Activism Could Rescue Value For Shareholders Of Fast Growing Liberated Syndication
Summary
- Liberated Syndication is a leader in the fast growing world of podcasts and quickly growing top line revenues at an organic 4 year CAGR of 15%.
- Gross margins have been stellar, and the business has the ability to generate significant free cash flow with little overhead and capex requirements.
- Management however has a checkered history. With little board independence, insiders are capturing the lion-share of the benefits from LSYN’s success to enrich themselves at the detriment of shareholders.
- As a result, an activist hedge fund has acquired a 6% stake in LSYN and is proposing the replacement of all four members of the board.
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LSYN is a leader in a fast growing industry with great financial results
Liberated Syndication (OTCQB:LSYN) is a little heard of micro-cap stock that trades OTC. They are a leading host/distributor of podcasts, and according to their latest investor presentation, they have a 28.2% share of the top 400 podcasts as of August 2018, the largest of anyone in the industry. Edison Research has an excellent report on podcast consumers that highlights the ongoing growth in podcast listeners and the continued expansion of the industry.
Percent of US population over 12 that listen to podcasts monthly:
Source: Edison Research
Percent of US population over 12 that listen to podcasts weekly:
Source: Edison Research
LSYN was an early entrant into the field and has been well positioned to take advantage of these trends. Their organic revenues have grown 25% on average since 2015 with a 5 year CAGR of 15%.
Source: S&P Cap IQ
The jump in revenues in 2018 is a result of the acquisition of a web hosting firm, Pair Networks, Inc. The total purchase price was $16.12mm and the operations contributed $9.37mm to 2018’s revenue. The below graphic from LSYN’s Q1 2019 investor presentation breaks out the firm’s sources of revenue after the Pair acquisition.
Source: LSYN Q1 2019 Investor Presentation
The podcast and web hosting platforms operate under a similar business model. LSYN offers a range of options for companies/individuals interested in publishing a podcast/website. These options have different monthly prices based on the publisher's needs and can range from $5-$75 a month for basic podcast packages, $99-$249 a month for "pro" podcast packages, and $5.95-$1k a month for web hosting.
Source: LSYN Q1 2019 Investor Presentation
LSYN hosts many of the most downloaded podcasts, such as The Joe Rogan Experience, along with podcasts that are published by well known corporations such as Forbes, ebay, and Thomson Reuters. By nature, these revenue streams are recurring. Given LSYN is an industry leader, so long as the public consumption of podcasts continues to increase and organizations in turn continue to create their own podcasts, LSYN's growth in monthly fee revenue should continue as well, although it should inevitably slow from the historical 20% annual rates. Per Q1's investor presentation, web hosting revenues from the Pair acquisition had grown at a slower but still respectable 5.4% in FY 2018.
Gross profit margins have averaged 74% since 2015 and have been growing. Combine this with the fact that a relatively light amount of SG&A is actually needed to run the operations of this business and you have a company that has been very profitable and also generates a great amount of free-cash flow.
Source: S&P Cap IQ
As of the end of Q1 2019, LSYN was reporting $12.5mm in cash on the balance sheet against $7.9mm of debt that is related to the Pair acquisition. They have historically carried a cash balance closer to $5mm, which is about what they would have if they completely paid off all outstanding debt. Management stated on their latest earnings call that they value the added flexibility provided by carrying a higher cash balance and could use the liquidity to pursue investments in growth and acquisitions. LSYN carries no other major liabilities and as the Capex amounts in the table above show, the amount of investment needed to sustain this business is very light. In short, LSYN has ample liquidity and cash flow generation to sustain their business, pursue growth, and even return funds to shareholders if they decided to (more on treatment of shareholders shortly).
Management’s red flags and excessive compensation
Based on the financials alone, LSYN would seem to be an extremely compelling buy. But once you dig into the background on the company and management, serious red flags quickly emerge. The story is long, but the short version is that LSYN was spun-off from a now defunct public company called FAB Universal Corp. FAB was created in 2012 via a reverse merger between Hong Kong based Digital Entertainment International and Pittsburgh based Wizzard Software. Ultimately FAB was delisted after it surfaced that the company failed to disclose a $16.4mm Chinese bond issuance, “certain deficiencies” with regard to their accounting policy were discovered, and their China based chairman was detained by authorities in China. The podcasting portion of the business was spun-off and as a result LSYN became the public company it is today. The CEO, CFO, and all four board members (the chairman of the board being the CEO) are all the very same individuals that presided over FAB Universal (excluding the China based chairman).
Since LSYN’s spin-off, it has proven to be a very successful company operating in a niche space. The problem is that this management team seems to have little accountability to shareholders and has awarded themselves an astounding amount of cash and share based compensation. These actions finally received a response from the hedge fund Camac Partners, LLC which owns 6.035% of LSYN’s outstanding shares.
Activist calls for the removal and replacement of all LSYN board members
In April of this year, Camac called for a special shareholder meeting to discuss various proposals, with the headline proposal being the replacement of all members of LSYN’s board of directors. This document provides an excellent background along with Camac’s issues concerning management and the board, and I would encourage anyone interested in LSYN to read it along with this letter to shareholders dated June 12th. Their complaints on insider compensation are particularly lucid:
- “Runaway executive compensation: In 2019, Christopher J. Spencer, Libsyn’s chief executive officer, is slated to receive a $400,000 salary and an $800,000 bonus, and John Busshaus, Libsyn’s chief financial officer, is slated to receive a $350,000 salary and a $700,000 bonus. This amounts to over 59% of Libsyn’s 2018 income. We believe that these amounts, which are in addition to numerous equity grants totaling millions of shares, are wildly disproportionate for a company of Libsyn’s size. It does not appear that Libsyn or the Board uses an independent compensation consultant—a standard practice when setting executive compensation.”
- “Massive dilution: Since April 2017, the Board has approved multiple massive stock awards to insiders. If vested, these awards would have the effect of diluting Libsyn’s original public stockholders by almost 50 percent. These awards represent a wholesale transfer of value from stockholders into the pockets of Libsyn management and directors. Further, the Board has recently taken a number of troubling actions to permit the vesting of certain awards where Libsyn management had not met the applicable performance thresholds, and extend the time to achieve the thresholds for other awards.”
This dilution is extraordinary. The current management team and board went from holding less than 2% of shares outstanding to 27.87% currently. All from potentially awarded stock compensation and none from actual purchases. Camac needs 25% of shareholders to vote in favor of this special shareholder meeting in order to move forward to next steps on their proposals.
Conclusion
LSYN has seen stellar revenue growth and financial results. Management no doubt deserves some credit for this success. However, there is a lack of accountability to shareholders and without forced change I would expect more acquisitions that would in turn be used to justify higher compensation and bonuses for management as SG&A continues to creep higher. The extreme dilution from excessive stock awards to management has been detrimental to shareholders. Camac’s initiatives face an uphill battle given insiders account for nearly 28% of voting shares, but even if they can prove to be remotely successful in improving board accountability, LSYN has the potential to share successful returns with all shareholders.
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Disclosure: I am/we are long LSYN. 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.