Steel City Capital LP, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A net return of 7.6% was delivered by the fund for the Q1 of 2021, above the S&P 500 and MSCI All World Index that delivered a 5.8% and 4.8% returns respectively, but below its Russell 2000 benchmark, that had a 12.9% gain for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Steel City Capital, in their Q1 2021 investor letter, mentioned Liberated Syndication Inc. (NYSE: LSYN), and shared their insights on the company. Liberated Syndication Inc. is a Pittsburgh, Pennsylvania-based IT service management company that currently has a $128.9 million market capitalization. Since the beginning of the year, LSYN delivered a -9.93% return, while its 12-month gains are up by 75%. As of April 30, 2021, the stock closed at $4.90 per share.
Here is what Steel City Capital has to say about Liberated Syndication Inc. in their Q1 2021 investor letter:
“Liberated Syndication (LSYN) shares have stalled out, and probably deservedly so. The inability to timely report financials and pending restatements are really just the tip of the iceberg, and it’s what’s lurking beneath the surface that’s of more concern. The delay relates to unpaid European VAT in the 2015-2018 time period, which the company is only now going back and accounting for. Not only will the review result in restatements, but it’s going to cost LSYN a pretty penny as well. Management isn’t giving guidance on this front (they honestly don’t know), but when all is said and done, I suspect the hickey will end up being several million dollars after including penalties and interest. This won’t place an undue strain on the company financially given its cash balance and recent capital raise, but there’s certainly an opportunity cost both in terms of operational investment as well as management focus. My best guess is that it will take the better part of 2021 for the company to come current on the financials.
LSYN announced three acquisitions in quick succession this year. Auxbus, a podcast creation platform will improve the company’s customer acquisition funnel; AdvertiseCast will enhance podcasters’ ability to sell advertisements; and Glow enables podcasters to build subscription programs. The latter two are perhaps the most important, as the ability of podcasters to monetize their content is becoming increasingly important.
Shortly after the announcement of the Glow deal, Apple announced (to much fanfare) that it too is launching a subscription podcasting platform, à la Glow. In short order, Spotify announced that it is launching a similar platform. On one hand, you could argue this validates the company’s pursuit of Glow. The industry is moving in the direction of subscription podcasts (with ad-free listening and exclusive content) and LSYN is staying at the leading edge of this movement. On the other hand, you could argue that Apple and Spotify are cutting into the potential revenue stream that’s available to LSYN. Not only is Glow at risk of being relegated to the corner by the two behemoths, but Spotify’s aggressive pricing structure will probably drive a race to the bottom on price and commission, stymieing LSYN’s ability to meaningfully accelerate non-hosting revenue growth. This outcome is dangerous for the equity story considering the most likely path to value creation is through rapid top-line growth.
Think about it this way: Most listeners consume podcast content via Apple and Spotify. It stands to reason that’s where most listeners will sign up for paid subscriptions as well. As a result, podcasters will make a disproportionate amount of their revenue on those platforms. If that’s where most of the money is coming from, why bother with Glow? (The counter argument is that, aside from a small annual fee, profits from subscriptions on Glow should all drop to the podcaster’s bottom line so there’s no reason not to utilize that as well.)
The best way to mitigate this risk is by finding a way to directly connect with podcast listeners, which would mean acquiring or merging with the likes of an Overcast or GoodPods. Management and the Board have obviously been focusing on expanding LSYN’s capabilities and value proposition via M&A, so maybe they have something up their sleeves.
The next 6-12 months are going to be critical for LSYN. First and foremost, it’s imperative they get a CEO seated ASAP to establish a vision, integrate the acquisitions into a single platform (as opposed to existing as a hodgepodge of functions), and maintain the company’s relevancy in the rapidly-evolving industry (PSA: Come to Pittsburgh. It’s great.). Second, the company needs to wrap up its restatements at a reasonable cost and avoid going down a costly rabbit hole that won’t create shareholder value (see Tandy Leather Factory). If they find themselves falling too far behind, the best path to shareholder value maximization may be putting the company up for sale. From the vantage of the Partnership, I’m sitting tight for the time being, as I have a tremendous amount of respect for Eric Shahinian at Camac and CFO Richard Heyse. They continue to do their best with the hand they’ve been dealt.”
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