Let's have a look at the numbers since we just got revised guidance after the sale of their E-Pay Business last week. Link to PR with revised guidance here, applicable segments quoted below:
And quickly, let me get the 1q2010 EPS ($0.21) from their filing located here. Click to enlarge, as always.For the second quarter of 2010, management now expects revenue in the range of $363 million to $383 million, adjusted EBITDA from continuing operations in the range of $57 million to $62 million and EPS from continuing operations in the range of $0.28 to $0.32 on a fully diluted basis after affecting for the sale of the E-Pay Business.For the full year 2010, management now expects revenue in the range of $1.505 billion to $1.595 billion, adjusted EBITDA from continuing operations in the range of $270 million to $285 million and EPS from continuing operations in the range of $1.74 to $1.86 on a fully diluted basis after affecting for the sale of the E-Pay Business.
So before we go too much further let's do the math just based on the above information, using numbers that would be the most favorable for the company. Full year EPS ($1.74) = 1q2010 EPS ($0.21) + 2q2010 EPS ($0.32) + 3q & 4q EPS ($1.21 total or 0.605 each quarter). Hmmmm, that can't be right. Maybe those people aren't communicating clearly enough what it is they're guiding. $1.74 = (E-Pay Sale/share) $1.21 + 1q (0.21) + 2q (0.32) + 3q & 4q EPS ($0 ?!). If the situation is the former, could the company be hoping that their video game business, which appears to be gradually rolling out right now, be enough to double 2q's earnings going forward? Let's get with IR and try for some clarification on Tuesday before carrying on, shall we?
Moving on. Just like credit card interest rates, Redbox and Coinstar exploit their customers' laziness. For every $1 in coins that gets converted in a change counter CSTR keeps 9.8 cents. For every 24 hours that a DVD is kept CSTR charges the customer $1 up to a max of $25 at which point the customer just keeps the disc. With the advent of debit cards, and the rapid move toward streaming media, two of Coinstar's primary businesses are at risk of serious deterioration going forward. Should the company be awarded a 29x 2010 multiple (using the conservative 1.86 guided to benefit the company) given the structural situation they face? Some believe that the liquidation of Movie Gallery will drive business to Redbox. Simply, if people weren't shopping at Movie Gallery before, where were they getting their movies?
In other competition news, and proving their management's gold medal inadequacy, Blockbuster is presently rolling out their own kiosk version of the Redbox model with plans to have up to 10,000 installed by the end of the year. Though the bottom of the 9th and with huge carried debts BBI will be attempting to snipe a segment of Redbox's customer base.
Debt situation: $225MM on the revolver due November 2012 and $169MM in convertible debt due September 2014, payable in cash (principal) and cash or shares (accrued interest) semi-annually starting March 2010. To compound the debt situation CSTR is gambling with their balance sheet by entering into long term agreements with Universal Studios, Warner, and 20th Century Fox committing to big cash expenses, yet still not getting discs to customers until 28 days after the Retail Street Date.
Just using quick adding machine numbers here, I'm looking at between $700 and $750MM of combined debt service and distribution agreement payments between now and the end of 2012 with the annual breakdown resembling a balloon rather than even distribution.Universal Studios agreementOn April 22, 2010, our Redbox subsidiary entered into a rental revenue sharing agreement (the “Universal Studios Agreement”) with Universal Studios Home Entertainment LLC (“Universal Studios”). Redbox estimates that it would pay Universal Studios approximately $82.8 million, during the term of the Universal Studios Agreement, which is expected to last from April 22, 2010 through April 21, 2012. Annual commitments under this agreement are expected to be $23.2 million in 2010, $42.7 million in 2011, and $16.9 million in 2012.Under the Universal Studios Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental at each location that has a DVD-rental kiosk owned and/or operated by Redbox in the United States. Under the Universal Studios Agreement, Redbox will make the DVDs available for rental 28 days after the “street date,” the earliest date established by Universal Studios on which the DVDs are initially made available to the general public, whether on a rental or sell-through basis. In addition, and pursuant to the terms of the Universal Studios Agreement, Redbox agreed to dismiss with prejudice its lawsuit against Universal Studios relating to Redbox’s access to Universal Studios titles.20th Century Fox agreementOn April 22, 2010, our Redbox subsidiary entered into a disc output lease and rental agreement (the “Fox Agreement”) with 20th Century Fox Home Entertainment LLC (“Fox”). Redbox estimates that it would pay Fox approximately $394.5 million, during the term of the Fox Agreement, which is expected to last from April 22, 2010 through April 21, 2015. However, at Fox’s discretion, the Fox Agreement may expire earlier on April 21, 2013. Annual commitments under this agreement are expected to be $36.1 million in 2010, $69.6 million in 2011, $80.2 million in 2012, $84.8 million in 2013, $91.0 million in 2014, and 32.8 million in 2015.Under the Fox Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental at each location that has a DVD-rental kiosk owned and/or operated by Redbox in the United States. Under the Fox Agreement, Redbox will make the DVDs available for rental 28 days after the “retail street date,” the earliest date established by Fox on which the DVDs are initially made available to the general public, whether on a rental or sell-through basis. In addition, and pursuant to the terms of the Fox Agreement, Redbox agreed to dismiss with prejudice its lawsuit against Fox relating to Redbox’s access to Fox titles.Warner agreementOn February 12, 2010, our Redbox subsidiary entered into a rental revenue sharing agreement (the “Warner Agreement”) with Warner Home Video (“Warner”), a division of Warner Bros. Home Entertainment Inc. Redbox estimates that it would pay Warner approximately $124.0 million during the term of the Warner Agreement, which is expected to last from February 1, 2010 through January 31, 2012. Annual commitments under this agreement are expected to be $54.0 million in 2010 and $70.0 million in 2011.Under the Warner Agreement, Redbox agrees to license minimum quantities of theatrical and direct-to-video DVDs for rental at each location that has a DVD-rental kiosk owned and/or operated by Redbox in the United States. Under the Warner Agreement, Redbox will make the DVDs available for rental 28 days after the “street date,” the earliest date established by Warner on which the DVDs are initially made available on physical home video formats to consumers, whether on a rental or sell-through basis. In addition, and pursuant to the terms of the Warner Agreement, Redbox voluntarily dismissed its lawsuit against Warner relating to Redbox’s access to Warner titles.
edit - @smallcapanalyst discovered this gem highlighting the difference between the 2008 and 2009 annual reports. Take note of the studio agreement wording.
I will grant to the casual observer that this company is a high order cash cow, but cannot take a pass on the trade because its momentum, and a nifty squeeze carried it to these bloated levels. This stock must return to valuations more inline with the questionable forward outlook for the company.
Please check back on Tuesday for clarification on the guidance numbers provided.
