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Synacor Inc. (SYNC), a provider of online content and services to various telecom and electronic companies, reported its second quarter results on July 25, 2012. After announcing the results, the company's stock dipped over 10% in after-hours trading. In a previous piece on SYNC, we recommended a short position on the stock, and we reiterate our previous stance supported by the 19% drop since we last discussed the company.

SYNC posted earnings of $1.2 million, compared to $0.6 million in 2Q2011, which represents a 50% increase. Revenues in the quarter rose almost 60% to $30.8 million from the previous year's quarter. Despite the impressive increase in both revenues and earnings, the company was unable to give any meaningful earnings surprise, unlike the first quarter, when the earnings surprise came in at almost 30%. The table below sets out the actual results versus the consensus expectations.

  

SYNC 2Q2012 Results

  

Actual

Expected

Change (%)

Revenues (million)

$30.8

$30.7

0.3

EPS

 

$0.04

$0.04

0

The company derives a majority of its revenues from its Search and Display advertising, which has experienced staggering growth since the company's IPO in February. An increase in the number of end consumers for its clients, like CenturyLink (CTL), is helping boost the company's revenues. In the second quarter, the company generated $25.4 million of revenues through its Search and Display advertising business, which is an improvement of almost 70% from the same quarter of the previous year.

The company's other revenue source, subscription-based services, saw an improvement from the prior year quarter as well, generating $5.4 million in revenues, up almost 20% from 2Q2011. The company has identified three key business metrics relating to internet usage, search and advertising, against which its performance can be analyzed, namely unique visitors, search queries and advertising impressions. In the quarter recently ended, all three metrics improved compared to the previous year's quarter, as indicated by the table below.

  

2Q 2012

2Q 2011

Unique visitors

20m

14m

Search queries

238m

154m

Advertising

10b

6b

impressions

  

Despite the improvement in all key metrics for the company in 2Q2012, as compared to 2Q2011, advertising impression is the only metric that showed an improvement compared to the first quarter of the current year, while search queries and unique visitors both dropped sequentially.

  

2Q 2012

1Q 2012

Unique visitors

20mn

21.3mn

Search queries

238mn

277mn

Advertising

10b

8.5b

impressions

  

Going forward

The company has already warned that with the introduction of smartphones and their increasing usage, its largest revenue source (Search and Display advertising) can be adversely affected. Currently, the company depends on customers using the internet on their computers. As more and more consumers switch to using the internet through their smartphones using applications other than internet browsers, its sales could be adversely impacted. It is probable that the rise in smartphone users has led to the sequential quarterly decline in the total search queries and unique visitors. As at June, 2012, SYNC had only 45 customers, and out of the 45, only four customers (Verizon (VZ), Toshiba, CenturyLink, Qwest (Q)) accounted for more than 70% of the company's revenues. This overdependence on a small customer base, as well as possible loss of business from any of the above mentioned names, could potentially affect the company's profitability.

Overall, SYNC's quarterly results were impressive, with improvements seen in revenues, EBITDA and earnings. However, since we last analyzed the company, its stock has dropped almost 19%. In our previous discussion, we mentioned the stock's strong performance since its February IPO, however, we also suggested that much of the growth that the company has shown has already been priced in. Perhaps the most disappointing feature of its quarterly results announcement was its third quarter guidance being below analyst estimates. The company announced that it expects full year revenues to be near the low-end of the $123 million-$126 million range, and quarterly revenues to be between $28 million-$28.5 million. Full year and quarterly revenue expectations were $125.3 million and $30.6 million.

The stock is trading at a forward one year P/E multiple of 34x, which is at a premium of 177% and 270% over its peers Digital River Inc (DRIV) and Web.com Group, Inc. (WWWW). Moreover, SYNC's EV/EBITDA (38x) is also at a hefty premium to DRIV's 3.77x.

Source: Synacor's Growth To Fade As Users Switch To Smartphones