Company Update (NASDAQ:OUTR): Outerwall Inc Announces 2015 Fourth Quarter And Full-Year Results


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Outerwall Inc (NASDAQ:OUTR) reported financial results for the fourth quarter and full year ended December 31, 2015.

“Due to our unrivaled network of retail partners and millions of loyal customers who value our products and services, Outerwall delivered solid 2015 results with strong free cash flow and core diluted EPS from continuing operations, despite challenging headwinds that continued to impact Redbox,” said Erik E. Prusch, Outerwall’s chief executive officer and interim Redbox president. “We remain focused on strengthening our businesses, while continuing to return significant free cash flow to investors.”

Prusch continued, “Redbox is a compelling business, providing new movie releases to millions of loyal consumers at a great value. We will manage the business for profitability and cash flow, and we will continue our focus on expense management, operational efficiencies and network optimization. We are confident that millions of consumers will continue renting from Redbox for many years to come, as a majority of our customers use Redbox to complement digital alternatives. We fully intend to continue meeting the entertainment needs of our customers as we maintain our focus on providing value for all of our stakeholders.”

2015 highlights include:

  • Generated $248.5 million in free cash flow, an increase of 3.4% from 2014, despite a 4.3% decline in revenue as the company maintained focus on operational excellence and expense management
  • Delivered $485.3 million in core adjusted EBITDA from continuing operations, which was down $11.5 million from 2014, despite $98.4 million less in revenue
  • Repurchased approximately 2.5 million shares for $159.8 million and paid $21.3 million in cash quarterly dividends, returning approximately 73% of free cash flow to shareholders
  • Opportunistically repurchased $41.1 million in face value of the company’s 5.875% Senior Notes due 2021 in the fourth quarter

“Overall our 2015 performance reflects our ability to manage our businesses for profitability and drive year-over-year growth in core adjusted EPS and free cash flow through expense management,” said Galen C. Smith, Outerwall’s chief financial officer. “At the same time, we continued to return capital to shareholders, repurchasing 2.5 million shares and paying $21 million in quarterly dividends. In addition in December, we opportunistically repurchased $41 million of our outstanding senior notes for $35 million in cash.”

Smith continued, “In 2016 we will continue to align costs with revenue, optimize our kiosk networks and create operational efficiencies to manage Redbox and Coinstar for profitability and cash flow and move ecoATM to profitability. In 2016, we plan to return 75% to 100% of annual free cash flow to investors through share repurchases, dividends and senior note repurchases.”

CONSOLIDATED RESULTS

GAAP Results

The company’s full-year 2015 GAAP results include a non-cash, non-tax deductible goodwill impairment charge of $85.9 million recorded in the second quarter of 2015 related to the ecoATM segment and $27.2 million in one-time restructuring and related costs from continuing operations recorded over the year, as the company continued to align costs with revenue across the enterprise. The restructuring and related costs in 2015 reflect $11.3 million recorded in the fourth quarter of 2015, including costs associated with organizational changes in the Redbox and ecoATM segments and an $8.5 million cash payment to settle the $15.4 million outstanding under the $25.0 million purchase commitment entered into as a part of the NCR asset acquisition in 2012. These costs were allocated to the lines of business and are included in segment operating results for the fourth quarter of 2015.

For the fourth quarter of 2015, consolidated revenue was $527.2 million, a decrease of 11.8%, compared with $597.4 million in the fourth quarter of 2014, primarily reflecting an $83.7 million decrease in revenue from Redbox, partially offset by an increase in revenue of $12.1 million from ecoATM and $1.4 million from Coinstar. Consolidated revenue was $2.2 billion for the full-year 2015, a decrease of 4.3% compared with full-year 2014.

Income from continuing operations for the fourth quarter of 2015 was $17.1 million, or $1.00 of diluted earnings from continuing operations per common share, compared with income from continuing operations of $51.1 million, or $2.68 of diluted earnings from continuing operations per common share, in the fourth quarter of 2014. The decreases were primarily due to the lower consolidated revenue and the impact of the one-time restructuring and related costs in the fourth quarter of 2015. For the full-year 2015, income from continuing operations was $49.4 million, or $2.75 of diluted earnings from continuing operations per common share, compared with$124.7 million and $5.89, respectively, for the full-year 2014.

Net cash provided by operating activities was $59.3 million in the fourth quarter of 2015, a decline of 54.8% compared with $131.3 million in the fourth quarter of 2014. The decline was primarily due to the decrease in net income and an increase in net cash outflows from changes in working capital. For the full-year 2015, net cash provided by operating activities was $326.1 million, compared with $338.4 million for the full-year 2014.

Cash capital expenditures for the fourth quarter of 2015 decreased 32.0% to $17.4 million compared with $25.6 million in the fourth quarter of 2014, due to lower purchases of property and equipment for kiosks and corporate infrastructure. For the full-year 2015, cash capital expenditures decreased 20.8% to $77.6 million compared with $97.9 million for the full-year 2014.

Core Results

Core adjusted EBITDA from continuing operations for the fourth quarter of 2015 was$95.8 million, compared with $147.7 million for the fourth quarter of 2014. The $51.9 million decrease was primarily due to lower segment operating income in the Redbox segment. For the full-year 2015, core adjusted EBITDA from continuing operations was $485.3 million, a $11.5 million or 2.3% decrease compared with $496.8 million for the full-year 2014.

Core diluted EPS from continuing operations for the fourth quarter of 2015 was $1.43, a decrease from $2.83 for the fourth quarter of 2014. For the full-year 2015, core diluted EPS from continuing operations was $8.77 compared with $7.26 per diluted share for 2014. Non-core adjustments in the fourth quarter and the full-year 2015 netted to $0.41 and $5.97, respectively, compared with $0.09 and $1.24 for the same periods in 2014. The fourth quarter 2015 adjustments include $0.42 in one-time restructuring and related costs, while the full-year 2015 adjustments include $0.94 in one-time restructuring and related costs and $4.87 in goodwill impairment related to the ecoATM segment.

Free cash flow for the fourth quarter of 2015 was $41.9 million, a decrease of $63.8 million, compared with $105.7 million in the fourth quarter of 2014, primarily due to lower net operating cash flow in the fourth quarter of 2015, partially offset by lower capital expenditures. For the full-year 2015, free cash flow increased $8.1 million to$248.5 million, compared with $240.4 million for the full-year 2014.

SEGMENT RESULTS

Redbox

Redbox segment revenue for the fourth quarter of 2015 was $407.0 million compared with $490.7 million in the fourth quarter of 2014. The decrease of $83.7 millionreflects the impact of a 24.3% decline in movie rentals year-over-year.

Redbox generated 135.8 million rentals in the fourth quarter of 2015, down from 179.5 million rentals in the fourth quarter of 2014. The decline in rentals reflects the impact of several factors, including an accelerated secular decline in the physical market, high frequency renters returning more slowly to their normal rental patterns following successive quarters of weak content, fewer titles available to rent in the quarter compared with the fourth quarter of 2014, lower demand from price-sensitive customers following the price increase, and the impact of fewer kiosks as the company continued efforts to optimize the network by removing underperforming kiosks. Net revenue per rental was $2.98 in the fourth quarter of 2015, compared with $2.73 in the fourth quarter of 2014, primarily due to the price increase for movies and video games.

Redbox segment operating income in the fourth quarter of 2015 was $62.6 million, a decrease of 50.2%, compared with $125.8 million in the fourth quarter of 2014. Segment operating margin was 15.4% in the fourth quarter of 2015, compared with 25.6% in the fourth quarter of 2014. The lower margin was the result of higher content purchases and promotions intended to bring consumers back to the kiosk after an extended period of weak content, as well as $8.4 million, or 210 basis points of segment operating margin, in restructuring and related costs allocated to the segment in the fourth quarter of 2015.

Coinstar

Coinstar segment revenue increased $1.4 million, or 1.7%, to $83.3 million in the fourth quarter of 2015, compared with $81.9 million in the fourth quarter of 2014, and same store sales increased 2.3 percentage points to 5.6% compared with the fourth quarter of 2014.

Coinstar segment operating income was $31.2 million in the fourth quarter of 2015, a decrease of $2.3 million compared with $33.6 million in the fourth quarter of 2014, primarily due to a $2.0 million increase in general and administrative expenses due in part to higher technology costs and $1.5 million in one-time restructuring and related costs, partially offset by lower costs as a result of ongoing cost containment initiatives. As a result, Coinstar segment operating margin decreased 350 basis points to 37.5% for the fourth quarter of 2015, compared with 41.0% in the fourth quarter of 2014.

ecoATM

On November 10, 2015, the company acquired certain assets and liabilities ofGazelle, Inc. for $18.0 million in cash. The purchase is accounted for as a business combination and the results of operations from Gazelle are included in ecoATM segment results from the acquisition date.

Revenue in the ecoATM segment was $36.8 million in the fourth quarter of 2015, an increase of $12.1 million or 48.9%, compared with $24.7 million in the fourth quarter of 2014, due primarily to the revenue contribution from Gazelle following the close of the acquisition.

There were 2,250 ecoATM kiosks installed at the end of the fourth quarter of 2015, an increase of 360 kiosks from the end of the fourth quarter of 2014. The number of value devices sold and percentage of value devices to overall devices sold increased in the fourth quarter compared with the fourth quarter of 2014. The average selling price of value devices sold increased $1.93 to $61.70 in the fourth quarter of 2015, compared with $59.77 in the fourth quarter of 2014.

Segment operating loss decreased approximately $1.3 million to $6.8 million in the fourth quarter of 2015, compared with $8.1 million in the fourth quarter of 2014, reflecting the company’s focus on controlling expenses and creating efficiencies. The segment operating results include $0.6 million in one-time restructuring and related costs and $0.3 million in fees related to the Gazelle acquisition included in general and administrative expense.

CAPITAL ALLOCATION

In the first quarter of 2015, the company’s board of directors initiated a quarterly cash dividend of $0.30 per outstanding share of our common stock and paid a total of$21.3 million in cash dividends in 2015. On February 3, 2016, the company’s board of directors declared a quarterly cash dividend of $0.30 per share expected to be paid on March 29, 2016, to all stockholders of record as of the close of business on March 15, 2016.

During the fourth quarter of 2015, the company repurchased 673,821 shares of common stock at an average price per share of $53.89. For the year, the company repurchased 2.5 million shares at an average price per share of $63.56 for a total of$159.8 million. As of December 31, 2015, there was approximately $256.4 millionremaining under the company’s stock repurchase authorization.

In December, the company repurchased $41.1 million in face value of its 5.875% Senior Notes due 2021 for $34.6 million in cash. The gain from early extinguishment of these notes was approximately $5.9 million and is included in net interest expense.

2016 ANNUAL GUIDANCE

Outerwall provides annual guidance only and expects to update its annual guidance as appropriate each quarter when reporting its financial results. Due to the difficulty in forecasting as a result of the content release schedule, accelerating secular decline, and the company’s focus on profitability and cash flow, Outerwall will not provide revenue guidance for 2016. The company will continue to provide guidance for core adjusted EBITDA from continuing operations, core diluted EPS from continuing operations and free cash flow.

There are several factors that influence the company’s 2016 expectations, including the new release schedule and strength of content for movies and video games, Redbox’s success in re-engaging consumers to rent movies, the integration of Gazelle, the redeployment of previously manufactured ecoATM kiosks, and the company’s ability to further align costs with revenue.

Outerwall’s 2016 annual guidance reflects:

  • A continued focus on expense management, operational efficiencies and network optimization across the enterprise
  • Managing the Redbox business for profitability and cash flow in the face of an estimated 15% to 20% decline in rentals from secular decline
  • Moving ecoATM to segment operating profit breakeven in 2016

Outerwall’s guidance for weighted-average diluted shares outstanding does not include the impact from any potential share repurchases in 2016.

The following table presents the company’s full-year 2016 guidance:

2016 FULL-YEAR GUIDANCE

As of

Dollars in millions, except per share data

February 4, 2016

Consolidated results

Core adjusted EBITDA from continuing operations(1)

$340 — $380

Core diluted EPS from continuing operations(1)(2)

$5.00 — $6.30

Free cash flow(1)

$140 — $190

Weighted average diluted shares outstanding(2) (in millions)

16.29 — 16.35

Core effective tax rate

34.5% — 35.5%

Capital expenditures

Redbox

$15 — $19

Coinstar

$7 — $9

ecoATM

$5 — $6

Corporate

$18 — $21

Total CAPEX

$45 — $55

Net kiosk installations

Redbox

(1,000) — (2,000)

Coinstar

(150) — (200)

ecoATM

50 — 100

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

2Excludes the impact of any potential share repurchases in 2016 (Original Source)

Shares of Outerwall are down nearly 19% in after-hours trading. OUTR has a 1-year high of $85.26 and a 1-year low of $28.85. The stock’s 50-day moving average is $34.63 and its 200-day moving average is $55.65.

On the ratings front, Outerwall has been the subject of a number of recent research reports. In a report issued on February 1, Roth Capital analyst Darren Aftahi reiterated a Hold rating on OUTR, with a price target of $37, which implies an upside of 13.2% from current levels. Separately, on January 28, Wedbush’s Michael Pachter reiterated a Buy rating on the stock and has a price target of $59.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Darren Aftahi and Michael Pachter have a total average return of -7.1% and -9.8% respectively. Aftahi has a success rate of 47.3% and is ranked #3259 out of 3612 analysts, while Pachter has a success rate of 35.2% and is ranked #3550.

Outerwall Inc is a provider of automated retail solutions offering convenient products and services that benefits consumers and drives incremental retail traffic and revenue for retailers.