Coinstar, redbox meet Wall Street expectations, stock price still drops on workaround fears

Despite contentions that the company was going to face questions "they won't be able to work around" after yesterday's announcement of its Q4 2009 financials, redbox parent Coinstar Inc. met Wall Street expectations thanks at least in part to the growth of its DVD-rental business, according to Reuters.

But stock prices dropped somewhat overnight, apparently based on fears that its workaround efforts aren't going to be as successful as the company says they will be.

The Bellevue, Wash.-based Coinstar, which also makes coin-counting machines, said it rolled out nearly 9,000 DVD-rental kiosks last year.

Net Q4 income attributable to Coinstar was $5.5 million, or 18 cents a share, versus $4.2 million, or 15 cents a share, in Q4 last year.

Excluding a non-cash goodwill impairment charge, the company earned 32 cents a share, meeting analysts' estimates, according to Thomson Reuters I/B/E/S.

Coinstar saw revenue rise 44 percent to $328 million. DVD revenue grew 73 percent to $231.8 million.

The company forecast fiscal 2010 revenue in the range of $1.47 billion to $1.57 billion, largely in line with analysts' estimates of revenue of $1.50 billion.

The company forecast factors in costs associated with its planned kiosk installations, about a third of which are scheduled for the first quarter.

Video Buyers Group president Ted Engen, who last year was quoted in the New York Times saying, "these machines are to the video industry what the Internet was to the music business — disaster," about the redbox kiosks, said earlier this week that he expected redbox and Coinstar to face tough questions after the release of its financial results, according to Home Media Magazine.

Coinstar says it's still able to get feet on the street to work around the latest wrinkle in the embargoes, Target and Walmart implementing temporary purchase limits on new release DVDs, but some investors and analysts are shying away anyway, evidenced by some degree of selloff and a drop in stock prices despite earnings and forecasts that met expectations.

According to Barron's, Brigantine Advisors analyst Steven Frankelhas changed his rating on Coinstar stock from 'buy' to 'hold,' as he awaits "signs that margins have bottomed and that the company can put its disputes with the studios behind it."

The cost of redbox's workaround is clearly affecting margins, Frankel pointed out: gross margin fell to just under 16 percent last quarter from well above 17 perecent in the third quarter, and nearly 19 percent a year ago. Frankel estimated the extra effort of securing DVDs from retailers — even before Target's and Walmart's changes of heart — adds $1-$3 to the cost of each disc.

"The company needs to put these issues behind it and agree to some sort of revenue sharing/rental window," he wrote. "Without such an agreement, margins are likely to remain under pressure, as the workarounds only get more difficult as the size of the installed base of kiosks grows."