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Redbox Eyes Critical 2016

12 Jan, 2016 By: Erik Gruenwedel

With Redbox reporting Q4 results Feb. 4, the kiosk disc rental service aims to close the book on a challenging fiscal 2015, which includes absorbing secular declines in rentals.

Redbox represented nearly 60% of a domestic disc rental market that saw revenue decline nearly 8% to $3 billion, according to year-end estimates by DEG: The Digital Entertainment Group. Kiosk revenue dipped nearly 3% to $1.78 billion.

Last month, Redbox revised downward fiscal-2015 guidance between $1.75 billion and $1.76 billion, compared with the prior range of $1.79 billion to $1.81 billion. It did so based on preliminary results through the end of November and expectations for December. The fiscal revision included the departure of president Mark Horak.

While Redbox has seen improvements in both unique customers and total rentals during the first two months of Q4 compared to Q3, the business has not met the company's performance expectations and continues to remain challenged by the historically low box office during the third quarter, which was the worst theatrical box office for Redbox in four years.

Speaking last month to Wedbush Securites’ Michael Pachter, Galen Smith, CFO of Redbox parent Outerwall, said Q4 financials have been impacted by increased marketing spend without a notable increase in total consumers. There was an increase in unique consumers.

“It is moving in the right direction, just not to the degree we thought based on the [Q4] box office,” Smith said, adding that estimated operating margins remain between 20% to 25%.

The CFO said average customer basket size and rental frequency met expectations while the growth of unique customers did not. He said last year’s price hike resulted in a rise from mid-single-digit rental declines to high-single-digit declines.

Smith said the transition to increased stocking of next-generation video game titles in kiosks flies goes against the typical Redbox customer, which he said is more the buy, sell, trade type than heavy gamer.

“For us it’s much [about] the family. So, as [next-generation video game] device penetration continues to grow, we expect to benefit [from] that,” he said. “We believe Redbox remains a compelling business.”

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