Outerwall held its Q3 earnings call Thursday, posting a nearly two-fold revenue jump attributed to its acquisition of ecoATM and growth in both Coinstar and Redbox kiosk businesses.
The company has been the subject of analyst speculation in the run-up to its earnings report, as investors dumped shares following news that Outerwall cut its earnings and revenue forecasts for the fiscal year. But CEO Scott Di Valerio shifted the focus back to the company's strengths in its principal businesses.
"Our core segments, Redbox and Coinstar, are market-leading franchises with strong value propositions and well-managed kiosk networks. We continue to leverage our position by offering consumers value and convenient solutions," Di Valerio said during the earnings call. "And we are driving ecoATM to deliver growth and cash flow."
A faulty promotional strategy in the Redbox network took much of the blame for a sluggish start to the quarter. Di Valerio said the volume of promotions running, along with deep discounts such as 50 percent off Friday rentals, negatively impacted revenue and growth margins — a strategy that was quickly recalibrated.
"We did have too many at one time and put the tonnage in at the wrong levels. And while it did help drive some rentals, we certainly gave up some typically full-price rentals in the quarter," he said.
Outerwall CFO Galen Smith explained that in spite of the discount debacle, Redbox rentals grew 13.1 percent, with both rentals and revenue per kiosk up year-over-year for the first time since Q1 2012.
Di Valerio hinted that Outerwall's venture into on-demand video streaming, Redbox Instant by Verizon, will soon expand to new consumer devices. He also told analysts that he expects more consumers will know about service by the end of the year.
"We should see a bit of work getting done there, more awareness around Redbox Instant, as well as more people coming through the top of the funnel should be happening here in the fourth quarter and moving into the first quarter as well," Di Valerio said.
The Coinstar line of business delivered a solid quarter, Di Valerio said, with 2.6 percent revenue growth and an increase in average transaction size.
The company increased its coin processing fees on Oct. 1, which Di Valerio said helped offset the increased costs the business has incurred since the last price increase in 2010.
Outerwall remains optimistic about its venture into electronics recycling following its July acquisition of ecoATM. Di Valerio projected to have somewhere between 800 and 900 ecoATM kiosks deployed by the end of the year, while also forecasting a lofty total market opportunity between 5,000 and 10,000 kiosks in the U.S.
Di Valerio said they are breaking away from the traditional mall channel for the ecoATM and have begun testing in large-format grocery stores. With 20 percent of the 175 million devices sold annually getting traded in, Outerwall sees a lot of demand for refurbished mobile phones.
"But the other thing that we don't talk a lot about is that ecoATM machines also take tablets and MP3 players," Di Valerio said. "And we're beginning to see a relatively large refresh cycle on tablets as well over the next year or so. We think there's some very good opportunity, therefore, for eco."
And that optimism holds strong even in light of increased competition. This year, nearly every major retailer implemented an electronics buy-back program — an offering that directly impedes on the market share Outerwall is trying to capture with ecoATM.
"There is certainly a positive as people begin to understand that you can turn in your phones. As we said, 20 percent of phones are recycled. So there is 80 percent out there that need to get turned in," Di Valerio said. "So there are great opportunities for us there. But also it's something that we're focused on from a competition perspective."
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