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Synacor Inc. (SYNC), a provider of online content to various telecom and electronic companies, reported its results for the third quarter yesterday, after the market closed. Since the earnings release, the stock has dipped by 4%. In our last report, we mentioned that despite impressive growth in revenues, the stock has a limited upside potential, as much of its growth has already been priced in. On the basis of the latest released results, we reiterate our previous stance.

The company ended the quarter with yet another double-digit growth in revenues. In the quarter, it generated a staggering 18% growth in its overall revenues; however, that growth in revenues failed to trickle down to its bottom line, which shrunk by approximately 50%. The company's earnings dropped to $0.7 million; SYNC reported earnings per share of $0.02 as compared to EPS of $0.07 a year ago. It seems like the company's growth in revenues and earnings is slowing down, and is evident from viewing its results for the previous few quarters. In the second quarter, SYNC's revenues jumped by 60%, while its earnings grew by 50% YoY. Moreover, the company hasn't provided any positive earnings surprise since the first quarter, and to make things worse, its earnings have dropped for the first time since its IPO in the first half of the year.

The company derives the majority of its revenues from search and display advertising, which has shown sound growth over the last few quarters; however, it is apparent that growth is slowing down. In the second quarter, revenues from search and display advertising grew by 70%, and by the end of the third quarter, that growth has slowed down to 24%. Moreover, subscription based revenues have tumbled too for the first time, decreasing by approximately 2% over the third quarter of 2011.

Key Business Metrics

The company has identified three business metrics against which its operational performance can be judged; these are unique visitors, search queries and advertising impressions. The company averaged 20 million unique visitors per month in the third quarter, more or less flat on a sequential basis. Deterioration was also seen in the total search queries, which declined to 234 million as compared to the 238 million search queries in the second quarter, representing a 2% decline. Growth was only seen in the advertising impressions, which grew to 11.6 billion as compared to 8 billion in the third quarter of the previous year.

Overall, the company's quarterly results were disappointing, despite the growth in revenues, as it didn't produce a similar growth in earnings due to higher costs arising from its revenue sharing arrangements with its customers, which include Verizon (VZ) and CenturyLink (CTL), among a few others. Research and development expenses incurred related to the maintenance of its technological platforms, as well as general and administrative expenses, also played a part in the company reporting lower earnings. Both research and development and administrative expenses jumped up 25% and 47%, respectively, in the third quarter.

Guidance Cut

At the end of the second quarter, the company announced that it expects revenues for the full year to be in the range of $123 million-to-$126 million; however, it has now cut its guidance, and is expecting revenues to be in the range of $120 million-to-$122.8 million, which further confirms our opinion that the company's growth in revenues is not sustainable.

The stock is down 56% since our last report on SYNC. SYNC is trading at 18 times its forward earnings, which is a premium of 50% and 100% over its peers Digital River Inc. (DRIV) and Web.com Group, Inc. (WWWW). On an EV/EBITDA basis, the stock looks overvalued as well, with an EV/EBITDA of 14x as compared to DRIV's 3.2x.

Source: Sell Synacor: A Story Of Slowing Growth And Expensive Valuations