FAB Universal is a Cash Generating Machine

Zacks Small Cap Research

By Ken Nagy, CFA

On November 13, 2013, FAB Universal (NYSE MKT:FU), the distributor of digital entertainment, reported its third quarter and nine month financial results for the period ended September 30, 2013.

Revenues for the third quarter roared to $29.751 million, an increase of $28.006 million over revenues of $1.745 million for the three months ended September 30, 2012. Sequentially, revenues improved by $3.894 million from revenues of $25.857 million for the three months ended June 30, 2013.

The jump in year over year revenues was led by continued momentum from FAB’s fast-growing, high-margin digital segment, which includes its Intelligent Media Kiosk business. FAB kiosks, located in high-traffic areas of office buildings, shopping malls, retail stores and airports, are self-service terminals that provide a range of entertainment and consumer applications.

The company continued to expand its network of Intelligent Kiosks during the third quarter by adding over 2,421 for a current total of 16,820
kiosks and 5C brand licenses in 40 cities throughout China including Beijing, Shenzhen, Chengdu, Guangzhou. This compares to 2,311 kiosks being added in the second quarter of 2013.

 

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Management believes there is ample room to expand its network of Intelligent Kiosk by adding new locations in the cities in which FAB already operates and establishing a presence in the other 120 cities in China with a population of over 1 million people. As a result, management intends to continue to aggressively build out its network during the final quarter of the year.

Revenue for the wholesale business unit was $14.0 million for the third quarter of 2013 compared to none in the year ago period and $14 million for the second quarter of 2013. Revenue for the digital business unit was $13.3 million for the second quarter of 2013 compared to $1.7 million for the third quarter of 2012 and $9.6 million for the second quarter of 2013. Revenue for the retail business unit was $2.5 million for the second quarter of 2013 compared to none in the comparable period of 2012 and $2.3 million for the second quarter of 2013.

Gross profit jumped year over year by $13.129 million to $14.090 million for the third quarter resulting in gross margin of 47.4 percent up sequentially from 44.5 percent during the three months ended June 30, 2013 and 37 percent for the first quarter fiscal 2013.The improvement in gross margin was driven by the increased mix of digital revenue and tighter control of cost of revenue from both the wholesale and podcasting businesses.

Net Income for the third quarter jumped to $7.291 million. This is the fourth consecutive quarter of solid profits which was up sequentially from $5.729 million during the three months ended June 30, 2013 and year over year from a net loss of ($4.951) for the third quarter of 2012.

DEI is engaged in marketing and distributing various officially licensed digital entertainment products under the “FAB” brand throughout the PRC. Its products and services are primarily distributed through its flagship stores, wholesale services, proprietary “FAB” kiosks, and online virtual stores. Therefore, the terms of the agreement call for issuance of shares to DEI in lieu of cash payments. 10 million shares were issued to DEI investors at the time of closing last year. 20.2 million shares are expected to be issued in late November and the final payment of 7.5 million shares are scheduled to distributed in mid May 2014.

During the third quarter FAB announced one of its first advertising agreements where China Xiangyu Cultural Development Company has signed with the company for advertising on the top screen of the FAB Intelligent Media Kiosk Network. The advertising revenue from this non-exclusive agreement is expected to be at least $2.5 million annually.

Furthermore, FAB recently took the first steps to build a presence in mobile phone and subscription TV distribution channels in order to distribute content over mobile phones. During the third quarter, FAB announced an agreement to distribute its copyright protected digital music content through China Unicom, China mobile and China Telecom, the top three providers of mobile phone services in China.

The balance sheet strengthened with cash of $43.575 million, working capital of $33.145 million and no long term debt as of September 30, 2013. This compares to cash of $27.675 million and working capital of $19.138 million at the end of the second quarter 2013. Additionally, the company generated approximately $15.9 million in operating cash flow during the quarter. This compares to the $10 million of cash flow generated in both the first and second quarter.

FAB has a strong foothold in the explosive growth of the entertainment industry in China, which is being propelled by the increasing spending power of a rising middle class and the government stated plans for the industry to become a major economic growth engine over the next few years.

With its strong brand recognition and distribution base, FAB is perfectly situated to capitalize on the industry’s rapid growth, by expanding its distribution network, driving more content through the network, and extending its market leadership and brand strength, all the while positioning the company to take advantage of the increasing rate of internet penetration and expanding internet infrastructure in China.

Additionally, as a result of year to date performance, including expected reinvestments in the licensing and kiosk business during the fourth quarter as well as the anticipated increase in offerings of purchased digital media content across a wider set of distribution channels, now expanded to include mobile phones and subscription TV, management is raising its guidance for the fiscal 2013 full year to revenues of between $102 million to  $105 million and net income of $19 million to  $21 million for the full year.  This is up from second quarter guidance of anticipated revenues of between $98.9 million to $102.6 million and net income of $19.3 million to $20.1 million for the full year.

A copy of the full research report can be downloaded here >> 
 FAB Universal Report

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