FAB Universal offers a Combination of Explosive Growth and Margin Expansion

Zacks Small Cap Research

By Ken Nagy, CFA

FAB Universal Corporation (NYSE MKT:FU) is a distributor of global digital media worldwide. The company serves its customers through three segments including: Retail, Wholesale and Digital Media. Libsyn, which is a subsidiary of Digital Media operates podcast hosting technology.  On April 5, 2012 FAB signed an official share exchange agreement with Wizzard Software Corp. The acquisition closed September 26, 2012 and the new company became FAB Universal

We feel No other stock provides the investor the unique blend of several high growth businesses that range from podcasting to Kiosk. FAB is the only company in China that uses Kiosk as a digital content distribution platform. Podcast growth has been very strong and could contribute $1 million to the bottom-line in 2013. Finally the firm should see margin expansion in the coming quarters as the fastest growing segments also have the highest margin contribution.

Retail Media

Retail business is conducted through its flagship stores. One is located in the Joy City shopping mall and the other is an entertainment superstore in SoShow.  Each store is over 20,000 square feet in size and carries one of the largest selections of copyright protected audio and video products in China, including CDs, VCDs, DVDs, blu-rays, books, magazines and portable electronic devices. The flagship stores are recognized by many Chinese consumers as the most trusted place to buy copyright protected products. The corporate goal is to go from 2 flagship stores to 6 stores over three years and perhaps as many as 200 smaller stores.

 FAB has regularly used celebrity signing events as a major driver to FAB’s retail stores. This is a popular venue for Chinese music and movie stars to meet their fans.  Recently stars from outside mainland China, from Hong Kong, Taiwan, Korea and Japan, wishing to enter the Chinese market have chosen FAB as their launching platform. These events not only promote sales of audio-video products but also increase FAB’s brand recognition.

Wholesale

The wholesale business provides audio-video products such as compact discs, video compact discs and digital video discs as well as books and magazines to audio-video product retailers. FAB distributes these media products to over 80 customers.  FAB’s wholesale business caters to three types of customers: large retail stores, FAB license stores and small wholesale/resellers. Customers place orders by telephone, through the internet or in-person and fulfillment is handled by FAB’s vehicle fleet or through direct warehouse access.

Digital Media

Kiosks/Licensing-
The company’s Intelligent Media Kiosks, based on 61 proprietary intellectual property rights, are ATM style terminals where consumers can download copyright protected music, video games, ringtones, digital books and movies directly to their cell phones, memory sticks or other mobile storage devices.  The Kiosks also run video ads on the high-tech LCD screens and accept payments for utility bills, and credit card bills. Currently, FAB is the only company in China that used Kiosk as a digital content distribution platform. Similarly, the company’s 5C intelligent media kiosks have now expanded to 40 cities with around 8,400 licensees and an installed network count approaching 12,500 Intelligent Media Kiosks.

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Podcasting - FAB provides a web based podcast distribution platform for podcast producers wanting to broadcast their audio or video shows to people worldwide, in most cases through RSS distribution.  FAB’s podcast hosting service accumulates and provides audience statistics as well as advertising sales, ad insertion and App creation and sales to help podcasters generate revenue. Throughout 2012, Libsyn had approximately 50 million total audience members and 1.6 billion download requests for podcast episodes.

Podcast has shown explosive growth. Unique monthly audiences have experienced accelerated growth from 20 million people in the first quarter of 2012 to 28 million people in the first quarter of this year. The 40% increase is a result of the addition of 8 million podcast audience members enjoying podcasts from 240 countries around the world on the Libsyn Network each and every month.

More shows are now being distributed to mobile devices than to traditional PC’s. Media distribution to mobile devices such as iPhones and iPads demonstrate a fundamental shift away from the traditional method of downloads via iTunes to the PC. This fundamental catalyst represents a significant opportunity for monetization of podcasts through advertising due to the fact that these mobile downloads can now be tracked in the same manner as streaming video content from a website like YouTube. This type of tracking was not possible before this shift in audience consumption habits.

FAB Universal, the parent company of Libsyn, is looking for Libsyn to generate $1 million of profit this year, a first for the podcast division.

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Margin Expansion

From a margin standpoint the division expected to grow the fastest (Kiosk) has the highest corporate margin ranging from 75-84%. Retail is next with a margin range of 26-27% and Wholesale is the lowest margin business at 18-20%. Looking at expected growth rates margin expansion should be a part of the story.

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


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