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Redbox Revenue Drops 17% in Q4, as DVD Rentals Plummet

Redbox, the kiosk-based DVD rental unit of Outerwall, reported a 17% decline in revenue for the fourth quarter of 2015, as movie rentals dropped 24% year over year.

Outerwall said Redbox’s revenue for the quarter was $407 million, down from $490.7 million in the fourth quarter of 2014. For 2016, the company expects rentals to decline 15% to 20% and Outerwall said it is “managing the Redbox business for profitability and cash flow” in the face of the unit’s “secular decline.”

Outerwall shares sank as much as 30% in after-hours trading on the weaker-than-expected 2016 outlook for Redbox. The stock closed at $32.69 per share Thursday.

Redbox recorded 135.8 million rentals in Q4, down from 179.5 million rentals in the fourth quarter of 2014. Outerwall blamed the decline on several factors, including high-frequency renters “returning more slowly to their normal rental patterns following successive quarters of weak content,” as well as fewer titles available to rent in the quarter compared with year-earlier period.

In addition, Outerwall said, the revenue drop stemmed from lower demand from price-sensitive customers following Redbox’s price increase in December 2014, under which the daily rental rate for DVDs rose from $1.20 to $1.50. Finally, Redbox was hurt by “the impact of fewer kiosks” after the company has decommissioned underperforming kiosks.

“Redbox is a compelling business, providing new movie releases to millions of loyal consumers at a great value,” Outerwall CEO Erik Prusch, who also is interim president of Redbox, said in announcing the results. “We will manage the business for profitability and cash flow, and we will continue our focus on expense management, operational efficiencies and network optimization.”

In December, Outerwall announced that Redbox president Mark Horak was exiting after less than two years in the post. Prusch is serving as interim Redbox president until the company finds a replacement.

Net revenue per Redbox rental was $2.98 in the fourth quarter of 2015, compared with $2.73 in Q4 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 year-earlier period. The lower margin was in part the result of higher content purchases and promotions intended to bring consumers back to the kiosk “after an extended period of weak content,” Outerwall said. In addition, Outerwall allocated $8.4 million in restructuring and related costs to Redbox in the fourth quarter of 2015.

The company operated 40,480 Redbox kiosks at the end of 2015, removing 1,800 units (a decline of 4.2%) over the course of the year. In 2016, Outerwall expects to remove 2,000 more Redbox vending machines.

Overall, Outerwall reported $527.2 million in consolidated revenue for the fourth quarter of 2015, a 12% decline, and net income of $17 million ($1.00 per share), down 61% from the year-earlier period. The results beat Wall Street estimates of $513 million in revenue and earnings per share of 63 cents; those were based on Outerwall’s lowered guidance for full-year 2015 earnings and EPS, which it issued in early December.

For 2015, Outerwall posted consolidated revenue of $2.19 billion (at the top end of its reduced guidance) and adjusted EPS excluding non-core businesses of $8.77 (beating its December projection of $7.65 to $8.15).

In addition to Redbox, which represented 77% of Outerwall’s Q4 2015 revenue, the company operates the Coinstar coin-counting machine network and 2,250 ecoATM electronics recycling kiosks.

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