Steel City Capital recently released its Q4 2020 Investor Letter, a copy of which you can download here. In 2020, the fund returned 10% net of fees, while the S&P 500 Index was up 16.3%. You should check out Steel City Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q4 2020 Investor Letter, Steel City Capital highlighted a few stocks and Liberated Syndication Inc. (NYSE:LSYN) is one of them. Liberated Syndication Inc. (NYSE:LSYN) is an IT service management company. In the last three months, Liberated Syndication Inc. (NYSE:LSYN) stock gained 34.6% and on January 20th it had a closing price of $5.15. Here is what Steel City Capital said:
“Liberated Syndication (Long): Liberated Syndication is one of the leading podcast hosting and distribution platforms in the country. It offers professionals and hobbyists alike access to storage, bandwidth, distribution, and statistics tracking. Financially, 3Q’20 was an “ok” quarter, despite lots of noise flowing through the statements. Total revenue was +4.7%, lifted by Libsyn (+12.1%), while Pair, where results have been lumpy, reverted to a negative quarter (-5.7%). Profitability was overshadowed by $2.9 million of costs related to the previously announced separation of former CEO Spencer. Free cash flow was negative in the quarter – although not as a result of the Spencer ouster. The Busshaus-related tax issue finally came home to roost, with income taxes payable sapping cash flow by $2.8 million in the quarter.
The real “news” was buried in the 10-Q. The company added a risk factor that covered an expanded list of tax related issues – again emanating from the Busshaus era. First among them is the failure to collect and remit state sales taxes following the 2018 South Dakota vs. Wayfair SCOTUS decision related to interstate e-commerce. Second, management has determined it incorrectly reported personal income related to its restricted stock vesting events from 2017-2019 and failed to withhold sufficient Federal withholding taxes for certain employees, officers, and directors. The amount of underreported personal income across the three years was $3.8 million. Additionally, the company more prominently highlighted an ongoing domestic and international IRS audit of FAB Universal (LSYN’s former parent), placing investors on notice that there could, under certain circumstances, be remaining financial liabilities tied to the company’s days as wholly-owned subsidiary. Management expects to have more guidance on the financial impact of the sales and income tax issues in early 2021, while the timing related to the IRS audit is undeterminable. My best guess is these issues will be annoying, potentially costly, but far from fatal.
The “silver lining” – for the optimists among us – is the identification of these errors suggests the new CFO is doing his job, and doing it well. I had the opportunity to speak with him in mid-November and I left the conversation wholly impressed. In response to my prying questions about the tax issues, he retorted (I’m paraphrasing): “Look, one of my jobs as CFO is to be as transparent and honest as possible about the issues the company faces. That’s why there’s added disclosures in the 10-Q. It’s up to investors to decide whether or not they want to hold shares based on the facts at hand.” What a breath of fresh air following the Spencer/Busshaus era.
On his plate going forward is bringing the company into compliance with Section 404 of SOX. The company indicated it will hire a project partner to support its remediation work and anticipates the implementation of a control framework in 3Q’21 / 1Q’22. Compliance is a necessary precursor to a NASDAQ up-listing. He also took it upon himself to quarterback a lawsuit against a group of Chinese shareholders whose shares originated in the days of FAB. Based on my understanding of the situation, there’s no legal precedent for the exact issues being contested by the company, so it’s hard to say exactly how the lawsuit will turn out or when a resolution will be reached. Best case, the shares held by the group will be voided and disappear. Worst case, nothing happens. In the “middle,” if the contested shares remain outstanding, they could potentially be restricted from voting which would make any corporate actions that require majority shareholder approval easier. I’m not holding my breath and the investment thesis certainly doesn’t hinge on the lawsuit, but it’s nice to see management “doing the right thing.”
Aside from cleaning up the mess left by prior leadership, management must continue to map out a path forward for the company. With that in mind, I think LSYN’s management would be well advised to emulate the steps being taken by IAC at their rapidly growing Vimeo business. Referring to Vimeo in IAC’s 3Q’20 shareholder, CEO Joey Levin said the following:
“Vimeo was also profitable on an Adjusted EBITDA basis in the quarter, though that was more of an accident than a trend-setter – we couldn’t keep investments at pace with revenue growth, an oversight we will not repeat in the next few quarters as we press on product development, marketing, and especially growing enterprise sales teams globally. An early lead in a large and expanding market ought not be squandered by optimizing near-term profits. On the Self-Serve segment of our revenue (meaning, a customer begins to pay Vimeo without having spoken to a salesperson), we’re seeing about $5 in profit for every $1 we spend in marketing. That ratio has continued to steadily improve and we haven’t yet found the limit on our ability to spend on marketing with those returns.”
Within LSYN’s podcasting operations, my sense is management has only scratched the surface in terms of understanding unit economics (customer acquisition cost, contribution margin, lifetime value), but based on what has been disclosed, the returns have got to be pretty attractive. Churn is exceptionally low, gross margin has scaled nicely, and podcast related revenue is up 12% through 9/30/2020 with the company spending only 1% of revenue on advertising. Said another way – despite the company barely lifting a finger to promote its product, podcast-related sales are still growing at a healthy double-digit clip! There is also a range of other product development opportunities the company could pursue, ranging from low-hanging fruit (improving the cross-sell of Pair’s web-hosting services to podcast producers) to the more challenging (monetizing advertising), all of which would further enhance unit economics.
For its part, Pair tends to catch a bad rap as a slow and stodgy business that has no place in the company (“Sell it!” say the Twitterati). I couldn’t disagree more. In some respects, LSYN is a capital allocator’s dream. It is a combination of a fast-growing business with seemingly unlimited reinvestment opportunities (the Libsyn podcasting platform) and a mature, slow-growth business that, because of its limited reinvestment opportunities, throws off gobs of excess cash (Pair web-hosting). Not all businesses are so lucky as to have a steady stream of excess capital available for reinvestment in their high growth and highly profitable opportunities. LSYN’s management has a tremendous opportunity to create meaningful shareholder value by reinvesting every single penny of excess cash flow from Pair into customer acquisition and product development on the Libsyn side of the house. An early lead in a large and expanding market ought not be squandered by optimizing near-term profits.
I’ve been asked whether or not the recent run-up in LSYN’s share price is reason to begin paring back on the Partnership’s position. As it stands today, I do not believe selling is the proper course of action. True, at current levels, LSYN’s valuation is “fuller” than it was at the beginning of 2020. The “easiest” of retorts is to argue the company still trades below the broader small-cap universe3 and our purchase multiple will come down each year if the company does nothing but bank free cash flow to its balance sheet. But I think there’s more to be had than the company simply plodding along, particularly given the opportunities looming over the horizon (the prospect of a new, industry focused CEO being hired; product enhancements; and increased marketing spend). And it’s not lost on me that LSYN is among the rarest of companies that operates with negative net tangible assets, supporting an ROIC profile that is, quite literally, off the charts. Growth can and should create substantial shareholder value in the years to come.”
On Jan. 20, we published an article revealing that Greystone Capital was bullish on Liberated Syndication Inc. (NYSE:LSYN) stock. The investment firm said that the company is competitively positioned to generate higher margins and has a strong balance sheet.
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