Outerwall Inc. Announces 2015 First Quarter Results

BELLEVUE, Wash., May 7, 2015 /PRNewswire/ -- Outerwall Inc. (Nasdaq: OUTR) today reported financial results for the first quarter ended March 31, 2015.

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"Outerwall's strong performance this quarter was the result of continued execution of our strategy of optimizing our core Redbox and Coinstar businesses, scaling ecoATM and improving operational efficiencies across the company," said Nora M. Denzel, Outerwall's interim chief executive officer. "We are leveraging our market-leading brands to drive profitability and deliver value for shareholders, partners and customers."

Highlights from the first quarter 2015 include:

• Reported consolidated revenue of $608.6 million, the highest quarter in the company's history
• Delivered 21.7% growth in core adjusted EBITDA from continuing operations to $147.9 million, reflecting continued expense management across the company, including 3.4% lower direct operating expense and 7.7% lower G&A expense
• Increased core diluted earnings per share from continuing operations 102.1% to $2.87
• Redbox generated its highest quarterly revenue in company history and delivered solid margin expansion, primarily driven by the price increase in December 2014
• Signed a new two-year content agreement with Warner Bros.
• Continued investing in growth by scaling ecoATM, installing approximately 250 kiosks in the quarter
• Generated free cash flow of  $85.4 million, an increase of 26.2% year-over-year
• Repurchased 617,195 shares for $40.7 million and paid the company's first quarterly dividend of $0.30 per share

"Our strong financial results demonstrate continued solid execution and operational excellence across the company," said Galen C. Smith, chief financial officer of Outerwall. "Our performance reaffirms our ability to generate strong profitability and free cash flow while simultaneously investing in the future of our business.

"We have maintained a disciplined approach to capital allocation and remain focused on returning capital to shareholders," said Smith. "Our board of directors has declared the company's second cash dividend payment of $0.30 per share. Also during the quarter, the board increased our share repurchase authorization by $250 million and we repurchased approximately $41 million of our common shares, leaving us with more than $373 million remaining under our current authorization, demonstrating our continued confidence in Outerwall's long-term prospects and future cash flow."

Outerwall also announced that Maria Stipp resigned as the president of ecoATM effective as of May 29, 2015, to take a chief executive officer role at another consumer company.  The company expects to name an interim leader in the near future. 

CHANGES IN REPORTING IN THE FIRST QUARTER OF 2015

During the first quarter of 2015, the company added ecoATM, its 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 the New Ventures segment. The combined results of the other self-service concepts are now included in the All Other category but are not presented as a separate reportable segment.

The results of the company's Redbox Canada operations, which were discontinued during the first quarter of 2015, are presented as discontinued operations in the company's consolidated financial statements and are no longer included in Redbox segment operating results. All prior periods have been recast to exclude Redbox Canada.

CONSOLIDATED RESULTS

Consolidated revenue for the first quarter of 2015 was a record for the company, increasing $10.9 million, or 1.8%, to $608.6 million compared with $597.8 million for the first quarter of 2014. The year-over-year revenue growth was primarily due to higher revenue from Redbox driven primarily by the price increase in December 2014, and an increase in revenue from ecoATM.

Operating income for the first quarter of 2015 was $82.5 million and the operating margin was 13.6% compared with operating income of $62.7 million and operating margin of 10.5% in the first quarter of 2014. The year-over-year increase in operating margin primarily reflects the higher consolidated revenue and lower direct operating expense resulting from lower product costs in the Redbox segment and a decrease in general and administrative expenses driven by ongoing cost reduction initiatives across the company. Both operating income and operating margin in the first quarter of 2015 were negatively impacted by $15.9 million in restructuring and lease termination costs from the early termination of operating leases for certain floors at Redbox headquarters and severance expense.

Income from continuing operations for the first quarter of 2015 was $42.2 million, or $2.23 of diluted earnings from continuing operations per common share, compared with $27.6 million, or $1.09 of diluted earnings from continuing operations per common share, in the first quarter of 2014.

Core adjusted EBITDA from continuing operations for the first quarter of 2015 was $147.9 million, compared with $121.5 million in the first quarter of 2014. The year-over-year increase was primarily due to higher Redbox segment operating income and lower losses from equity method investments as a result of Redbox's withdrawal from the Redbox Instant by Verizon joint venture during the fourth quarter of 2014.

Core diluted earnings per share from continuing operations for the first quarter of 2015 were $2.87, an increase of 102.1% compared with $1.42 per diluted share in the first quarter of 2014. The increase was primarily attributable to the results of operations described above, a 25.4% reduction in the number of weighted average shares used in the diluted per share calculations due primarily to stock repurchases, and $0.59 of non-core adjustments, net of tax, in the first quarter of 2015 compared with $0.31 in the first quarter of 2014.

Net cash provided by operating activities in the first quarter of 2015 was $106.1 million, compared with $94.6 million in the first quarter of 2014. The $11.5 million increase was primarily due to the increase in operating income.

Cash capital expenditures for the first quarter of 2015 were $20.7 million compared with $26.9 million in the first quarter of 2014, with the decrease primarily related to lower capital expenditures in the company's Redbox and Coinstar segments.

Free cash flow for the first quarter of 2015 was $85.4 million, compared with $67.6 million in the first quarter of 2014, primarily driven by higher net operating cash flow and lower capital expenditures.

SEGMENT RESULTS

Redbox

The results of the company's Redbox Canada operations, which were discontinued during the first quarter of 2015, are presented as discontinued operations in the company's consolidated financial statements and are no longer included in Redbox segment operating results. All prior periods have been recast to exclude Redbox Canada from Redbox segment results.

Redbox segment revenue increased $6.5 million, or 1.3%, to $519.5 million in the first quarter of 2015, a new quarterly record, from $513.0 million in the first quarter of 2014, primarily due to the price increase in December 2014 and strong seasonality in the first quarter of 2015.

Redbox generated approximately 173.0 million rentals in the first quarter of 2015, compared with 198.8 million rentals in the first quarter of 2014, as rentals were negatively impacted by a weaker content slate, lower demand from price-sensitive customers and ongoing secular decline in the physical rental market.

Net revenue per rental was $3.00, an increase of $0.42, or 16.3%, from the first quarter of 2014. The increase in net revenue per rental was primarily the result of the price increase partially offset by the expected increase in single night rental activity as a result of the price increase.

Redbox segment operating income in the first quarter of 2015 was $122.9 million, an increase of 16.2% compared with the first quarter of 2014. Segment operating margin was 23.6%, an increase of 300 basis points from the first quarter of 2014, despite the impact of the $15.2 million in restructuring and lease termination costs recognized in the first quarter of 2015, primarily due to lower direct operating expenses related to lower content costs and a decline in general and administrative expenses as a result of ongoing cost reduction initiatives.

Coinstar

Coinstar segment revenue was $69.3 million, an increase of $0.6 million, or 0.8%, compared with $68.8 million in the first quarter of 2014, primarily due to growth in the number of Coinstar Exchange kiosks and transactions partially offset by a decrease in Coinstar revenue in the U.S. due to a reduction in coin volume.

The impact of the increased coin voucher product transaction fee from 8.9% to 9.9% implemented in the U.K. in August 2014 was largely offset by the unfavorable exchange rate impact on U.K. revenue due to the recent strengthening of the U.S. dollar versus the British pound.

The average Coinstar transaction size continued to increase while the number of transactions has declined. The decline in transactions is the result of 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 $22.5 million compared with $22.7 million in the first quarter of 2014, and Coinstar segment operating margin was 32.5% compared with 33.1% in the first quarter of 2014.

ecoATM

During the first quarter of 2015, the company added ecoATM as a separate reportable segment. All goodwill previously allocated to the New Ventures segment has been allocated to the ecoATM segment.

ecoATM segment revenue was $19.7 million in the first quarter of 2015, an increase of $3.8 million compared with the first quarter of 2014 primarily due to the increase in the installed kiosk base and continued ramping of kiosks deployed in 2014. The company installed approximately 250 kiosks in the quarter and ended the quarter with approximately 2,140 kiosks installed.

The key revenue drivers for the segment are identified as devices collected per kiosk per day, the percentage of those devices that are value devices and the average selling price the business receives when reselling the devices. The collection of value devices on a per kiosk basis in the first quarter of 2015 was lower than in the first quarter of 2014 as a result of lower transactions at the kiosks due to a decline in retail foot traffic at ecoATM locations and expanded alternative recycling options such as carrier promotions. These factors also impacted the mix of value devices collected and was the primary reason for the decline in the average selling price of value devices in the first quarter of 2015 compared with the first quarter of 2014.

The segment operating loss in the first quarter of 2015 was $8.3 million compared with $5.3 million in the first quarter of 2014, due to an increase in direct operating expenses, including the costs associated with the acquisition, transportation and processing of electronic devices, as well as the costs of servicing the kiosks and payments to the retailers for use of their space. As ecoATM continues to expand its installed base and previously installed kiosks continue to ramp, ecoATM expects its direct operating expenses to increase in total but to decline as a percentage of revenue.

CAPITAL ALLOCATION

On May 5, the company's board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on June 23, 2015, to all stockholders of record as of the close of business on June 9, 2015.

On February 3, 2015, the board of directors approved an additional stock repurchase authorization of up to $250.0 million of its common stock plus the cash proceeds received from the exercise of stock options by the company's directors and employees. During the first quarter of 2015, the company repurchased 617,195 shares of common stock at an average price of $65.96 per share for approximately $40.7 million. As of March 31, 2015, there was approximately $373.3 million remaining under the company's stock repurchase authorization.

The company's net leverage ratio¹ was 1.62x at March 31, 2015.

¹Refer to Appendix A for a discussion of Use of Non-GAAP Financial Measures and Core and Non-Core Results.

2015 ANNUAL GUIDANCE

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

ADDITIONAL INFORMATION

Additional information regarding the company's 2015 first quarter operating and financial results and guidance are included in the company's prepared remarks. These items, 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 first 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 May 21, 2015, at 1-855-859-2056 or 1-404-537-3406, conference ID 16684484.

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,
• 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 the 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 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 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) 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, ii) 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, iii) income or loss from equity method investments, which represents our share of income or loss from entities we do not consolidate or control and iv) tax benefits related to a net operating loss adjustment ("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 core diluted EPS from continuing operations 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: 

SOURCE Outerwall Inc.

Related Links

http://www.outerwall.com