“Outerwall reported a solid finish to the third quarter as the performance in our Redbox business improved substantially moving through the last few weeks of the quarter,” said J. Scott Di Valerio, chief executive officer of Outerwall Inc. “While heightened promotional activity had positively influenced traffic at Redbox through July and into August, we identified pressure on revenue from the level of promotional discounts and higher than expected single-night rentals, and recalibrated our marketing strategies to improve bottom-line performance. We recognize the shift occurring in our Redbox business as we move from primarily a network expansion focus to an emphasis on incremental growth and network optimization, and the importance of driving bottom line and maximizing cash flow in the business. Our Coinstar business turned in a solid performance, and we are optimistic about the growth and future free cash flow opportunity ahead with the addition of ecoATM to the Outerwall automated retail platform.”
Outerwall’s 2013 third quarter and nine months financial highlights included:
|Third Quarter||Nine Months|
|• Consolidated revenue||$||587.4||million||$||1,716.3||million|
|• Net income||$||82.7||million||$||152.1||million|
|• Core adjusted EBITDA* (See Appendix A)||$||110.5||million||$||339.2||million|
|• Diluted earnings per share||$||2.95||$||5.32|
|• Core diluted earnings per share* (See Appendix A)||$||0.97||$||3.78|
|• Net cash provided by operating activities||$||61.7||million||$||132.4||million|
|• Free cash flow* (See Appendix A)||$||21.8||million||$||23.8||million|
*Refer to Appendix A for a discussion of non-GAAP financial measures, including the exclusion of certain non-core items.
New Capital Structure and Additional Share Repurchases
“We remain focused on driving profitable growth and maximizing free cash flow by creating greater operating leverage in our core businesses and reducing costs across the enterprise. We are making progress, having already reduced our costs in the fourth quarter,” said Galen C. Smith, chief financial officer of Outerwall Inc. “As part of these efforts, and our commitment to value creation, we will continue to allocate capital to the highest return opportunities. Given the needs of the business and the strength of our cash flows, we believe it is appropriate to return 75% to 100% of free cash flow to Outerwall shareholders, which in the near term will be in the form of share repurchases, enabling us to benefit from current valuation.”
Smith continued, “Further, we are refining our target net leverage ratio to be 1.75x to 2.25x net debt to core adjusted EBITDA, which we plan to establish during the fourth quarter through refinancing existing debt and additional revolver capacity. With this new capital structure, Outerwall will continue to benefit from a strong financial foundation that enables us to both drive further growth and value creation in the business and return an appropriate level of capital to our shareholders.”
During the third quarter, the company repurchased approximately $23.6 million of its common stock for a total of $95.0 millionof its original $100 million share repurchase target for 2013. The company plans to repurchase an additional $150 million of common stock, $100 million of which it announced in September and expects to execute before the end of the fourth quarter and the balance occurring early in the first quarter of 2014. As of September 30, 2013, there was $300.4 million remaining under the current board authorization for stock repurchases.
Revenue for the third quarter of 2013 increased 9.3% to $587.4 million compared with $537.6 million for the third quarter of 2012, driven primarily by Redbox segment revenue of $491.7 million and New Ventures segment revenue of $16.0 million, which included the revenue from the ecoATM business since the acquisition closed on July 23, 2013. Redbox revenue increased 7.0% compared with $459.5 million for the third quarter of 2012, attributable primarily to Redbox® kiosk installations installed in 2012 that continue to ramp and a 2.1% increase in same store sales. Coinstar, formerly known as Coin, segment revenue was $79.6 million for the third quarter of 2013, compared with $77.6 million for the same period last year driven primarily by a 5.5% increase in average transaction size.
Operating income for the third quarter of 2013 was $48.4 million, which resulted in an operating margin of 8.2%, compared with operating income of $66.9 million and an operating margin of 12.4% in the third quarter of 2012. The decline in operating income was primarily driven by the Redbox segment where lower than expected revenue growth was offset by increased expenses that reflected several factors, including: higher product costs as a result of a 19% increase in theatrical titles driven largely by a weaker release schedule in 2012 due to the Summer Olympics and content purchases in anticipation of higher rental demand, growth in the installed kiosk base, increased content purchases under the company’s Warner agreement, which was signed in the fourth quarter of 2012, relative to Q3 2012 when the company was procuring Warner content through alternative sources, as well as increased higher-cost Blu‑ray content purchases as the company continues to grow this format. Product is typically purchased six to eight weeks in advance based on forecasted demand and revenue and future content purchases are adjusted if results in the current period do not meet expectations, but it impacts operating income in the short-term. Increases in revenue share, customer service, and payment card processing fees and support function costs directly attributable to revenue and kiosk growth were offset by a reduction in kiosk field operation costs as Redbox continues to gain efficiencies as its installed base grows.
Net income for the third quarter of 2013 was $82.7 million, or diluted earnings per share of $2.95, compared with $36.8 million, or $1.14 per diluted share, in the third quarter of 2012. Core diluted earnings per share for the third quarter of 2013 was $0.97, excluding favorable non-core adjustments of $1.98 per share, compared with $1.26 per diluted share, which excluded unfavorable non-core adjustments of $0.12 per share, in the third quarter of 2012. Non-core adjustments for the third quarter of 2013 included the gain on the previously held equity interest in ecoATM, the impact of the rights to receive cash issued in connection with the acquisition of ecoATM, associated acquisition costs, and the loss from equity method investments.
Net cash provided by operating activities in the third quarter of 2013 was $61.7 million, compared with $117.5 million in the third quarter of 2012. The primary factor in the decline in operating cash flow relative to last year was the timing of working capital items and the decline in operating income as noted above. Cash capital expenditures for the third quarter of 2013 were$39.9 million, compared with $56.5 million in the third quarter of 2012. Free cash flow for the third quarter of 2013 was $21.8 million, compared with $61.0 million in the third quarter of 2012.
Redbox performance in the third quarter was in line with revised expectations. Redbox generated 199.5 million rentals in the quarter, the highest number of rentals the company has reported in a quarter and up 13.1% year over year. Unique credit and debit cards used in the quarter increased 8% over the prior year to a record of nearly 42 million. In addition to promotional discount activities, rental performance was supported by a stronger content slate and continued strong performance of Blu-ray and video games. Net revenue per rental came in at $2.46, down from $2.52 in the third quarter of 2012, reflecting the promotional activity and increased single night rentals in the quarter.
Revenue increased $2.0 million, or 2.6%, primarily due to a 5.5% increase in the average coin-to-voucher transaction size to$41.25 and an increase in the volume of non-cash voucher products by 0.6%. Revenue increased at a rate lower than the increase in transaction size due to variations in country and product mix, including growth in Canada driven by TD Canada Trust, which has a different revenue model than regular coin-to-voucher transactions. Same store sales were also up slightly overall. Effective October 1, 2013, the company implemented a price increase for all U.S. grocery retail locations for the coin voucher product taking the rate to 10.9%. The price increase was implemented to offset the increase in operating costs and transportation and processing expenses since the last price increase taken in February 2010.
The recently acquired ecoATM business continued to perform above expectations throughout the third quarter. At the end of the quarter, there were more than 800 ecoATM kiosks in the marketplace, up from the approximately 700 kiosks at the close of the acquisition in July. The company continued testing ecoATM kiosks in both the mass and grocery channels in the quarter and expects those channels, along with expansion in the mall channel, to contribute to growth in 2014.
The company continued its review of its other New Ventures to ensure they provide the appropriate level of risk adjusted returns. The company expects to complete the review by the end of the year.