Your Computer's Home Page Was Likely Made By Synacor 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 (GOOG) and Synacor (SYNC) 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 (VZ), Charter Communications (CHTR) and CenturyLink (CTL). "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 of Comcast (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 this." 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 & Co. 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 report. "The competition is diffuse, potentially strong, but not particularly well-organized," said Tullo. The biggest competitor is Yahoo (YHOO), which provides similar services for AT&T (T) and Frontier 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 Everywhere. 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 pages. In the first quarter, revenue in that segment rose 10% to $4.9 million. 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 clients." 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."
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