Outerwall, Inc. (OUTR)

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$OUTR - Outerwall Inc. Announces 2014 Second Quarter Results

4:01 PM ET 7/31/14 | Dow Jones
Outerwall Inc. Announces 2014 Second Quarter Results

Reports Solid Profitability and Strong Operating and Free Cash Flow; Updates Full-Year 2014 Guidance

PR Newswire

BELLEVUE, Wash., July 31, 2014

BELLEVUE, Wash., July 31, 2014 /PRNewswire/ -- Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the second quarter ended June 30, 2014.

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"Our 2014 second quarter results reflect our ability to leverage our core capabilities of operating and scaling automated retail businesses profitably despite the impact of a weak content release schedule on our Redbox business," said J. Scott Di Valerio, Outerwall's chief executive officer. "June represented the lowest monthly theatrical box office in Redbox history. Box office in June was down 83 percent from June 2013 as only four titles were released during the month. While the release schedule was not compelling for consumers during the quarter, consumer engagement with Redbox remained strong as demonstrated by a significant year-over-year increase in e-mail open rates, e-mail subscribers and Redbox app downloads.

"Coinstar produced solid results in the quarter, with revenue, segment operating income and segment operating margin increasing year-over-year, " Di Valerio added. "We also continued to scale ecoATM. We finalized kiosk installation agreements with retail partners in the mass merchant and grocery channels. Overall, we delivered solid results during the quarter despite external challenges and believe we are well-positioned to deliver value to our consumers, retail partners and shareholders."

2014 2013 Change

Second Quarter Second Quarter %

------------------ ---------------- ---------

GAAP Results

-- Consolidated revenue $ 549.2 million $553.1 million (0.7)%

-- Income from continuing

operations $ 21.8 million $ 50.4 million (56.7)%

-- Net income $ 21.8 million $ 46.9 million (53.6)%

-- Diluted EPS from

continuing operations $ 1.08 $ 1.77 (39.0)%

-- Net cash provided by

operating activities $ 62.8 million $ 30.2 million 108.2%

Core Results*

-- Core adjusted EBITDA

from continuing

operations $ 110.3 million $129.9 million (15.1)%

-- Core diluted EPS from

continuing operations $ 1.42 $ 2.04 (30.4)%

-- Free cash flow $ 36.8 million $(5.9) million 719.1%

*Refer to Appendix A for a discussion of Use of Non-GAAP Financial Measures and Core and Non-Core Results.

Highlights from the second quarter of 2014 include:

-- Managed business for profitability and operating cash flow despite a weak

release schedule that impacted Redbox revenue

-- Generated $36.8 million in free cash flow in the quarter, bringing the

year-to-date total to $104.4 million

-- Repurchased approximately $50.0 million or approximately 712,000 shares

of common stock during the quarter

-- Completed a $300 million debt offering and amended and extended the

company's credit facility, effectively locking in attractive interest

rates, extending debt maturities and maintaining financial flexibility

"We produced solid results in the second quarter of 2014 with consolidated revenues and profitability in-line with our expectations despite weaker than expected performance from our Redbox business. In addition, we generated strong cash flow in the quarter and repurchased $50 million of our common stock, reflecting our commitment to returning cash to shareholders," said Galen C. Smith, chief financial officer of Outerwall.

For year-over-year comparison purposes, the company noted the following:

-- In the second quarter of 2013, the company implemented a new accounting

methodology for amortizing its content library that was prospectively

applied. Had this new methodology been applied retrospectively, Redbox

content costs, which are included in direct operating expenses, would

have been $29.4 million higher on a pretax basis in the second quarter of

2013 as content costs would have shifted from prior periods to the second

quarter of 2013.

-- In the second quarter of 2013, the company recognized a $17.8 million tax

benefit as a result of selling several thousand NCR kiosks through a

wholly owned subsidiary.

CONSOLIDATED RESULTS

Consolidated revenue for the second quarter of 2014 decreased $3.9 million, or 0.7% to $549.2 million compared with $553.1 million for the second quarter of 2013. The year-over-year decline in consolidated revenue was primarily due to the impact of a weak content release schedule on the Redbox business, partially offset by an increase in revenue from the Coinstar segment and the inclusion of the ecoATM business that was acquired in late July 2013 and is included in the company's New Ventures segment.

Operating income for the second quarter of 2014 was $47.9 million and operating margin was 8.7% compared with operating income of $76.1 million and operating margin of 13.8% in the second quarter of 2013. The year-over-year decrease in both the operating income and margin was primarily due to the impact of a weak content release schedule on Redbox revenue and the change in the content amortization accounting methodology that occurred in the second quarter of 2013 as noted above. Had the updated amortization accounting methodology been in effect prior to the second quarter of 2013, operating income and operating margin would have been $46.7 million and 8.4%, respectively, in the second quarter of 2013.

Income from continuing operations for the second quarter of 2014 was $21.8 million, or $1.08 earnings per diluted share from continuing operations, compared with $50.4 million, or $1.77 per diluted share, in the second quarter of 2013. The year-over-year decrease in income from continuing operations was primarily due to lower revenues and the impact of the change in the amortization accounting methodology that was implemented in the second quarter of 2013. Had this methodology been in effect prior to the second quarter of 2013, income from continuing operations for the second quarter of 2013 would have been $32.2 million.

Core adjusted EBITDA from continuing operations for the second quarter of 2014 was $110.3 million, compared with $129.9 million in the second quarter of 2013. The year-over-year decline was primarily due to lower segment operating income at Redbox and higher segment operating losses in New Ventures as the company continued to invest as it scales its ecoATM business. The declines were partially offset by increased Coinstar segment operating income. Had the updated amortization accounting methodology been in effect prior to the second quarter of 2013, core adjusted EBITDA from continuing operations in the second quarter of 2013 would have been $100.5 million.

Core diluted earnings per share from continuing operations in the second quarter of 2014 were $1.42 compared with $2.04 per diluted share in the second quarter of 2013. The company also noted that had the updated amortization accounting methodology been in effect prior to the second quarter of 2013, core diluted earnings per share from continuing operations in the second quarter of 2013 would have been lower by $0.64.

Net cash provided by operating activities in the second quarter of 2014 was $62.8 million compared with $30.2 million in the second quarter of 2013. The increase was primarily due to an increase in net operating cash inflows from changes in working capital and lower deferred income taxes.

Cash capital expenditures for the second quarter of 2014 were $26.1 million compared with $36.1 million in the second quarter of 2013.

Free cash flow for the second quarter of 2014 was $36.8 million, compared with negative $5.9 million in the second quarter of 2013, primarily driven by higher net operating cash flow and lower capital expenditures.

SEGMENT RESULTS

Redbox

Redbox segment revenue in the second quarter of 2014 was $445.5 million compared with $478.5 million in the second quarter of 2013. Redbox generated approximately 169.3 million rentals in the quarter, a decrease of 9.3% compared with the second quarter of 2013, on a considerably weaker release schedule than the year ago period. A key driver of Redbox performance is the availability of new release content, including the strength of titles and the release schedule. Total box office[1] in the second quarter 2014 was 37.5% lower than the second quarter of 2013. The impact of overall weaker releases in the second quarter of 2014 was further compounded by the scarcity of strong content available for rent in June. Compared with June 2013, the box office in June 2014 was 83.0% lower, and there were only four titles released during the month.

Redbox same store sales decreased 7.8% in the second quarter of 2014 compared with a decrease of 6.8% in the second quarter of 2013, primarily due to the impact of a weak content release slate and the timing of releases throughout the quarter. The company noted, however, that consumer engagement remained strong and grew in the second quarter of 2014 compared with the second quarter of 2013, with e-mail subscribers and Redbox app downloads growing by more than 20%. In addition, e-mail open rates, a measure of consumer interest in the product offering, increased 30% from the second quarter of 2013.

Net revenue per rental was $2.63, an increase of $0.07, or 2.7%, from the second quarter of 2013. The increase was primarily the result of a higher percentage of Blu-ray rentals as a percent of total rentals, a 29.1% reduction in promotional spend as Redbox continued its focus on increasing promotional efficiency through customer-specific offerings, and continued stabilization in single night rentals.

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July 31, 2014 16:01 ET (20:01 GMT)