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Coinstar Posts $6.4 Million Profit

29 Apr, 2010 By: Chris Tribbey

A higher share of the DVD rental market and the installation of 2,400 more kiosks during the first three months of the year helped Redbox parent Coinstar to a first-quarter profit of $6.4 million on revenue of $350.1 million, beating analyst earnings estimates.

The earnings were more than triple the $2 million Coinstar reported during the first quarter of 2009.

The financial report comes a week after Redbox ended litigation with Universal Studios Home Entertainment and 20th Century Fox Home Entertainment, bowing to the studios’ desires to create a sellthrough window by delaying new DVD releases for 28 days. Coinstar said the agreements, plus one reached with Warner Home Video Feb. 12, resulted in “substantially lower product costs.” Redbox had been buying DVDs from those three studios at retail stores.

“One of the things that happened with the workaround is we didn’t get the quantities we wanted to stock in our machines,” said Coinstar CEO Paul Davis. “We still prefer day and date, and we have studios that believe in that, and see the value in day and date. If a studio is adamant about moving to a window, it’s got to be a win for us, a win for them.” Sony and Paramount are among the studios offering new releases at Redbox kiosks on street date.

Regarding the revenue effect of holding new release titles for 28 days, Davis said, “We’re very new into this, because we’re only a few days into this new window.” Warner’s The Blind Side (March 23) was the first title under the new window agreement, available at Redbox April 20. Warner’s Sherlock Holmes (March 30) was first available at Redbox April 27.

Redbox increased its DVD rental market share to 23%, according to Coinstar, up 7.3% from the first quarter of 2009.

“Virtually all of the [market] share came from brick and mortar retailers [closing],” Davis said.

With 2,400 additional kiosks deployed from Jan. 1 to March 31, there are now more than 24,800 Redbox kiosks nationwide. During the month of March, Redbox was renting more than 9 million DVDs a week. Individual kiosks provided a 21% revenue jump year over year. Each DVD rental provided $2.16 cents, compared with $2.01 during the same quarter of 2009.

Davis also announced that Redbox was “moving forward” with its plans to include Blu-ray Disc rentals at kiosks nationwide in the “next few months.”

“We’ll try our best to match where the market is [for DVD vs. Blu-ray rentals],” Davis said of stocking Blu-rays in kiosks.

Regarding price, he said Blu-rays would not be $1 a day, “because we’re paying more for it, obviously.”

Davis added that Redbox would expand its video game rental test to another market during the second quarter. He offered no more details.

Overall revenue was up 46.6%, compared with the $238.8 million Coinstar brought in during the first quarter of 2009. The increase was largely due to DVD, which accounted for $263.2 million in revenue for the quarter, an increase of 70.1% from the $154.7 million in DVD revenue brought in during the first quarter of 2009.

“Solid execution in our core businesses drove our strong financial results across the board,” said Coinstar chief financial officer J. Scott Di Valerio. “The traction we gained in the first quarter indicates we are well-positioned for continued success in our DVD business, renewed growth in Coin and increased profitability.”

For the second quarter of 2010, Coinstar expects revenue between $370 million and $390 million. For full-year 2010, the company is forecasting revenue between $1.53 billion and $1.63 billion.

Eric Wold, analyst with Merriman Curhan Ford in New York, said the 28-day delay for new releases from Fox, Universal and Warner Home Video would have minimal impact on Redbox, noting that when Warner’s The Blind Side (March 23) first became available for both Redbox and Netflix on April 20, it jumped from No. 5 to No. 1 on Rentrak’s rental charts by the end of the week.

“We believe this is a positive indicator that demand for The Blind Side remained strong and consumers (for the most part) were willing to wait the 28 days until it was available in the two channels that provide both lower price points and greater convenience,” he wrote in a note to investors.

He said that since Redbox transactions are a standalone decision by renters and not based on a subscription like Netflix, the impact of the 28-day window would be felt less by the kiosk operator.

In a filing with the Securities and Exchange Commission April 29, Coinstar revealed more details regarding its agreements with Warner, Universal and Fox.

First, the DVDs acquired via its retail workaround program accounted for 9% of the total DVDs Redbox had in its library, as of March 31. Overall, the value of DVDs owned by Redbox was $87.2 million, as of March 31, according to the filing.

Under the Warner agreement, Coinstar expects to pay the studio $54 million this year and $70 million in 2011. Universal will get $23.2 million this year, $42.7 million in 2011 and $16.9 million in 2012. Fox is looking at $36.1 million this year, $69.6 million in 2011, $80.2 million in 2012, $84.8 million in 2013, $91 million in 2014 and $32.8 million in 2015.

In addition to its first-quarter earnings, Coinstar also announced April 29 that Redbox would be expanding its presence at U.S. Naval installations nationwide and would begin installing its kiosks at 100 Schnucks Markets locations across Missouri, Illinois, Indiana, Wisconsin, Iowa, Tennessee and Mississippi. The Redbox kiosks will replace Blockbuster Express kiosks.

Redbox kiosks are currently located at 47 of the 56 Naval stations in the continental United States. Coinstar will install another 20 at bases through 2010, including Pearl Harbor this summer.

“As vending machine technology and secured communications became available, the Navy Exchange Service Command wanted to utilize these advances to increase DVD rental availability to our active duty personnel and their families,” said Richard Dow, SVP of operations for the Navy Exchange Service Command.

The rollout of Redbox kiosks to Schnucks locations is expected to be completed by June.

“Providing exceptional customer service has been our mission for more than 70 years and we are excited to deliver the leading DVD experience to our customers,” said Scott Schnuck, chairman and CEO of Schnucks. “Our customers have asked for Redbox citing convenience and value and Redbox supports our commitment of providing quality service at an affordable price.”


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