Outerwall Adjusts As Promotional Discounts Hit Redbox Average Tickets
Simultaneous promotional discounts from Redbox in the first half of Q3 negatively affected revenue and gross margins, but Outerwall made adjustments “quickly and appropriately,” said CEO Scott Di Valerio on the company’s quarterly earnings call Thursday. Promotions in July and early August involved “a little more volume than what we typically would do,” including a rent-one-get-one-rental-free deal, 50 percent off on Friday rentals and a text club, Di Valerio said.
Citing “too many at one time,” Di Valerio said the buzz helped drive rentals, but Redbox relinquished full-price transactions in the process. The average ticket shrank to $2.39 in July due to discounting and resumed a more typical level of $2.57 in September, he said. The promotions drove up the number of single-night rentals in July, and rental activity in September followed seasonal patterns, scaling back as a result of back-to-school, football and new TV program schedules, he said.
Redbox high-frequency rentals were up 14 percent year-over-year, Di Valerio said, and the company continues to roll out its customer relationship management (CRM) initiatives to drive growth by personalizing promotions to high-frequency renters. Redbox had a 3 percent increase in rental frequency among its high-frequency renters due to CRM programs despite the drop in the average ticket, he said.
Redbox is broadening the CRM program that it began rolling out in Q3 and plans to send out more “adaptive” offers personalized to individual customers to help drive incremental rentals, Di Valerio said. A mistake in July was offering promotional incentives to customers who would have been renting anyway, he said. High-frequency renters, who frequent kiosks at least four times a month, don’t need a lot of promotional incentive to rent, he said. The CRM program will allow the company to drive “the right amount” of incremental rentals while keeping average checks at acceptable revenue levels, he said.
Same-store sales growth at Redbox was 2.1 percent, a 9 percentage point increase from negative 6.8 percent in Q2, Di Valerio said. The customer base of total active credit and debit cards advanced 7.9 percent over Q3 2012, he said, while kiosk growth grew 2.8 percent, demonstrating a positive consumer response, “particularly when we have strong content.” The expanded consumer base provides additional opportunities to drive incremental rentals across the company’s kiosk network, he said.
The company recognizes that Redbox growth is “maturing to single-digit revenue,” mirroring the Coinstar business trajectory, Di Valerio said. Outerwall completed its acquisition of ecoATM in July giving the company “a platform for growth” and a business that will deliver cash flow as it “moves to scale,” Di Valerio said. It has about 800 ecoATM kiosks in place and plans to add roughly 100 more by year-end, he said.
Outerwall has pegged the addressable market for ecoATM kiosks at 5,000-10,000 , which will lead the company to outlets “other than the mall channels,” Di Valerio said. The company is testing the kiosks in the mass channel now, including in large-format stores, he said. Assuming ecoATM reaches its 600-kiosk target for 2013, Di Valerio expects the expansion to be greater next year. He cited the “big opportunity” from 175 million new devices that are sold annually. Only 20 percent of devices sold in a year are traded in, while there’s a lot of demand for refurbished phones, he said. He noted that ecoATM machines also take tablets and MP3 players, and the company is seeing a growing refresh cycle on tablets, he said.
It’s still too early to talk about numbers in the Redbox Instant by Verizon venture, Di Valerio said, but “we're making progress.” Customer acquisition levels and service engagement are both up, along with the amount of time consumers are spending renting at the kiosks and streaming content, he said. Both companies are “pleased” with the expansion of devices offering the service, including Roku, PS3 and the upcoming PS4, he said. The service offers roughly 200 titles at kiosks and some 7,800 digital movies in the subscription library, plus those available for rent or purchase, he said. The companies are ramping up promotional activities via the Web, CRM and through in-store and kiosk programs for Q4, he said.
Outerwall’s Q3 revenue was $587 million, up from $538 million in the year-ago quarter, the company said. Operating income fell to $48 million compared with $67 million in Q3 2012, while expenses jumped to $539 million from $471 million. Wedbush Securities maintained an “outperform” rating on Outerwall and lowered fiscal year 2013 revenue estimate to $2.33 billion from $2.34 billion to reflect Q3 results and revised guidance. Wedbush also trimmed its 2014 revenue estimate to $2.54 billion from $2.67 billion to reflect lower Redbox revenue growth, but it maintained an earnings per share estimate of $6.45 to reflect “higher Redbox margin assumptions and the positive impact of ecoATM.” Outerwall lowered its guidance in September, adjusting projections for consolidated revenue to between $569 and $589 million compared to prior estimates of $604 to $630 million. Outerwall shares closed 4.3 percent higher Friday at $64.62.