When you first launch a Web browser on a Toshiba computer, the
start page that gets displayed was created by Synacor. But you
can't tell that because it's branded under the Toshiba name.
And when you're conducting an online search on that page and
click on a sponsored link, Toshiba,Google (
) andSynacor (
) all get paid. It's a win-win situation for all parties, and it
didn't cost Toshiba a dime to get that page created.
This is just one example of Synacor's business. The Buffalo,
N.Y.-based company creates seamless start pages for companies
that are not in the business of making them.
Its pages had 21.3 million unique visitors and generated 271
million search queries during the first quarter, an 81% and 85%
increase vs. the prior year, respectively.
Eighty-four percent of the company's revenue comes from start
pages and display advertising.
According to PricewaterhouseCoopers, the international search
and display market is expected to grow at a 13% annual rate
between 2011 and 2015 to $115 billion. The U.S. market's annual
growth is estimated to be 11% to reach $31 billion by 2015.
In the first quarter, this segment's revenue at Synacor soared
81% to $25.8 million. The client base is made out of cable,
telecom, satellite and consumer electronics companies.
Its four largest clients are Toshiba,Verizon (
),Charter Communications (
) andCenturyLink (
"The big telecom companies historically have not been very
good at customer-interfacing products," said analyst Jason
Helfstein of Oppenheimer. "They are good at managing the network
and marketing these plans to you. We think that, outside
ofComcast (CMCSA), which has invested a lot of resources behind
this and is also in the content business, most of the other
telecom providers should be considering an outsource solution for
Relationships with clients take a long time to build. But once
they are on board, "The business is 'sticky' and results in
recurring revenue derived from Internet search-and-display
advertising," writes analyst Rich Tullo of Albert Fried &
Because those companies operate complicated networks and serve
millions of users, they have to comply with strict rules
regulating traffic to ensure integrity of all users' connections,
writes Tullo. This complex structure creates high barriers to
entry and limits competition to mostly in-house teams.
Within the broadband market, Synacor's share is estimated at
25%. In-house solutions take up another 44%, says Helfstein's
"The competition is diffuse, potentially strong, but not
particularly well-organized," said Tullo.
The biggest competitor isYahoo (YHOO), which provides similar
services forAT&T (T) andFrontier Communications (FTR) .
The display advertising part of Synacor's business sells its
inventory directly to advertisers and on-display ad networks. The
company has 30 major advertising clients. Last quarter, the ads
generated 8.5 billion impressions.
The remaining 16% of revenue comes from subscription-based
business, such as cloud-based e-mail and its newest venture, TV
TV Everywhere allows subscribers to access television on all
their devices via application-based services.
"We think TV Everywhere is the next big thing in media,"
writes Tullo. "(It) is a great distribution solution as TV
Everywhere allows subscribers to get HBO or NBC Sports
subscriptions remotely thereby creating more viewers for
advertisers and easy access for the consumer."
Synacor is well-positioned to benefit from this since TV
Everywhere's authentication process is executed on its start
In the first quarter, revenue in that segment rose 10% to $4.9
The main risk for Synacor is the customer concentration. Three
of its largest customers make up more than 60% of revenue.
"That's a risk if one of those relationships decides not to go
to Synacor anymore, but I don't think it's necessarily something
that should keep investors up at night," said Tullo.
"Because these are long-term contracts, these are sticky
relationships; it doesn't cost the multi-service providers any
money to maintain this relationship with Synacor. So it's about
the quality of the service that Synacor provides, and that
quality is very strong," he said.
Synacor went public in February and has a float of just 29% of
outstanding shares. The remaining stock is owned by insiders and
venture capital firms. The lockout period ends in July, at which
point the company may see insider selling.
However, "the volume has actually been pretty good," states
Helfstein. "For a market cap this size, the trailing volume over
the past 30 days has been a million a day because there has been
a lot of retail interest in the stock."
Synacor's balance sheet is pretty solid. With almost no debt
and $33 million in cash, the company has been generating positive
free cash flow of $9 million in 2011 and is projected to generate
$16 million this year.
"Management seems to be executing according to their numbers;
their growth has been very strong," said Helfstein. "I think they
are very focused on the vision of bringing their product to more
Would Synacor be an acquisition target in the future?
"It's possible, but part of the value is to be 'Switzerland,'"
said Helfstein. "If you're selling to multiple customers, you
can't be bought by one customer."