FAB Universal's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.14.13 | About: FAB Universal (FU)

FAB Universal Corp. (NYSEMKT:FU)

Q2 2013 Earnings Call

August 14, 2013 10:00 am ET

Executives

Stephanie Prince - LHA

Chris Spencer - CEO

John Busshaus - CFO

Analysts

Ken Nagy - Zacks

Jim Macquarie - Sheridan

Bud Zaino - Royce and Associates

Harris Shapiro - Millennium Capital

Jeff Harte - Saber Capital Management

Sean Kenlon - Colebrooke Capital

Daryl Rene Quarles - Wells Fargo

Mike Samples - Raymond James

Tom Monson - Stifel Nicolaus

Operator

Greetings, and welcome to the FAB Universal Second Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Stephanie Prince. Thank you, Ms. Prince. You may now begin.

Stephanie Prince

Thank you, Tania, and good morning everyone. This is Stephanie Prince from LHA. Thank you for joining us for FAB Universal's second quarter 2013 earnings conference call. With me this morning are Chris Spencer, FAB Universal's Chief Executive Officer and John Busshaus, Chief Financial Officer.

FAB Universal issued a press release this morning with details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's site at fabuniversal.com.

I would like to remind everyone that today's call is being recorded. A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the Investor Relations page of the company's website at fabuniversal.com following the conclusion of this conference call.

I would also like to call your attention to the customary Safe Harbor disclosure regarding forward-looking information. The conference call today will contain certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. 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.

I would now like to turn the call over to Chris Spencer. Chris?

Chris Spencer

Thank you, Stephanie, and thank you everyone for joining us today. I will begin today's call by briefly reviewing who we are and our growth strategy, before highlighting some key financial results and discussing the second quarter performance of our business segment. John will then review our financial results and guidance before we open up the call to your question.

For those of you, who are new to FAB, FAB Universal is a global leader in digital media entertainment sales and distribution. We distribute audio and video products, including copyright protected music, video games, digital books and movies, DVDs and Blu-rays, to consumers in China through three channels wholesale, retail, and our network of Intelligent Kiosks. Together, these channels form our distribution platform and the cornerstone of our growth strategy, which is to extend our market leadership and fully leverage our established FAB brand. Within the media and entertainment industry in China, consumers associate the FAB brand with high quality popular copyright protected media and entertainment content.

Complementary to our digital and media distribution business, we also operate the largest network of independent and professional digital media publishers using podcasting reaching over 50 million audience members annually in over 240 countries.

Interest like iTunes meets Redbox which meets Netflix. Through our media and entertainment distribution platform, we have 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. And with our brand recognition and distribution base, we're perfectly situated to capitalize on this rapid growth, by expanding our distribution network, driving more content through the network, and extending our 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.

Financially, our results demonstrate the success we were having as a leader in the media and entertainment industry. We are posting strong revenue growth, high margins and profits, and generating a good deal of cash each quarter. For the second quarter, we delivered revenue of $25.9 million, a sequential increase of approximately 15%, led by 41% increase in our high margin digital segment revenue.

And for the third consecutive quarter, FAB Universal produced solid profits. Net income reached $5.7 million or $0.28 per share, following EPS of $0.15 for the first quarter, and $0.11 for the fourth quarter. For the first six months of 2013, we produced revenue of $48.5 million, net income of $8.8 million, and EPS of $0.42, putting us on track to achieve our 2013 guidance of generating approximately $100 million in revenue and approximately $20 million in net income.

I'll now turn to a review of our business segments structuring my comments to match our segment reporting. I'm going to start with our growth engine, our digital segment, which includes FAB brand licensing and kiosks and our podcasting business. Our brand licensing and kiosk business posted another terrific quarter with sequential revenue growth of 41% and gross margins of 80.3%. For this business, we generate revenue from multi-year licensing agreements; content downloads, paid advertising, and membership card sale.

During the second quarter, we added over 2000 kiosk licenses bringing our installed base to nearly 16,000 kiosk and 5C brand licensees in 40 cities throughout China. As I've mentioned before, we have ample room to expand our network of Intelligent Kiosk by adding new locations in the cities in which we already operate and establishing a presence in the other 120 cities in China with a population of over 1 million people. To fully penetrate our addressable market and leverage our kiosk assets, we're executing a three prong strategy.

First, push hard to build out our network and strengthen our infrastructure. Second, increase the quantity and variety of digital content that we offer through the kiosk network. Third, once we have built out the kiosk network and enhanced the content, drive membership growth and advertising revenue.

Our Libsyn podcasting business remained on a steady growth path through the quarter. Libsyn's publishing platform hosted 14,760 shows compared to 13,534 during the first quarter of the year. The total number of episodes was nearly 1.5 million, slightly up from the first quarter.

We had 27 million unique monthly audience members compared to 28 million the first quarter, reflecting historical seasonal viewing patterns. By comparison, we had 22 million and 23 million unique monthly audience members for the second and first quarters of 2012. Based on this year-over-year growth, we believe we are on track to reach our estimate of 60 million unique individuals accessing our service for the full year of 2013 and delivering about 1 million of operating profit for the year.

Longer-term, the shift in digital content distribution from downloading to streaming is broadening our audience and enhancing our value proposition to advertisers because it allows us to track monthly unique audience usage data. The performance measure has mattered most to advertisers. With increased advertising revenue, we'll be able to more fully monetize our podcasting business.

Our wholesale segment supplies CDs, DVDs, and other forms of entertainment content to retail stores, smaller resellers, and FAB licensees, for a total of over 80 customers. Recently we added China Unicom to our customer base. China Unicom is a 40 billion telecommunications operator with company stores across 31 provinces in China and FAB is supplying many of these company stores with audio/video products for the first time. As the foundation for our brand, wholesale is a mature business that generates about 50% of FAB's free cash flow. For the second quarter, we recorded revenue of $14 million, compared to $13.8 million for the first quarter.

Lastly, our retail segment. We currently two superstores, offering a vast collection of copyright protected audio and video products and hosting weekly celebrity appearances, card signings, and album launch parties, on an exclusive basis. These events attract literally thousands of fans, spreads the FAB name throughout widespread media coverage, and most importantly, from our usage back to our kiosk network.

Although, our retail business, like media and entertainment brick-and-mortar stores in the U.S. is not a growth area of us, it carries significant strategic value as a brand promotion engine. For that reason, we plan to open one or two additional store this year subject to receiving the necessary governmental authorization. We are also working to open express style stores in the movie theater chain and the supermarket chain. For this segment, we reported sales of $2.3 million, compared to $2 million for the first quarter, a 15% sequential gain.

With our media and entertainment distribution platform, and the power of the FAB brand, we have the fundamentals in place to drive strong organic growth, expand our kiosks and licensing network, along with our inventory of digital content moving through the network. These fundamentals also create opportunities for us to extend our market leadership.

One complementary opportunity is the live entertainment and talent management business. We already showcased popular musicians at our FAB superstores, hosting album launch parties and other events to help them build an audience. Managing these starts and organizing concerts for them is a natural extension of our event business and FAB brands. Unlike the U.S., where concerts large and small are rooted in the culture, China's concert business is just now emerging along with the growing middle class.

And today, the music industry consists of a number of small operators giving us room to maneuver and become a large scale player. As these artists gain a wider following, more consumers will want to download their music from one of your kiosk, and we will have more content to distribute through our wholesale channel. For all of these reasons, we offer the talent a desirable home and foundation for building their careers, while giving us an attractive incremental revenue stream.

We're getting ready to commence operations of this business and plan to send 2014 establishing the foundation by securing venues and building a roster of artists with a goal of generating a meaningful contribution to our results in 2015.

In closing, FAB's growing distribution platform is the place for consumers and customers to buy high quality copyright protected media and entertainment products. We are posting strong growth metrics, employees to move ahead on a rapid trajectory as we execute on our growth plan.

I would now like to turn the call over to John to discuss our financial results in more detail. John?

John Busshaus

Thanks, Chris. As a background for those of you who are new to FAB Universal, we completed the acquisition of DEI, the operations in China on September 26, 2012. We are approaching the anniversary of that transaction, which will make year-over-year comparisons easier. But for now the variance in our reported results is almost entirely due to the acquisition. Therefore for purposes of this discussion I'm going to focus on sequential comparisons.

Revenue totaled $25.9 million, compared to $22.6 million in the first quarter of the year. By segment, wholesale revenue was $14 million, retail $2.3 million, and digital $9.6 million. For the first quarter, wholesale revenue was $13.8 million, retail was $2 million, and digital was $6.9 million.

Digital grew from 30% of total revenue for the first quarter to 37%. Within the digital segment, our 5C licensing and Kiosk business delivered $8.4 million in revenue, compared to $5.7 million for the first quarter, and podcasting recorded $1.1 million in revenue, compared to $1.2 million in the first quarter, reflecting the seasonal dip in unique monthly audience numbers that Chris mentioned.

Gross profit was $11.5 million, an increase of $3.2 million or 37.7% over the first quarter. Gross margin reached 44.5%, compared to approximately 37% for the first quarter, driven by the increased mix of digital revenue and tighter control of cost of revenue from both the wholesale and podcasting businesses. Gross margin for our digital segment grew from 76.7% to 80.4%.

Operating expenses for the second quarter was $4 million versus $4.1 million for the first quarter. The significant increase in gross profit combined with relatively flat operating expenses, resulted in a substantial increase in net income to $5.7 million or $0.28 per share, compared to $3 million or $0.15 per share for the first quarter.

Weighted average shares outstanding were $20.8 million for the second quarter, compared to $20.6 million for the first quarter of 2013.

Turning to the balance sheet, we ended the second quarter with a cash balance of $27.7 million. We generated approximately $10 million in operating cash flows during the quarter, which we applied to refundable $13 million deposit on a building in Beijing to have for the live entertainment and talent management business.

In other words, in the second quarter FAB generated another $10 million of cash equal to the first quarter's cash generation and doubled the $5 million of cash generated in the fourth quarter of 2012.

Inventories increased $2.2 million to $7.4 million reflecting an anticipated demand for our products for both our retail and wholesale customers, including stocking China Unicom 37 stores in Beijing during the third quarter.

Our long-term deposits of $39.5 million include anti-piracy sales guarantee deposits made to product licensors, rent deposits made to landlords, prepayments made for the opening of new retail stores, and the 39 deposits that I just described. These are the only major variances on the asset side of the balance sheet from March 31st.

Other current liabilities reflect fluctuations associated with normal operating activities and we continue to carry no long-term debt.

Our balance sheet contains deferred revenue, both current and long-term that is derived from our licensed kiosk business model and the sale of membership cards.

We record deferred revenue payments made by licensees to FAB for licensing the kiosk model and the FAB brand, and by customers for the purchase of FAB membership card. Licensees pay us cash upfront for a five-year license and we recognize that revenue over the five-year term of these contracts. Membership that's totaled for 3 to 12 month period.

As of June 30th, short-term deferred revenue amounted $12 million, representing revenue that will be recognized over the next 12 months. Long-term deferred revenue totaled $18.9 million at June 30th. This long-term amount represents revenue that we will be recognizing starting July 1, 2014, through July 30, 2018. More detailed information about our financial results can be found in our 10-Q, which we plan to file later today.

Now, turning to guidance. We continue to expect strong growth through the second half of 2013 and remain confident that we will achieve revenue of $98.9 million to $102.6 million and net income of $19.3 million to $20.1 million for the full year. We are reaffirming our full year outlook, even though second quarter net income exceeded the guidance we offered on the last quarter's call. As you may recall, our first quarter results came in a bit shy of our quarterly guidance. In both quarters, the variance between our reported results and quarterly guidance reflects the timing of signing new kiosk contracts and the associated revenue recognition.

On a six month basis these timing variances have evened out. Because of these quarterly ebbs and flows and contract updates, we are revising our guidance policy and going forward, we will only offer guidance on an annual basis.

I will now turn the call back to Chris. Chris?

Chris Spencer

Thanks, John. So, in closing here FAB achieved another outstanding quarter of growth, profitability, and cash generation. We are pulling out all the stops to drive organic growth, building on our fabulous distribution platform, and the FAB brands to cross over the $100 million to and deliver an impressive 20% return on sales.

We will now open up the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Ken Nagy from Zacks.

Ken Nagy - Zacks

Hi, thanks for taking my question and congratulations on a strong quarter. I just wanted to may be to talk a little bit about the kiosk life of contracts and how that is going to look for margin, will margin be based on new contracts with all that money as sort of upfront?

Chris Spencer

Well, that's a good question there. So, in terms of the kiosk, right now the contract, the margins, we expect the margins over the next two years to remain at above the same. I don't see them really growing at this point, but we do expect them to remain within the range that they had over the last two years that we provided.

Having said, whether or not with the fact that they are upfront, these kiosk are really starting to grow and pickup. As we mentioned on the call, we are focused right now on getting them out there. We are focused on right now getting better quality contents or more content I should say more various types of content on them.

And that is going to in return propel the advertising and the membership card growth. Margins for those vary at this early stage because we're not focused on that right now. But I do believe that margins for the next several years will be within the range, what we're discussing and I do believe that kiosk will remain very valuable to our overall brand strategy going forward.

Operator

Our next question comes from Jim Macquarie (ph) with Sheridan. Please proceed with your question.

Jim Macquarie - Sheridan

You talked about an inventory increase for the retail stores in the China Unicom. Does that imply that the retail business will see an increase in revenue in the second half?

Chris Spencer

We do believe that the second half will come within the guidance that we provided. At the same time, historically and seasonally the second half tends to be a little bit up. But John I'm going to allow you to expand on that comment.

John Busshaus

Yeah, as far as the second half of the year, we will see minor increases I believe within our retail division. We will see a little bit more of an increase sequentially within our wholesale division.

Jim Macquarie - Sheridan

And the big jump in digital from Q2 -- from Q1, is that driven by what was that driven by more kiosk, more content, what most of the nature of that increase?

Chris Spencer

Excellent question. It's kind of a two-fold series or two-fold parts. First is actually increase in actual sales of kiosk and the second is actually the timing of when those sales takes place. So think about the fact that we're signing a five-year contact and the fact that if you sign that contract at the beginning of a quarter you're able to realize more revenue in that quarter, whereas if you sign the contract at the end of the quarter as well as the timing of signing of a contract at the previous quarter. That's what we talked about with the ebbs and flows of our quarter. So, what we have realized in scene is the impact of the timing of those contacts.

John Busshaus

Because in fact they are five years, and they're not for revenue recognition.

Jim Macquarie - Sheridan

My last question is regarding operating expenses. You've been running at this; let's call it $4 million, $4.1 million for the past couple of quarters. Is that a reasonable expectation for operating expenses going forward that $4 million to $4.1 million?

John Busshaus

Chris, will talk to this one. We expect our cash operating expenses to be in line with our first and second quarter, but we also have stock-based compensation expense that will likely increase and that's going to be as a result of what would happen with pricing with stock on the market then buying at the fair market value. Expenses for the growth of our business are also built into our net income outlook for the year.

Chris Spencer

Yeah, and just to touch on that. We do have some milestones we're going to be issuing some stock assuming they're achieved due to the acquisition and so that will be an expense. And then, we're expanding, we're looking to get into this, so we're getting into this live entertainment, as well as the talent management. But I don't believe those expenses are going to be too substantial to really move the needle very much. So I do think there's some going to be from time-to-time some increase in expenses but overall, I do believe they're going to be pretty much well within the range that we projected.

Jim Macquarie - Sheridan

And the stock comp expense is the milestones are based on share price or based on operational metrics?

Chris Spencer

Operational metrics but obviously the expense is based on share price.

Jim Macquarie - Sheridan

And so what happens is that you hit the metrics -- well let's assume you hit the metrics. You hit the metrics and then there is some I'm going to call it a one timeish but there is an unusually high stock-comp expense, because you hit the metrics, correct that in that period?

Chris Spencer

Correct.

Operator

Our next question comes from Bud Zaino with Royce and Associates. Please proceed with your question.

Bud Zaino - Royce and Associates

The accounts receivable, what's been your experience with a bad debt on that, where is that receivable been derived?

Chris Spencer

Can you repeat you question please?

Bud Zaino - Royce and Associates

There is $9 million accounts receivable in your currents assets, once is that derived in your short experience, what has been the bad debt experience on collecting those receivables?

John Busshaus

Our short-term experience has been we've had limited bad debt collection. We've actually been pleasantly surprised with the ability to collect accounts receivable since the acquisition to-date. I don't know of any significant write off that we've had everything it has been relatively minor.

Chris Spencer

Yeah. And just to touch on that, I just wanted to add that well I believe, and this is the CEO, Chris, but not from a CFO point of view, but I believe it takes little too long, so that's the China way they continue to tell us. However, they are successful in collecting the debts. So you can't really complaint if it takes the next two quarters.

Operator

Our next question comes from Harris Shapiro with Millennium Capital. Please proceed with your question.

Harris Shapiro - Millennium Capital

And you've indicated my prediction of almost a year ago. So now, how do you let the Street know about this? You're the best kept secret on Wall Street. Well, what are you folks doing for IR, investment banking affiliation, for non-money raising Road Shows? In other words, how are you going to get the word out?

Chris Spencer

Well, it's an excellent question. And one of the ways that we've started get the word out is by retaining LHA. LHA is a well-known very reputable institutional investor relations firm and with them we've a very detailed plan that we put together to execute over the next six months, because agree like you that is very important for us to get our message out there. I agree and just like you said, I couldn't say this better as is that we're the best kept secret out there. We're generating a tremendous amount of cash. And I think we have such amazing potential in China in terms of building our brand in the media and entertainment world. So we do have an excellent plan in place. We are going to be out on the road on non-deal road shows, non-deal. We are working towards our relationship with investment bankers. And all of -- everything you basically just covered, we have put in place over the last 90 days. And I would argue that today is the launch of the kickoff of that plan. So I think you'll be seeing a lot more of us and hearing a lot more about us over the next six months.

Harris Shapiro - Millennium Capital

And as you know, I did a report yesterday, it did get published on the Seeking Alpha, about half a million eyeballs look at it, so hopefully that will help too. Congratulations.

Chris Spencer

Thanks a lot.

John Busshaus

Thank you.

Operator

Our next question comes from Jeff Hart with Saber Capital Management. Please proceed with your question.

Jeff Harte - Saber Capital Management

You're halfway through the year and I can see that you're at the midpoint for your revenue guidance. How should I think about net income, your guidance of around $20 million and the year-to-date net income of $8.7 million, you suggest to me a stronger second half in terms of profitability? What is driving the higher profitability?

John Busshaus

Yeah, that's an excellent question. We're expecting a greater contribution from our high margin kiosk business in the second half of the year relative to the first half of the year because we report our kiosk business within the digital segment, which is also contain sales from podcasting and members. Our mix of segment revenue is not likely to change between the first and second half of the year.

Jeff Harte - Saber Capital Management

Well, talking about the kiosk. Given the increasing penetration of the internet in China, won't kiosk network at some point become irrelevant, kind of similar to what happened to say blockbuster chain in the United States?

Chris Spencer

Well, I'm taking that one John. This is one of my favorite questions. So yes that would be our biggest concern. However, we feel very strongly that that's not going to be the case. You've to realize how it is partly that kiosk business right now is a major growth driver, it's a major cash generator, but what we have here is a key to our overall FAB branded puzzle.

Right now, we're reaching the consumers in China through our wholesale division. We reached them through our retail division which however is really more of a brand promotion platform that we use. We bring in artists; we do these large star findings. We then have the kiosk network, but also the licensees, the network of licensees, thousands and thousands of licensee location throughout China. So what we do is is we work all this together. As we're launching the live performance and artist of management sides of our business here, it really ties together. So while I completely agree with you, with this whole blockbuster concern or even a dial-up network. These are issues we're fully aware of.

Fortunately though, this acquisition or this merger of our company is specifically in place to make sure that that doesn't happen to us. Why blockbuster ended up not being the Netflix is beyond me. I'm sure something was going on over there. But the fact is that we're ready for it.

On the podcasting front, you have to realize. For the last seven years we've been distributing massive amounts of entertainment through the internet. 1.5 billion plus episodes were shows, audio and video shows. We delivered annually for the last several years here. So we're ready for the internet side of the business. But we feel very strongly that the kiosk business will continue to grow over the next several years at a minimum, but then it also will complement our additional businesses. For example we have a talent, a new talent. So we launch their new album through our distribution channel, okay. It goes through our kiosk, okay. It goes though our wholesale channel.

Well let's say that we have a new concert and we want to promote this new talent at a concert coming up here. Well, we can sell the concert tickets through the kiosk. We can promote the new song; the latest release or the latest single from one the hottest artist through the kiosk. So they aren't just specifically for downloading audio and video content. We feel they're going to be great compliments going forward to our overall brand expansion in China.

Operator

Our next question comes from Sean Kenlon from Colebrooke Capital. Please proceed with your question.

Sean Kenlon - Colebrooke Capital

Yeah, thank you guys and congratulations on the performance. Just had a question on how should I think about 2014 sales and margins. I mean do you expect the segment break down to be roughly the same as in 2013?

Chris Spencer

You know what I can tell you is we fully expect to build on the growth that we're generating in 2013 across all our key metrics revenues, gross profits, and net income. We feel that we only scratch the surface for the addressable kiosk markets. We feel that we have 16,000 units out there right now. There's no reason we can't get the 300,000 units. There's no reason that we can't expand this on a very large scale when it comes to the talent management, when it comes to the live performances.

The wholesale business is a strong cash generator for us. So it allows us to fund organic growth year without having to go out to any type of capital markets, you know. And we feel that the kiosk business has tremendous opportunity here over the next several years which will continue to generate very significant margins and then we feel again by expanding our retail segments very systematically in cohesion with, if you will the live performance and the talent management business, we can really grow a large entertainment brand in China.

So the bottom-line is I think we're going to come in right where we've been projecting that we'll come in. But we feel that there is just so much opportunity to grow a real entertainment brand in China that the growth outlook is very substantial.

Sean Kenlon - Colebrooke Capital

Just had one or two other questions, on, you recently added China Unicom to your wholesale customer base. Is adding new customers in the segment an important part of the growth strategy?

Chris Spencer

Yeah, it definitely is. Our wholesale business here of providing content to other retail establishments is definitely part of our business. I mean it generated almost 50% of our cash flow. It's a great solid substantial business. So we are looking to add customers. But wholesale customers don't just spring up out of nowhere. So while we focus on our wholesale business and we look to continue to grow it, we really look at it as a nice cash generator for allow us to be innovative. It allows us to both be a operator of a good solid mature business, but also be innovative at the same time, grow our kiosk business and grow these new opportunities with the again the talent management and the live entertainment business.

Sean Kenlon - Colebrooke Capital

I just had two others. You talked before about acquiring complimentary businesses. Are you close to completing the transaction on anything?

Chris Spencer

Our efforts over the past few months have been centered on defining the strategy that makes sense for our business and the growth opportunities. What we're kind of looking for is businesses in the U.S. that will compliment what we're doing over in China right now. We're looking for content portfolios because we believe the higher diversity of our content, the better that -- the more demand we're going to have to drive the membership card. These are kind of obvious things, drivers, growth drivers, what we're trying to do. And we feel by our early initial investigation of the acquisition opportunities out there that we can be quite successful in acquiring content related acquisitions here in the United States portfolios revenue, generating portfolios on a non-dilutive basis and we feel that we can then bring those two our Chinese network to our digital kiosk network. And there is other opportunities as well there is talent management, and live entertainment type, acquisitions, opportunities, here in the U.S. but I think they are a little further down the road. But I think right now we're focused on technology related as well as content related acquisitions.

Sean Kenlon - Colebrooke Capital

I you said, just one last question regarding the kiosk you got about 16,000 now. How many of you plan to install before the end of 2013?

Chris Spencer

Well, we don't necessarily give exactly how many we're going to have out there. We believe then we're confident that the growth will continue at rates similar to that of last year.

Sean Kenlon - Colebrooke Capital

So the pace will be the same as first half?

Chris Spencer

That's what we believe.

Sean Kenlon - Colebrooke Capital

And then what you think you have in place by the end of 2014?

Chris Spencer

Well, again we don't really breakout the individual kiosk sales over on a projected basis. So, I think that we just going to keep -- I got keep going back to the guidance here. We believe that it will continue as it has for the last two years, with growth in there that we projected is contemplated already in the guidance we provided.

Operator

Our next question comes from Daryl Rene Quarles with Wells Fargo. Please proceed with your question.

Daryl Rene Quarles - Wells Fargo

My question is when getting back to your stock options, when you bought DEI from what I calculated could be as many as like 28 million shares. So, I just wanted a little more clear guidance on how that's going to impact profitability going forward and whether it will dilute the current shareholder earnings?

Chris Spencer

Well, I'm going to let John expand on that a little bit, but yes there is definitely additional shares to be issued. We feel that at the end of the September our partners in China will earn approximately $20 million that will be issued during the fourth quarter subject to their meetings, performance milestones, and corporate government hurdles. There is no additional voting right associated with the shares, but obviously they would be dilutive.

John Busshaus

And as of course the second part your question those issuance of shares will have no direct impact on expense. Those were accounted for at the time of the acquisition through a fair market value and allocation and resulted in the number that we put on our balance sheet and goodwill ultimately.

Daryl Rene Quarles - Wells Fargo

So, it won't impact expense, but the shares will grow from the current $20.8 million up to in the 40 some million. That's correct? If milestones are missed.

John Busshaus

Yes. That would be correct.

Operator

Our next question comes from Mike Samples with Raymond James. Please proceed with your question. Mike, your line is live.

Mike Samples - Raymond James

Yes, I had a question about the cash filled up. What uses are company looking for on the extra cash is it just acquisitions or are they looking at prefer to sell some stock or what have you?

Chris Spencer

I think right now at this time we are focused on the acquisition. We feel that acquiring content portfolio specifically as well as other very select strategic acquisitions would be the most beneficial use of the cash at this time. Because we feel that the growth that we're seeing right now and the margin that we're seeing, there is no better investment that in to our own business.

And the best way we can do that is to continue to grow our digital kiosk business. And we feel that our content obviously is one of the key of the three drivers that we were talking about for that business. So, I think that's the initial use of it. We also are going to use much, much more limited portions of it again to launch and grow the live entertainment as well as the talent management business.

At this time, we have no scheduled plans for a share buyback because again I feel right now the best use of capital would be to grow this tremendous cash generating high margin business that we have at this time in front of us.

Mike Samples - Raymond James

And just one additional question, the over kiosk that have been in place for a while, is there a growth rate steady or is that been increasing?

Chris Spencer

Has the growth rate of all the terminals grown or?

Mike Samples - Raymond James

Say the same, yes.

Chris Spencer

Define growth rate, you probably look at individual machine in terms of advertising and membership or are we talking about how many old ones we have out there versus new one?

Mike Samples - Raymond James

No, no, no I was talking about the sales, the dollars that are generated for older machines has it been increasing or is it kind of stagnated?

Chris Spencer

I kind of look at that as kind of same-store sales if you will may be in the fast-food industry. And the fact is that, we don't really focus on that at this time because again we're focusing on the key drivers, which is get the more machines out there, get more, more content on there and continue to drive growth across our network. So, we're constantly slopping out old machines for new machines in terms of the actual kiosk or the actual terminal itself.

But getting to your question here we are now starting to focus on the membership drive and the advertising, which is the third component of it and that's where we are putting a lot of our attention going forward. So in terms of giving -- providing you the metrics, I don't have them in front of me. I can tell you though it has not been a priority up until this point, because we had to meet, we had to gain some -- we had to hit a number out there. We had to get enough of them out there for them to become popular, so that you could know the joint membership because you see them at every mall you go to.

So once we start hitting, we got the penetration that we needed. Now, we're starting to see increases in the membership usage, as well as the advertising opportunities for the kiosk, both old and new, both newer locations and older locations. I think we had our best number and John please confirm, I'm not talking out of place here, but I think we had our best sale ever in the second quarter of membership cards or memberships for and that's across the whole entire network and that's more how we look at it right now, is across the whole network rather than same sale, the same store sales if you will same kiosk sales. I do believe that going forward we will be able to get more into depth, into individual kiosks usage.

Operator

Our next question comes from (inaudible) Investor. Please proceed with your question.

Unidentified Analyst

I've a couple questions. Is there any intention to expand outside of China or you're going just comfortable with your assets in China?

Chris Spencer

That's a good question and it's something we discussed constantly. We are looking for opportunities. But I think right now, we feel that the greatest opportunity we have is to continue to grow this FAB brand within China. We do get approached quite often from other nations or other countries or reputed companies in other countries wanting to expand for example, the kiosk network and our licensing brand and we do look at those selectively. I mean there's no doubt about it. If the content is right, if the models are right, I think we would consider it.

But I think to answer your question very specifically, at this time right now, we just feel there is such an opportunity to build a full national entertainment brand, the likes of the largest entertainment brands here in the United States by no means are we $100 million company revenue wise. I'm trying to compare ourselves with the Disney. But I do believe we have the same opportunity in China. When you tie these things together, when anybody buys a CD or DVD we are providing the wholesale to a good portion of the county. They want to see the star signing; they want to see key up with the latest content. We have the retail stores and we have our licensees across the whole country, we have our kiosks out there. We're now getting into the talent management and finally, we're getting into the live concert.

So it's going to be FAB everywhere and it's going to be related to the highest quality content, which is an issue still over there and it's continuing to get better and better, which we're right on the customers that way. It's going to grow with the whole growth of the middleclass. And the fact that they're really demanding higher quality entertainment, they want more, they want more like the western world. And so, I really think we have this opportunity to develop this huge entertainment brand in China.

So I must say a long answer to your quick question is we really are focused on our opportunities there because we think they're so substantial. And I think we're starting to demonstrate that already. And I do think those selectively will look for opportunities in the future going forward.

Unidentified Analyst

Is there any interest in catalogue or metrics in terms of possibilities that they might be interested in looking at your company as a patent to theirs?

Chris Spencer

Well, I don't know why they wouldn't, no. But I don't know I cannot speak for them. I surely would love that phone call.

I think we would make a nice growth opportunity for them, as well in China. And I won't be the dead horse to continue on with why we're so excited about this. But I do think we could be a complementary strategy to some of these large growing internet and media companies here in the United States that want us to withhold in China, why not. I mean one of these large media companies would come in and really have a leg up with a very professional organization here. And so, I do believe we are making an appealing acquisition opportunity.

Unidentified Analyst

Have you guys ever approached them and posed the question?

Chris Spencer

We have not yet. We were three quarters into this. I do think though that we are at a point where we really have our act together. We really have this really running this very well. We have the right people in the right places. We've demonstrated that we can operate mature businesses very successfully. We've demonstrated that we can innovate with our internet kiosk and or -- excuse me, our media kiosk business. And I think we've also demonstrated that we are ready for the future here with the internet with the massive podcasting platform that we can use for media distribution on a worldwide basis. So I think we are very well prepared and maybe it's time we start looking towards that. So I appreciate your question. I contemplated often.

Unidentified Analyst

You've done a great job. And unfortunately, no one knows about this stuff and they will find out.

Chris Spencer

I think over the next six months we're going to be out there talking loud and so everybody will listen.

Operator

Our next question comes from Tom Monson from Stifel Nicolaus. Please proceed with your question.

Tom Monson - Stifel Nicolaus

Jimmy Rogers has just joined your board a couple months ago. Can you comment on what his interest are in the company?

Chris Spencer

I can say I don't want to put words in his mouth. He's a very good speaker in his own right and he has got plenty of opinions on why he would do that. I can say that I believe -- I believe he is very, very high and this is not, this is very public obviously because he's always talking about it in public venues. But he's very high on China. He's very high on the opportunities in China. He's very bullish on the media and entertainment industry within China.

So I think that's what made the initial fit and then by meeting everybody. He came to our headquarters in Beijing. He was with us in Shenzhen when there was a large conference and he just became part of it and really starting to see it. He did his due diligence and I think he, again I don't want to put words in his mouth, but I think he feels that we have an opportunity as I've been saying here you know to really be a major, major brand in the entertainment field in China.

Operator

Our next question comes from Emilie Powell from (inaudible) Investor. Please proceed with your question.

Unidentified Analyst

I got a two part question. You're furnishing copyrighted material, that's correct?

Chris Spencer

Yes, correct, exclusively.

Unidentified Analyst

Compensation I imagine is being made to the artists?

Chris Spencer

Of course. As you know, as per contract.

Unidentified Analyst

Does this contribute in any way what you're doing to the pirating that goes on in China?

Chris Spencer

Well let me make sure I understand your question here. Does what we're doing contribute to the pirating?

Unidentified Analyst

Right, if you're furnishing copyrighted material and China is known for pirating DVD's and music from the United States. I mean you're giving that to them can they make these and then sell them on their own?

Chris Spencer

Well, I think they can do that no matter what to be honest. Whether we are involved in it or not, I think that there is always going to be piracy. There's piracy in the United States for content. Just look at all those sights on the internet where you can go download just about anything. So I do think that that's going to be there to some extent.

What I like about it is that it is quickly turning. The government has put our mandates that this is an industry that they want to see growth and be a large growth driver for their economy going forward. They have very aggressively fought and battled piracy, specifically after joining the World Trade Organization and they have been, there's been a lot of pressure from the Western World to go after piracy and I think they're doing a pretty decent job of it. I keep up on that. It's something that I consider myself very well read on and we are on top of that.

Now whether we're contributing to it or not, I don't think there's any way that we would measure that. I can say though that I don't think we're going to be bringing such new content to China that they couldn't get it somewhere else already. I think what we're doing is providing access to it, and I think that if you provide access at a fair price, the majority of people want higher quality content, okay. So when they get this piracy content. I don't know if you've seen it before. I have over there, in a lot of cases a DVD but if you will, first of all it doesn't have all the factors. It doesn't have all the fancy things. But that's not important to everybody. But a lot of times it's a guy holding up a video camera in a movie theater and you see people getting up in the middle of the movie theater and walking out and things like that, or going into the restroom. And so it's not very high quality and what we're seeing over there is that if you give people an opportunity to buy higher quality content at a reasonable price, they will do that because number one, they know it's against, the piracy is against the law. Whether or not they're going to get caught, I think people have to the right thing.

I have the ability to get illegal content on the internet on a regular basis. Like my iTunes and my other accounts and networks and so forth, their bill keeps going up every month in my house at least. So I don't want to ramble on about this, but it's something we're very serious about. Mr. Jang, the Chairman of our Board here is the Head of the anti-piracy copyright protection organizations within China for the last 20 years. He, you could argue is the face of copyright protection in China. He has definitely been a main driver for the last 20 years about this and he's done a good job. So we’re very aware of it.

I think your question is interesting and it definitely merits a longer conversation at some point which I will be happy to have with you. But I don’t think necessarily we're going to contribute to it. I think we're going to help to make it better over there be again access, higher quality and good pricing.

Unidentified Analyst

I have a second part of my question. Tom says that you offer guidance on an annual basis. Would you clarify that statement?

Chris Spencer

Well I think what he was saying was is that because of the ebbs and flows and the revenue recognition that we deal with the kiosk business, our digital media kiosk business, which is really our looking forward driver at this point. I think that we have decided rather than give quarter by quarter guidance; we're going to give an annual guidance. Just because of the ebbs and flows of our business right now. John is that accurate?

John Busshaus

Yes, that is.

Operator

At this time I would like to turn the call back over to Mr. Chris Spencer for closing comments.

Chris Spencer

Well thank you. Thanks everyone here for joining us this morning. We are excited about the future obviously and we look forward to updating you on our progress on our third quarter call in mid November. Please call us if you have any questions in the mean time and have a great day.

Operator

That concludes today's teleconference.

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