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Redbox: A Slightly Smaller Cash Cow

28 Apr, 2016 By: Erik Gruenwedel

With $84.2 million in first-quarter (ended March 31) operating income on revenue of $421.5 million and a 20% operating margin, Redbox is a friend to the corporate bottom line. It’s also a proverbial cash cow, which in economic terms means a mature — not growing — business. 

As a result, Redox’s profit was down more than 31% ($38.6 million), while revenue dropped nearly 19% ($98 million) as fewer people chose to rent movies and video games in the quarter.

Redbox generated about 137.7 million rentals in the quarter, down from 173 million rentals in the previous-year period. The decline was driven primarily by an 18% drop in total disc rentals related to “same-store” kiosks, which was caused by the impact of an ongoing secular decline in the physical market, fewer kiosks and lower demand from price-sensitive customers.

The kiosk vendor’s standby excuse about weak release slates and related box office undermining results was a non-factor as the quarter saw a 16.4% higher total box office of movies released than in the prior-year period. There was also an increase in higher-margin video game rentals, due to 2015 holiday sales of new-generation platforms that increased demand for new-generation content released at the end of last year.

Indeed, net revenue per rental was $3.06, compared with $3 in the first quarter of 2015. The $0.06 increase was primarily due to higher video game rentals, which have a higher per-day rental price, and lower promotional spend as compared with the first quarter of 2015.

"We saw a sequential increase in our high frequency renters," Outerwall CEO Erik Prusch said on the call.

Compared to the disappointing fourth quarter, Redbox in Q1 delivered growth in revenue, rentals and margins. Revenue increased $14.5 million on a 1.4% increase in rentals, while segment operating margin improved 4.6%. Gross margin was 54.4%, down from 59.5% in the first quarter of 2015, but a 2.3% improvement from Q4.

In March Redbox conducted an online survey that highlighted high marks in user satisfaction and indicated the majority of customers, roughly 80%, see game rentals as a way to influence their purchasing decisions.

"Clearly, we're filling a try-before-you-buy market need and we will continue to invest in the right titles across consoles to take advantage of this market opportunity and support the needs of our customers," Prusch said.

The interim president of Redbox highlighted the kiosk vendor’s ability to generate sustained cash flow and profitability in a challenging market. Notably, Redbox staff will also handle aspects of sister company ecoATM's business. 

"We will continue to leverage our valued and compelling brands … and an unrivaled network of kiosks and retail partners," he said in a statement.

Wedbush Securities media analyst Michael Pachter said Redbox remains a dilemma to investors due to its strong fiscal track record in a rapidly changing consumer environment. 

"We believe that a stubborn cost-conscious base of consumers will steadfastly refuse to switch to the higher priced, more convenient on-demand service, and we think that Redbox revenues will stabilize (perhaps at current levels) in the near future," Pachter wrote in an April 29 note.

B. Riley & Co. analyst Eric Wold applauded management's renewed focus on driving Redbox's competitive advantages: Low cost and ubiquitous access.

"While Redbox faces a somewhat difficult rental environment during 2016 (with the Olympics and election), we come out of Q1 optimistic that management is focused on driving traffic/rentals in a margin-friendly manner as opposed to fighting the [release] slate," Wold wrote in a note.

Meanwhile, Prusch reiterated that management “to explore strategic and financial alternatives” for Outerwall, which could include selling the company.

“The board is involved in a comprehensive process and is committed to acting in the best interest of all shareholders,” he said.

About the Author: Erik Gruenwedel

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