CSTR - Coinstar

[TwoCitiesCapital]

http://degonline.org/wp-content/uploads/2015/04/Q1-2015-DEG-Home-Entertainment-Report.pdf

 

Q1 2015 Rental Kiosk Revenue +7.7% vs. Q1 2014, while VOD had a decline of 5%. Looks like box office in Q1 2015 was pretty weak.

 

http://www.boxofficemojo.com/quarterly/?chart=byquarter&quarter=Q1&view=releasedate

It was pretty weak. Q2 will be where it's at - Avengers is seriously anticipated around the globe. The first one pulled in over $620M globally and this one is expected to do better. Just to put that into context, if it simply matches the first one, we've already accounted for 1/3 of the Q1 box office total with the one film...I don't have a model for how that translates into profits at redbox, but I do know that many people will opt to wait a few weeks and pay a dollar or two as opposed to having to pre-order tickets for $20+ apiece.

 

When do you think Avengers will be available on RedBox?

 

Release date is currently expected to be in August. They don't have a distribution deal with Disney, so however long it takes them to buy the DVDs and stock the machine should be added to that date. I'd expect that September would be the first month in which the DVD is really up for rent across the country. Fast and Furious 7 will also be available in August with a 28 day delay due to the agreement with Universal. September could be a BIG month for Redbox.

 

http://finance.yahoo.com/q/ae?s=OUTR+Analyst+Estimates

According to Yahoo! finance, revenue estimates are $592M and earnings should be $1.64 EPS.

If Redbox really did near $535m as the other site suggests, then Outerwall as a whole should have no problem surpassing $592M with coinstar and eco-atm included so I'm expecting a beat on revenues. I'd also expect margins to be higher this year than last and so I think we'll be looking at a beat on earnings too - maybe somewhere in the neighborhood of $1.75 per share.

[yadayada]

Is this right?

 

535m$ in revenue means roughly 155m$ in ebitda for redbox assuming costs are roughly the same in Q1 as in Q4 last year. That is 620m$. Ebitda for coinstar is 120m$ and ebitda for new ventures is -30m$ in 2014. So that is 710m$ in ebitda.

 

I get taxes and interest of roughly 190m$. And the capex guidance is roughly  100-120m$ for 2015 for all their ventures. That means about 400m$ in free cash flow. or a 33% yield. and this does not account for a success in ecoatm (not counting on it at this point) and no noticable box office juicing it up a bit.

 

Not sure why the market has not jumped on this report? This stock weirds me out :/ . An 18% ev/fcf yield and possibly more! I cannot understand why the market hates it so much, makes me feel im missing something. I think i get back in with a tiny option position to gamble on a jump on may 7 when they report.

[DavidVY]

I liked their model but I couldn't wrap my head around the EcoATM acquistion. Its a total POS.

 

Redbox and Coinstar are great tho. EcoATM should go in the trash. I don't know why they dumped more $ into it.

[Picasso]

I liked their model but I couldn't wrap my head around the EcoATM acquistion. Its a total POS.

 

Redbox and Coinstar are great tho. EcoATM should go in the trash. I don't know why they dumped more $ into it.

 

It reminds me of what Jeff Ubben would target when finding a potential investment.  You have a core business which is a good business for a long time and the suddenly there is a cyclical dip in earnings which causes the company to panic and buy another business of lesser quality and destroying the value of the total business in the process.  Then they would go in there and get them to refocus on the underlying business.

 

Obviously some people like ecoATM on here, but I think you need someone to go in there and kill that project.  It just seems to me like one of those reactions by acquisition when the core business looks weak.

[AzCactus]

Even with EcoATM which I quite honestly have never seen or used, the market seems to be undervaluing the company substantially.  I just wish I would have had the brains to buy in the 50's and average down. 

[kab60]

Even with EcoATM which I quite honestly have never seen or used, the market seems to be undervaluing the company substantially.  I just wish I would have had the brains to buy in the 50's and average down.

Me too, but I just initiated a position today anyway. I don't think it has been much cheaper when you look at the per share value. They went from 28m to 19m shares in one year. I hope new CEO dumps ecoATM, takes a big impairment charge and focus.

[TwoCitiesCapital]

Is this right?

 

535m$ in revenue means roughly 155m$ in ebitda for redbox assuming costs are roughly the same in Q1 as in Q4 last year. That is 620m$. Ebitda for coinstar is 120m$ and ebitda for new ventures is -30m$ in 2014. So that is 710m$ in ebitda.

 

I get taxes and interest of roughly 190m$. And the capex guidance is roughly  100-120m$ for 2015 for all their ventures. That means about 400m$ in free cash flow. or a 33% yield. and this does not account for a success in ecoatm (not counting on it at this point) and no noticable box office juicing it up a bit.

 

Not sure why the market has not jumped on this report? This stock weirds me out :/ . An 18% ev/fcf yield and possibly more! I cannot understand why the market hates it so much, makes me feel im missing something. I think i get back in with a tiny option position to gamble on a jump on may 7 when they report.

 

I think that expecting $400M in FCF might be a bit optimistic. This isn't a business that has extreme levels of operating leverage that profits will explode on slight increases in revenue. The costs are relatively variable - the more releases and the more popular the title, the more physical copies Redbox has to buy, so I'd expect profit growth to be relatively in line with revenue growth and not to nearly double on an 7% increase in revenues. Especially since you're simply extrapolating the results of what will likely be a strong quarter to all 4 quarters that will be dominated by different release schedules, costs associated with ecoATM, etc. etc. etc.

 

I think it's a good bet that we'll exceed the 240M in FCF reported last year, but I don't think we get to $400. I might have screwed up my estimate on earnings - I was using estimated revenue figures using similar margins/expenses that they had last year and I think I may have made a mistake somewhere, but $400M in FCF seems extremely optimistic.

[yadayada]

The increase in revenue is not because of volume increase. If volume increased you would see more then a 25% increase in revenue vs Q4 and Q1 last year, since they increased prices by 25%.  There is now much more operating leverage per rental.

 

Im also assuming they lose the same amount with ecoatm as last year (which is far from optimistic) and im counting in the new ventures capex.

 

the 400m$ assumes that new ventures suck up about 80m$ this year in capex and losses.  Maybe gotta add an extra 20m$ there though.

 

 

 

Actually my cost assumption is wrong. Because costs now are lower, since volume is lower. So less costs then in Q4. If volume would be the same in Q1 as in Q4 last year, revenue should be 25% higher. Rentals actually declined by 14%. (take 500 (last quarter revenue) and assume 2$ per rental, that is 250 rentals. Then take 535 and assume 2.5$, that is 214 rentals, and 214 is 14% lower then 250).

 

But in Q3, revenue was 12% lower, and direct operating was about 7% lower vs Q4.

 

That is an extra 23m$ in lower costs. So ebitda is really 178m$ for Q1 then just for redbox (assuming the figure on that site is right). Subtract 50m$ in ebitda losses for new ventures, add 120m$ for coinstar and you get 782m$ ebitda. Subtract 209m$ for D&A and subtract 47m$ for interest and then take a 35% tax rate on that and you get 341m$ in net income. But add back 100m$ of depreciation (since actual capex including new venture cap ex is 100-120m$ and not 210m$) and you get 441m$ in FCF. That is if all quarters are roughly the same as Q1, which seems likely with the killer line up  of 2015? So in 7 days they will probably post a complete blow out quarter if i did not make any mistakes here. Over 4$ just in EPS vs 1.7$ in estimates?

 

 

 

[DavidVY]

I see the ecoATM at the malls. It sounds like a good concept (on paper), but man nobody has ever used it. Who wouldn't want to recycle their phones. The only problem is that they offer 2/3 the price of game-stop, or 1/3 the price of craigslist. Game-stop is about 20 steps away from ecoATM.

 

I go to the mall about 3-5/week to have lunch. I have direct view of it. Its always sitting empty.

 

Did nobody do any due diligence? I mean they had a small chunk of it. Fine, I get it- take a small shot. But if its going poorly, why dump more $ in.

 

Sh-t like that makes me want to strangle management

 

[Travis Wiedower]

ecoATMs are all over my city and I always pay attention when I'm near one. Pretty sure I've never seen a person stop and use it. I think there's a decent chance ecoATM is at least part of the reason the former CEO left but we'll never know. New CEO shuttering that segment would make me happy though.

[Travis Wiedower]

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 increase in revenue is not because of volume increase. If volume increased you would see more then a 25% increase in revenue vs Q4 and Q1 last year, since they increased prices by 25%.  There is now much more operating leverage per rental.

 

Im also assuming they lose the same amount with ecoatm as last year (which is far from optimistic) and im counting in the new ventures capex.

 

the 400m$ assumes that new ventures suck up about 80m$ this year in capex and losses.  Maybe gotta add an extra 20m$ there though.

 

 

 

Actually my cost assumption is wrong. Because costs now are lower, since volume is lower. So less costs then in Q4. If volume would be the same in Q1 as in Q4 last year, revenue should be 25% higher. Rentals actually declined by 14%. (take 500 (last quarter revenue) and assume 2$ per rental, that is 250 rentals. Then take 535 and assume 2.5$, that is 214 rentals, and 214 is 14% lower then 250).

 

But in Q3, revenue was 12% lower, and direct operating was about 7% lower vs Q4.

 

That is an extra 23m$ in lower costs. So ebitda is really 178m$ for Q1 then just for redbox (assuming the figure on that site is right). Subtract 50m$ in ebitda losses for new ventures, add 120m$ for coinstar and you get 782m$ ebitda. Subtract 209m$ for D&A and subtract 47m$ for interest and then take a 35% tax rate on that and you get 341m$ in net income. But add back 100m$ of depreciation (since actual capex including new venture cap ex is 100-120m$ and not 210m$) and you get 441m$ in FCF. That is if all quarters are roughly the same as Q1, which seems likely with the killer line up  of 2015? So in 7 days they will probably post a complete blow out quarter if i did not make any mistakes here. Over 4$ just in EPS vs 1.7$ in estimates?

 

I certainly hope that you're right. I did run my own figures last night again when I had a little more time to think it through, and I got somewhere around $280-320M in FCF this year using some optimistic assumptions on revenues and margins. There could certainly be an error in my margin and/or revenue expectations but it seemed I'd have to be pretty optimistic to get to $400M.

 

I haven't bought into the beginning of the secular decline yet, but I do agree with other posters about the debt. I expect equity holders could achieve payback in 3-4 years with Outerwall's current cash flows, but then what do we have left?

Redbox will most likely have begun it's decline by that point (if we're not there yet) and coinstar will likely be entering a secular decline too as more consumers move to electronic forms of payment every year. Prices can only be raised so high to make up for volume declines and I think we're pretty much there for both. All we'll have left is an ice cube melting much faster than today, ecoATM if it's successful, less $1+B in debt and debt service.

 

I think the value at the end of that period is still positive at these prices, but not positive enough to justify more than a 8-10% annualized return for current equity holders. That's good, but not great, and it requires us to absolutely right about the timeframe of the decline. Maybe earnings next week will change my mind if they really do blow expectations out of the water, but I'm not going to get too excited until I see evidence that I'm totally underestimating redbox or ecoATM.

 

Still long redbox, still think current expectations are too low, still hoping for a short squeeze, but I don't think we're going to get a 30% annual cash flow yield/returns like some of you seem to think. The $1B in debt is what stands in the way of that happening.

 

 

[rsmehta]

ecoATMs are all over my city and I always pay attention when I'm near one. Pretty sure I've never seen a person stop and use it. I think there's a decent chance ecoATM is at least part of the reason the former CEO left but we'll never know. New CEO shuttering that segment would make me happy though.

 

  EcoATM is a great concept.

 

  What I can't understand is their pricing model. They should be the best price option for consumers.

 

    How can a B & M offer consumers 30% more for their used devices than EcoATM??

[yadayada]

The increase in revenue is not because of volume increase. If volume increased you would see more then a 25% increase in revenue vs Q4 and Q1 last year, since they increased prices by 25%.  There is now much more operating leverage per rental.

 

Im also assuming they lose the same amount with ecoatm as last year (which is far from optimistic) and im counting in the new ventures capex.

 

the 400m$ assumes that new ventures suck up about 80m$ this year in capex and losses.  Maybe gotta add an extra 20m$ there though.

 

 

 

Actually my cost assumption is wrong. Because costs now are lower, since volume is lower. So less costs then in Q4. If volume would be the same in Q1 as in Q4 last year, revenue should be 25% higher. Rentals actually declined by 14%. (take 500 (last quarter revenue) and assume 2$ per rental, that is 250 rentals. Then take 535 and assume 2.5$, that is 214 rentals, and 214 is 14% lower then 250).

 

But in Q3, revenue was 12% lower, and direct operating was about 7% lower vs Q4.

 

That is an extra 23m$ in lower costs. So ebitda is really 178m$ for Q1 then just for redbox (assuming the figure on that site is right). Subtract 50m$ in ebitda losses for new ventures, add 120m$ for coinstar and you get 782m$ ebitda. Subtract 209m$ for D&A and subtract 47m$ for interest and then take a 35% tax rate on that and you get 341m$ in net income. But add back 100m$ of depreciation (since actual capex including new venture cap ex is 100-120m$ and not 210m$) and you get 441m$ in FCF. That is if all quarters are roughly the same as Q1, which seems likely with the killer line up  of 2015? So in 7 days they will probably post a complete blow out quarter if i did not make any mistakes here. Over 4$ just in EPS vs 1.7$ in estimates?

 

I certainly hope that you're right. I did run my own figures last night again when I had a little more time to think it through, and I got somewhere around $280-320M in FCF this year using some optimistic assumptions on revenues and margins. There could certainly be an error in my margin and/or revenue expectations but it seemed I'd have to be pretty optimistic to get to $400M.

 

I haven't bought into the beginning of the secular decline yet, but I do agree with other posters about the debt. I expect equity holders could achieve payback in 3-4 years with Outerwall's current cash flows, but then what do we have left?

Redbox will most likely have begun it's decline by that point (if we're not there yet) and coinstar will likely be entering a secular decline too as more consumers move to electronic forms of payment every year. Prices can only be raised so high to make up for volume declines and I think we're pretty much there for both. All we'll have left is an ice cube melting much faster than today, ecoATM if it's successful, less $1+B in debt and debt service.

 

I think the value at the end of that period is still positive at these prices, but not positive enough to justify more than a 8-10% annualized return for current equity holders. That's good, but not great, and it requires us to absolutely right about the timeframe of the decline. Maybe earnings next week will change my mind if they really do blow expectations out of the water, but I'm not going to get too excited until I see evidence that I'm totally underestimating redbox or ecoATM.

 

Still long redbox, still think current expectations are too low, still hoping for a short squeeze, but I don't think we're going to get a 30% annual cash flow yield/returns like some of you seem to think. The $1B in debt is what stands in the way of that happening.

I think you have to account for the fact that after they raise prices 25% and 33%, they make more money per DVD and Bluray even while reducing volume. Direct operating costs are about 67% of revenue in Q4 2014. So if we assume they charge 1.5$, with 1$ of costs, now they charge 1.875$ with still 1$ of costs (or maybe a tiny bit higher then that due to reduced scale effects).

 

Here is my math (somewhat oversimplified, but i think it stands)

 

last year 500m$ of revenue in one quarter, with 335m$ in direct operating costs, They charged 1.5$.

 

This quarter, 535m$ of revenue with X amount of direct operating costs and they charged 1.875$ per piece.

 

So how to get X and calculate ebitda?

So take 500m$ divided by 1.5$ you get 333m rentals. Now with 535m$ they charge 1.875$, that is 285m rentals. If you assume it costs 10% more in direct operating costs due to reduced economies of scale (so really 1.1$ now), you get 313m$ in direct operating costs.

 

previously 335m$ in operating costs in Q4 and now about 313m$ in direct operating costs with higher revenue. G&A and marketing, interest and capex are fixed and predictable. So that is how I get to roughly 180m$ in ebitda. This is vs about 126m$ in ebitda in Q4. And since all the other costs are fixed, most of this extra ebitda is extra FCF, except for some higher taxes.

 

Only way im wrong here is if somehow less late returns affected my calculation. Since that is more costly now, it could be that people are more cautious about it.  In that case ebitda could turn out worse. Im not sure how to calculate that.

[kab60]

Haven't really done the math but I sticking to managements guidance and if they overdeliver that's just gravy. I'd expect an interim CEO to be somewhat conservative but I wouldn't count on it. If only they'd recognize ecoATM is sunk costs and focus everything on improving efficiency I'd feel more comfortable. By the way, did Vanguard open a 10% position in Q1?

[pantheman]

By the way, did Vanguard open a 10% position in Q1?

 

Nope. They've owned a million shares or more since 2008. They did add ~300k shares in Q1.

[kab60]

Seems like a pretty strong quarter... Record high revenue, adjusted ebitda of 147,9m. Seems to focus on reducing costs. EcoATM still shit, president resigned/fired.No change in guidance.

[TwoCitiesCapital]

Seems like a pretty strong quarter... Record high revenue, adjusted ebitda of 147,9m. Seems to focus on reducing costs. EcoATM still shit, president resigned/fired.No chance in guidance.

 

http://finance.yahoo.com/news/outerwall-inc-announces-2015-first-200200803.html

 

Highlights from the first quarter 2015 include:

 

Reported consolidated revenue of $608.6 million, the highest quarter in the company's history

Delivered 21.7% growth in core adjusted EBITDA from continuing operations to $147.9 million, reflecting continued expense management across the company, including 3.4% lower direct operating expense and 7.7% lower G&A expense

Increased core diluted earnings per share from continuing operations 102.1% to $2.87

Redbox generated its highest quarterly revenue in company history and delivered solid margin expansion, primarily driven by the price increase in December 2014

Signed a new two-year content agreement with Warner Bros.

Continued investing in growth by scaling ecoATM, installing approximately 250 kiosks in the quarter

Generated free cash flow of  $85.4 million, an increase of 26.2% year-over-year

Repurchased 617,195 shares for $40.7 million and paid the company's first quarterly dividend of $0.30 per share

 

Loss at ecoATM grew but the results for the quarter are generally positive. The revenue beat our expectations, but the decline in volume could be concerning if it accelerates. We took a bigger hit in volume than I was hoping for with the first full quarter of higher prices. I'm thinking it'll be relatively stable throughout the year, maybe even grow some, as the content from Summer releases becomes available but we'll see.

 

I'm impressed with the results though - definitely exceeded my expectations. I'm fine with the stock not moving on this news if they can continue to repurchase 3.25% of the shares every quarter....

 

Certainly wouldn't mind them paying down some of their debt though. I'd feel more comfortable as an equity holder if there wasn't 1B in front of me.

[yadayada]

free cash flow of 85m$. I wasn't that far off!

 

Let's see what the stock does tommorow.

 

 

Interesting that they only spent 20m$ in capex, that means probably very little on Eco atm.

[kab60]

They payed down 82m of debt. I didn't expect that but I like it. But not a lot of shares purchased. Might be difficult with high short %?

[yadayada]

If the stock pops tommorow we might see a short squeeze.

45% is sold short, and over 30% are long term hedge funds that hold over 5%. And the number is probably higher.

 

Seems that the stock needs a large pop to cause a nice chain reaction :) .

[InvestingOnSale]

They payed down 82m of debt. I didn't expect that but I like it. But not a lot of shares purchased. Might be difficult with high short %?

 

They are forecasting about $235mm of FCF for 2015 and have indicated returning 75-100% of that to investors via repurchases and dividends. So if you figure they return 80% of $235mm and then pay $1.20 per share in dividends annually on 18mm-odd shares, you end up with around $40mm per quarter for share repurchases. I thought it sounded low too, but it's right in line with guidance given their FCF forecast.

[rsmehta]

1. Avengers age of ultron (May 1st)

2. Fast 7

3. Superman/batman(July 17th)

4. Jurassic world(June 12th)

5. Terminator (June 26th)

6. Independence Day (July 3)

7. Assassins creed (June 19th)

8. Ant-man(July 31st)

 

 

Can't wait for Q3/Q4 results with that slate.

 

    Everyone is under-estimating the second half of this year.

[yadayada]

I dont buy it for a second that they will do only 230-240. They did 85m$ this quarter, that means they only do 150m$ for the rest of the year? With that small dividend they are balancing out the small interest payments from those convertibles to make it more expensive for the shorts. Seems like management wants to underpromise and overdeliver to pull of some sort of short squeeze so they can nicely cash in their options? And look good too ofcourse.

 

If rest of year fcf is only 150m$, that is 50m$ per quarter, which means about 40-50m$ lower revenue on average with the same costs for the next few quarters. Seems unlikely with all those movies released this year.

[Wilson-TPC]

One negative and many positives in this report.

 

The volume rental was sequentially lower by about 13%, but that was due to the weaker content slate. My survey has indicated consumers aren't that price sensitive to this price increase and there remains further price increases in the future.

 

Cash flow came in well above my estimates and should exceed the guidance given in the beginning of the year. The lower buyback was limited to the volume traded. If you assume they buy back 3-4% of shares traded per day, and it trades about 400k per day, then they are limited to buying back 12k-14k shares per day. Also be mindful that it's not like the company is out buying EVERY day, it's when they receive the cash from the operations, then they purchase additional shares.

 

Overall, I like where this is headed, and I recently wrote up my thoughts on SA. If you want to read the report and do not have PRO, I have attached it here.

 

Best,

 

Wilson

OUTR_-_An_Investment_Everyone_Loves_to_Hate.pdf