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Analysts Cautiously Optimistic About Pending Redbox Financials

By : Erik Gruenwedel | Posted: 08 Feb 2010

Few fiscal results will get as much scrutiny as Thursday’s fourth-quarter (ended Dec. 31) returns for Coinstar Inc., parent of Redbox DVD rental kiosks.

With 22,200 kiosks installed at the end of 2009 and catalyst of the controversial $1 DVD movie rental, Redbox continues to redefine the rental industry — a reality that both excites and worries investors, analysts say.

With more than $1.1 billion in revenue guarantees (for new-release titles) to Sony Pictures Home Entertainment, Paramount Home Entertainment, Lionsgate and Summit Home Entertainment, among others, Redbox must rotate product as efficiently as a subway turnstile.

Indeed, the average Redbox kiosk generated 8.9% revenue growth during the first three quarters, according to analyst Eric Wold, with Merriman Curhan Ford in New York, who believes Q4 revenue per kiosk will increase 2.7% above that.

“Should Redbox surpass revenue expectations and guidance of $218 million to $238 million (after posting somewhat disappointing revenues in 3Q), we believe this would address any revenue concerns,” Wold wrote in a note.

John Kraft, analyst with D.A. Davidson & Co. in Lake Oswego, Ore., believes Redbox will generate $225.5 million in rental revenue, up 69% from the same time last year.

More importantly, analysts want to see what effect the ongoing new-release embargo imposed upon Redbox by Warner Home Video, 20th Century Fox Home Entertainment and Universal Studios Home Entertainment is having on margins and operating costs.

“If [pre-tax earnings] margins come in the range of 15% to 17% (which has been the pre-tax range over the previous four quarters when only one studio workaround was in place), we believe this would help address any [pre-tax earnings] concerns,” Wold wrote.

Redbox has resorted to hiring runners (about 900), who canvas major third-party retailers such as Wal-Mart and Target on street date, to stock kiosks with quantities of select embargoed new releases purchased at retail prices.

Analyst Kraft expects Redbox to increase the size of its retail run squad.

“We have seen … a significant increase in job postings on the company’s Web site,” Kraft wrote in a note.

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, lowered his quarterly revenue estimate to $317 million from $333 million due to concerns regarding the workaround program.

Wold expects Redbox to report revenue of $327.4 million.

“We expect the new limit of five new-release DVDs per customer imposed by Wal-Mart and Target could drive up inventory costs further,” Pachter wrote in a note.

The analyst said Redbox, and other kiosks, continue to benefit from a “tailwind” effect brought on by ongoing closures of Movie Gallery and Blockbuster Inc. video stores.

Pachter said that if Redbox increased rental prices just slightly, it could “dramatically” increasing earnings and more than offset higher costs associated with studio workaround programs.


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