OUTR - Outerwall

[TwoCitiesCapital]

Anyone buying more?

 

I'm waiting to see what the actual results are. This is their forward looking guidance, but they could be sand-bagging ahead of a pick up around the holidays. I'm not crossing my fingers though - I don't want to be caught buying more if FCF does actually come in around $20-30M but would certainly continue buying if the results top management's current estimates.

 

I just hope they didn't blow their entire repurchase load already - they do always seem to repurchase all their shares near the highs for the quarter....

[thefatbaboon]

If it goes down to 20 like Picasso says then I hope the company uses 340m to repurchase everyone's shares but mine.  They have a 600m credit line that only had 55 drawn as of q3.

 

This is a fascinating investment. I must admit It hasn't gone as I planned at any point. I didn't like the price increase taken after 3 bad quarters last December. It seemed like bad strategy. You should raise when you have a good product and people are "in the habit". I didn't like the Eco saga and the ex ceo saga. I was disappointed with the cost structure flexibility ytd. And now this screw up.

 

And yet every time I step away and re look I feel the investment case is always re-saved by fewer and cheaper shares. maybe I'm crazy.

 

Now as for redbox health one aspect of the announcement that I found slightly reassuring. Revenue is missing expectations by only 2-3%. So they spent promotional $ and that has halved fcf expectations but it did at least bring people to the kiosks.

[Guest Grey512]

If it goes down to 20 like Picasso says then I hope the company uses 340m to repurchase everyone's shares but mine.  They have a 600m credit line that only had 55 drawn as of q3.

 

This is a fascinating investment. I must admit It hasn't gone as I planned at any point. I didn't like the price increase taken after 3 bad quarters last December. It seemed like bad strategy. You should raise when you have a good product and people are "in the habit". I didn't like the Eco saga and the ex ceo saga. I was disappointed with the cost structure flexibility ytd. And now this screw up.

 

And yet every time I step away and re look I feel the investment case is always re-saved by fewer and cheaper shares. maybe I'm crazy.

 

Now as for redbox health one aspect of the announcement that I found slightly reassuring. Revenue is missing expectations by only 2-3%. So they spent promotional $ and that has halved fcf expectations but it did at least bring people to the kiosks.

 

The faster the business dies, the more they buy back... Just crazy (not saying I disagree with you).

This stock makes my head spin. Hate the business. Not enough #@#$s to short the stock.

 

 

[Picasso]

If it goes down to 20 like Picasso says then I hope the company uses 340m to repurchase everyone's shares but mine.  They have a 600m credit line that only had 55 drawn as of q3.

 

Right now I can find hundreds of different stocks that are considered "obsolete" for the future business conditions.  Whether it's oil pipelines or retailers, whatever.  They're all trading much, much cheaper and many with less debt and similar repurchase plans.  Outerwall just doesn't scream cheap when you compare your different investment options right now.

 

Also consider the following:

 

1) If Outerwall needs to draw down on their credit line to repurchase shares, this stock is screwed.  There's no way someone else besides an Outerwall bagholder will look at that positively.

 

2) If free cash is falling this fast with minimal revenue losses, what do you think will happen to free cash when revenue losses accelerate?  That's not a positive.  You're pushing into serious negative operating leverage here.

 

I think you've finally pierced the armor of the bull case behind this stock.  If I was shorting (I refuse to short stocks these days) I would be hoping they use up their line of credit to buy up a bunch of overvalued shares in the 20's, 30's, 40's, 50's. 

 

I know there were some guys long like 30% of their portfolio in this stock from the last CSTR thread.  Be careful guys.  These levered stocks have a nasty habit of getting really, really "cheap."

[thefatbaboon]

I made mistake saying that Rev only decline 2-3%. I was looking at the year on year revenue estimate. Not the quarter. It's actually looking more like a 15-20% decline. From 490ish last year to 400ish implied for this q4.

[TwoCitiesCapital]

I made mistake saying that Rev only decline 2-3%. I was looking at the year on year revenue estimate. Not the quarter. It's actually looking more like a 15-20% decline. From 490ish last year to 400ish implied for this q4.

 

Yea, but last Q4 was their biggest quarter ever - so if this is actually a mediocre quarter for them then it doesn't surprise me to see the 15-20% decline. The 2-3% year over year is probably more telling. Every quarter this year has been less than Q4 in 2014.

 

Also, as the other posters have noted, if Outerwall draws down it's credit line to repurchase stock, I'd probably sell. I don't mind them spending FCF on it, but I don't want to see them any further indebted than they currently are.

[AzCactus]

Afterhours down 24% that's pretty ridiculous

[AzCactus]

I'm probably going off the deep end here but would love to see Mecham take control here and use this as his Berkshire Hathaway .

[Libs]

KJP:

 

Thanks. I'm getting $250-$280MM now.

 

I agree with the bulls here. It almost feels too good to be true.

 

Speaking of which, some say the truly good investments make your stomach churn a bit when you make them. But I've never had that, not once. The stuff that has hit my over the head has always instilled me with 100% greed, and no queasiness whatsoever.

 

I admit to some queasiness here, because of the melting cube aspect. But it's not stopping me. FWIW.

 

Should have listened to my gut. Sigh.

[Travis Wiedower]

I'm probably going off the deep end here but would love to see Mecham take control here and use this as his Berkshire Hathaway .

 

I don't know much about Mecham, but this is the perfect business for it if he ever had a desire for that type of thing.

[JayGatsby]

So far I'm happy with what Prusch is doing:

1. Horak was doing an absolutely awful job with inventory in my opinion as I mentioned earlier. There have been numerous times recently when I've looked at Redbox.com to find a movie to watch, failed, and found something pretty quickly on iTunes. Kids movies seem to rent pretty well so why not have a selection of Elf, Charlie Brown, etc for the holidays? If Jurassic World, Fast and the Furious, and Mission Impossible are coming out why not offer a selection of the older titles? That seems like basic stuff that everyone else in the industry is doing. These movies are new on Amazon for $8-$10 so I have a hard time believing the economics don't work.

2. The press release hinted that the prior management (and Horak) decision to raise prices may not have been the right one. At the end of the day price is their biggest competitive advantage.

3. SampleIt has been in test phase forever (at least since Jana Partners invested a year ago). Glad they're finally making a decision on it.

 

I'm comfortable with their prior goal of 1.75x - 2.25x leverage. As EBITDA goes down they'll delever on a dollar basis.

 

 

[thefatbaboon]

Two cities,

 

Im not sure you can call q4 2014 biggest ever quarter. Unit rentals were higher in all of the following quarters: q4 2012, all 4 quarters of 2013, and q1 of 2014. The revenues in q4 2014 were good because of the price increase from 1.50 to 2.00 taken in beginning December.  This year we have the benefit of that price being in the whole quarter as opposed to just one third of last years q4. Even with this better price new midpoint guidance implies q4 revenues 409.  Down from 494 last year. That's -17%. But it's significantly worse than that. So far pricing has given us about +16% ytd over 2014. Pricing theoretically ought give us same amount versus 2/3 of q4 and be flat versus 1/3, so +10%. In other words underlying unit guidance is around -27%. Which would be going from 181m last year to 132m this year. 

 

But we know they've been promoting so I am guessing they are giving up some of this pricing advantage.  They said in the release that "redbox has driven improvements in both unique customers and total rentals during the first two months of the fourth quarter relative to the third quarter". Well we know rentals last quarter were 133m. Ok, so we can assume that they've given up enough price to have revenues come down as per guidance but in doing so won some extra rentals compared to the 132m implied by guidance+16% price. 

 

I'm not happy, a company in this situation cannot afford to do too much dumb stuff. I think the handling of last years price increase and obviously Eco have probably cost the company the whole of the market cap as implied by yesterday's after hours trades at 45. 

 

Jay, I agree with you that so far the new CEO seems to be acting logically. And we can all now see some clear stupidities that prior management was responsible for. But I'm concerned because managing a declining business is not forgiving of mistakes. There is usually no path back.

We are creatures of habit and the longevity of a dying habit depends on managing the decline rate. Getting people to start or restart is much much much harder. And usually totally uneconomic. It's all about slowing down quitters. Bad management decisions are not easily reversed. They can be changed yes, but it's not easy to go back and reclaim lost territory because once that customer starts using a more convenient technology it's not easy to lure him back.

 

Overall I'm disappointed and quite concerned. Although at the end of the day fcf for the year is still estimated to equal or exceed last years fcf of 240m.  But I'm now seeing a fast decline rate continuing for the "consumer with options". So the outerwall equity thesis is going to depend on whether there is a meaningful amount of core consumers who have financial problems or haven't streaming/sat/cable/acquisition options who prove larger and stickier than everyone thinks.

 

Im not a seller at after market prices but I think it's impossible to argue that we haven't lost a significant part of our valuation of outerwall with the information implied by the new update. So far over the last 18 months or so of my involvement this has been the very definition of a value trap. The intrinsic value moves down with new information at about the same rate as the market cap while preserving a fairly similar discount. And personally I have been unable to see round the corner to any of these unpleasant "surprises".  I hope we get a good surprise one day!

 

 

 

 

[Guest roark33]

When people say that the new mgmt is acting logically, how do you reconcile that statement with the decision to invest $18m in Gazelle?  Not a retail facing "kiosk" business and is a "double-down" on the failing ecoATM business?

 

[thefatbaboon]

Roark, can't speak for jay but for me it's not so much that I have evidence of them being logical. So I guess I misspoke, but I don't see evidence of illogical behaviour. Which I felt with the Eco buy and the handling of the price increase.

 

18 for gazelle is irrelevant. They are pot committed. They have sunk +500m on the Eco disaster. Maybe before throwing towel they want to see if having a direct route to a second hand buyer changes anything? I give them benefit of doubt because I don't have good arguments against. Even if odds of success are slim it is worth trying before kissing a final goodbye to half a billion.

 

Honestly, the 18 on gazelle is the least of my concerns.  I and many others on this board had written off All of Eco already and gazelle immediately it was bought.  I think people who are long the stock have much more important things to puzzle over.

[Guest roark33]

I disagree.  I think a majority of long investors would cheer an immediate shut down of ecoATM.  Therefore each additional "investment" into that sub makes the case that mgmt is not being wise with the free cash flow from redbox and coinstar.  You can't say, well it's only 18m.  That's real money. Continued attempts at throwing good money after bad shows that mgmt has failed to learn the most basic econ lesson (sunk costs) and additionally is not going to be wise with additional cash flow from the business.  I have spoken to a few longs who saw that 18m, although small, as the straw that broke the camel's back. They sold after last Q around 60.  They are most likely pleased that mgmt tipped its hat that it wasn't going to actually return all the free cash flow to shareholders...

[TwoCitiesCapital]

I disagree.  I think a majority of long investors would cheer an immediate shut down of ecoATM.  Therefore each additional "investment" into that sub makes the case that mgmt is not being wise with the free cash flow from redbox and coinstar.  You can't say, well it's only 18m.  That's real money. Continued attempts at throwing good money after bad shows that mgmt has failed to learn the most basic econ lesson (sunk costs) and additionally is not going to be wise with additional cash flow from the business.  I have spoken to a few longs who saw that 18m, although small, as the straw that broke the camel's back. They sold after last Q around 60.  They are most likely pleased that mgmt tipped its hat that it wasn't going to actually return all the free cash flow to shareholders...

 

EcoATM has been a massive failure, but spending that 18M doesn't mean the company has succumbed to the sunk cost fallacy. They spent a ton of money on ecoATM that was largely wasted as the project was currently structured, but they did end up with a lot of inventory of and some operating experience in the field of used technology in the process. If spending an incremental $18M provides value to the that inventory, network, and experience by making it the slightest bit profitable, then I'd say that is an incredible use of an incremental $18M and probably a significantly better ROI than repurchasing shares or paying down debt.

 

I'm not terribly excited about the $18M spend on gazelle, but I'm not angry about it either and it's not necessarily evidence of the management acting irrationally.

[cmlber]

I disagree.  I think a majority of long investors would cheer an immediate shut down of ecoATM.  Therefore each additional "investment" into that sub makes the case that mgmt is not being wise with the free cash flow from redbox and coinstar.  You can't say, well it's only 18m.  That's real money. Continued attempts at throwing good money after bad shows that mgmt has failed to learn the most basic econ lesson (sunk costs) and additionally is not going to be wise with additional cash flow from the business.  I have spoken to a few longs who saw that 18m, although small, as the straw that broke the camel's back. They sold after last Q around 60.  They are most likely pleased that mgmt tipped its hat that it wasn't going to actually return all the free cash flow to shareholders...

 

I'm not, and have never been, long this stock, but I think you could argue the $18m is actually a freebie.  If they announced tomorrow that they were totally shutting down ecoatm, per your belief (which I agree with), the stock would rally and OUTR would be able to buy back far fewer shares with its free cash flow.  So you could argue that the depressed valuation that comes as a result of continuing to try to make ecoatm work more than offsets the cost of the additional investments, so it may not be so illogical.

 

I think the bigger (and only) issue here is, how long do people keep renting physical DVDs?  EcoAtm is irrelevant.

[ritrading]

I think the bigger (and only) issue here is, how long do people keep renting physical DVDs?

 

Does Redbox rent out Blurays? I imagine that people renting blurays would come earlier than laying down cables for broadband in most of the places where Redbox is relevant.

[JayGatsby]

I disagree.  I think a majority of long investors would cheer an immediate shut down of ecoATM.  Therefore each additional "investment" into that sub makes the case that mgmt is not being wise with the free cash flow from redbox and coinstar.  You can't say, well it's only 18m.  That's real money. Continued attempts at throwing good money after bad shows that mgmt has failed to learn the most basic econ lesson (sunk costs) and additionally is not going to be wise with additional cash flow from the business.  I have spoken to a few longs who saw that 18m, although small, as the straw that broke the camel's back. They sold after last Q around 60.  They are most likely pleased that mgmt tipped its hat that it wasn't going to actually return all the free cash flow to shareholders...

 

EcoATM has been a massive failure, but spending that 18M doesn't mean the company has succumbed to the sunk cost fallacy. They spent a ton of money on ecoATM that was largely wasted as the project was currently structured, but they did end up with a lot of inventory of and some operating experience in the field of used technology in the process. If spending an incremental $18M provides value to the that inventory, network, and experience by making it the slightest bit profitable, then I'd say that is an incredible use of an incremental $18M and probably a significantly better ROI than repurchasing shares or paying down debt.

 

I'm not terribly excited about the $18M spend on gazelle, but I'm not angry about it either and it's not necessarily evidence of the management acting irrationally.

Exactly. The $500M was sunk. The new $18M is a new investment. If they can turn the overall enterprise into a $5M EBITDA enterprise through the combination then it's a good investment. Doesn't seem like a very high hurdle. Personally I'm curious to see how it plays out.

 

I'm also curious to see how Redbox does with new leadership. Compare the top movies itunes to what's available on Redbox: http://www.apple.com/itunes/charts/movies/ . I'm tired of the old "bad box office" excuse when they're doing absolutely nothing to try to stimulate demand.

[Guest roark33]

I disagree.  I think a majority of long investors would cheer an immediate shut down of ecoATM.  Therefore each additional "investment" into that sub makes the case that mgmt is not being wise with the free cash flow from redbox and coinstar.  You can't say, well it's only 18m.  That's real money. Continued attempts at throwing good money after bad shows that mgmt has failed to learn the most basic econ lesson (sunk costs) and additionally is not going to be wise with additional cash flow from the business.  I have spoken to a few longs who saw that 18m, although small, as the straw that broke the camel's back. They sold after last Q around 60.  They are most likely pleased that mgmt tipped its hat that it wasn't going to actually return all the free cash flow to shareholders...

 

I'm not, and have never been, long this stock, but I think you could argue the $18m is actually a freebie.  If they announced tomorrow that they were totally shutting down ecoatm, per your belief (which I agree with), the stock would rally and OUTR would be able to buy back far fewer shares with its free cash flow.  So you could argue that the depressed valuation that comes as a result of continuing to try to make ecoatm work more than offsets the cost of the additional investments, so it may not be so illogical.

 

I think the bigger (and only) issue here is, how long do people keep renting physical DVDs?  EcoAtm is irrelevant.

 

I really think I must be reading this wrong.  Are you suggesting that the 18m of "potentially" value destroying investment in Gazelle is worth it because it delays the spike in share price when they announce the Eco shutdown and allows them to buyback more shares during that "depressed share price" phase. 

[cmlber]

I disagree.  I think a majority of long investors would cheer an immediate shut down of ecoATM.  Therefore each additional "investment" into that sub makes the case that mgmt is not being wise with the free cash flow from redbox and coinstar.  You can't say, well it's only 18m.  That's real money. Continued attempts at throwing good money after bad shows that mgmt has failed to learn the most basic econ lesson (sunk costs) and additionally is not going to be wise with additional cash flow from the business.  I have spoken to a few longs who saw that 18m, although small, as the straw that broke the camel's back. They sold after last Q around 60.  They are most likely pleased that mgmt tipped its hat that it wasn't going to actually return all the free cash flow to shareholders...

 

I'm not, and have never been, long this stock, but I think you could argue the $18m is actually a freebie.  If they announced tomorrow that they were totally shutting down ecoatm, per your belief (which I agree with), the stock would rally and OUTR would be able to buy back far fewer shares with its free cash flow.  So you could argue that the depressed valuation that comes as a result of continuing to try to make ecoatm work more than offsets the cost of the additional investments, so it may not be so illogical.

 

I think the bigger (and only) issue here is, how long do people keep renting physical DVDs?  EcoAtm is irrelevant.

 

I really think I must be reading this wrong.  Are you suggesting that the 18m of "potentially" value destroying investment in Gazelle is worth it because it delays the spike in share price when they announce the Eco shutdown and allows them to buyback more shares during that "depressed share price" phase.

 

Your exact quote was "I think a majority of long investors would cheer an immediate shut down of ecoATM."  That implies you believe the stock would be higher, right?  So while it sounds very odd, why is it so hard to imagine there might be some value to having a lower stock price.  If, in an alternate universe where instead of announcing the $18m investment they announced an ecoatm shut down, how much higher do you think the stock price would be?  If they're going to buyback $200m of stock this year, if the price would be 9% higher in that alternate universe, it's a wash for intrinsic value one year out (assuming no expected value on the investment)... 

 

I was simply making what I think is an interesting point, based on your initial premise that investors would "cheer" (what does that mean besides the stock would go up?) an ecoatm shutdown and the fact that the long thesis here is basically CoBF members will be the sole owners of Redbox in 3 years when they buy back all the stock.

[Travis Wiedower]

It is kind of an interesting thought experiment. If buybacks are the most +EV way to spend their cash (I'm not claiming it is) then management should want to keep the stock price depressed as long as possible.

[AzCactus]

Am I the only one wondering if Arlington is adding at these prices?

[Txvestor]

Am I the only one wondering if Arlington is adding at these prices?

 

I think it is quite likely alan is acting on this. Whether he is adding or selling I have no idea ;).

This is a tough one. If the revenues continue to decline dramatically, this could go to zero and the shorts would have had it right. It will also throw managements judgement into disrepute, having used cash flow in the most idiotic way. Already their recent acquisitions, buybacks at much higher prices with balance sheet debt etc. do not at this juncture appear prudent.

That said, all it takes is one good quarter to see this thing take off like a rocket. And if subsequently we find out that they loaded up on buybacks at these levels, it would be a kicker.

I frankly don't care what happens to the stock near term, as if it works out, the buybacks at these levels are absolute contrarian steals, but I do need to see the revenues start to stabilize one of these quarters. Right now their price increase recently seems more like a desperate attempt at maintianing revenue and profitability than something done out of strength.

Surely the idiots in management know their business better than what it appears? Right now they have delivered news that have the shorts tails up.

 

[TwoCitiesCapital]

Am I the only one wondering if Arlington is adding at these prices?

 

I think it is quite likely alan is acting on this. Whether he is adding or selling I have no idea ;).

This is a tough one. If the revenues continue to decline dramatically, this could go to zero and the shorts would have had it right. It will also throw managements judgement into disrepute, having used cash flow in the most idiotic way. Already their recent acquisitions, buybacks at much higher prices with balance sheet debt etc. do not at this juncture appear prudent.

That said, all it takes is one good quarter to see this thing take off like a rocket. And if subsequently we find out that they loaded up on buybacks at these levels, it would be a kicker.

I frankly don't care what happens to the stock near term, but I do need to see the revenues start to stabilize one of these quarters. Right now their price increase recently seems more like a desperate attempt at makntianing revenue and profitability than somethign done out of strength.

Surely the idiots in management know their business better than what it appears?

 

Redbox revenues are down 8% if we hit the management's lower end guidance for the year. That's more than I expected but it is far from the disaster scenario. It does push us more closely in the direction that the bears said it would go though. It's certainly not the exciting outcome that many bulls hoped for with the price increase.

 

It's hard for me to buy the management's discussion about a weak box office with such a strong release Summer, but there was a poster who mentioned that Redbox said it doesn't make money on the blockbusters. If that's the case, maybe it's simply the # of releases that matters to Redbox. If we look at just the # of releases, 2015 has had 7-8% fewer titles released than last year which would align almost exactly with the drop in revenue. Maybe the management does have some credibility when discussing a weak box office?