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Article Excerpt
OPERATOR: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Coinstar Inc. fourth quarter 2008 earnings conference call.
During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, February 12, 2009.
I would now like to turn the conference over to Brian Turner. Please go ahead, sir.
BRIAN TURNER, CFO, COINSTAR, INC.: Good afternoon and thank you for joining us today.
With me on the call today is Dave Cole, our current CEO; and Paul Davis, our COO and incoming CEO as of April 1, 2009. Before we start, I have to remind you that during the course of this call various remarks we make about future expectations, plans and prospects for the Company constitute forward-looking statement for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from expectations, plans and prospects contemplated in these forward-looking statements as a result of various factors, including those discussed in our previous 10Qs and 10Ks filed with the SEC.
I would also like to point out that we will be discussing certain non-GAAP financial measures, including but not limited to EBITDA, pro forma revenues, adjusted earnings per share on a historical and forward-looking basis during this conference call. These are non-GAAP financial measures under Regulation G. Definitions of these non-GAAP financial measures, the importance of these measures to investors, and reconciliations of these measures to the most directly comparable GAAP measures can be found in today's earnings release and related slides which are posted in the "About Us" Investor Relations section of Coinstar's website at www.coinstar.com.
A replay of this webcast will also be available on the "About Us" Investor Relations section of our website. We have posted a copy of today's prepared remarks and a series of charts mentioned in today's call to the "About Us" Investor Relations section of our website. We encourage you to go to our website and bring up the the accompanying power point slides so that you may follow along with us.
With that, let me turn the call over Dave Cole.
DAVE COLE, CEO, COINSTAR, INC.: Thank you, Brian.
Over the last seven years, Coinstar has evolved into the category captain for the Fourth Wall. With today's announcement of our intent to acquire the remaining equity stake in Redbox, we have taken yet another step in that evolution. As many of you know, when I arrived here in 2001, we were a one product company in a single channel; and at that time, our revenue was $129 million with EBITDA of about $36 million.
Just seven years later, Coinstar has a platform of technology, customer relationships, field operations, and infrastructure that reaches 140 countries and 90,000 points of presence. And all of this, has translated into significantly higher revenue and EBITDA. In 2008, we had our best year ever in terms of revenue, EBITDA and installations; and in 2009, we expect revenue to be over $1.2 billion with EBITDA just shy of $200 million. Well ahead of plan.
Of course not everything is perfect, but against the current economic background, our bundle of products and services is delivering superior value to retailers and consumers. We've come this far because we've formulated a strategy that appeals to both retailers and consumers, and we've assembled the right team of people committed to excellent execution. This strategy combined cyclical and counter cyclical product lines and includes early stage, adolescent, and mature business; and includes home grown as well as acquired product lines. But as a whole, we believe Coinstar's Fourth Wall business model is our growth engine and has the relevance and durability to deliver results to stockholders for years to come.
This is my last conference call as CEO of Coinstar. So before turning on the reigns over to Paul, I want to thank our dedicated employees, our loyal customers, and our shareholders who I've gotten to know over the years. It's been a privilege to lead this organization since 2001, and I know the Company has exceptionally strong management as Coinstar embarks on its next stage of growth. Thanks to all of you for making the experience a special one.
With that, I will turn the call over to Paul.
PAUL DAVIS, COO, COINSTAR, INC.: Thank you, Dave. And on behalf of everyone at Coinstar I want to pass along our heartfelt thanks for your leadership over the years.
A strong foundation has been develops over the past several years and we believe we have a tremendous opportunity to grow not only the Company's revenues, but also its profitability well beyond where it is today. That's the opportunity I saw when I came here and I have a great deal of enthusiasm and confidence in our unique business model and our future. Our vision for Coinstar is to be the world's leading supplier of valuable services that make life easer for consumers, generate strong returns for our retail partners, and provide robust value creation for our shareholders.
Coinstar was founded on a truly innovative idea of turning consumer change into cash conveniently and at a self-service kiosk. Over time, the Company's not only expanded it's foot print in product lines but we've leveraged our expertise to bring incremental value to consumers and retailers at the front the store. We will continue to innovate focusing on consumers' needs, and we will look both inside and outside the Company to add even greater value to our Fourth Wall offering.
And as you would expect from an incoming CEO, I'm looking in depth at our overall business model and each of our products lines, and specifically I'm look for relevance in value as it relates to our retailers. I'm also looking across selling potential and short and long-term trends. I'm reviewing how we are organized, the revenue and cost synergies we can achieve, and finally I'm looking at the value we have the ability to create for our shareholders.
Now let's turn to the business of the moment. Looking at chart one for the year ended December 31, 2008. Coinstar posted record consolidated annual revenues with record EBITDA. We generated $0.50 of GAAP EPS and $0.84 of adjusted EPS. We installed more coin units in 2008 than any year in our history.
In just over three years we now have a DVD kiosk network that rivals our coin network in terms of size and profitability and has more physical locations for consumers than any DVD rental operator in the US; and we exceeded the revenue in EBITDA guidance we provided at the beginning of the year. As shown in chart two, we outperformed some product lines offset by lower than expected results in others, specifically our DVD kiosk business performed very well. Coin, Entertainment, Money Transfer and E-Pay all were effected by the economy, however, we believe they' performed fairly well all things considered.
Now let me take a deeper dive on each of our product lines starting with the DVD kiosk space. Today we announced our intent to purchase Get A Movies or GAM's 44.4% equity stake in Redbox Automated Retail LLC. For those of you that are unfamiliar, GAM is a wholly-owned subsidiary of McDonald's Corporation. In addition to acquiring McDonald's share, we expect to exercise our rights to acquire the remaining interest owned by other minority holders. Brian will go through the financial details shortly. We entered into this agreement for two simple reasons. First, the return on investment; and second, Redbox's attractive growth characteristics.
To that point, if you turn to charts 4 through 16, we are seeing some exceptional trends in the current environment. As shown in chart 5, 2008 pro forma DVD revenues increased 179% to approximately $400 million with 2008 pro forma EBITDA increasing approximately 382% to $72 million. These results were driven by approximately 1,900 net installs for the fourth quarter on the heels of 4,800 through the first three quarters of the year. Between DVD Xpress and Redbox, we now have 13,700 units installed and our same-store sales growth for the full year 2008 was 52%.
Factors driving success continue to be strong installations, the terrific unit economics which I'll revisit in a moment, and the counter cyclical nature of DVD rentals to the economy. As shown in chart six through eight, utilizing the Coinstar sales force, Redbox has seen an exception installation pace over the last three years, resulting in Redbox having by our estimates more than twice as many locations as the next largest DVD rental operators; and more than five times as many locations deployed than the next leading kiosk operator.
As for 2009, we expect Redbox to install into the 6,000 to 8,000 new units, up from our prior expectation of 4,000 to 6,000 kiosks. This will bring our total to over 20,000 units by the end of 2009, twice our original expectations when we made our initial investment in 2005. These increases are being driven by escalating retailer demand and the consumer's desire to find a more convenient alternative to brick and mortar locations without sacrificing quality.
In terms of how those low installations affect financial performance, we expect our DVD revenues to increase about 80% in 2009 to between $690 million to $750 million with corresponding EBITDA of 14% to 16%. And these margins reflect the network mix that's skewed heavily to immature machines which typically experience lower margins as they ramp. To that point, as shown on chart nine, the revenue ramp continues to remain strong with year three revenues of over $50,000 per unit. Per unit manufacturing and installation costs continue to decline with units costing between $14,000 and $15,000 for 2009. Therefore, with a per unit capital cost of just over $14,000, and increasing revenue trends, a Redbox unit produces a healthy ROIC.
In charts 10 through 12 we see Redbox rentals progressing quite rapidly resulting in steady market share...
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