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A 40% Jump in Redbox Revenue Helps Coinstar Post $53.7 Million Profit

26 Apr, 2012 By: Chris Tribbey

The top 17 rental days in Redbox’s history occurred during the first quarter of 2012 (ended March 31), giving the kiosk operator a nearly 40% jump in revenue, and helping parent company Coinstar enjoy first-quarter revenue of $568.2 million and a profit of $53.7 million.

That’s compared with revenue of $424.1 million during the same quarter of 2011, when Coinstar reported a profit of $8.5 million.

Better same-kiosk sales, the addition of more kiosks, strong performance of new-release titles and consumer acceptance of a 20-cent price increase all were credited by Coinstar for the strong results by Redbox, which posted revenue of nearly $503 million. Redbox generated $76.4 million in operating income during the period compared with operating income of $23.7 million last year.

Redbox’s share of the physical disc rental market jumped 7% year-over-year, solidifying its lead at 38.5%. Redbox now has more than 30 million unique customers a month.

Redbox rentals hit 196 million for the quarter, an increase of 19.4% year-over-year. Net revenue per rental was $2.56, an increase of nearly 17%, which Redbox credited to the price increase to $1.20, a higher mix of Blu-ray rentals and a better take of revenue from video game rentals. Blu-ray helped contribute 8.7% of Redbox’s revenue for the quarter, while video games helped contribute 5%.

Year-over-year Redbox added 5,000 net new kiosks, and same-kiosk sales growth hit 28.1%. Moneyball, Puss in Boots, 50/50, In Time, Abduction and Mr. Popper’s Penguins were the top-performing titles for Redbox during the quarter.

“Coinstar delivered strong financial results in the first quarter, demonstrating the strength of our core businesses and the value we offer consumers,” said Coinstar CEO Paul Davis. “As we move forward in 2012, we continue to execute on a number of important initiatives, including the launch of our Redbox digital solution with Verizon via our joint venture and the rollout of one to two of our new venture businesses.”

Davis said Redbox was “pleased” with the success of its workaround program for Warner Home Video titles. Redbox has been buying Warner titles “at retail prices” since February, after an agreement that kept Warner’s new releases out of Redbox kiosks for 28 days after street date expired Jan. 31.

“While this content has a higher cost per unit, DVDs procured through workaround typically generate a higher margin percent when compared with our direct studio licensing arrangements as our rentals of this content are spread over a lower number of units,” Davis said in a statement. “We are extremely pleased with our ability to provide consumers with DVDs from Warner Bros. earlier than previously available under our prior contract.”

Regarding the acquisition of NCR Corp.’s kiosks, Coinstar is aiming to close that transaction by the end of the second quarter. In February, the company acquired the rights to 10,000 Blockbuster Express kiosk locations.

The digital joint venture with Verizon also is expected to launch during the second half of 2012. The new undertaking will offer on-demand streaming and downloads from Verizon, combined with discs from Redbox, under a subscription model.

Redbox expects to begin moving into Canada during the second quarter, and currently is in discussions with retailers up there regarding kiosk placement.

During the second quarter, Redbox is looking at carrying 35 titles that pulled in $5 million or more at the box office, including five titles that took in more than $100 million.

For all of 2012 Coinstar is expecting revenue of between $2.15 billion and $2.28 billion, and earnings per share of $4.40 to $4.80.

“Solid execution and operational excellence across Coinstar drove top- and bottom-line growth,” said J. Scott Di Valerio, Coinstar’s CFO. “Our performance underscores the ability to generate profitable growth and simultaneously invest in the future of our core businesses and new automated retail concepts.”

B. Riley & Co. analyst Eric Wold said the $76.4 million in operating income — compared to $23.7 million a year ago — speaks to how well Redbox’s workaround program is working. He said he wouldn’t be surprised if Warner came back to the negotiating table.

“With the workaround, Redbox is able to buy the titles it wants in the quantities it wants without having to stock the underperforming direct-to-video titles that Warner needs to monetize,” he said. “And getting the DVDs into the kiosks within 7 days helps to drive increased rental turns compared to the prior 28 day availability, which helps to further monetize the higher acquisition costs.

“All in all, Redbox management has learned significantly from the initial workaround attempts two years ago and is proving they can be successful, and I think they will continue to learn and improve.”

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said the results show demand for DVD rentals “has proved to be more inelastic than the company had initially projected.”

“We believe another factor that drove demand was the lack of a true substitute to Redbox, as Netflix has implemented very unpopular price increases and does not offer a pay-as-you-go rental option, while Blockbuster Express has a more expensive pricing structure,” he wrote in a research note.

About the Author: Chris Tribbey

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