By Ken Nagy, CFA
On August 14, 2013, FAB Universal (NYSE MKT:FU), the distributor of digital entertainment, reported its second quarter and six month financial results for the period ended June 30, 2013.
Revenues for the second quarter rocketed to $25.857 million, an increase of $24.987 million over revenues of $870,164 for the three months ended June 30, 2012. Sequentially, revenues improved by $3.221 million from revenues of $22.636 million for the three months ended March 31, 2013.
The jump in year over year revenues was well above management’s guidance of between $23.4 million and $23.9 million and was led by continued gains 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 second quarter, adding over 2,000 for a current total of nearly 16,000 Kiosks and 5C brand licensees in 40 cities throughout China.
Similarly, 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 second half of the year.
Revenue for the wholesale business unit was $14.0 million for the second quarter of 2013 compared to none in the year ago period and $13.8 million for the first quarter of 2013. Revenue for the digital business unit was $9.6 million for the second quarter of 2013 compared to $0.9 million for the second quarter of 2012 and $6.9 million for the first quarter of 2013. Revenue for the retail business unit was $2.3 million for the second quarter of 2013 compared to none in the comparable period of 2012 and $2.0 million for the first quarter of 2013.
Gross profit jumped year over year by $10.987 million to $11.494 million for the second quarter resulting in gross margin of 44.5 percent up sequentially from 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 second quarter jumped to $5.729 million. This third consecutive quarter of solid profits was up sequentially from $3.003 million for the three months ended March 31, 2013 and year over year from a net loss of ($330,139) for the second quarter of 2012.
Based on a weighted average number of basic and diluted common shares of 20.761 million, basic and diluted net income per share resulted in net income of $0.28 per share for the second quarter fiscal 2013. This compares to a basic and diluted net loss per share of $0.04 on a weighted average number of basic and diluted shares of 8.658 million during the three months ended June 30, 2012 and to net income per share of $0.15 on 20.628 million basic and diluted common shares for the first quarter 2013.
It should be noted that variances in FAB’s reported results is almost entirely due to the acquisition of Digital Entertainment International Ltd. (DEI) in September 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.
The balance sheet remained strong with cash of $27.675 million and working capital of $19.138 million as of June 30, 2013. This compares to cash of $29.768 million and working capital of $19.634 million at the end of the first quarter 2013.
Additionally, the company generated approximately $10 million in operating cash flows during the quarter, equaling the first quarter's cash generation and doubling the $5 million of cash generated in the fourth quarter of 2012.
FAB has a strong foothold in the explosive growth of the entertainment industry in China, which is being propelled by the increasing spending tower 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.
As a result, management continues to expect to generate between $98.9 million to $102.6 million of revenue 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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By Ken Nagy, CFA