By Ken Nagy, CFA
Three Things to Watch for at FAB Universal’s (FU) Third Quarter
1. Does Digital Continue its growth trend?
Recall revenues for the second quarter of 2013 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.
Digital Drives Margins
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.
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.
2. Does the company continue to generate cash?
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.
3. What is the 2014 contribution from newly signed deals and what does the new business model look like?
FAB Signs Two Deals
On September 24, 2013 FAB entered into an agreement with Future TV Co. Ltd. to distribute its copyright-protected media content through pay TV terminals used in the home by Future TV’s subscribers.
Under the terms of the agreement, FAB will provide copyright protected content including high-definition video, music lessons, children's programs, and other educational and related programming. Future TV will integrate the content provided by FAB Universal with its operational platform and manage subscriber payments.
On September 17, 2013, FAB Universal, the distributor of digital entertainment, reported it secured music distribution rights from the top 3 mobile phone service providers in China.
The agreements to distribute its copyright-protected digital music content through China Unicom, China Mobile and China Telecom expands FAB’s distribution platform and increases the quantity and variety of its content.
Additionally, by allowing FAB to add a mobile phone channel to its distribution platform, the agreements further leverage the company’s exclusive and acquired copy-right protected digital music content and also reaches new customers for its catalog of FAB-branded digital media and entertainment content.
A copy of the full research report can be downloaded here >> FAB Universal Report
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By Ken Nagy, CFA