Wizzard Software: New Acquisition Transforms Company's Stock

| About: FAB Universal (FU)

Podcast-leader Wizzard Software (WZE) will soon close its acquisition of Beijing-based Digital Entertainment International (a.k.a. FAB) in a move that we expect will transform the company's stock.

In one transaction, Wizzard will become a three and a half dollar stock earning 43 cents a share. Its revenues will jump to almost $80 million, and Wizzard will gain access to the world's largest consumer market.

It is projected that for the full year 2012 the revenue will be at least $90 million and per share earnings are estimated to be $1.00 per share. Here's the story:

Wizzard Software (As of market close on July 27, 2012)

  • Market cap: $30.85M
  • Share price: $3.55
  • Share Float: 8.36M
  • Short Float: 1.74%
  • 2011 Revenue: $6.54M
  • 2011 Net Income: -$9.98M
  • 2012 Revenue Estimate: $90M

Wizzard Software is the world's leading podcast network. They offer their 14,000+ clients "everything podcasting" -- from publishing and delivery to monetization. They have a customizable flash player, new ad insertion technology, verifiable reporting statistics, and they can even turn a client's show into an App.

Wizzard's clients include Microsoft, National Geographic, Harvard Business Review, and NPR. The Pittsburgh-based company received over 1.64 billion podcast requests in 2010 from approx. 20 million monthly users worldwide. Their publishing platforms, Libsyn Indie & Libsyn Pro, host over 1 million audio and video episodes.

After Wizzard helps its clients get podcasts onto iTunes and elsewhere, their monetization services come in. Through their ad insertion technology, revenue sharing agreements with ad networks, and its Smartphone App, Wizzard helps its clients monetize podcasting. Their services are truly end-to-end.

The Acquisition

Digital Entertainment International (NASDAQ:FAB) is China's version of Coinstar's RedBox, but on steroids. The Beijing company offers expansive retail stores, 4,000 kiosks throughout China, and an online marketplace to purchase CDs, DVDs, blue-ray disks, games, magazines and books as well as software and movie downloads.

Total revenues for FAB's fiscal 2011 were $70.9 million with $15.3 million in net income, representing 28% sales growth and 32% earnings growth year-over-year.

On April 10 Wizzard Software and FAB agreed to a share-exchange deal in which Wizzard would buy 100% of FAB's shares by issuing 49% of Wizzard's outstanding shares plus giving two seats on Wizzard's board of directors.

Under certain conditions and after 2 years, FAB could own 78% of Wizzard Software.

In its acquisition, Wizzard is gaining an international partner in a quest to expand their digital media distribution into the world's larger consumer market. Wizzard is also spinning off its healthcare unit into its own public company after the merger. This should work to consolidate the company's focus on digital media.

But looking at the hard numbers really shows how much the acquisition of FAB benefits WZE. With this transaction, the company will immediately be operating well into the black and taking in annual revenues of almost $80 million. The stock, which is currently trading around 3 and a half dollars, will be earning 43 cents a share based on 2011 earnings for both WZE and FAB.

After the acquisition, its price-to-sales ratio (based on Friday's price of $3.55 a share) will stand at an attractive 0.57. Compare that to Coinstar's 0.79. Its trailing P/E after the acquisition will be 8.31 - considerably lower than Coinstar's 10.64.

After Wizzard Acquires FAB

  • Share float after acquisition: 12.456M (49% growth)
  • 2011 revenue (combined): $77.44M (1084% growth)
  • 2011 net income (combined): $5.32M
  • 2011 EPS after acquisition: $0.43
  • 2012 EPS estimate: $1.00
  • 2012 Revenue est: $90M

This deal is just the beginning for Wizzard. Not only will they gain access to the world's largest consumer market by acquiring FAB, they could also enter into virtually any type of digital media. This deal will transform the company's top and bottom lines and immediately make its stock worthy of a much higher premium.

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

Additional disclosure: It should be noted that Contextuall investors do hold a position in WZE.

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