Wizzard Software: Acquiring The Redbox Of China

| About: FAB Universal (FU)

Wizzard Software (WZE) hit its own lottery yesterday, when it announced the acquisition of Digital Entertainment International (FAB), a leading licensor and distributor of copyright-protected digital media content in China. Overnight this micro cap went from 2011 revenue of $6.5 million, to $77 million in revenue. This is an astonishing 1,100 % growth in revenue. The company's net income went from a loss of $9.9 million in 2011 to now a gain in net income of $5.4 million. FAB is headquartered in China, and offers the largest selection in mainland China of copyrighted DVDs, Blu-ray Discs, music CDs, video games and downloadable digital content through three distribution channels - wholesale and retail, vending kiosks, and internet stores. In the press release, the CEO of Wizzard, Chris Spencer described FAB in China as "Best Buy meets iTunes meets Redbox." We all know how successful the Redbox (CSTR) business model has been in the U.S. If FAB is anywhere close to that in China, and its revenue growth says it is, then WZE is tremendously undervalued.

2010 was considered by some as the year of the Chinese IPO. China was, and in my opinion still is, experiencing an industrial revolution. China recorded double-digit GDP growth in 2010 and investors in the U.S. were looking for ways to get in on the party. The demand was there, so a myriad of Chinese companies began listing on U.S. exchanges. Investors' appetites turned after a combination of accounting scandals, and the Chinese government's attempt to curb inflation by tapping the brake pedal on the growth rate. Now it has become harder to find demand for Chinese IPOs in the U.S. so they have to seek alternatives. I believe this was the cause of this particular acquisition. Wizzard Software, a company whose stock was sub $1 prior to a reverse split in February, was looking for a boost to its revenue, while Digital Entertainment International wanted a listing on a U.S. exchange. Alas we have a marriage that is an instant benefit to investors.

Looking closer at the numbers, Wizzard announced it will issue shares equal to 49% of its outstanding shares at the time of closing. Today WZE has 8.164 million shares outstanding. If you add 49% to that, you will now have 12.164 million shares outstanding when the acquisition closes. In 2011 Wizzard had a loss of $9.9 million, but FAB had net income of $15.3 million. If you take that $15.3 million over 12.164 million shares, that gives you 2011 eps of $1.25/share! At the time of writing this article, WZE stock closed at $2.86 so it is trading at a trailing PE of 2.28. Coinstar, parent company of Redbox, grew revenue 40% last year and the stock is trading at a trailing PE of 19. Let's look at some more numbers; FAB revenue for 2011 grew 28% year over year to $70.9 million. Using the new shares outstanding of 12.164 million, WZE trades at a market cap of $36.4 million. That is a price-to-sales ratio of less than 1 at .51! Coinstar's price to sales you ask? 3.70.

If you are an admirer of the success that the Redbox Kiosk business model has had as I am, imagine investing in something similar to that at the early stages in China. The acquisition of FAB by Wizzard Software enables you to now do that at a cheap price.

My disclaimer is to note that Digital Entertainment International is a Chinese company, and some Chinese company's have had a history of fraud.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.