societal shift towards virtual socialization.

FASTER, BETTER, CHEAPER

High-speed Internet service providers have continuously upgraded their networks in recent years, providing users with significantly faster connection speeds and enabling online access through multiple types of devices, thus reinforcing and enabling the growth in Internet usage.

These higher speeds and increased number of platforms have resulted in an increased number of services available online. In addition, the proliferation of new types of connected mobile devices, such as smartphones and tablets, has enabled consumers to increase the amount and type of content they consume online. Rapid innovations in technology have made it possible for users to easily transition between smartphones, tablets, laptops and desktops, thereby significantly increasing the total amount of time spent online and the quality of the viewing experience.

TRENDS

SYNC's customers, who are predominantly high-speed Internet service providers that also offer television services, are facing increasing competition from companies that deliver video content over the Internet, more commonly referred to as "over-the-top," or OTT.

These new competitors include a number of large and growing companies, such as Google , Netflix , Hulu, and Amazon . With the increased availability of high-speed Internet access and over-the-top programming, consumers' video content consumption preferences may shift away from current viewing habits.

As a result, many of SYNC's customers and potential customers are compelled to find new ways to deliver services and content to their consumers via the Internet. SYNC expects this pressure to become even greater as more video content becomes available online. SYNC expects to continue to benefit from this trend as customers adopt the platform to package and deliver video programming and other related authentication services on their own branded websites.

Another trend is the proliferation of Internet-connected devices, especially mobile devices. Smartphones, tablets and connected TVs have made it more convenient for consumers to access services and content online, including television programming.

To remain competitive, SYNC's customers and potential customers must have the capability to deliver their services and products to consumers on these new devices. SYNC's platform enables them to extend their presence beyond traditional personal computers, and we expect that a significant portion of our revenue growth will come from traffic on these devices.

SYNC's platform creates a revenue stream for its search advertising partner, Google, and SYNC's advertising network partners, who provide SYNC with advertisements and share in the fees generated by those advertisements when SYNC deliver them with search results and other content on customers' websites.

COMPETITIVE STRENGTHS

SYNC provides a white-label solution that, unlike the co-branded approach of most of competitors, creates a consumer experience that reinforces customers' and partners' brands.

SYNC gives customers control over the sign-on process and billing function for a wide range of Internet services and content by integrating with their internal systems (where applicable) thereby allowing SYNC customers to "own the consumer."

SYNC allows each customer to fashion websites that are specifically tailored to their desired "look and feel."

COMPETITION

SYNC faces competition at three levels:

  • When a prospective or existing customers considers another supplier, including one of SYNC's partners, for elements of the services or products which SYNC provides.
  • When consumers choose to rely on other vendors for similar products and services.
  • When content and service providers prefer to establish direct relationships with one or more of SYNC customers.

In addition, SYNC competes with companies such as Facebook, Yahoo! (NASDAQ:YHOO), Google, AOL (NYSE:AOL) and MSN (NASDAQ:MSFT), which have destination websites of their own or are capable of delivering competing platforms with content and service offerings similar to SYNCs.

SYNC also competes with providers of paid content and services over the Internet, especially companies with the capability of bundling paid content and value added services in much the same manner as SYNC.

These companies include ESPN3, F-Secur, Exent Technologies, Zynga (NASDAQ:ZNGA), MLB Advanced Media, Symantec (NASDAQ:SYMC), McAfee, Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA).

In some cases SYNC has performed software integrations with these companies on behalf of customers or, as in the case of F-Secure and Exent, SYNC has partnered with them in order to offer their services more broadly to all of SYNC's customers.

EMPLOYEES

As of December 31, 2011, SYNC had 260 employees in the United States and 1 employee in the United Kingdom

USE OF PROCEEDS

SYNC expects to net $53 million from the IPO by selling 5.5 million shares. Stockholders intend to sell 1.36 million shares. SYNC intends to use the IPO proceeds for working capital and other general corporate purposes

Source: IPO Preview: Synacor