OUTR - Outerwall

[TwoCitiesCapital]

    2013: FCF: 166 mm, shares outstanding as on 12/31/2013: 26.1mm, $6.36 / share of FCF

 

    2014: FCF: 240 mm, shares outstanding as on 12/31/2014: 19mm, $12.63 / share of FCF

 

    2015: FCF: EST 280mm(assuming $75mm of FCF in Q$), shares outstanding: 16mm(repurchase 1.25mm shares), $17.5 / share of FCF

 

 

 

    Everyone is looking at the doomsday scenario, but how about the way FCF/share has grown in the past 3 years.

 

    Q4 and Q1 are going to be monster slates. I actually believe we will be somewhere between $80-90mm of FCF for each of these quarters(Q4 and Q1).

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    You can make arguments like "if operating costs are so flexible, then why did they have to shut down Redbox Canada". Against this, I would argue "Look at how much more FCF was generated by the price increase last December, despite huge decline in rentals."

 

  Management warned of a very weak slate in Q3(Box office was down 45.3% YoY, so on a relative basis, ~23% rental decline is actually outperforming the box-office). Despite this rental decline, they still managed 65mm of FCF.

 

 

    I think Q4 will be very telling as to whether which one of the following thesis is going to hold true:

 

1. DVD rentals are in a major decline, and this is a value trap

or

2. Redbox is 50% cheaper than VOD/Apple TV/Amazon prime/Google play. They are going to be the Lowest-cost producer in the Rentals for new content. The Q3 decline in rentals was due to a weak slate.

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    I am always a believer that you typically can't mess with the lowest cost producer of anything(esp. when you are 40-50% cheaper than the alternative). I do believe that 80% of America will go the extra effort to save a couple bucks and rent from Redbox.

 

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    What would be interesting is if someone can plot YoY changes in box office content and compare that to YoY changes in Redbox rentals.

 

    This would be fairly insightful to the board

 

+1.

[rsmehta]

In case anyone else was wondering about the Q4 slate:

 

Below I have the top 10 movies of 2015 thus far, and the DVD release date for them.

 

1 Jurassic World Uni. 20-Oct

2 Avengers: Age of Ultron BV 2-Oct

3 Inside Out BV 3-Nov

4 Furious 7 Uni. 15-Oct

5 Minions Uni. 15-Sep

6 Cinderella (2015) BV 15-Sep

7 Mission: Impossible Par. 15-Dec

8 Pitch Perfect 2 Uni. 22-Sep

9 The Martian Fox Feb-16

10 Ant-Man BV 8-Dec

 

    The top 10 box office hits accounts for $3.09B of box office revenue, or about 38.6% of the 2015 box office($8.01B till date).

 

    This has been taken from:

http://www.boxofficemojo.com/yearly/chart/?yr=2015&view=releasedate&view2=domestic&sort=gross&order=DESC&&p=.htm

----------------------------------

 

  Out of these 10 titles:

 

1. 3 Titles were  released on DVD on Q3

2. 6 Titles are to be released on DVD Q4

3. 1 Title is to be released on DVD in Q1 2015

 

    Of the 3 titles to be released on DVD on Q3, all three were released on 9/15 or later(In other words, only had 2 weeks of rental in Q3, balance will spillover to Q4).

 

    The top 4 box office hits in 2015 are all set to release in Q4(23% of box office in 2015 YTD).

 

    There will be additional rentals from the Hunger games series and Star Wars series in Q4, as the sequel for each of these franchises are coming out which generates add'l rentals of earlier prequels in the series.

 

--------------------------------------------------

 

    This is setting up for a monster Q4.

 

[Travis Wiedower]

What would be interesting is if someone can plot YoY changes in box office content and compare that to YoY changes in Redbox rentals.

 

    This would be fairly insightful to the board

 

Not quite what you're asking but I previously did some work on trying to find a correlation between box office releases and Redbox rentals. My summary of findings is in the old CSTR thread (post #460), but here it is copied in full:

 

I've been bored tonight so I tried to find a correlation between box office sales and Redbox sales. Anyone want to check my logic?

 

First I calculated quarterly revenue per kiosk from 4Q14 back to 1Q10. I then needed to figure out how long on average it takes a movie to go from its theater release to Redbox. I basically looked at October and November releases and figured out how many days each movie took to go from theatrical release to DVD release (average: 107.4 days). Studio deals affect when Redbox gets those DVDs which by my math is an average of 12.2 days (I figured 5 days to stock DVDs from studios without a Redbox deal but it doesn't really make a difference). So in total it takes 119.6 days (or almost exactly 4 months) for a movie to go from its theater release to Redbox.

 

Next I looked at the quarterly box office sales but had to adjust them for the above time it takes a movie to get to Redbox (4 months). Slightly simplifying it but basically if a movie gets released in the theater in the first two months of a quarter it will show up in Redbox's sales the next quarter. If a movie is released the last month of a quarter it will make it to Redbox two quarters later. So essentially 2/3 of a quarterly box office will correlate to the next quarter's Redbox sales and 1/3 will correlate to the next-next quarter's Redbox sales.

 

Comparing quarterly revenue per kiosk to box office sales (that correlate to that specific quarter as described above) only gives a correlation (Pearson's r) of .4387 which isn't even statistically significant.

 

This was mostly an academic endeavor--certainly not a basis for an investment or anything. I was surprised there wasn't a larger correlation though, any thoughts? Good chance I'm either a) overlooking something or b) there's just too many variables that are averaged together and stuff. One or two big films having exceptionally long or short theater-to-DVD times could probably swing everything.

[TwoCitiesCapital]

The market makes no sense to me. Down 4% to it's trough immediately after earnings just to jump 10% two days later on no news. I can't imagine that this is anything other than a delayed reaction to the 5% of stock that they bought back in Q3 alone at great prices...

 

I was hoping for low-60s to persist for another quarter to help solidify the expected return by giving them the opportunity to repurchase another 5% of shares before a monstrous Q4. Maybe I was hoping for too much.

 

[ZenaidaMacroura]

Recall management mentioned previously that they make more on middling box office lineups than they do on blockbusters.  I think the justification is people are more apt to rent "ok" movies they passed on during the theatrical release (but have enough appeal that they actually have a desire to see them) than blockbusters which people tend to see in theaters with friends/make a date of.

[thefatbaboon]

The market makes no sense to me. Down 4% to it's trough immediately after earnings just to jump 10% two days later on no news. I can't imagine that this is anything other than a delayed reaction to the 5% of stock that they bought back in Q3 alone at great prices...

 

I was hoping for low-60s to persist for another quarter to help solidify the expected return by giving them the opportunity to repurchase another 5% of shares before a monstrous Q4. Maybe I was hoping for too much.

 

They also often (not sure what reason) bunch up repo activity in a quarters middle month. So some part of the move today might be ascribed to their return to the market.

 

Psychology bullshit warning, but everyone was waiting for this telegraphed terrible quarter to materialise. Very similar to q2 2014.  Stock is weak into the report. Shorts short into it. Then everyone realises world hasn't ended etc etc.

[TwoCitiesCapital]

Recall management mentioned previously that they make more on middling box office lineups than they do on blockbusters.  I think the justification is people are more apt to rent "ok" movies they passed on during the theatrical release (but have enough appeal that they actually have a desire to see them) than blockbusters which people tend to see in theaters with friends/make a date of.

 

I don't recall the quote, but if they're talking absolutes (i.e. all of the mediocre films against all of the blockbusters) it's probably simply because there are far more mediocre films than blockbusters - also, mediocre films will come cheaper so there is less of a capital outlay that they have to make back. In this case, it doesn't derail the thesis that Q4 will likely blow the top off volumes and FCF due to the high number of in-demand movies coming on slate in September/October.

 

If we're talking on a movie to movie basis where they make more off of most individual mediocre films than they do off of individual blockbusters, I'd be extremely surprised to hear that mediocre films take the cake.

[JayGatsby]

From last quarter's call (below). I guess they forgot to talk about it. I have a spreadsheet I put togher a few months ago of about  year and a half of titles based on boxofficemojo. The problem I had with it was they introduced the price increase so it was hard to see the organic changes. I'll put it up later and maybe someone finds something interesting in it.

 

Andy Hargreaves

Just wondering on the elasticity, if you've noticed anything in terms of -- you mentioned, I think, in the letter that there is a little bit of elasticity difference in maybe demographics but their difference in movies by box office as well, or anything else like that, that you've noticed?

 

Galen C. Smith

Andy, I don't think we've seen anything different as of yet from what we used to see. So really, historically, we've seen that $25 million or $100 million box office tend to be very good. One of the things that we'll spend some more time talking about next quarter is, Q4 has got some very large releases with very big box office. Those tend to be movies that you either watch in a theater or they're ownable titles that you're going to go out and purchase, and they may not be the best rental titles. And so you can have a very big box office and yet you doesn't generate a lot of rentals. Really that sweet spot is a good movie that's comedy or action in that $25 million to $100 million range. So nothing around that's really changed with the price increase.

[TwoCitiesCapital]

The market makes no sense to me. Down 4% to it's trough immediately after earnings just to jump 10% two days later on no news. I can't imagine that this is anything other than a delayed reaction to the 5% of stock that they bought back in Q3 alone at great prices...

 

I was hoping for low-60s to persist for another quarter to help solidify the expected return by giving them the opportunity to repurchase another 5% of shares before a monstrous Q4. Maybe I was hoping for too much.

 

They also often (not sure what reason) bunch up repo activity in a quarters middle month. So some part of the move today might be ascribed to their return to the market.

 

Psychology bullshit warning, but everyone was waiting for this telegraphed terrible quarter to materialise. Very similar to q2 2014.  Stock is weak into the report. Shorts short into it. Then everyone realises world hasn't ended etc etc.

 

It's possible, but there were 800k shares traded above the 3m volume average today so it can't be all them given that they barely bought more than that the entirety of last quarter. Also, they repurchased 900k shares last quarter and shares still languished, suggesting that their buying activity hasn't gotten to the point where it pushes the price yet. I would would be willing to accept that it was them if it was a relatively low volume day and you had the price up 10% on no news suggesting the possibility of a price insensitive buyer, but volumes were pretty high today.

 

The only way it's them is if they blew most of their repurchase money for Q4 today.

[JayGatsby]

Attached is a spreadsheet I put together a few months ago. The first tab is the box office (domestic I think... don't remember) from box office mojo, and the second tab summarizes it in a few ways. Not sure if this is helpful to anyone but figured I'd post it just in case. At the time it seemed that management was blaming their results on the box office every quarter (I guess they're still doing that). I remember feeling more negative about the trends after building this.

OUTR_movies.xlsx

[ratiman]

 

 

I never thought I'd say this, but I actually like this investment for ecoATM. I think most of us value ecoATM at $0, so any incremental upside is good. It looks like the margin is in selling direct to the consumer. If the ASP for an ecoATM "value" device is $60 I see a lot of margin upside here. Unless Gazelle has some crazy amount of marketing or overhead I can't see how they aren't cash flow positive with those kind of margins. Eco should be able to leverage a lot of their existing overhead. We'll see I guess. Considering we're getting the business for free, it seems like a worthwhile experiment.

 

Techcrunch says that Gazelle had $100M in revenue in 2013.

 

http://techcrunch.com/2015/11/03/redbox-coinstar-and-ecoatm-owner-outerwall-buys-gadget-trade-in-site-gazelle-for-18-million/

 

I don't know, ecoatm/Gazelle looks like a good business. According to Alexa and some quick searches for "buy/sell used phone", Gazelle dominated the other sites with the exception of swappa.com ($23M marketplace volume), and glyde.com, which is VC backed and probably doomed if Gazelle sold for just $18M. Combine eco's supply and Gazelle's distribution and it should be profitable and dominate the niche.

[KJP]

 

Combine eco's supply and Gazelle's distribution and it should be profitable and dominate the niche.

 

Why is vertically integrating a money-losing supplier with a money-losing retailer going to produce a profitable business?  Wouldn't the combined company still have the same cost to gather phones (EcoATM legacy costs), the same costs to sell them (Gazelle legacy costs) and get the same prices from consumers?

[JayGatsby]

I think the synergy is in Gazelle's direct-to-consumer sales model. The volume and revenue numbers in that article imply an average selling price significantly above ecoATM's. EcoATM is currently run-rating ~$100M of revenue per year and is losing say $10M of operating income per year.  If Gazelle allows ecoATM to improve their ASP by 10% ($6/device) ecoATM becomes breakeven. The Gazelle website would imply an ASP at least double what eco is receiving (based on a "value device" mix of 100% galaxy and iphone devices). Of course this requires someone to actually buy the phone from Gazelle, which isn't automatic. There should also be some efficiencies to be gained but probably not a game changers.

 

I think the consumer market for used devices will actually improve. The company I work for is buying iPhone 5S's with no urgency to upgrade. The 5S does everything people need and saves a lot of money. As the rate of improvement slows on new devices the impetus to have the most recent device continue to be diminished. There's value in being able to offer a steady supply of "certified" reconditioned devices (with new batteries) to corporate customers. All that said, I'm not sure there's profit to be made on the buy / recondition / sell trade, but at this point I find it to be a worthwhile experiment. I still don't understand how Gazelle wasn't profitable buying/selling $100M of devicess, so maybe it is an impossible industry.

 

Interesting article; good find.

[KJP]

EcoATM is currently run-rating ~$100M of revenue per year and is losing say $10M of operating income per year.  If Gazelle allows ecoATM to improve their ASP by 10% ($6/device) ecoATM becomes breakeven.

 

I may be misunderstanding you, but how are you accounting for Gazelle's costs?  Remember, the assumption is that Gazelle's ASPs are high and it's losing a significant amount of money.  Perhaps Gazelle was losing money because it lacked sufficient scale, but how is integrating with EcoATM going to solve that?  The underlying assumption there would be the Gazelle lacked scale because it was supply-constrained.  How plausible is that?       

 

Put another way, six months ago, Gazelle could have bought phones from EcoATM and sold them on its website.  But that either (i) didn't happen because it couldn't be done profitably; or (ii) did happen, and didn't create a profitable business for either company.  How does putting the two companies together change that?  It might if there were overlapping functions that could be cut, but that's not the rationale Outerwall's management is giving.

[ratiman]

EcoATM doesn't show up for "sell iphone" until bottom of page 2. It's possible that some fraction of the Gazelle users will use an EcoATM instead of the lengthy send a box/return a phone process. It creates value by providing a better experience to some unknown fraction of Gazelle users.

[shhughes1116]

EcoATM doesn't show up for "sell iphone" until bottom of page 2. It's possible that some fraction of the Gazelle users will use an EcoATM instead of the lengthy send a box/return a phone process. It creates value by providing a better experience to some unknown fraction of Gazelle users.

 

Remember that we are in the midst of a fairly substantial shift in how consumers obtain smart phones.  For a long time, people have been getting new phones as part of a contract and thus the phone is subsidized and owned by the consumer.  The big wireless companies are now moving to a leasing model where the consumer doesn't own their phone.  If you want to own your phone, you pay full freight for it, which is expensive even for some of the older phones. 

 

Buying an iPhone 5s for 100 bucks from an operation like ecoATM (or whatever the current ASP is) is more than likely cheaper than leasing a new phone for $20/month. 

 

Not saying that ecoATM is going to make money hand over fist, but it does provide a relatively cheap source of phones which can then be sourced and sold via Gazelle.  As more folks buy their own phone (and I think this will happen as folks realize how expensive the leasing model really is and how much you get f**ked by the wireless company when/if you damage your phone), the combination of ecoATM and Gazelle may enable Outerwall to be cash flow positive on this operation. 

[thefatbaboon]

Interesting analysis. Because Eco was a stock deal they don't really get any tax benefit from impairments as far as I can tell. They can use the losses to offset capital gains, but they don't have any. There's some tax depreciation left in the equipment, but not enough to move the needle on your analysis.

 

I used coinstar this weekend for the first time in a while. I don't really understand where the costs are in that business so they must have a fairly large revenue share / lease with Kroger. Seems like they collect coins and Kroger needs coins so Kroger would just buy the coins direct from the machine with no outside labor required. Having said that, I'm not totally sure what Coinstar's value-add is to the process other than the occasional broken machine. Kroger must make enough from the machines that it isn't worth getting their own. I guess the moat here is that the consumer Googles "coinstar" when they're trying to find a box? I could see margin there going up in the short-term, but in the long-term it will probably contract. Transaction size won't really increase over time so they have to raise prices to match cost increases. I'm not sure how much higher than 11% they'll be able to go.

 

Disappointing they couldn't structure Eco a bit better. 

I've wondered the same thing regarding coinstar. Why chains didn't  just buy and operate their own machines. But having gotten to this position now, no way are these chains going to "overbuild" and in the process replace a costless, overheadless revenue participation with self owned and operated capex, opex, etc

[AzCactus]

Interesting analysis. Because Eco was a stock deal they don't really get any tax benefit from impairments as far as I can tell. They can use the losses to offset capital gains, but they don't have any. There's some tax depreciation left in the equipment, but not enough to move the needle on your analysis.

 

I used coinstar this weekend for the first time in a while. I don't really understand where the costs are in that business so they must have a fairly large revenue share / lease with Kroger. Seems like they collect coins and Kroger needs coins so Kroger would just buy the coins direct from the machine with no outside labor required. Having said that, I'm not totally sure what Coinstar's value-add is to the process other than the occasional broken machine. Kroger must make enough from the machines that it isn't worth getting their own. I guess the moat here is that the consumer Googles "coinstar" when they're trying to find a box? I could see margin there going up in the short-term, but in the long-term it will probably contract. Transaction size won't really increase over time so they have to raise prices to match cost increases. I'm not sure how much higher than 11% they'll be able to go.

 

Disappointing they couldn't structure Eco a bit better. 

I've wondered the same thing regarding coinstar. Why chains didn't  just buy and operate their own machines. But having gotten to this position now, no way are these chains going to "overbuild" and in the process replace a costless, overheadless revenue participation with self owned and operated capex, opex, etc

 

Very likely its not worth Kroger's time to deal with the work to make sure that the machines are functioning properly.  They would rather just collect their share and call it a day.  This is akin to when Buffett was a kid and put pinball machines in barber shops.  The barbers could have easily done this themselves but they probably figured that it wasn't worth their time.  They would rather have Buffett and his business partner do the work and collect their %. 

[thefatbaboon]

When the operating costs are so flexible, then why did they have to shut down redbox canada?

At current prices the margin of safety is so slim, that for me its not a good investment. There are so much better and safer things out there with BRK, LMCA, IBKR, LVNTA, etc. that i won`t touch this.

 

I don't think operating cost are very flexible. My valuation assumes that if units are down x then direct operating costs will only be down half x.

 

Regarding Canada shut down though I wouldn't want to draw lessons. It was very subscale and one can't make compelling inferences from that to the 40,000 kiosk us business.

 

I am a huge fan of the companies you mention (except ibkr which I have never looked at). But I think outerwall is completely different beast and as an investor one has the opportunity to approach it differently. Of course you may still not like it, but...

 

A business like Berkshire or Sirius or Live is valued by capitalising a long term stream of fcf. The quantum of near term fcf is not the overwhelming factor in an equity valuation of their businesses.

 

Outerwall is something rather different. I look at is an opportunity to buy a free option. The near term fcf IS the equity valuation. So I pay 1bn for it knowing that I'm getting that money back for sure over the next 6 years under even the direst circumstance. I then have a free option on any upside surprises.

 

I'm NOT looking for a margin of safety to an expected outcome. Im too ignorant about the future of DVDs to have something I'm confident is "an expected outcome". I have a wide range of possible decline rates.  So I look to cover my ass if my worst case happens.

 

Three years ago DVDs were already dead but fcf has doubled and shares outstanding have halved. And that is after the imbecilic purchase of Eco for 500m. If I can get a conceptual free option on the future resembling the past for a bit longer it has the chance to be very lucrative.

 

[AzCactus]

When the operating costs are so flexible, then why did they have to shut down redbox canada?

At current prices the margin of safety is so slim, that for me its not a good investment. There are so much better and safer things out there with BRK, LMCA, IBKR, LVNTA, etc. that i won`t touch this.

 

I don't think operating cost are very flexible. My valuation assumes that if units are down x then direct operating costs will only be down half x.

 

Regarding Canada shut down though I wouldn't want to draw lessons. It was very subscale and one can't make compelling inferences from that to the 40,000 kiosk us business.

 

I am a huge fan of the companies you mention (except ibkr which I have never looked at). But I think outerwall is completely different beast and as an investor one has the opportunity to approach it differently. Of course you may still not like it, but...

 

A business like Berkshire or Sirius or Live is valued by capitalising a long term stream of fcf. The quantum of near term fcf is not the overwhelming factor in an equity valuation of their businesses.

 

Outerwall is something rather different. I look at is an opportunity to buy a free option. The near term fcf IS the equity valuation. So I pay 1bn for it knowing that I'm getting that money back for sure over the next 6 years under even the direst circumstance. I then have a free option on any upside surprises.

 

I'm NOT looking for a margin of safety to an expected outcome. Im too ignorant about the future of DVDs to have something I'm confident is "an expected outcome". I have a wide range of possible decline rates.  So I look to cover my ass if my worst case happens.

 

Three years ago DVDs were already dead but fcf has doubled and shares outstanding have halved. And that is after the imbecilic purchase of Eco for 500m. If I can get a conceptual free option on the future resembling the past for a bit longer it has the chance to be very lucrative.

 

Well said my friend +1

[frommi]

So I pay 1bn for it knowing that I'm getting that money back for sure over the next 6 years under even the direst circumstance. I then have a free option on any upside surprises.

 

 

In general i agree with your post, but nothing in investing is for sure. Just ignore me, most people here will be better of when they do. I have still a lot to learn.

 

 

[thefatbaboon]

So I pay 1bn for it knowing that I'm getting that money back for sure over the next 6 years under even the direst circumstance. I then have a free option on any upside surprises.

 

 

In general i agree with your post, but nothing in investing is for sure. Just ignore me, most people here will be better of when they do. I have still a lot to learn.

 

I don't ignore what you said because my core philosophy IS based on investing in the high class predictable long lived business like the ones you mentioned. So I come from exactly the same place, why take capital from good, dominant businesses to invest in dvd rentals?!

 

  I try and kill these ideas whenever they come to me. And usually I manage. But I've been in outerwall for a little over a year and I still haven't been able to kill it. 

 

Of course nothing is "sure" and I probably shouldn't have used that word. I meant "reasonably sure according to my analysis". 

[JayGatsby]

I may be misunderstanding you, but how are you accounting for Gazelle's costs?  Remember, the assumption is that Gazelle's ASPs are high and it's losing a significant amount of money.  Perhaps Gazelle was losing money because it lacked sufficient scale, but how is integrating with EcoATM going to solve that?  The underlying assumption there would be the Gazelle lacked scale because it was supply-constrained.  How plausible is that?       

 

Put another way, six months ago, Gazelle could have bought phones from EcoATM and sold them on its website.  But that either (i) didn't happen because it couldn't be done profitably; or (ii) did happen, and didn't create a profitable business for either company.  How does putting the two companies together change that?  It might if there were overlapping functions that could be cut, but that's not the rationale Outerwall's management is giving.

Fair concern. My assumption was they weren't losing a "significant amount of money". I was assuming it was roughly a breakeven business, or at least would be under OUTRs ownership. This could be the wrong assumption though. Fundamentally I don't undersand how you can lose money buying and selling phones on the internet, so my guess is they weren't managing costs very well.

 

Just to be clear, I'm not underwriting my OUTR investment based on any value at ecoATM. But as we judge the capital allocation skills of the new CEO, I think this seems like a worthwhile experiment for $18M. It seems like a business where you should be able to earn small margins with or without scale, and I do think there are benefits of scale (repair effiencies (one person just does iphone 4, the other just does iphone 5), back office, sales/marketing, etc). Eco's biggest problem has been really low ASPs. They've been collecting a lot of devices but not getting any money for them. I assume this is because they're selling them wholesale, so maybe this can help that. If not, the experiment was a failure and we move on. Any cash flow is upside to the investment thesis.

[KJP]

I may be misunderstanding you, but how are you accounting for Gazelle's costs?  Remember, the assumption is that Gazelle's ASPs are high and it's losing a significant amount of money.  Perhaps Gazelle was losing money because it lacked sufficient scale, but how is integrating with EcoATM going to solve that?  The underlying assumption there would be the Gazelle lacked scale because it was supply-constrained.  How plausible is that?       

 

Put another way, six months ago, Gazelle could have bought phones from EcoATM and sold them on its website.  But that either (i) didn't happen because it couldn't be done profitably; or (ii) did happen, and didn't create a profitable business for either company.  How does putting the two companies together change that?  It might if there were overlapping functions that could be cut, but that's not the rationale Outerwall's management is giving.

Fair concern. My assumption was they weren't losing a "significant amount of money". I was assuming it was roughly a breakeven business, or at least would be under OUTRs ownership. This could be the wrong assumption though. Fundamentally I don't undersand how you can lose money buying and selling phones on the internet, so my guess is they weren't managing costs very well.

 

Just to be clear, I'm not underwriting my OUTR investment based on any value at ecoATM. But as we judge the capital allocation skills of the new CEO, I think this seems like a worthwhile experiment for $18M. It seems like a business where you should be able to earn small margins with or without scale, and I do think there are benefits of scale (repair effiencies (one person just does iphone 4, the other just does iphone 5), back office, sales/marketing, etc). Eco's biggest problem has been really low ASPs. They've been collecting a lot of devices but not getting any money for them. I assume this is because they're selling them wholesale, so maybe this can help that. If not, the experiment was a failure and we move on. Any cash flow is upside to the investment thesis.

 

If the theory is that Gazelle is a long shot, but the company is pot committed at this point, I can understand it.  But there was talk that EcoATM + Gazelle "should dominate the niche."  I don't understand the rationale for that belief.  Also, there is significant overhead to operating Gazelle's business model and that's why it's easy to lose money doing it.  That's why it may not be profitable.  I was assuming a lack of profitability based on the TechCrunch article's statement that Gazelle's backers put at least $56 million into it and sold it for $18 million. 

 

 

[JayGatsby]

If the theory is that Gazelle is a long shot, but the company is pot committed at this point, I can understand it.  But there was talk that EcoATM + Gazelle "should dominate the niche."  I don't understand the rationale for that belief.  Also, there is significant overhead to operating Gazelle's business model and that's why it's easy to lose money doing it.  That's why it may not be profitable.  I was assuming a lack of profitability based on the TechCrunch article's statement that Gazelle's backers put at least $56 million into it and sold it for $18 million.

That's a good point. $56M of cash gone implies they've spent a lot. Maybe I misunderstand the business, but it seems like something that should have significant direct costs (repairs/reconditioning) but require pretty minimal overhead. Where's the overhead required? I don't know how the prior VC owners were running it, but it does look like you're right that they were burning cash pretty quick.