Libsyn (LSYN): CEO’s Departure Makes this Stock Even More Interesting
This is a follow-up article on Libsyn (LSYN). In my initial interest post on the company I talked a little about the fact that company’s CEO was named in an SEC complaint. That complaint was directed at the former CFO of the company and the current CEO of the company. I can now say “former CEO” of the company. Libsyn announced that this CEO was resigning from his position as CEO and also from the board. This was – to me – a very big deal. To the market, it wasn’t. Libsyn stock barely moved on the news. That makes this stock a lot more interesting to me now.
However, the CEO was not the only issue I had with Libsyn. As discussed in my earlier article on Libsyn, I do have some concerns about the company’s level of technological sophistication versus some of its newer competitors. Libsyn has a business model that is probably – most of the other companies in this industry don’t really release any sort of financial info that can give me certainty on this – a lot more durable than competitors. Libsyn has two business segments. One is “Pair”. This hosts websites – especially WordPress websites. It also does domain registration. The other is the namesake Libsyn business. Libsyn’s business model consists almost entirely of collecting revenue in 3 forms: 1) Fees paid by podcast producers (people like me and Andrew), bandwidth fees (again paid by people like Andrew and me based on number and size of downloads of a podcast each month), and premium subscriptions (Libsyn takes a cut of the premium fee – for example the $7.95/month subscription service Andrew and I do – and the podcast producers take the remaining amount). These 3 things taken together account for virtually all of Libsyn’s revenue. It also has some ad revenue – but, this is small.
Competitors like Stitcher – which owns an ad company called Midroll – probably rely more heavily on a combination of ad revenue and premium subscription revenue. Libsyn also does not have a premium podcast network like some competitors. So, something like Stitcher – previously owned by E.W. Scripps, but recently announced to be sold to Sirius/XM – brings in revenue sort of like a hybrid TV broadcaster / cable channel. You pay a certain amount each month for a subscription to Disney Plus, HBO Max, etc. People pay for a “Stitcher Premium” subscription and get access to premium features (like behind a paywall episodes, etc.) of the various podcasts on the network. Libsyn’s tiny amount of “app” revenue (it’s like 3% of recent revenue, maybe as high as 5% in some quarters where ad revenue is real low) comes from specific show-by-show revenue. It comes from taking a cut of people who signed up just for the specific premium content of a podcast like Focused Compounding. So, it is single podcast specific revenue. There are reasons why I think that makes more sense than a paid network. Ad revenue is potentially a very big future source of earnings for any podcast host. However, it is the most economically sensitive part of the podcasting industry. Things like fees paid by podcast producers, bandwidth (basically podcast audience size), and even premium subscriptions are a lot more “sticky” forms of revenue than ad revenue. Ad revenue depends on both the amount of ad spots sold and the pricing of those ads. Recently, podcast listenership has not declined much due to COVID. It’s a mix. Podcasts like the category Andrew and I do – finance / investing – haven’t declined at all. A sports podcast or something like that may be down a bit. It’s category specific. But, it’s not like audience numbers have dropped during COVID. Ad revenue has dropped. Probably by a lot. So, if you are a mainly ad supported podcast hosting company that was already burning cash before COVID – you could be a motivated seller of your whole company. Or, you could need to raise capital in some way. This isn’t necessary for a company like Libsyn.
That’s all good for Libsyn. But, there are downsides to their approach to. One is that they are diversified between two kinds of businesses – podcast hosting and website hosting – that I don’t believe are equally attractive.
Libsyn as a whole is cheap. It hadn’t been paying taxes before. It will be now. But, as I laid out in my earlier article – Libsyn’s EBITDA should convert to FCF very nicely. It’ll be at a really high rate, maybe as high as like 75-80% after taxes. Why?
Libsyn (and sometimes maybe Pair too) is a growing business. It has minimal cap-ex needs. And it generates float as it grows – payments are made to the company in advance of services provided, bandwidth bills paid in cash, etc. As a result, if the business grows 10% or more in a year – there’s a meaningful amount of float. The way EBITDA works is that it does not include float generation. So, you can see that at like a manufacturer Cash Flow From Operations (CFFO) can come in light versus EBITDA while at Libsyn CFFO can be extremely high relative to EBITDA. In other words, every dollar of reported EBITDA at Libsyn is worth more than at a manufacturer. People may overlook this. I’m not sure. Reported earnings suffer from amortization of the Pair purchase. And then float drives CFFO (and FCF) higher versus EBITDA than usual. Therefore, some investors may use either P/E or EV/EBITDA to value Libsyn while I might favor Price/Free Cash Flow.
Of course, if the growth of the company reverses itself, float will run-off in the opposite direction and shrinking FCF will become a much smaller portion of shrinking EBITDA. Basically, if Libsyn grows 10% a year – FCF conversion will be extremely high versus reported EPS. But, this is only if the company keeps growing year after year.
Podcasting itself will – putting ad revenue aside, and ad revenue is unimportant at Libsyn – grow at a nice clip year after year after year. So, FCF conversion at the Libsyn segment of Libsyn should be incredibly strong.
I would estimate that the company’s “true” P/E is about 15 times right now. That’s not really a “forward” P/E either. If the company grows 10% a year, then obviously the forward P/E will be more like 13 or so when the trailing P/E is 15 or so.
The stock is cheap.
Or, at least it would be cheap if Libsyn – the listed company – was 100% Libsyn the podcast company. It’s not. Right now, you are getting a corporation that is about 50% a podcast host and 50% a website host. I have no reason to believe the website host will grow much (or at all) over time.
In its last earnings press release, the company described revenue growth this way:
“Revenue for the full year of 2019 was $24,201,629, a 10% increase over revenues of $22,010,132 for 2018. This reflects an increase in Libsyn4 hosting revenue as well as LibsynPro, with a slight offset by a decrease in the dollars being spent on ad campaigns by advertisers. Libsyn contributed $14,486,211 of revenue while Pair Networks contributed $9,715,418.”
This does not suggest anything good about Pair Networks. The two businesses should not be seasonal. So, it should be possible to go mostly off the last quarter to get an idea of year-over-year revenue growth. In the most recent quarter, the revenue line “podcast hosting” rose 22% year-over-year. Meanwhile, the revenue line “website hosting” rose just 4%. Podcast hosting is bringing in about 1.5 times as much revenue as website hosting. If the current growth rates – 22% a year at podcast hosting and 4% a year at website hosting – were to continue for 3 full years from today, then podcasting will be almost 2.5 times larger than web hosting. To put it another way, the company will have gone from being almost 50% podcasting and 50% web hosting not too long ago to being 70% podcasting and 30% web hosting in 2023. This would make the appraisal of the podcasting side of the business more and more important to the value of the stock. There are two reasons for this. One, it will eventually just be the bigger business. Two, it’ll be faster growing. For example, the company’s growth in 2023 would be coming 90% from podcasting and only 10% from web hosting. Even now, the company’s growth is like 80% podcast driven. Especially when the need for additional cash investment is near nil, the value of a stock is driven primarily by the future growth of earnings. So, while this appears to be a mix of a podcast business and a web host business – the valuation placed on the stock a few years down the road will basically all be about the value of the podcast business. All of the “economic value added” here will be in podcasting.
Is podcasting a good business to be in?
It’s a growth business. And Libsyn has a good business model in terms of profitability, returns on capital, etc.
But, it’s a highly competitive business. This is where we get to one of the two big question marks I have for this stock. The value of the podcasting business certainly appears to be very high versus the current stock price. A business with these returns on capital growing at this rate could easily be worth more than 30 times free cash flow. It probably should be worth more than that if the growth can be sustained for a long time. So, you’re getting “Pair Networks” and the company’s little bit of net cash for free in this stock. You’re really just paying a normal type of growth multiple for a growing business like Libsyn and getting the rest thrown in for free.
But, will the growth continue and will profitability stay the same?
I’m not sure. Scuttlebutt suggests “no”. I mean, it suggests that Libsyn does not necessarily have the best service, the cheapest service, etc. out there. And it suggests – even the company admits this – that competition will only intensify in podcast hosting. Everyone wants to be in this business. Companies with deeper pockets, higher paid employees, more tech, better brand names, and just greater recognition among the podcast hosting public are willing to get into this business offering much, much lower prices (you can’t get cheaper than free – and there will be a lot of free services offered in this business) than Libsyn. So, it seems likely that competitors of Libsyn will offer better services at lower prices.
On the other hand, retention rates are high in this industry. So, if just Libsyn’s existing group of podcast producers stick with the company, give good word of mouth referrals, etc. – you’re looking at a really good growth stock here. But, it’s an odd growth stock. It doesn’t seem to have the lowest prices or the best service. That scares me.
The other issue, of course, is management. I know nothing about Camac (the fund that owns some Libsyn stock and has 3 board seats). Andrew has spoken with the guy who runs that fund. But, I have nothing to report one way or the other about my feelings regarding Camac. It’s an activist fund. And a lot of the activism has now been completed with both the former CEO and CFO gone.
I like the management currently running Pair and Libsyn just fine. And I like the next layer of management down at Libsyn (which is the more important side of the company) a ton too. But, there’s going to be a big need for capital allocation going forward. Libsyn could bring in about $8 million a year in cash before it pays taxes. After paying taxes, it’ll still have like $6 million a year coming in. It has net cash already. It could support a lot more debt than it does. I know nothing about this board, about the new CEO they will bring in, etc.
Allocation of the free cash flow will be a huge factor in determining your return in this stock.
If Libsyn decided tomorrow to spin out Pair and to devote 100% of free cash flow to buying back its own stock (in the remaining podcasting business) this would be a potentially spectacular long-term investment.
That’s not typical capital allocation though. The more likely thing is that Libsyn keeps Pair forever. And also that Libsyn uses its free cash flow to go out and buy other tech companies.
Still, I’m more interested in the stock today than I was early this week.
Andrew and I will continue to do scuttlebutt on this. As mentioned, we are Libsyn customers. We have talked to some people at the company. We’ve put in work on this one. But, I’m not sure we’ve come to a conclusion. I am, however, sure the stock really should have risen more on the news of the CEO’s departure. That is one big hurdle already cleared in making this a more solid investment candidate.