Verizon Venture, Blockbuster Kiosks Set Coinstar’s 2012 Course

Regarding the plans for the joint venture with Verizon, Davis cited a competitive need to keep matters “close to the vest,” and wouldn’t talk about platforms or product offerings, instead deflecting questions about subscription details to the second half of the year when the service launches.

The purchase of NCR kiosks will allow the company to “fill in pockets with key retailers” in parts of the country where it doesn’t currently have a presence, Davis said. Part of the deal is a five-year service agreement that kicks in following closing of the deal that will give Coinstar “the opportunity to work with NCR on other strategic self-service concepts and initiatives,” Davis said. He said NCR’s “terrific presence outside of the U.S.” is an asset as the company contemplates “moving outside of the domestic U.S.” Coinstar expects the NCR transaction to close “no later than” Q3 when it will work to “quickly expand the Redbox presence to allow for a single network of Redbox kiosks in the United States.” Chief Financial Officer Scott Di Valerio wouldn’t say how many of NCR’s roughly 10,000 kiosks are part of the proposed deal.

The current year will be one of “significant investment” with the $14 million infusion that’s part of the Verizon deal and the purchase of kiosks from NCR for $100 million, said Di Valerio. The $14 million allocation for the Verizon venture will be coming “in a short period of time” as the venture gears up, Di Valerio said. Coinstar isn’t expecting additional investments to be “a significant drain on our overall cash position,” Di Valerio said. “Coinstar expects to be able to fund additional investments in the venture through cash flow generation this year,” he said. Executives wouldn’t say when they expect the venture to be profitable.

Additional 2012 Coinstar investments will finance the company’s test of the Redbox service in Canada and “working through buying content outside of distribution for Warner,” whose content agreement with Redbox ended in January. Di Valerio also referred to additional investment into “new business seeds,” with a plan to launch one, possibly two, throughout the year. The company plans to broaden market tests of its coffee venture from 50 test locations on the West Coast and Washington, D.C. to over 500 locations throughout the country, it said.

The Redbox distribution agreement with Warner Brothers ended in January and Redbox “will be obtaining Warner titles through alternative means at retail prices rather than from their distributors,” executives said. “There are significant differences in how we are approaching this situation compared with what we faced in 2009,” they said. Until January Redbox had been buying Warner content on a 28-day delay since early 2010. “We now plan to have Warner titles in the kiosks weeks earlier and have more flexibility in deciding which titles to purchase,” executives said. Redbox renewed or extended content agreements with Sony, Paramount, Lionsgate, Summit, and Anchor Bay, they said.

On whether other studios might follow Warner down the same path when distribution agreements expire later this year, Davis said the company doesn’t comment on negotiations with studios in public, but “we have good relationships with all the studios and we're well positioned relative to giving consumers what they need on the Warner titles."

When asked how Redbox’s dealings with Warner will differ from its relationship in 2009, Davis said, “Before we were competing with day and date and were doing everything we could to get it in the box after the day and date release.” Today Redbox is dealing with a 28-day window, he said. Davis wouldn’t identify the source of the Warner titles and said, “it won’t be every title. We're trying to be in tune to what the consumer wants and have good representation of that product in the box sooner than 28 days."

Redbox had expected a “certain level of resistance to the price increase” at kiosks and had factored that into Q4 guidance. Although the impact of the price increase on rentals was lower than expected, the company doesn’t believe Q4 demand is “necessarily a baseline” for 2012, due to the strong slate of titles released in Q4, coupled with the holiday season, which “may have muted the impact of the price increase on demand.” The company still may see a “downward impact” during periods of weaker content or lower seasonality, it said.

Videogames comprised 7.5 percent of Redbox Q4 revenue, in line with guidance. Redbox “over-purchased inventory” for Q4 and also saw a decline in salvage value, the company said, resulting in a margin hit of 2.1 percentage points. The company is “learning more about consumer rental patterns, optimal product and platform mix, seasonality and life cycles, which can vary widely,” it said. It’s adjusting the process for videogames to better align demand with “optimal product and platform mix” so purchased videogames achieve margin targets before including any benefit from salvage value, executives said. The company successfully adopted that approach with Blu-ray content in 2011, executives said, and hopes to improve videogame productivity and margin in 2012 using the same strategy. Seventeen videogames are slated to release in Q1, including four in January, six in February and seven in March, executives said. The company estimates videogame rentals will account for about 5 percent of Redbox revenue in Q1.

Blu-ray titles continued to perform “very well” and accounted for 6.8 percent of Redbox Q4 revenue, the company said. Blu-ray as a percentage of total Redbox movie rentals trended up throughout the year, peaking in December. According to an internal company survey, the number of Redbox consumers that own Blu-ray compatible devices rose to 51 percent in Q3 2011. “We continue to view Blu-ray as an important option for consumers and a profitable revenue growth driver in the long-run,” executives said. Action titles continue to be most popular, although demand increased across a broader spectrum of titles, they said.

Redbox has been the leader in DVD rentals for the past two quarters and gained 10.4 share points year over year for a total market share of 37.8 percent, Davis said. The top five Redbox retailers were Walgreens, Walmart (including Sam’s Club and other Walmart-owned stores), Kroger, 7-Eleven and McDonald’s, the company said. Redbox same-store sales were up 27 percent for the quarter over 2010, and there were 35,400 kiosk installations in 29,000-plus locations in Q4, the company said. Redbox kiosks are within a 5-minute drive of 68 percent of the U.S. population, he said.

NCR reported an operating loss of $15 million for Q4 2011, equal to the quarterly operating loss for Q4 2010, the company said in its earning webcast Monday. NCR said the losses in the 2010 and 2011 Q4 periods were the result of kiosk depreciation and DVD amortization. The agreement for Coinstar to procure NCR hardware, software and services will yield $25 million in gross profit over five years, NCR said.

A lawsuit brought by NCR against Dish to retain rights to the Blockbuster Express name on kiosks (CED July 26 p1) is still pending, a spokesman for Dish Network told us Tuesday. A spokesman for NCR said the court case is in early proceedings and that the brand license doesn’t transfer as part of the proposed agreement with Coinstar. “Once the transaction has closed, there’s no need for the brand license agreement to continue,” he said.

Coinstar’s forecast for full-year 2012 is revenue of $2.5 billion-$2.75 billion with core EPS of $3.80-$4.30. Projected Q1 revenue is $530-$555 million.