Outerwall (OUTR, Financial) has more than 20 years of experience creating some of the most profitable spaces for their retail partners. Outerwall is on the cutting edge of automated retail as the company that introduced Redbox entertainment, Coinstar money services and ecoATM electronics recycling kiosks.
Outerwall kiosks are in neighborhood drug stores, grocery stores, malls, mass merchants and other retail venues in the U.S., Canada, Puerto Rico, the U.K. and Ireland.
The company’s second-quarter results by revenue and EPS was also in line. It generated strong results that reflected continued profitability and cash flow and delivered shareholder value. In view of the merger agreement with Apollo, Outerwall did away with the full-year 2016 guidance.
Second-quarter performance
GAAP results
In the second quarter, consolidated revenue was $518.0 million (a decrease of $27.3 million, or 5.0%, from $545.4 million in the prior-year quarter).
Income from continuing operations for the second quarter was $40.5 million, or $2.38 of diluted earnings from continuing operations per common share (a $47.4 million loss from continuing operations, or a $2.66 loss per common share, in the prior-year quarter).
In the second quarter, net cash flows provided by operating activities was $75.0 million ($75.1 million in the prior-year quarter).
Cash capital expenditures for the second quarter decreased by $4.6 million, or 23.5%, to $14.9 million ($19.5 million in the prior-year quarter).
Core results
In the second quarter, core adjusted EBITDA from continuing operations were $115.9 million (a decrease of $6.0 million from $121.8 million in the prior-year quarter).
Core diluted EPS from continuing operations for the second quarter was $2.41 (an increase of 9.5% from $2.20 per diluted share in the prior-year quarter).
Free cash flow for the second quarter was $60.1 million (an increase of $4.5 million, or 8.0%, from $55.6 million in the prior-year quarter).
Segment results
Redbox
Redbox segment revenue for the second quarter was $389.1 million (a decrease of $49.9 million or 11.4% from $439.0 million in the prior-year quarter).
Redbox generated approximately 123.6 million rentals in the second quarter (a decrease from 146.0 million rentals in the prior-year quarter).
Net revenue per rental was $3.13 in the second quarter ($3.00 in the prior-year quarter).
Redbox segment operating income in the second quarter was $82.1 million (a decrease of $16.9 million, or 17.0%, from $98.9 million in prior-year quarter).
Segment operating margin was 21.1% in the second quarter (22.5% in the prior-year quarter).
Coinstar
Coinstar segment revenue for the second quarter was $84.2 million (an increase of $3.9 million or 4.8% from $80.3 million in the prior-year quarter).
Coinstar segment operating income was $33.2 million in the second quarter (an increase of $1.3 million, or 3.9%, from $31.9 million in the prior-year quarter).
Coinstar segment operating margin declined by 40 basis points and was 39.4% for the second quarter (39.8% in the prior-year quarter).
ecoATM
Revenue in the ecoATM segment increased by $18.7 million, or 71.9%, and was $44.8 million in the second quarter. The average selling price of value devices sold increased by $2.81 and was $64.53 ($61.72 in the prior-year quarter).
In the second quarter, ecoATM segment operating loss decreased to $700,000, which included $384,000 of restructuring and related costs, compared with a loss of $92.8 million in the second quarter of 2015.
Share repurchases
During the second quarter of 2016, the company repurchased $2.6 million in face value of its 5.875% Senior Notes due 2021 for $2.2 million, reducing the outstanding principal balance to $228.6 million. The gain from early extinguishment of these notes reduced net interest expense by approximately $418,000 in the quarter. In addition to the notes repurchased, the company also reduced the outstanding balance on its credit facility by $44.7 million.
Dividend
On June 21 the company paid a cash dividend of 60 cents per outstanding share of its common stock totaling approximately $10.2 million. On July 24 the company's board of directors declared a quarterly cash dividend of 60 cents per share that was scheduled to be paid on Sept. 6 to stockholders of record as of the close of business on Aug. 23.
The second-quarter positives
- Solid execution companywide.
- Improved sequential results at Redbox.
- Highest second quarter revenue in Coinstar's 25-year history.
- The company made substantial progress at ecoATM and continues to expect the business to achieve segment operating profitability for 2016.
- Revenue and EPS in line.
Focus
- Disciplined expense management.
- Reducing operating costs, G&A and marketing expenses.
- Improving overall productivity.
Why Outerwall?
- The company has a decent dividend yield.
- It has a low forward PE.
- The company continues to leverage its valued brands.
- Redbox remains a compelling business.
- Coinstar delivers substantial margins.
Strategy
- Continue to profitably manage Redbox business.
- Build strong consumer and retailer relationships, and deploy, scale and manage kiosk businesses.
- Optimize and grow revenues from Coinstar business.
- Drive ecoATM business to profitability.
Conclusion
The company is successfully executing its strategy of optimizing core Redbox and Coinstar businesses, scaling ecoATM business and increasing shareholder returns. It remains focused on maintaining its position as a leader in automated retail, optimizing core businesses, gaining efficiencies across the company and managing for profitability and free cash flow. It is looking for opportunities that could leverage its competitive strengths and grow Outerwall’s top and bottom line.
It continues to build upon a solid foundation, leading brands with strong consumer engagement, relationships with its retail and studio partners and a sound financial position. The company is performing well, and adding this company will reap shareholder returns.
Disclosure: I do not hold any position in the company.
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