Outerwall Inc. Announces 2015 Third Quarter Results

BELLEVUE, Wash., Oct. 29, 2015 /PRNewswire/ -- Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the third quarter ended September 30, 2015.

(Logo - http://photos.prnewswire.com/prnh/20130701/AQ41388LOGO)

"Our performance in the third quarter underscores our ability to drive the bottom-line," said Erik E. Prusch, Outerwall's chief executive officer. "Redbox was challenged by the lowest theatrical box office in four years for Redbox titles and revenue was lower than we expected. However, we continued to control costs and create efficiencies as our Redbox and Coinstar businesses generated solid margins and cash flow. We remain focused on moving ecoATM to profitability as quickly as possible and made progress in a number of key operational areas due to our deliberate efforts to reduce costs. We are also determined to prudently drive top-line performance and are working on multiple fronts to make that happen."

Highlights from the third quarter 2015 include:

• The company continued to focus on effectively managing expenses across the enterprise, delivering 3.3% year-over-year growth in core adjusted EBITDA from continuing operations despite revenue decreasing 6.9%
• Core diluted EPS from continuing operations increased 32.3% to $2.21 reflecting increased profitability and a lower share count
• Repurchased 938,586 shares of common stock for $60.8 million
• Generated 116.3% growth in free cash flow (FCF) to $65.6 million bringing the year-to-date total to $206.6 million

"Our continued focus on operational excellence drove strong third quarter results, with significant year-over-year increases in free cash flow, core adjusted EBITDA and core diluted EPS," said Galen C. Smith, Outerwall's chief financial officer. "We generated more than $65.6 million in free cash flow during the quarter, an increase of 116.3 percent from the third quarter last year. We continued our balanced approach to capital allocation and repurchased more than 900,000 shares in the quarter, or 5.2 percent of shares outstanding. We remain on track to uphold our commitment of returning 75 to 100 percent of annual free cash flow to shareholders directly through share repurchases and quarterly cash dividends."

Smith continued: "Our performance in the quarter demonstrates our ability to continue delivering strong financial results despite exceptionally weak content that impacted revenue and rentals in our Redbox business. We will continue driving Outerwall's financial performance, managing expenses and improving profitability to both reinvest in the business and enhance the bottom-line."

CONSOLIDATED RESULTS

GAAP Results

Consolidated revenue for the third quarter of 2015 was $512.1 million compared with $549.9 million in the third quarter of 2014. The $37.8 million decrease was due primarily to a $39.7 million decrease in revenue from Redbox driven by a decline in rentals and the removal of underperforming kiosks, partially offset by the price increases for movie content implemented in December 2014. Movie rentals were impacted primarily by lower total box office of movie titles released including seven fewer titles, the timing of the release slate, a higher impact from secular decline in the physical market and lower demand from price-sensitive customers following the price increases which is heightened in periods of weak content. Revenue from the ecoATM and Coinstar segments increased by $1.2 million and $0.6 million, respectively, in the third quarter of 2015 compared with the third quarter of 2014.

Income from continuing operations for the third quarter of 2015 was $37.6 million, or $2.12 of diluted earnings from continuing operations per common share, compared with income from continuing operations of $22.1 million, or $1.12 of diluted earnings from continuing operations per common share, in the third quarter of 2014. The increases were primarily due to an increase in operating income from the Redbox and Coinstar segments, as a result of lower direct operating expenses, lower kiosk related depreciation, and ongoing cost reduction initiatives.

Net cash provided by operating activities increased 72.4% to $85.6 million in the third quarter of 2015, compared with $49.6 million in the third quarter of 2014. The increase was primarily due to a decrease in net cash outflows from changes in working capital.

Cash capital expenditures for the third quarter of 2015 increased 3.4% to $19.9 million, compared with $19.3 million in the third quarter of 2014, as the result of timing of ongoing investments in the businesses.

Core Results

Core adjusted EBITDA from continuing operations for the third quarter of 2015 was $119.7 million, an increase of $3.8 million, or 3.3%, compared with $115.9 million for the third quarter of 2014. The increase was primarily due to increased segment operating income from the Redbox and Coinstar segments.

Core diluted EPS from continuing operations for the third quarter of 2015 was $2.21, an increase of 32.3% compared with $1.67 per diluted share in the third quarter of 2014. The increase was primarily attributable to increased segment operating income from the Redbox and Coinstar segments, 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 third quarter of 2015 totaled $0.05 compared with $0.51 in the third quarter of 2014.

Free cash flow for the third quarter of 2015 was $65.6 million, an increase of $35.3 million, or 116.3%, compared with $30.3 million in the third quarter of 2014, primarily driven by higher net operating cash flow.

SEGMENT RESULTS

Redbox

Redbox segment revenue for the third quarter of 2015 was $395.4 million compared with $435.1 million in the third quarter of 2014. The decrease of $39.7 million reflects $35.8 million attributed to a decline in total disc rentals and $3.9 million related to a decrease in revenue from kiosks removed subsequent to the third quarter of 2014 as a result of continued efforts to optimize the network by removing underperforming kiosks.

Redbox generated approximately 132.6 million rentals in the third quarter of 2015, down from approximately 170.8 million rentals in the third quarter of 2014. The decline in rentals was driven by several factors, including a substantially lower box office which was 45.3% lower and included seven fewer titles than the third quarter of 2014,  the timing of the release slate, a higher impact from secular decline in the physical market, lower demand from price-sensitive customers following the price increases implemented in December 2014 and January 2015, which is heightened during periods of weak content, and a decline in video game rentals due to consumer transition to new generation platforms and the limited new release titles available for the new platforms.

Net revenue per rental was $2.96 in the third quarter of 2015, an increase of $0.42, or 16.5%, from $2.54 in the third quarter of 2014. The increase in net revenue per rental was primarily the result of the impact of the increase in daily rental prices, partially offset by the expected increase in single night rental activity and lower demand from price-sensitive customers as a result of the price increases; a decrease in Blu-ray revenue primarily as a result of fewer Blu-ray releases; and a decrease in video game revenue resulting from the consumer transition to new generation platforms and a lack of new release content availability related to the transition and seasonality of publisher release schedules.

Redbox segment operating income in the third quarter of 2015 was $90.4 million, an increase of $2.1 million or 2.4%, compared with $88.3 million in the third quarter of 2014. Segment operating margin increased 260 basis points to 22.9% in the third quarter of 2015, compared with segment operating margin of 20.3% in the third quarter of 2014, primarily attributable to an improvement in gross margin related to the price increases and lower spending on content in the third quarter of 2015 due to fewer movie releases and weak content, lower games purchases due to the consumer transition to new generation platforms, and lower cost per title driven by studio mix, as well as reductions in direct operating, general and administrative and marketing expenses as the business continues to focus on operating efficiencies and aligning its cost structure with physical rental demand.

Coinstar

Coinstar segment revenue was $85.7 million, an increase of $0.6 million compared with $85.1 million in the third quarter of 2014, primarily due to an increase in the number of Coinstar Exchange kiosks and transactions and higher revenue for Coinstar in the U.S. due to increased volume.

Coinstar revenue in the U.K. and Canada in the third quarter of 2015 was negatively impacted by unfavorable exchange rates due to the strengthening of the U.S. dollar versus the British pound and Canadian dollar compared with the prior year, and largely offset the impact of the increased coin voucher product transaction fee from 8.9% to 9.9% implemented in the U.K. in August 2014.

Coinstar segment operating income was $34.5 million in the third quarter of 2015, an increase of $1.1 million, or 3.1%, compared with $33.4 million in the third quarter of 2014. Coinstar segment operating margin increased 100 basis points to 40.3% for the third quarter of 2015, compared with 39.3% in the third quarter of 2014, as the business continues to actively manage expenses and identify additional opportunities to reduce costs.

ecoATM

Revenue in the ecoATM segment was $31.0 million in the third quarter of 2015, an increase of $1.2 million, or 4.1%, compared with $29.7 million in the third quarter of 2014. This increase was primarily due to an increase in the number of ecoATM installed kiosks, increased collections and an increase in the number of value devices sold, partially offset by a lower average selling price of value devices sold, primarily due to a lower mix of higher value devices and lower collections of value devices per kiosk due to sustained carrier marketing of alternative recycling options.

While the number of overall devices sold increased 38.5% and the number of value devices sold increased 35.1% in the third quarter of 2015 compared with the third quarter of 2014, the collection of value devices on a per kiosk basis, as well as the number of higher value devices collected, declined as a result of alternative recycling options marketed by the carriers. The average selling price of value devices sold was $59.15 in the third quarter of 2015 compared with $75.95 in the third quarter of 2014.

Segment operating loss increased to $3.1 million in the third quarter of 2015, compared with $2.0 million in the third quarter of 2014, primarily due to an increase in direct operating expenses related to costs associated with the increased installed ecoATM kiosk base.

The number of installed ecoATM kiosks were 2,210 in the third quarter of 2015, an increase of 700 compared with the third quarter of 2014. As a result of the company's optimization efforts in the third quarter of 2015, ecoATM removed approximately 250 underperforming kiosks, primarily from the grocery channel, and redeployed approximately 180 kiosks into retailer locations, with the majority in the mall and mass merchant channels, for a net reduction of 50 kiosks from the second quarter.

CAPITAL ALLOCATION

On October 27, 2015, the company's board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on December 8, 2015, to all stockholders of record as of the close of business on November 23, 2015.

During the third quarter of 2015, the company repurchased 938,586 shares of common stock at an average price per share of $64.73 for a total of $60.8 million. As of September 30, 2015, there was approximately $292.7 million remaining under the company's stock repurchase authorization.

2015 ANNUAL GUIDANCE

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

 

ADDITIONAL INFORMATION

Additional information regarding the company's 2015 third 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 third 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 November 12, 2015, at 1-855-859-2056 or 1-404-537-3406, using conference ID 46780582.

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:

 

 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/outerwall-inc-announces-2015-third-quarter-results-300169044.html

SOURCE Outerwall Inc.