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FAB Universal Corporation (NYSEMKT:FU)

Q1 2013 Earnings Call

May 15, 2013 1:00 PM ET

Executives

Chris Spencer – CFO

John Busshaus – CEO

Operator

Greetings, and welcome to the FAB Universal First Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Spencer, Chief Executive Officer for FAB Universal. Thank you, Mr. Spencer. You may now begin.

Chris Spencer

Thank you. Thank you everybody for joining us here today. We are really looking forward to this call as we have some exciting things to talk about. First, I would like to turn it over to our Communications Secretary, (Sarah Morio) who will read the required forward-looking statement legal disclaimer. Sarah?

Unidentified Company Speaker

Legal notice regarding forward-looking statements. Forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, may be included in this teleconference. These statements relate to future events or our future financial performance. These statements are only predictions and may differ materially from actual future results or events. We disclaim any intention or obligation to revise any forward-looking statements, whether as a result of new information, future developments, or otherwise. There are important risk factors that could cause actual results to differ from those contained in forward-looking statements including, but not limited to, risks associated with the changes in general, economic, and business conditions, actions of our competitors, the extent to which we are able to develop new services and markets for our services, the time and expense involved in such development activities, the level of demand and market acceptance of our services, the changes in our business strategies, and acts of terror against the United States. Chris?

Chris Spencer

Thank you, Sarah. Now, I would like to turn the call over to John Busshaus, the FAB Universal CFO who will do review of the financial statements. John?

John Busshaus

Thank you, Chris. As we take a look at the balance sheet, our cash balance is $29.7 million. That’s an increase of $10 million from the end of 2012. This increase was driven by a strong first quarter from our operations. Accounts receivable increased approximately $1.7 million from the end of 2012 while our other current assets remained relatively consistent. Net property and equipment totaled $16.5 million, including real estate with a value of $13.9 million.

The balance sheet also shows intangible assets, net of amortization, of $26.6 million and goodwill of approximately $60.8 million. Goodwill consists of $11.5 million for Libsyn and $49.3 million for FAB. Intangible assets consist of customer relationship of $7.5 million, intellectual property of $3.6 million, trade names of $14.1 million, and non-competes of $1.4 million.

Our long-term deposits of $26.2 million include anti-piracy sales guarantee deposits made to product licensors, rent deposits made to landlords, and prepayments made for opening new flagship retail stores in the future. As we take a look at our accounts payable, short-term bank loans, taxes payable, other payables, and accrued expenses, these are all as a result of normal fluctuations with normal operating activities. Taking a look at this deferred revenue, there are two parts to our deferred revenue. Deferred revenue totaled $22.4 million and that is for payments made to us for the purchase of our FAB membership cards and payments made by licensees to FAB for licensing the 5C business model and FAB brand. Licensees pay an upfront fee to license our 5C business for five years. As such, the revenue for these licenses is recognized over five years thus the deferred revenue. For example, if we were to sell license for our 5C business for $5,000 and licenses for five years, we must record that revenue over five years at $1,000 each year. We get the $5,000 cash up front and at the time of signing the license, well, we don’t give the cash back over the five years, it’s ours, but we only record a $1,000 of revenue each year.

The other part of deferred revenue relates to the acquisition. When we acquired FAB, they had $29.8 million of deferred revenue which was to be recognized over the course of the next five years. However, because of the acquisition, GAAP accounting required us to value all assets and liabilities at fair market value. For deferred revenue, that fair market value was $9.2 million. This means that we will not recognize $20 million, the $29 million minus $9 million of revenue over the next five years. This is an average of about $1.25 million a quarter. However, its front loaded. The first quarter of 2013 that deferred revenue number was $1.9 million, and that amount decreases over time to approximately $300,000 a quarter. We have already received the cash in the deferred revenue as FAB membership cards and licensing in the 5C businesses require upfront payment in full.

Taking a look at our P&L, revenue for the first quarter of 2013 totaled $22.6 million. Revenue consisted of $13.8 million from our wholesale distribution business with a gross profit of approximately 19%, $2 million in revenue came from our retail business with gross profit of 27%. Our 5C licensing and kiosk business delivered $5.7 million of revenue and gross profit of 81% and podcasting provided $1.2 million in revenue in gross profits of 58%. As a result, overall gross profit was $8.4 million, or 40%, and this number takes into consideration the $1.9 million that I talked about previously for the recording of the deferred revenue.

Operating expense for first quarter was $4.1 million versus $1.7 million in 2012. The increase is due to the incremental expense associated with the business of FAB. As a result, the first quarter of 2013 delivered net income of $3 million, or $0.15 per share and our comprehensive income reflected $3.5 million, or $0.17 per share. In summary, we were able to generate $10 million of incremental cash on $22.6 million of revenue. This cash has been generated primarily by our kiosk in licensing agreements and the fees collected for this business. Chris, back to you?

Chris Spencer

Thanks, John. Okay, hello everyone. I am Chris Spencer, FAB Universal CEO. I am glad to be back on this call with you today. I spent the last week in Beijing meeting with our team over there and reviewing our rapidly growing business. I have to say every time I return from over there I come back more impressed. What probably impressed with me most is their flat-out ambition and drive while I consider myself ambitious and driven along with most of the people I associate with it just seems that they are taking to a whole new level in China right now. The only way I can think of to explain it is that it feels over there like what it must have felt like in the early 1900s when the Rockefellers and the Mellons and Carnegies were also driven to create new industries and let’s face new monopolies. Almost 10% of the world’s billionaires are now from China and that number is growing fast. It almost feels like a land grab over there right now. It’s incredible of what’s being accomplished and we are very excited to be a part of it. FAB is creating a national entertainment media brand in China and doing a great job. I will get into that a little bit more here later in the call, but we are needless to say very excited about what’s happening.

So, a quick look back at the financials that John just went over. I’d like to highlight a few points and explain a few others. Please excuse any duplicate information. For the first quarter of 2013, we recorded revenues of $22.6 million, from revenues of $847,000 in the first quarter of 2012. These are record first quarter revenues for us clearly due to the FAB acquisition, but they are record first quarter revenues for FAB even prior to the acquisition. So, even without the acquisition, these are record for FAB China, these are record for us as a combined company we are doing very good.

For the first quarter 2013, we posted net income of $3 million, or $0.15 per share versus a net loss of $997,000, or $0.13 per share in the first quarter of 2012. This number includes the fact that we had the substantial amount of deferred revenue and non-cash expenses in the first quarter. While our GAAP reported net income was only $3 million due to this deferred revenue and non-cash expenses, we increased our cash position by $10 million in the first quarter as John was explaining. This is after increasing cash by $5 million in the fourth quarter. Cash is now at $29 million, and it appears to be growing steadily. And this is critical to some things that we will be talking about here. If management’s opinion that our first quarter financial performance was strong with the record first quarter profit and we expect to see strong growth throughout 2013, we look forward to generating about a $100 million in business in 2013, and we plan to continue to aggressively look for substantial cash generating media acquisitions both in the U.S. and abroad.

So, a little guidance here, FAB Universal expects to generate between $23.4 million and $23.9 million in revenue in the second quarter of 2013 and between $98.9 million and $102.6 million for the full year 2013. The company expects after tax net income between $2.8 million and $3 million for the second quarter and between $19.3 million and $20.1 million for the full year 2013. So, to conclude this financial section here, as of March 31, we had just under 21 million shares outstanding. We are projecting net income for 2013 of about $20 million. And we reported just over $29 million cash in the bank as of the end of March. Business is good, and we believe we will continue to grow and generate significant cash throughout the year.

Okay. Now, for a brief business update. As we disclosed previously, FAB has four business divisions all related to media and entertainment distribution. The first one podcasting, our podcasting business continues to grow at a steady, albeit modest pace. In the first quarter, we had our best revenue generating period on record. Unique monthly audience members continued to grow to over 28 million uniques at the beginning of 2013 marking another milestone achievement. Just to give you something to go by, on our last call, March 31, we reported 25 million monthly uniques for the fourth quarter, so the network grew by 3 million monthly uniques in a very short time. Our podcast network is expected to reach over 60 million unique individuals for all of 2013 and provide approximately $1 million in profit.

The second one here, retail, FAB first started out about 16 years ago as a retail store selling CDs. Today, we have two superstores, each over 20,000 square feet, which are in high-traffic shopping malls. In addition to selling DVDs and CDs and other forms of digital entertainment, these stores are used to build the FAB brand. The way we do this is by having star signings, where you can meet and greet your favorite movie star or rock star. These events attract thousands of fans and I hope several times a month. The FAB store in Beijing is the place to launch a new album or movie. The subsequent pictures, newspaper articles, and videos are used throughout the FAB licensee network to give the FAB brand stature and credibility. And it really seems to be working, and you can gauge this by the number of brand licenses and kiosks we are selling each quarter. Everyone knows FAB is the place to buy high-quality media. In 2013, we plan to open two new superstores, and we plan to open many express style stores throughout through previously announced partnerships with movie theater chain, and a chain of supermarkets.

So, number three, wholesale, as FAB began growing as a retailer years ago at times having many small retail stores in several cities. We always seem to have a hard time getting quality, non-pirated movies, and music albums to sell. So, as a result, FAB created its own wholesale distribution division. This division supplies CDs, DVDs, and other forms of entertainment content to over 80 large customers in Asia. FAB delivers product through a fleet of trucks and ships products through express mail, producing approximately half of the free cash flow of FAB.

Number four, FAB brand licensing and kiosk. We had a lot of questions recently about what exactly is the FAB brand licensee is like a franchise. Yes, it is, but in China, it’s not a franchise, so it’s a licensee. But we had so many questions I just want to reiterate a little bit about exactly what it is. A FAB brand licensee can have a small FAB branded retail store selling CDs and DVDs and other similar products along with an ATM style FAB Intelligent Media Kiosk, or a FAB brand licensee can have no physical store and just kiosks. Some licensees have just the kiosks and put them in high-traffic areas and create sort of a kiosk route for themselves if you will, and some licensees have small FAB branded media stores in retail areas and have one or more kiosks in their store. So, they are all kind of different. The bottom line is that they can have small retail stores with kiosks. Some people just have kiosks. Some people just have the retail stores. But the bottom line is that they are all based on the FAB brand, which is growing rapidly over there in China.

Now, when you think of a FAB kiosk, think of a stand-alone ATM machine that you would see at your local restaurant. These Intelligent Media Kiosks are very elegant and very sophisticated. They are simple to use and allow consumers to purchase copyright-protected music, video games, digital books, and ringtones, directly to their cell phones, memory drives or other mobile storage devices. The kiosks have TV type screens in them and run paid advertisements and FAB also sells membership cards for the heavy users. We currently have just under 400,000 paid members and when you put this model together, the best way to kind of describe it, is iTunes meets Redbox meets Netflix. Currently, FAB Universal has over 10,000 brand licensees with 13,800 kiosks in over 40 cities throughout China. This is a strong franchise style network and continues to grow rapidly, enjoying approximately 80% gross margins in the first quarter. I believe there about the same in the fourth quarter as well.

Now, as for the future of the brand license and kiosk business, the plan is simple, rapid expansion. Right now, we’re in 40 cities. There is over 160 cities in China with a population of 1 million people or more. Of the 1.3 billion people in China, half are now living in urban areas. With the cash flow that this business segment generates, we can fund rapid expansion internally. This is the future of the FAB business model, and this is where we see the most potential growth going forward, and with the 80% margins last quarter, we are obviously very excited about this business, or I mean how can you not be.

So, now, I’d like to discuss one last piece of business directly related to our future growth, and that is expansion through acquisitions. The acquisition of FAB has turned out to be a great deal when you consider the growth, cash generation, and the opportunity our company now has. And by opportunity, I refer to the substantial distribution network we have in China, the world’s fastest growing consumer base. We currently have 10,000 brand licensees, 13,000 digital kiosks, 80 major wholesale customers, and a couple of very large high traffic flagship retail stores. Through this distribution network, we have the potential to move a lot of entertainment products. There are many much larger media companies around the world that would love to have access to secure reliable media distribution network like ours in China. We are a U.S. based New York Stock Exchange public company that can be trusted and relied upon, and that is 90% of the battle in terms of entering the Chinese market today.

So, as the middle class continues to grow and spend on entertainment as the percentage of GDP continues to climb towards the levels found in more developed countries. We see tremendous opportunity. FAB has an established growing brand with a reputation as the media company with class and integrity. This is why there are so many third-party FAB branded licensees and why so many of the top music and movie stars work with FAB. With access to capital so available and so inexpensive both in the U.S. and in China right now combined with our current pace of internal cash generation, we are in a position to make very selective acquisitions using inexpensive, non-dilutive financing. We are in a position of put up 10% or 20% of the cost of an acquisition using our cash on hand and speed up the repayment of any acquisition-related debt by quickly expanding the acquired business through our distribution network in China. So, many people go out and they make acquisitions and they hope to increase them or improve them and grow them just by better management or a new idea they may have.

What we have here is the ability to make an acquisition and immediately expand and grow it the revenues and the profits by bringing it into China to our own distribution network that we know works. So, we are very excited about these opportunities we have right now. After our meetings in Beijing last week, we are right now in the market to retain a top notch investment banker to assist us in executing our acquisition strategy. We expect to announce an engagement in the next 60 days and we would like to take advantage right now of the inexpensive capital and the opportunities that we have.

So, that’s it for today. We had an outstanding quarter generating $10 million in cash and we expect to have a strong 2013 as we reiterated. Our business is good. Thank you very much for being a part of this call, and it’s really exciting time for FAB Universal. Good bye.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time, and we thank you for your participation.

Question-and-Answer Session

[No Q&A session for this event]

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