Outerwall Inc. Announces 2015 Second Quarter Results

BELLEVUE, Wash., July 30, 2015 /PRNewswire/ -- Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the second quarter ended June 30, 2015.  

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"In the second quarter we continued to execute on our key strategies and delivered core results that were up significantly year-over-year across the board," said Nora M. Denzel, Outerwall's interim chief executive officer. "Although we recognized a goodwill impairment for ecoATM during the quarter, given its unique value proposition, we still expect ecoATM revenue growth and profitability over time as the business scales. Overall, our outlook for the second half of 2015 remains positive, with a strong box office expected in the fourth quarter."

The company also separately announced today that its board of directors has appointed Erik E. Prusch as chief executive officer effective July 31, 2015. Prusch will succeed Denzel, who will remain on the board.

"Erik joins Outerwall with more than 25 years of successful leadership and operations experience in consumer, retail, and technology companies, and I look forward to working with him to ensure a smooth transition," said Denzel.

During the three months ended June 30, 2015, the company recognized a non-cash, non-tax deductible charge for goodwill impairment of $85.9 million related to its ecoATM business segment. The impairment charge reflects the impact of competitive pressures on ecoATM and lowered expectations for future revenue growth. The charge resulted in a GAAP reported loss. Core results exclude the impact of the impairment charge as a non-core adjustment.

 

Highlights from the second quarter 2015 include:

• Delivered 9.1% growth in core adjusted EBITDA from continuing operations to $121.8 million on essentially flat revenue reflecting solid execution and continued expense management
• Core diluted EPS from continuing operations grew 44.1% to $2.19 driven by higher profitability, a lower tax rate and lower share count
• Twentieth Century Fox Home Entertainment signed a new two-year, 28-day delay agreement with Redbox and Sony Pictures Home Entertainment recently extended the existing day and date agreement through September 2016
• Free cash flow grew 51.4% to $55.6 million bringing the year to date total to $141.0 million
• Repurchased 284,537 shares of common stock for $22.0 million and paid another quarterly dividend of $0.30 per share

"In the second quarter, we delivered solid growth in core adjusted EBITDA, core diluted EPS from continuing operations and free cash flow through solid execution as we continue to align costs and capital expenditures with revenue and optimize the kiosk networks. Our performance allows us to raise expectations for core adjusted EBITDA and core diluted EPS from continuing operations and free cash flow for 2015," said Galen C. Smith, Outerwall's chief financial officer.

"We remain committed to our disciplined approach to capital allocation and returning 75-to-100 percent of annual free cash flow to shareholders," continued Smith. "In addition to paying out the quarterly dividend, we repurchased another $22 million in common stock in the quarter."

CONSOLIDATED RESULTS

GAAP Results

Consolidated revenue for the second quarter of 2015 was down slightly to $545.4 million, compared with $546.5 million in the second quarter of 2014, on lower revenue from Redbox nearly offset by higher revenue from ecoATM and Coinstar.

The loss from continuing operations for the second quarter of 2015 was $47.4 million, or $2.66 of diluted loss from continuing operations per common share, compared with income from continuing operations of $23.8 million, or $1.15 of diluted earnings from continuing operations per common share, in the second quarter of 2014, primarily due to the non-cash $85.9 million goodwill impairment charge recognized in the second quarter of 2015.

Net cash provided by operating activities increased 19.6% to $75.1 million in the second quarter of 2015, compared with $62.8 million in the second quarter of 2014. The increase was primarily due to higher Redbox segment operating income and a change in net non-cash income and expense included in net income and a decrease in net cash outflows from changes in working capital.

Cash capital expenditures for the second quarter of 2015 decreased 25.2% to $19.5 million, compared with $26.1 million in the second quarter of 2014, with the decrease primarily related to lower capital expenditures in the company's Redbox and Coinstar segments.

Core Results

Core adjusted EBITDA from continuing operations for the second quarter of 2015 was $121.8 million, which excludes the $85.9 million non-cash goodwill impairment charge and other non-core adjustments, an increase of $10.2 million, or 9.1%, compared with $111.7 million for the second quarter of 2014. The year-over-year increase was primarily due to higher Redbox segment operating income in the second quarter of 2015.

Core diluted EPS from continuing operations for the second quarter of 2015 was $2.19, an increase of 44.1% compared with $1.52 per diluted share in the second quarter of 2014. The increase was primarily attributable to the results of operations described and a reduction in the number of weighted average shares used in the diluted per share calculation due to stock repurchases. Non-core adjustments in the second quarter of 2015 amounted to $4.82 compared with $0.34 in the second quarter of 2014.

Free cash flow for the second quarter of 2015 was $55.6 million, an increase of $18.9 million, or 51.4%, compared with $36.8 million in the second quarter of 2014, primarily driven by higher net operating cash flow and lower capital expenditures.

SEGMENT RESULTS

Redbox

Redbox segment revenue for the second quarter of 2015 was $439.0 million, compared with $442.8 million in the second quarter of 2014, a modest 0.9% year-over-year decline despite a 13.1% decrease in rentals, as the recent price increases largely offset the impact of lower rentals.

Redbox generated approximately 146.0 million rentals in the second quarter of 2015, down from approximately 168.1 million rentals in the second quarter of 2014, primarily driven by a decline in video game rentals from a consumer transition to new generation platforms, lower demand from price-sensitive customers following the price increases, the expected secular decline in the physical market, and the removal of underperforming kiosks. Movie rentals were further impacted by weaker content and the timing of the release slate, as well as an increase in competition for viewing time from several significant theatrical releases during the second quarter of 2015.

Net revenue per rental was $3.00 in the second quarter of 2015, an increase of $0.37, or 14.1%, from $2.63 in the second quarter of 2014. The increase in net revenue per rental was primarily the result of the price increases, partially offset by an expected increase in single night rental activity as a result of the price increases.

Redbox segment operating income in the second quarter of 2015 was $98.9 million, an increase of 14.7%, compared with $86.2 million in the second quarter of 2014. Segment operating margin increased 300 basis points to 22.5% in the second quarter of 2015, compared with segment operating margin of 19.5% in the second quarter of 2014, primarily attributable to a decrease in direct operating expenses, driven by gross margin improvement. Direct operating and marketing expense also improved as the company continued to drive operating efficiencies in the business to align the cost structure with an anticipated gradual decline in physical rental demand.

Coinstar

Coinstar segment revenue was $80.3 million, an increase of $0.4 million, or 0.5%, compared with $79.9 million in the second quarter of 2014, primarily due to the growth in the number of Coinstar Exchange kiosks and transactions partially offset by decreased revenue for Coinstar in the U.S. due to a reduction in volume.

The U.K. business continued to benefit from the increased coin voucher product transaction fee implemented in August 2014, however the benefit was offset by the unfavorable exchange rate impact on U.K. revenue in the second quarter of 2015 due to the strengthening of the U.S. dollar versus the British pound as compared with the second quarter of 2014.

The average Coinstar transaction size increased on a year-over-year basis, while the number of transactions declined for the second quarter of 2015, reflecting larger pours and less frequent visits and a slight decrease in the U.S. kiosk base year-over-year as a result of continued optimization efforts.

Coinstar segment operating income was $31.9 million in the second quarter of 2015, an increase of $1.1 million, or 3.6%, compared with $30.8 million in the second quarter of 2014. Coinstar segment operating margin increased 120 basis points to 39.8% for the second quarter of 2015, compared with 38.6% in the second quarter of 2014, as the business continues to identify opportunities to reduce costs and actively manage expenses.

ecoATM

Revenue in the ecoATM segment was $26.1 million in the second quarter of 2015, an increase of $2.3 million, or 9.5%, compared with $23.8 million in the second quarter of 2014, primarily due to the increase in the number of ecoATM installed kiosks, offset by a lower average selling price on value devices due to a lower mix of higher value devices and lower collections per kiosk compared with the second quarter of 2014.

ecoATM installed approximately 120 net new kiosks in the quarter, primarily in the mass merchant channel, and ended the quarter with a total of 2,260 kiosks installed. During the quarter, ecoATM also redeployed approximately 70 underperforming kiosks from the grocery channel to the mall and mass merchant channels to optimize the profitability of the ecoATM kiosk network.

Collections of value devices on a per kiosk basis were lower in the second quarter of 2015 than in the second quarter of 2014 as a result of fewer transactions at the kiosks, primarily due to competition from carriers. Carrier marketing also impacted the number of higher value devices and the mix of overall value devices collected in the second quarter of 2015, which were the primary reasons for the decline in the average selling price of value devices compared with the second quarter of 2014. Compared with the first quarter of 2015, collections of higher value devices, collections per kiosk and the average selling price improved slightly in the second quarter of 2015 but were below our expectations and historical seasonal trends.

The segment operating loss increased $88.4 million in the second quarter of 2015 to $92.8 million, compared with $4.5 million in the second quarter of 2014, primarily due to the $85.9 million goodwill impairment charge recognized in the second quarter of 2015. Excluding the $85.9 million goodwill impairment charge, the segment operating loss increased $2.5 million, primarily due to an increase in direct operating expenses associated with the increase in the installed kiosk base. As the company continues to install additional ecoATM kiosks and existing kiosks continue to ramp, the company expects to leverage the fixed cost portions of direct operating expenses.

CAPITAL ALLOCATION

On July 28, 2015, the company's board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on September 15, 2015, to all stockholders of record as of the close of business on August 28, 2015.

During the second quarter of 2015, the company repurchased 284,537 shares of common stock at an average price per share of $77.40 for $22.0 million. As of June 30, 2015, there was approximately $353.4 million remaining under the company's stock repurchase authorization.

2015 ANNUAL GUIDANCE

The following table presents the company's updated full-year 2015 guidance and reflects the company's second quarter results and current outlook on the remainder of the year:

 

ADDITIONAL INFORMATION

Additional information regarding the company's 2015 second quarter operating and financial results and guidance is included in the company's prepared remarks, which, as well as this press release, are posted on the Investor Relations section of the corporate website at ir.outerwall.com.

CONFERENCE CALL

The company will host a conference call today at 2:30 p.m. PDT (5:30 p.m. EDT) to discuss second quarter 2015 earnings results and an update to 2015 guidance. The conference call will be webcast live and archived on the Investor Relations section of Outerwall's website at ir.outerwall.com. A recording of the call will be available approximately two hours after the call ends through August 13, 2015, at 1-855-859-2056 or 1-404-537-3406, using conference ID 74496002.

ABOUT OUTERWALL INC.

Outerwall Inc. (Nasdaq: OUTR) has more than 20 years of experience creating some of the most profitable spaces for their retail partners. The company delivers breakthrough kiosk experiences that delight consumers and generate revenue for retailers. As the company that brought consumers Redbox® entertainment, Coinstar® money services, and ecoATM® electronics recycling kiosks, Outerwall is leading the next generation of automated retail and paving the way for inventive, scalable businesses. Outerwall™ kiosks are in neighborhood grocery stores, drug stores, mass merchants, malls, and other retail locations in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland. Learn more at www.outerwall.com.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS 

Certain statements in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "estimate," "expect," "intend," "will," "anticipate," "goals," variations of such words, and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. The forward-looking statements in this release include statements regarding Outerwall Inc.'s anticipated growth and future operating results, including 2015 full year results. Forward-looking statements are not guarantees of future performance and actual results may vary materially from the results expressed or implied in such statements. Differences may result from actions taken by Outerwall Inc. or its subsidiaries, as well as from risks and uncertainties beyond Outerwall Inc.'s control. Such risks and uncertainties include, but are not limited to,

• competition from other entertainment providers,
• the ability to achieve the strategic and financial objectives for our entry into new businesses, including ecoATM and SAMPLEit,
• our ability to repurchase stock and the availability of an open trading window,
• our declaration and payment of dividends, including our board's discretion to change the dividend policy,
• the termination, non-renewal or renegotiation on materially adverse terms of our contracts with our significant retailers and suppliers,
• payment of increased fees to retailers, suppliers and other third-party providers, including financial service providers,
• the timing of new DVD releases and the inability to receive delivery of DVDs on the date of their initial release to the general public, or shortly thereafter, or in sufficient quantity, for home entertainment viewing,
• the effective management of our content library,
• the timing of the release slate and the relative attractiveness of titles in a particular quarter or year,
• the ability to attract new retailers, penetrate new markets and distribution channels and react to changing consumer demands,
• loss of key personnel or the inability of replacements to quickly and successfully perform in those new roles,
• the ability to generate sufficient cash flow to timely and fully service indebtedness and adhere to certain covenants and restrictions,
• the ability to adequately protect our intellectual property, and
• the application of substantial federal, state, local and foreign laws and regulations specific to our business.

The foregoing list of risks and uncertainties is illustrative, but by no means exhaustive. For more information on factors that may affect future performance, please review "Risk Factors" described in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. These forward-looking statements reflect Outerwall Inc.'s expectations as of the date of this press release. Outerwall Inc. undertakes no obligation to update the information provided herein.

(Consolidated Financial Statements, Business Segment Information and Appendix A Follow)

 

 

 

 

 

OUTERWALL INC.BUSINESS SEGMENT AND ENTERPRISEWIDE INFORMATION(unaudited)

Changes in our Organizational Structure

During the first quarter of 2015, we added ecoATM, our electronic device recycling business, as a separate reportable segment. Previously, the results of ecoATM along with those of other self-service concepts were included in our New Ventures segment. The combined results of the other self-service concepts, which include product sampling kiosk concept SAMPLEit, are now included in the All Other reporting category in the reconciliation below as they do not meet quantitative thresholds to be reported as a separate segment. All goodwill previously allocated to the New Ventures segment has been allocated to the ecoATM segment.

Comparability of Segment Results

We have recast prior period results for the following:

• Discontinued operations, consisting of our Redbox operations in Canada which we shut down during the first quarter of 2015; and
• The addition of our ecoATM segment and an All Other reporting category, which we added during the first quarter of 2015.

Our analysis and reconciliation of our segment information to the consolidated financial statements that follows covers our results of operations, which consists of our Redbox, Coinstar and ecoATM segments, Corporate Unallocated expenses and All Other. All Other includes the results of other self-service concepts, which we regularly assess to determine whether continued funding or other alternatives are appropriate.

 

 

APPENDIX A

Non-GAAP Financial Measures

Non-GAAP measures may be provided as a complement to results provided in accordance with United States generally accepted accounting principles ("GAAP").

We use the following non-GAAP financial measures to evaluate our financial results:

• Core adjusted EBITDA from continuing operations;
• Core diluted earnings per share ("EPS") from continuing operations;
• Free cash flow; and
• Net debt and net leverage ratio.

These measures, the definitions of which are presented below, are non-GAAP because they exclude certain amounts which are included in the most directly comparable measure calculated and presented in accordance with GAAP. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for our GAAP financial measures and may not be comparable with similarly titled measures of other companies.

Core and Non-Core Results

We distinguish our core activities, those associated with our primary operations which we directly control, from non-core activities. Non-core activities are primarily nonrecurring events or events we do not directly control. Our non-core adjustments for the periods presented include i) goodwill impairment, ii) restructuring costs (including severance and early lease termination costs and related impairment of assets) associated with actions to reduce costs in our continuing operations across the Company, iii) compensation expense for rights to receive cash issued in conjunction with our acquisition of ecoATM and attributable to post-combination services as they are fixed amount acquisition related awards and not indicative of the directly controllable future business results, iv) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control, v) tax benefits related to a net operating loss adjustment, and vi) tax benefit related to worthless stock deduction ("Non-Core Adjustments").

We believe investors should consider our core results because they are more indicative of our ongoing performance and trends, are more consistent with how management evaluates our operational results and trends, provide meaningful supplemental information to investors through the exclusion of certain expenses which are either nonrecurring or may not be indicative of our directly controllable business operating results, allow for greater transparency in assessing our performance, help investors better analyze the results of our business and assist in forecasting future periods.

Core Adjusted EBITDA from continuing operations 

Our non-GAAP financial measure core adjusted EBITDA from continuing operations is defined as earnings from continuing operations before depreciation, amortization and other; interest expense, net; income taxes; share-based payments expense; and Non-Core Adjustments.

A reconciliation of core adjusted EBITDA from continuing operations to net income from continuing operations, the most comparable GAAP financial measure, is presented in the following table:

 

Core Diluted EPS from continuing operations

Our non-GAAP financial measure core diluted EPS from continuing operations is defined as diluted earnings per share from continuing operations utilizing the treasury stock method excluding non-core adjustments, net of applicable taxes.

A reconciliation of core diluted EPS from continuing operations to diluted EPS from continuing operations, the most comparable GAAP financial measure, is presented in the following table:

 

A reconciliation of amounts used in calculating core diluted EPS from continuing operations in the table above is presented in the following table:

 

Free Cash Flow 

Our non-GAAP financial measure free cash flow is defined as net cash provided by operating activities after capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities. A reconciliation of free cash flow to net cash provided by operating activities, the most comparable GAAP financial measure, is presented in the following table:

 

Net Debt and Net Leverage Ratio

Our non-GAAP financial measure net debt is defined as the total face value of outstanding debt, including capital leases, less cash and cash equivalents held in financial institutions domestically. Our non-GAAP financial measure net leverage ratio is defined as net debt divided by core adjusted EBITDA from continuing operations for the last twelve months (LTM). We believe net debt and net leverage ratio are important non-GAAP measures because they:

• are used to assess the degree of leverage by management;
• provide additional information to users of the financial statements regarding our ability to service, incur or pay down indebtedness and repurchase our securities as well as additional information about our capital structure; and
• are reported quarterly to support covenant compliance under our credit agreement.

A reconciliation of net debt to total outstanding debt including capital leases, the most comparable GAAP financial measure, is presented in the following table:

 

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SOURCE Outerwall Inc.