Outerwall In $350 Million Stock Buyback, Names Ex-Warner Executive to Head Redbox

The Winter Olympics are expected to put a 4 million to 5 million rental dent in Redbox performance for Q1, said Chief Financial Officer Galen Smith on the company’s quarterly earnings call. Q1 performance is also expected to be affected by costs to build out the ecoATM business early in the year and the reversal of a $7 million benefit the company received from lower content amortization in Q4, Smith said.

Outerwall announced another share repurchase program with intent to buy back $350 million of Outerwall stock. If the tender offer is fully subscribed, the company will have repurchased $555 million of its common stock since February 2013, it said. Wedbush Securities analyst Michael Pachter said the share repurchase should position Outerwall for “significant earnings accretion” this year and will mean a reduction of diluted shares outstanding to roughly 21 million from last year’s 28 million. Wedbush expects Outerwall to generate more than $200 million in free cash flow in 2014.

Outerwall named Mark Horak, formerly president-Americas, at Warner Bros. Home Entertainment, as president of the Redbox business. CEO J. Scott Di Valerio said Horak brings a “significant amount of experience” to Redbox, and the relationships he has developed over the years are “valuable resources” to the company. Outerwall also named Maria Stipp, who was interim president of ecoATM, as president of ecoATM and chief new ventures officer for the company.

Outerwall announced on Dec. 10 that it was laying off 8.5 percent of its workforce and discontinuing the Rubi coffee kiosks, Crisp Market food kiosks and Star Studio photo booths businesses. The company ended the year with 2,900 employees, according to the 10-K SEC filing. The “sharp reduction” in new ventures should allow the company to create more cash flow than in the past, Pachter said. Wedbush expects the company to invest $35 million in ecoATM annually through the 1,000 planned installations. It finished the year with 880 ecoATM kiosks deployed.

EcoATM kiosks are “ramping toward” $100,000-$120,000 in annualized revenue per unit but performance was slowed in Q4 due to locked iPhones that knocked down the average sales price ecoATM received per device from Q3 levels, the company said. As new iOS phones hit the market in Q4, phones whose “Find My iPhone” app had not been disabled couldn’t be used again by another consumer, or recycled, and had to be “sold for parts,” Di Valerio said. That led to a “significantly lower price” from ecoATM’s buyers, he said. The company addressed the issue with a software fix in the kiosk’s user interface that “walks customers through” the process of going into the cloud to turn off the Find My Phone feature. That has allowed the company to get in more phones that were not “bricks” and that increased the overall value of the collected phones, Di Valerio said.

Redbox revenue in Q4 was $496 million, up 1.7 percent over the year-ago quarter, it said. Rentals grew 2.2 percent to 192 million year over year, with net revenue per rental of $2.58, compared with $2.57 in Q4 2012, it said. Revenue per kiosk was up 2.1 percent, Redbox said. While November tied with December 2012 as Redbox’s second highest rental month, rentals didn’t come in as expected in December 2013, the company said. The company cited a shortened holiday season due to a late Thanksgiving, which led to a “lower-than-expected seasonal lift in December.” The average check grew by 4.8 percent sequentially, which the company attributed to customer relationship management strategies including adaptive email that sends customized offers only to customers who are renting “out of cycle,” he said. But single-night rentals were up, “putting pressure on revenue,” Redbox said. It cited higher customer frequency and response to promotions as factors and noted that the percentage of single-night rentals dipped slightly from Q3 due to a decrease in broad-range discounts and the focus on customers renting out of cycle.

Blu-ray titles posted record numbers for Redbox, accounting for 14.2 percent of disc rentals and 16.3 percent of revenue in Q4, up from 10.7 percent and 12.5 percent in the year-ago quarter, Redbox said. Top-performing titles in the quarter included White House Down, After Earth, The Heat, and This Is the End. Iron Man 3 and World War Z, released in late September, also made strong contributions to Q4 Blu-ray rentals, Redbox said. Some 28 percent of rental customers in Q4 rented a Blu-ray disc at least once, it said.

Blu-ray remains key to Redbox’s growth strategy, the company said, and it expects to support the growth through Blu-ray upselling currently available online and via the Redbox mobile app. The feature will be added at kiosks in 2014 “to make it easy for our customers to rent and watch movies in the best format available today,” it said. Deeper household penetration of Blu-ray devices -- which Redbox cited as 72 million homes -- will help fuel growth. Fifty-five percent of Redbox customers own a Blu-ray compatible device, the company said, and “early success” of the Xbox One console is bringing Blu-ray playback capability into more homes, it said.

Video games generated 6.1 percent of revenue and 2.7 percent of rentals in Q4, compared with 6.8 percent of revenue and 3 percent of rentals in Q4 2012, Redbox said. The company cited weakness in the Wii platform and the increase in Xbox 360 games requiring multiple discs to play. Game publishers continue to support games for PS3 and Xbox 360, Redbox said, “but at a slower pace of new releases and with less prominent franchises compared with a year ago.” As the video game industry transitions to new consoles, the price of current-generation consoles will drop further, it said. That should enable “new, price-sensitive consumers to enter the marketplace,” Redbox said, calling its service a “great entry point for value conscious consumers who want to try new games before they purchase them.” Redbox will continue to offer a mix of games across different platforms, it said.

On Redbox’s joint streaming service with Verizon, Di Valerio again said 2013 was focused on “getting the CE devices onboard.” The companies haven’t released subscriber figures, and Di Valerio said Redbox will work with Verizon to provide more details “at the right time.” He said Redbox Instant by Verizon brought more CE devices onboard in the first year of operation than its competitors. The team is continuing to “work the interface to better merchandize the product” across the 8,000 streaming titles as well as 200 additional titles available at kiosks, he said. The companies have been seeing “reasonable results” and “some momentum” in growth in subscribers, viewing hours and transactions, he said. In Q4 the service launched on Xbox One, PS3 and PS4, Kindle Fire and Windows Phone 8.

Outerwall Q4 revenue was $2.3 billion, up 4.9 percent from the year-ago quarter, it said. Shares closed 12 percent higher to $71.37.