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Soft Release Slate Undermines Redbox Q3 Financials

30 Oct, 2014 By: Erik Gruenwedel

Blu-ray Disc and video games help increase per-rental revenue 3.3%

As expected, Hollywood’s dearth of box office hits and abridged retail releases contributed to Redbox generating a 6% decline in third-quarter (ended Sept. 30) operating income to $85.7 million, compared with operating income of $91 million during the prior-year period.

Redbox saw nearly 14% fewer (18 million) rental transactions in the period.

The Bellevue, Wash.-based kiosk vendor, which operates more than 36,000 units nationwide, said revenue declined 11% to $438 million on more than 172 million rentals, compared with a 2.1% increase a year ago.

Redbox said the year-over-year decrease was primarily due to a weak release schedule in the second quarter and the unfavorable timing and mix of content released in the third quarter.

Notably, while revenue and income declined, margins rose. Increased Blu-ray Disc and video game rentals combined to increase per-rental revenue 3.3% to $2.54. Redbox’s operating margin increased nearly 6% to 19.6%, which the company attributed to managing G&A expenses and direct operating costs.

Blu-ray represented 15.1% of rentals and 17.6% of revenue, both significant increases from the same period last year. Single night rental margins improved due in part to targeted promotions. Notably, Redbox reduced marketing promotional spending 5.8% year-over-year.

CEO Scott Di Valerio, on parent Outerwall's Oct. 30 fiscal call, lauded Redbox's efforts to reign in costs and improve operating margins in the face of declining revenue and rental transactions.

"Our optimization efforts in our Redbox segment, including the initiatives such as rebalancing, implementing the vertical merchandizing zone and leveraging our CRM [customer relationship management] system, have produced tangible results and will help offset the expected decline in the physical rental market," Di Valerio said.

Redbox has begun rolling out a loyalty membership program, dubbed Redbox Play Pass, targeting groups of customer emails with a free DVD rental after 10 paid rentals, including video games.

With Redbox ending its joint venture with Verizon on Redbox Instant, CFO Galen Smith said the kiosk vendor received a cash payment of $16.8 million from the venture in the current (fourth quarter) at the same time it ended capital contributions to fund the operations. Over the life of the JV (begun in 2013), Redbox received $70.5 million in cash for DVD rentals, while investing $77 million in capital contributions, including $14 million in during the third quarter.

"We’ve realized approximately $29.9 million in total cash tax savings through deductions related to our share of the JV losses over the life of the venture. We do not expect material net financial impact [from Redbox Instant] in Q4," Smith said.

Redbox anticipates strong rental demand in November and December due to typical holiday seasonality and increased box office compared with Q4 2013. Galen said theatrical box office in November and December is expected to top $300 million monthly compared with the year ago.

"However weaker content in September and early October is expected to partially reduce the pickup in November and December," he said.

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