Coinstar Inc. Q1 2009 Earnings Call Transcript

May. 7.09 | About: Outerwall Inc. (OUTR)

Coinstar Inc. (CSTR) Q1 2009 Earnings Call May 7, 2009 5:00 PM ET

Executives

Brian V. Turner – Chief Financial Officer

Paul D. Davis – Chief Executive Officer

Gregg Kaplan – Chief Executive Officer, Redbox

Analysts

Eric Wold – Merriman Curhan Ford & Co.

Simeon Gutman – Canaccord Adams

Bob Evans – Craig-Hallum Capital Group

Nate Brochmann – William Blair & Company

Larry Berlin – First Analysis Corp.

Operator

Welcome to the Coinstar, Inc. first quarter 2009 earnings conference call. (Operator Instructions). This conference is being recorded today, May 7, 2009. I would now like to turn the conference over to Mr. Brian Turner, CFO of Coinstar. Please go ahead.

Brian V. Turner

Good afternoon and thank you for joining us today. With me on the call today is Paul Davis, our CEO. 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 statements 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 the result of various factors, including those discussed in our previous 10-Qs and 10-Ks 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 and pro forma revenues on a historical and forward-looking basis on 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 recently or 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 accompanying PowerPoint slides so that you may follow along with us.

With that, let me turn the call over to Paul Davis.

Paul Davis

Thank you, Brian. We are pleased with our results for the first quarter. Our strong start to 2009 speaks to our value proposition and the resiliency of our primary business lines, DVD and Coin. In terms of DVD, performance once again exceeded our expectations and we will continue to invest in growing our footprint and capitalizing on the significant market opportunity before us. Our coin business also performed well for the period, delivering strong EBITDA, while satisfying both retailer and consumer demand.

In each instance, being a clear leader in the marketplace is an important driver of success. And we believe that our ability to create value going forward will depend on both market position and our ability to allocate capital efficiently against opportunities that leverage our core competencies.

Turning to the first quarter, as we look at chart one, for the quarter ended March 31, 2009, Coinstar posted record consolidated revenue of $271.2 million and EBITDA of $42.1 million, exceeding the revenue guidance provided at the beginning of the quarter. We generated $0.07 of GAAP EPS or $0.14 if you exclude non-recurring charges. And given the solid Q1 results, we see nothing that has changed our minds for full year guidance. And although it is early in the year it appears that we are trending towards the upper end of our revenue and EBITDA guidance for all of 2009.

Taking a deeper dive on each of our product lines let's start with the DVD kiosk space. As shown in chart two, between DVDXpress and Redbox we had 15,400 units installed nationwide as of March 31, 2009, 1,700 more than just three months ago. We remain on track to have between 20,000 and 22,000 kiosks by the end of the year.

As shown in chart three, first quarter DVD revenues were $154.7 million, a 156% increase over the prior year quarter driven by new unit placements and same unit sales growth. Same store sales were 35% for the first quarter. We also recorded our highest quarterly EBITDA in this segment of $29.1 million, a significant increase over just last quarter. We believe we are right on track to deliver our annual DVD kiosk revenue and EBITDA projections.

In chart four you will note that the DVD LOB's margins have expanded with scale. For the first quarter of 2009 the EBITDA margins increased to 18.8% slightly over 2008 levels. For the full year 2009 we still expect EBITDA margins to dip due to a combination of factors including record installations in 2009 and anticipated declines in previously viewed video prices built into our model.

We remain highly energized over the potential for Redbox. I'd like to outline three key reasons, strong consumer demand, strong retailer demand and strong viability of DVDs. First, in terms of consumer demand, we're able to provide people with very affordable entertainment that gives them exactly what they want, when they want it. And having over 15,400 locations makes our DVD kiosk offering extremely convenient. In fact, the deeper our penetration goes the more options we provide consumers as it relates to picking up and dropping off their rented videos.

As shown on charts five and six, we now have more than 3 times as many locations as the largest brick and mortar DVD chain and more than six times as many locations as the next leading kiosk operator. Despite these impressive numbers, our aided awareness is only 17%, which points to the potential for significant brand growth over the next decade.

In charts seven through ten, we see Redbox rentals progressing quite rapidly. When the initial investment was made in 2005, the target was 15% market share of any given market. But as shown in chart 10, that market share assumption may below as Houston and Salt Lake City, two of our more mature markets, have gained more than 20% market share.

We credit price, convenience, selection and a business model that doesn't rely on subscriptions or bricks and mortar. We're self service with low overhead and in this economy that's the name of the game. Also, as you can see on chart 11, our Net Promoter Score, a key indicator of customer satisfaction, continues to place Redbox north of 80% consistently, on par with iconic brands such as eBay, Apple, Harley Davidson and Amazon.

The second reason we're excited is continued momentum with retailers. Simply put, the success we've had with consumers drives high volumes of traffic at the retail level at a time when traffic gains present a real challenge. In Q1 alone we placed 1,700 new kiosks into the market while experiencing new contract momentum that bodes well for future growth.

And today we'd like to announce that we just received authorization for rapid deployment for nearly 2,800 new grocery locations replacing our largest kiosk competitor within three chains that they currently occupy. We continue to experience significant momentum in new channels of business with rollout agreements for an additional 1,000 locations between Circle K and Pantry convenience stores.

The final point I'd like to make regarding Redbox is the long term viability of the current DVD format and why I believe it will be with us for years to come. The first is bandwidth. As you can see in chart 12, despite increased household penetration of high speed internet and increasing bandwidth, it still takes over an hour to download a full movie and these movies are in much lower quality than Redbox DVDs.

The user experience is still very difficult, discouraging most consumers from downloading versus renting. The fact that some cable companies are also investigating tariffs for excessive bandwidth usage is another barrier for widespread movie downloading.

As shown on chart 13, while we do acknowledge that digital downloads will grow at a rapid pace; experts tell us that they believe it will only grow to approximately 25% of the market by 2013 which begs the question of who will get the remaining 75%. As the data on the slides suggests we believe we're well positioned to continue to grow our business at a healthy rate and get more than our fair share, mainly at the expense of the brick and mortar offerings.

The second is Blu-ray, which for those of you who are unfamiliar is a next generation optical disc format. A standard definition DVD is about 5 gigabytes of data while Blu-Ray is 20 to 30 gigabytes of data or four to six times more than standard definition. As a result, downloading a Blu-ray equivalent movie will take much more time than the current standard definition movie, whereas Redbox can stock Blu-Ray DVDs tomorrow since they have the same form factor as standard definition DVDs. Therefore, we can give consumers exactly what they want, where they want it in a convenient, easy to use format.

My last point is price. Redbox's $1 price point for a new release DVD is unmatched in the industry and in our opinion, will be very difficult for any digital distribution player to approach.

For all these reasons, we believe the lifespan for packaged media such as the DVD is long and robust. Certainly, it won't last forever, but we believe that for the foreseeable future both digital delivery and kiosks will grow significantly as both distribution methods provide significant consumer advantages over traditional brick and mortar.

One final thought on DVD, as the DVD market changes we are already laying the foundation for what will be the next product lines for Redbox. The real asset here is our networked technology and the connection our brand has with millions of consumers. We are confident that as formats change we can adapt and we're excited about the future of self-service entertainment and our ability to capitalize on the trends.

Moving to our coin business, as shown in chart 16, revenue for the quarter was down 2% to $58 million compared to $59.2 million in the year ago period. This decrease primarily reflects the 25% decline in the British pound to the U.S. dollar which when translated for U.S. GAAP reporting had the effect of reducing reported revenues by $2.2 million or 4%. Had the exchange rate not changed revenue would have increased 2% year-over-year.

With the placement of almost 4,500 units over the last 2 years I believe we are well positioned for revenue and EBITDA growth over the next three years as these units ramp and mature. You may recall that after being installed for over four years a typical coin unit produces an average of $16,500 in annual revenue.

However, in its first year it will only generate about 60% of this average and in its second year about 80%. Therefore in 2009, the 3,000 units placed in 2008 would be expected to generate about $10,000 on average with the 1,900 units placed in 2007 generating about $13,000 on average. We would expect both classes to improve from there.

Moving to same store sales, they were a negative 5.0% for the quarter the same as the fourth quarter. This was as expected. As shown in chart 17, this was partly due to the significant increase in installations over the past 24 months along with an adverse affect from the struggling economy. As we begin to anniversary the 3,800 installs made over the past 18 months, same store sales should start to improve, which should drive operating leverage.

In addition, we are realizing significant momentum as we expand into new countries and new channels. As an example, our Q1 revenue in Canada grew 43.4% in the coin segment. We are also planning to launch in Northern Ireland in Q3. Because we are not adding new coin locations at the same pace we've experienced over the past two years, our focus will be on monetizing the network we already have, essentially maximizing the returns we get at existing locations.

To be clear, we will hit our full year commitment of 800 to 1,000 new locations in 2009 but for the next 24 months it will be more about quality versus quantity. And I think the best way to highlight the opportunity is that we currently see about 13.5 transactions per store per day in coin. If we can drive just one more transaction per store per day, we'll see about $13 million drop to the pre-tax line. One transaction per day represents a volume increase of over 7%.

So in that spirit, we are taking three actions that we mentioned last quarter. First, we are evaluating ways to drive more consumers to our coin kiosks, in an effort to drive incremental volume. This might take the form of national marketing, or we may run regional tests before committing to a broader roll-out.

Second, we are dialing up our focus on free coin counting options, what we call Coin to Card. One example is that we are partnering with Rixty to enable a fee free option for on-line gamers in Q2. Recall that in our fee free option, the consumer does not pay a fee; however, Coinstar still receives our fee from the card issuer. As reflected in chart 18, we believe reaching fee resistant non users through the Coin to Card offering poses significant upside in the coin business.

Third, and finally, we have already started to evaluate individual ROICs for each coin unit. For those locations that do not meet minimum thresholds we will consider redeploying them to other locations. This is certainly not a top line initiative but is intended to have an effect on profitability.

Now let's move to money transfer. As you can see on chart 19, wire transactions continue to grow steadily and were up approximately 14% for the quarter while the average transaction was roughly $570.

Certainly the news in Money Transfer is mixed.

For the industry the U.S. to Mexico corridor transactions were down approximately 4.4% in the first quarter which contrasts with Coinstar's U.S. to Mexico money transfer business which was up 8% in the same period which implies we're picking up market share while others are losing.

So while we are certainly affected along with the industry, Coinstar is advancing its money transfer initiatives, albeit at a slower pace. These improvements were offset by the planned de-emphasis of money orders and home deliveries for money transfer in Mexico which resulted in overall revenues slightly declining.

As shown in the lower right portion of chart 19, as transactions and revenue have increased, the cost per transaction has declined. Based upon these trends, we continue to believe that driving increased volumes across our fixed costs will get us to profitability, although the current economy will work against those efforts in 2009. Secular trends continue to indicate strong underlying fundamentals for the money transfer business and once again, our goal is to be EBITDA positive for 2010.

Moving to EPay, as reflected in chart 20 Coinstar sold $130 million in face value, an 8.3% year over year increase, resulting in commissions to Coinstar of approximately $6.2 million.

In the U.S. our first quarter transaction volume increased approximately 14% as approximately 300 Travel Center of America, 875 Hess, 125 Greyhound and 500 Stripes locations were added over the last 12 months.

In the first quarter Coinstar's E-payment Services was named a top prepaid performer in the 2009 Convenience Store Decisions brand preference study demonstrating our growing leadership position in this important channel.

In the U.K., the quarter's gift card transaction volume continued to show strong gains by increasing transactions 68% over the year ago period. We continue to enjoy first mover advantage in the U.K .having the right cards, the right accounts and tremendous market momentum. Economic realities slowed our growth in EPay in the first quarter, but as we look to the remainder of 2009, between the U.K. and the U.S., we expect to add more locations with the expectation that face value of cards sold will increase another 10% to 20%.

Turning to entertainment, revenues totaled $32.4 million for the first quarter. March machine net placements were positive versus the previous month for the first time in two years reflecting what we believe to be a bottoming out of machine losses and a movement from weaker competitors to Coinstar. We've also reached an agreement with Wal-Mart on the pilot of a new, innovative game space within their stores, branded as Gameplay. The first of these front-of-store dedicated rooms are opening in April.

Whether we are seeing a bottom or a temporary bounce, entertainment results continue to lag, and as we've said before, we are evaluating options for the business. While the acquisition certainly presented and has delivered numerous cross-selling opportunities, we're weighing that against the desire to drive profitability.

With that let me turn the call over to Brian.

Brian V. Turner

Thanks Paul. For the quarter, Coinstar generated record revenues of $271.2 million. We generated record EBITDA of $42.1 million, our GAAP fully diluted, fully taxed earnings per share was $0.07, while fully taxed fully diluted earnings per share excluding nonrecurring charges was $0.14.

Charts 21 and 22 include a comparison of quarterly revenues by product line. Consolidated revenues increased 42.3% primarily due to the 155.7% increase in DVD kiosk revenue, the 1.6% increase in EPay, offset by the 2.9% decrease in money transfer revenues, the 2% decrease in coin revenues and the 26.7% decrease in entertainment revenues.

Charts 23 and 24 are a comparison of quarterly EBITDA. As we've stated, due to the fact that a high percentage of direct and indirect costs are shared among business lines, exact EBITDA by product line is only an estimate. As we look at the revenue and EBITDA charts you will note the decline in entertainment revenue and EBITDA, respectively. This is primarily due to the planned transition in the entertainment product line that we have discussed over the past several earnings calls. Coin EBITDA margins remained the same so more than anything it's a mix issue consistent with fourth quarter results.

With respect to EPay money transfer, EBITDA increased primarily as the result of integration efforts between Coinstar money transfer and GroupEx which results in cost savings. We expect these cost savings to continue to grow as we continue to integrate the money transfer operation. The integration plans were outlined in our last conference call.

Moving to expenses as shown in chart 25, as a percentage of revenues, direct operating expenses for the quarter increased to 70.8% of revenues. This was primarily due to the growth of Redbox which runs at a higher direct operating cost percentage than our other product lines.

General and administrative expenses also increased as a percentage of revenue to 12.3% from 11.1% compared to the year ago period. This is primarily attributable to the money transfer product line which runs at a higher G&A percentage than our other product lines. As money transfer continues to scale we would expect to experience leverage at the G&A line.

Depreciation and other for the quarter totaled $23.1 million versus $17million in the year ago period. The increase was primarily due to the installation of 2,900 coin units and 7,500 DVD units over the last four quarters.

Moving to interest expense, during the first quarter our average interest rate was5.1%. This average interest rate is higher than our revolver interest grid due to the accounting for the GAM/McDonalds seller note. Because the seller notes do not contain a stated interest rate an implied interest rate is required to be calculated. In this case a 9% interest rate was used which we believe is very conservative given that our revolver interest rate averages 4.9%.

Moving to taxes, our effective tax rate for the quarter was 49.7%. As we have stated in recent quarters, the greater than expected effective rate was due to the interplay of foreign and domestic profit and losses. Please remember that this is a book rate and is not indicative of cash taxes paid during the year. Actual cash taxes paid during the quarter totaled just $385,000, significantly less than the $1.9 million recorded for book purposes.

As stated on the last conference call, and as shown in chart 27, the first quarter had several nonrecurring charges that affected GAAP EPS including the accounting for the transition agreement for the former CEO which totaled$700,000 net of tax or $0.02, the implementation of the new standard FAS 141-R which requires expensing past capitalized and currently incurred acquisition costs of $600,000 net of tax or $0.02, and the accounting for the acquisition of the remaining equity of Redbox under the new standards FAS 141-R and FAS 160, which required us to expense $900,000 net of tax or $0.03 that previously would not have been expensed. Excluding the nonrecurring charges earnings per share for the first quarter was $0.14.

In addition, we also made certain nonrecurring investments in the infrastructure of Coinstar totaling approximately $1.2 million in the first quarter of 2009. With respect to CapEx for the quarter which is reflected in chart 28, the company spent $37.3 million of which the majority was for new DVD

kiosks.

Finally, I would like to discuss our debt. At the end of March, Coinstar had $325 million in revolving debt due in November of 2012 and our leverage ratio was just about 3 to 1. We've been very judicious over the last several years in keeping our debt modest relative to our EBITDA and that's certainly paid off in this environment.

In our last conference call we stated that it was our intent to pay off the Redbox purchase debt in cash and not use stock. In that regard, last week Coinstar completed an $87.5 million Term A loan financing. This debt contains a two-year term and interest rate grid ranging from LIBOR plus 375 basis points to 475 basis points depending upon our leverage ratio. Proceeds from the new Term A financing was used to pay off approximately 80% of the McDonalds and minority interest seller notes. For 2009, please remember to include this interest in your modeling for the remainder of the year.

Because of the structure of the seller notes, the prepayment results in reduction in debt owed to sellers of $10.7 million and satisfies all requirements for the July 30, 2009 payment. The remaining $20 million is not due until October 30, 2009; however, we are confident that we will be able to prepay the remainder before October. As reflected on chart 29, this results in a slight deleveraging of the balance sheet post transaction.

At March 31, 2009, our fully diluted outstanding share count was 29.2 million shares and we estimate that our average fully diluted share count for 2009 will range between 30 million and 31 million shares excluding any buyback activity.

Now on to guidance for the second quarter of 2009. Based on current trends we expect second quarter revenue of roughly $300 million to $310 million with GAAP earnings per fully taxed, fully diluted share in the range of $0.14 to $0.20. Management also reiterates its previous estimates that revenue for the full year 2009 will range from $1.2 billion to $1.3 billion with EBITDA between $185 million and $195 million although, as Paul stated earlier, we are trending to the upper end of those ranges.

Before I turn the call back to Paul, I would like to thank the people who worked for me over the last six years. The personnel in finance, treasury, information systems, human resources, facilities and new business development who made the areas I was responsible for incredibly successful. I'd also like to thank my peers, many of whom I now consider close friends.

When I joined the Coinstar team six years ago the company was a one trick pony with revenues slightly over $100 million. Today Coinstar, as a result of that team, is an amazing platform generating over $1 billion in revenues operating in approximately 140 countries. The last six years has been an amazing adventure in which the old adage of "if you can dream it you can make it happen," was once again proven true.

Finally, I would like to say a special thank you to my partners in creating Coinstar as such a special company to work for, especially Dave Cole, Don Rench, Rich Deck, Jim Blakely, Christi Liebe, Peter Rowan, Alex Camara, Mike Skinner, John Reilly, Denise Rubin, Steve Verleye, Tracey Brown, Patty Rood, Brad Holt and Anne B. Valles. This team of people was unparalleled in executing and

creating the incredible company that is Coinstar today. Each holds a very special place in my heart.

With that I'll now turn the call back to Paul.

Paul Davis

Thanks, Brian, and on behalf of everyone at Coinstar we would like to thank you for your efforts over the past six years. We certainly wish you well in all your future endeavors.

As all of you know by now, Gregg Kaplan from Redbox has joined Coinstar as President and COO and John Harvey, Redbox's current CFO will become Coinstar's Chief Financial Officer effective June 1st. Gregg is an extremely talented, driven executive who has grown Redbox from just a few employees and kiosks to more than 1,200 people and 14,000 units in the field.

Mitch Lowe, formerly of Netflix, will fill Gregg's shoes as President of Redbox after serving as COO for the past seven years. John Harvey brings public market experience having served as JetBlue's CFO. We are fortunate that he brings to the table an intimate knowledge of our company's fastest growing business segment. John and Brian have been working side by side to ensure a smooth transition.

Together we are confident in the future and believe that Coinstar will continue to make life easier for consumers, generate strong returns for our retail partners and provide robust value creation for our shareholders over the long haul.

Consistent with what I said last quarter, we are committed to delivering our yearly outlook, while at the same time we will take the remainder of 2009 to analyze the business from every angle and decide what's best for Coinstar and ultimately for our shareholders. We think it's worth applying rigorous analysis to what we're doing and how we're allocating our capital. We firmly believe in the Fourth Wall positioning yet believe we can always improve the model and do things better.

That said, our core capabilities ideally position Coinstar for the future. First, we have a terrific value proposition for our retail partners where we take underutilized space and make it income producing at no real cost to them.

Second, we have a technologically advanced network that is unrivaled and when coupled with our highly capable field organization we're able to deliver incredible value to both our retailers and consumers.

Our ability to grow our Fourth Wall presence through top tier sales efforts will remain a core competency as we move forward and everything we do is supported by a solid balance sheet. Ultimately it's times like these that strong brands get stronger and good companies become great companies, something we're whole heartedly committed to moving forward.

So with that we'll open up the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Your first question comes from Eric Wold – Merriman Curhan and Ford.

Eric Wold – Merriman Curhan Ford & Co.

Hey, it definitely won't be the same without you, Brian. So I guess a couple questions on Redbox. One, I guess looking at the EBITDA in the quarter, well I guess not Redbox, the EBD division, you had EBITDA on the quarter of about 19% or almost 19% versus last call you guided in the mid-teens. If that guidance to the mid-teens still holds what would kind of happen in the last three quarters of the year to drive it down to that level with the new machines this year versus what hasn't been happening obviously with the machines until last year?

Paul Davis

Yes, a good question. I'll take a stab at that. The primary driver of us keeping it fairly conservative to balance the year is the impact on previously viewed videos, so just as more and more DVDs make it into the market we'll pull those prices down slightly which impact how the profitability of the business. The other thing is just the additional operating costs tied to really strong push in the market with additional kiosks.

Eric Wold – Merriman Curhan Ford & Co.

And then a follow-up on that division, kind of update us on where you are with manufacturing capacity to get to the kind of 8,000 – 6,000 to 8,000 machines this year. What's needed to get done to get beyond that and kind of where you are in lining up second source?

Brian V. Winter

Sure, so manufacturing capacity is not an issue at this point. We have more than enough manufacturing capacity. We are lining up other alternatives so right now we see no issues in fulfilling the 6,000 to 8,000 for the year.

Eric Wold – Merriman Curhan Ford & Co.

Okay, if I might just one question then real quick and then I'll stick in the same division. Give us your general thoughts on the NCR acquisition of the new release and any implications there and kind of what your thoughts on their ability to kind of gain share in the market.

Paul Davis

Gregg Kaplan's with us today so I'll ask Greg to answer that question.

Gregg Kaplan

I think what we'd say is we – certainly NCR is a very strong company and we never want to take any competitor for granted. Having said that we're very, very confident in the installed base that we have, the relationships we have with the retailers, the dollar price point, the operational capabilities we've built and a whole list of other assets that have come about with seven years of learning.

So we're feeling pretty confident about our prospects and will continue to keep an eye on NCR plays in the space.

Operator

Your next question comes from Simeon Gutman – Canaccord Adams.

Simeon Gutman – Canaccord Adams

Hey Brian, I'm not one for these public things, but we'll miss your presence. First question on Redbox, I think Paul you laid out a pretty compelling case why that format is going to continue to be viable for the foreseeable future. Can you just discuss the acquisition, the DVD acquisition market and putting aside some of the legal stuff? I'm just curious about how that works and if I'm not mistaken the total number of DVDs rented in the country was about flat.

Should increasing – if that number goes up over time should the acquisition market improve and then if you can just touch on the resale market a little bit if this market starts to grow because of these kiosks and starts to improve the trajectory, does that put pressure on the resale market even more so than we're seeing today.

Gregg Kaplan

Sure, let me jump in and when you were talking about acquisition you mean the acquisition of DVDs by Redbox?

Simeon Gutman – Canaccord Adams

Yes, just acquiring them for procuring it.

Gregg Kaplan

Sure. We, going forward as Paul mentioned, we continue to see some pressure on the resale value of the DVDs over the course of the year. There are some things we're doing to mitigate that. There's options for disposing of those DVDs in different places that will mitigate that, but we still do continue to see pressure.

That was addressing the second part of your question. On the first part let me make sure, can you just repeat it so I make sure I answer it correctly?

Simeon Gutman – Canaccord Adams

Yes, just on the supply, I mean if the whole market isn't growing and I'm taking the kiosks and grossing it up to the entire rental market, if that market grows, I mean should the kiosk operator – should your terms in terms of buying the DVD improve over time?

Gregg Kaplan

Yes, good question. Couple of points, one is our expectation going forward, and there was a slide on this, is that the DVD rental market in total will probably remain generally flat, maybe even slightly down here over the next several years. Having said that there's the story within that which is we see the kiosk space growing within that market. We also continue to see the download and video on demand segment growing. So what will end up happening is you've got a very large brick and mortar segment that is shrinking because of those areas that are growing and benefiting and we think two models that are sort of better models than the existing model.

In terms of how that relates back to our acquisition capabilities, we do believe that as we've gotten bigger and we've been able to work well with the studios that that will allow us to purchase DVDs as we have in the past and potentially better and we're in the process of working on that.

Simeon Gutman – Canaccord Adams

Okay, and then one more on Redbox. As you positioned this business over the past few years and as you did the strategic plans for it, what were the expectations and maybe not to shed too much competitive light on it, but to the extent that you can what were the expectations for how the landscape evolves, particularly from a competitive response standpoint because I think that environment is going to change rapidly. Is this about the time where you expected it to change or are the competitors coming in later than you thought? And I'm just curious how accurate and how planned you expected this to happen?

Paul Davis

Well, when we first looked at this space I mean we saw the viable universe, and depending on what you wanted to believe based on the number of kiosks or the number of households per kiosk the viable universe could be anywhere from 60,000 to 90,000 just in the U.S. alone. We are in a fortunate position that we have a fairly significant lead over the next closest competitor. Candidly, we thought that they would continue to gain momentum and maybe our – we've always thought that we'd have a strong market share and leadership position.

I think it's happening a little quicker than what we even first imagined and I think a lot of it is just due to our operational capability to continue the fine tuning on the machine itself and the relationships we have with the customers. So it's always difficult to predict what's going to happen on the competitive front, but so far it's worked out well for us.

Simeon Gutman – Canaccord Adams

And then I have one more question, I'll just put it into two parts and leave it at that. On the CMT side if my math is right it looks like the average sales per agent had ticked down a little bit, but your market share numbers are fantastic relative to the industry. Why not slow down the number of ads right now? It seems like you might have an opportunity to do that.

And then second of all, even with the exchange rate difference on the coin business and I don't have the prior year comparison what it did, but it looks like the coin dollars processed in the whole network actually was down year-over-year. If that's correct then I just want to make sure that's correct and I mean that wouldn't speak to the cannibalization effect, so what is driving that?

Brian V. Winter

Great, so let's take them separately. The first one, the average sales per agent transactions are actually up. What's down is the amount they're transferring per transaction. As the economy has weakened what we've seen is that people are transferring less each time they do it. They just have less disposable income. So that's what accounts for the average sales per agent being slightly down and you're correct about that.

As far as volume, you're incorrect about that. Volume was actually up 2% when done I local currencies.

Simeon Gutman – Canaccord Adams

Right, year-over-year.

Brian V. Winter

Yes. Year-over-year volume was up. That is strictly a local currency issue.

Operator

Your next question comes from Bob Evans with Craig-Hallum Capital.

Bob Evans – Craig-Hallum Capital

Welcome Greg and John and Brian, wish you the best in the future and thank you for everything you've done in the last six years. First of all, can you answer the average tenure of the DVD casts? What's the average aging thus far? Is that something you're willing to answer?

Brian V. Winter

Yes. Last time that we averaged out it was slightly over 14 months.

Bob Evans – Craig-Hallum Capital

As of the end of Q1. Would you be willing to share by the end of the year what you expect it to be?

Brian V. Winter

Oh no, because then we'd have to tell you exactly how many units we're going to install this year.

Bob Evans – Craig-Hallum Capital

Fair enough.

Brian V. Winter

Good try.

Bob Evans – Craig-Hallum Capital

Same store sales decline, would you – do believe that's bottomed in Q1 or I guess what are your thoughts in terms of same store sale trends for coin?

Paul Davis

Yes, good question, Bob. As we start anniversarying all the installs we've had over the last 18 months, really that'll start to pick up and really you'll see it kind of lift in Q2, but you'll start to see the real impact in Q3 and Q4, so we shouldn't, unless things that we're not aware of happen in the marketplace; shouldn't see it move south of the 5%. Not expecting it.

Bob Evans – Craig-Hallum Capital

And in terms of the second source for manufacturing do you expect there to be much material change in terms of the cost of machine by coming up with a second source?

Brian V. Winter

We're always working on the cost of machine and supply chain management. That's an ongoing function so whether you have one source, two sources or multiple sources we are always going to try to get down the average cost per machine.

Bob Evans – Craig-Hallum Capital

The 2,800 units that you added from, I believe you said your second largest competitor post the deals that you won, do you have a sense of how that second largest competitor would be left with?

Paul Davis

Be taking a guess actually. Do you know, Greg?

Gregg Kaplan

Yes, our estimate is about 500 machines that that second largest competitor would have left, which would actually make them the third largest competitor. There's another player with about 1,300.

Bob Evans – Craig-Hallum Capital

So predominantly that would be, I assume with one retailer, most of those?

Paul Davis

It actually was with three retailers.

Bob Evans – Craig-Hallum Capital

But what they would be left with? The biggest majority would be left with one?

Paul Davis

That's correct.

Bob Evans – Craig-Hallum Capital

And then your 2,800 came, just to clarify, from three retailers?

Gregg Kaplan

Yes it did, Bob, and we can mention two of the three. The third one we're just not quite in a spot we can publicly announce the specifics, but it's with HEB and Albertson's, LLC, part of their business which is a division of Supervalu.

Bob Evans – Craig-Hallum Capital

Okay, and then there's one other large one. Okay.

Paul Davis

Yes.

Bob Evans – Craig-Hallum Capital

And can you – I don't know how much you can elaborate on this, but as it relates to the relationship with the studios outside of Universal, can you give us any kind of color because that's certainly a question that I get and how do the studios view Redbox.

Paul Davis

The great advantage that we have with both Greg being in this business for a lot of years and also Mitch having lived in this business for many years plus that and all the experience with Netflix is that we have really good relationships with the studios. They act fairly independently so there are six, seven distinguished relationships and we're constantly trying to figure out how to improve and but I don't think we have any concern, nothing that we're concerned with right now. But we're working through the Universal stuff and are not in a position to comment much on that.

Operator

(Operator Instructions). Your next question comes from Nate Brochmann – William Blair and Co.

Nate Brochmann – William Blair & Company

I'll tack on to everyone else's comments, thank you, Brian, for all your years of service and hard work. Just to kind of start out, now that we kind of look back at the last year with the whole Walmart install, the install, just kind of wanted to step back, Paul, and maybe get your take on how everything went and how happy they are with the new arrangement and then also just to maybe talk about how that arrangement is able to let you lead in with some new machines. You mentioned these new gaming machines?

Paul Davis

I think the transition has gone very well and it was a fairly big adjustment for us to pull the entertainment equipment out of the stores and then a major install effort on both coin and DVD. And we're well down the path. We still have some coin units that we need to install this year and we're working on, but this – yes, so we have a great relationship with Walmart.

We take nothing for granted. But this initiative on the entertainment space is an interesting pilot that I think signals a commitment on their part to do some interesting things at the front-of-the-store and we're fortunate that we're one of their major partners in doing this prototype room if you will.

And they are an innovative company that's always looking for more innovation from their partners and we have a good relationship with them and we're constantly testing and talking about new possibilities if you will.

Nate Brochmann – William Blair & Company

And then kind of to get back to the coin business a little bit, you gave some nice color, too, in terms of where we stand in terms of coin volume and whatnot. Clearly you halted at least in the first quarter the level of installs and we understand there's some strategic looking here and there at each individual location and I think as shareholders we applaud that for the profitability. But if it was in a normal environment would the focus still be on ramping up the number of installs across the board? Or would this have been the natural time when you would have stepped back and evaluated what you had and where your locations are?

Paul Davis

I don't know. Just as I – fresh set of eyes on the business I felt it was a prudent move to look at the business in total and look at each one of the individual ROICs and just look at the profitability. This is a very profitable business, plus 30% margin. This is not a business that's sick. It's a very healthy business but we view that instead of adding thousands more, what are the possibilities by going from 13.5 transactions to 14.5 or 15.5? What falls through the bottom is just very, very powerful.

We're still committed to the full year install as I mentioned in the script. But we're still committed the 800 to 1,000. A lot of what you saw in Q1, candidly, was just tied to we're focused on Redbox and then you're working with our key accounts on their roll out plans, so no one should be alarmed by what they saw in Q1.

Nate Brochmann – William Blair & Company

And then just this final question, I think you kind of alluded to this towards the end, Brian, that in terms of looking at the estimates for the year right now maybe it looks like it's trending towards the upper half a little bit especially with a strong performance in the first quarter and at least relative to I think general expectations, it looks like the second quarter's going to be a little stronger. I've got to assume part of that is just a little bit of conservatism in terms of waiting how the year exactly plays out in combination with a few known things and just wonder if you have any additional comments on that?

Brian V. Winter

Sure. I think there's multiple things that go into our thinking. You have some ups and you have some downs. We said that it was trending to the upper side of revenue and EBITDA, but on the other hand as of last call we didn't know the interest charges that would result so that would result because – the Redbox or the [Purchase King]. Now we do. So as you're adjusting your model you need to do both sides of the equation where yes, you can trend toward the upper side but you also need to put in that interest.

And I think you'll find that those two pretty much offset each other. So that's one. The second one is one quarter does not make a line. It's very early in the year. Certainly things are going very well. I know that Dave and myself were very proud of where the company is now and we're leaving it in incredibly capable hands with Paul, Greg and John and I think they're going to do some incredible things. But it's still only one quarter, so I think as you get to the end of the second quarter you get to ask the same question to John.

Operator

Your next question comes from Simeon Gutman – Canaccord Adams.

Simeon Gutman – Canaccord Adams

I thought I'd jump in again. Have you continued to comment on the sort of same store or comp performance of the Redbox machines? And then second of all, can you comment on what the initial productivity of the machine is and where I'm going is of the sort of new machines what percent of average productivity do they reach?

Brian V. Winter

This last quarter same store sales were right at 35%, and the – I think you're asking – the second part of your question has to do with ramp. And we typically expect year one that the machines average about $30,000 and then ramps $40,000 year two and then $50,000 in year three.

Now that ramp is different than just 18 months ago. You compare it to the conference call scripts 18 months ago it was $20,000 year one and now it's $30,000. Part of that, as we've gotten more machines out there the awareness has gone up and the [runs] at one place returns it's really taken off. So you're seeing a first year machine do greater volumes faster.

You're also seeing them breakeven faster. You'll recall two years ago we said they broke even at 12 months, a year ago nine months, now they're breaking even at six months. So we're seeing the ramp curve, especially in the first year improve and that's very heartening.

Simeon Gutman – Canaccord Adams

Okay, and then one more for Paul. Last quarter you talked about just looking at all the business lines and evaluating them and I sort of took away the message on the entertainment business is that's one you're still deeply evaluating. Does that really just reside in the entertainment business or are you still looking deeper across some of the even less mature businesses in the quote unquote "four full offering."

Paul Davis

Yes, it's a fair question. We're really going to spend the balance of this calendar year looking at all of our businesses. I think in particular because we have talked about entertainment and that's where we're really focused on entertainment right now and then considering different options. But we're actually exploring all options – that you shouldn't read that as a signal that something definite is going to happen because we have not made any final conclusions on that front.

Operator

Your next question comes from Larry Berlin – First Analysis.

Larry Berlin – First Analysis Corp.

Hope you're doing great today. And just a couple quick questions, first of all, you haven't talked about coffee yet today, just curious how that's going.

Paul Davis

Not much has changed since we last spoke. We, I think we talked about we expanded the pilot outside the grocery stores and supermarkets and we placed some units in convenience stores and travel centers. We're still committed to test that business. We still believe it's got upside, but because it's just a pilot we still have a lot to learn before we're ready to do kind of a full scale launch.

Larry Berlin – First Analysis Corp.

Then the other one, the coins in Europe you said you were going to push in to Northern Ireland. I was just curious if you could give a little more detail in terms of do you have a convenience store you're pushing into and so forth, and then any thoughts of where to go to from Northern Ireland?

Paul Davis

Well right now we're just focused on Northern Ireland and it's a partnership with Tesco. We have a great relationship with Tesco in the U.K. So they'll put some stores there and we'll keep a close eye on it. Every time we've expanded on the Continent outside as we've move kind of across Europe, we've seen great averages that really actually exceed our averages in the States. So but we're being prudent on allocation of capital and being very thoughtful on the pace at which we roll out.

Operator

Your next question comes from Eric Wold – Merriman Curhan Ford & Co.

Eric Wold – Merriman Curhan Ford & Co.

Hey, just a follow-up question. On the – kind of following up on the questions about coin counting comps and hopefully we're at kind of a point where they're bottoming here and kind of starting to rise again. Can you give a sense of if you look at the number of coin counting machines that are in the same store sales base, how many Walmart machines are in that base and kind of how many will start flowing in over the coming quarters which could hopefully eventually improve that same store sales number?

Brian V. Winter

That's a great question. If you look at it they really have to be in there five quarters because it's 12 months and one day. So what you see in the Walmarts, if you look back a year ago there was roughly 400 that were there. So that would be 400 in the same store sale comps. And so what you'll see flowing in is roughly 3,400 over the coming year.

Now remember, most of those did not start going in until Q1 so your real start of the anniversarying is really Q4 of '09 and then Q1 of '10. And that's why when we said if you look at the same store sales comps and you go back a couple conference call scripts, it should bottom in Q1 of '09, it should start to increase slightly I nQ2 and then start to accelerate from there.

I don't think anything dissuades us from what we said two quarters ago or what we're saying today. Everything seems to indicate that.

Operator

Your next question comes from Bob Evans – Craig-Hallum Capital.

Bob Evans – Craig-Hallum Capital

Hello again. I just want to make sure I'm clear on the total debt. As we sit today post transaction, where kind of net debt is at if you can – assuming the term loan A is done.

Brian V. Winter

Sure. Well, let me try and answer that and see if I get it right. We've got $325 million revolver. We have about $45 million worth of capital leases and then we had the seller notes out there. At any given time we have about $100 million in our bank accounts and our coin machines. That is not counting the money in transit to retailers. So if you look at net debt, which was your question, you would add all that up and you would be I think roughly around $350 million.

Bob Evans – Craig-Hallum Capital

So real quick, Brian, so the 325, the 45 on the capital leases and then I think I'm missing something to get to the –

Brian V. Winter

You have a $100 million of seller note because of the Redbox transaction because really what's happening is the Term-A is taking the place of the seller notes.

Bob Evans – Craig-Hallum Capital

Right, so basically Term-A replaces it and it's just a different term.

Brian V. Winter

Right. Then what you get, in part to your second question, is that the Term-A is a two-year note. The obvious goal would be to pay that off over cash flow and you would get rid of that $85 million to $100 million over the next couple of years. So you would see a deleveraging as you go forward. And certainly one of the slides we included there was what would be the pro forma leverage ratio with everything in there? And you can see it's about 2.5, which is considerably lower than it was just three months ago or six months ago.

Bob Evans – Craig-Hallum Capital

Right, and that's assuming that that's just a debt and not giving any credit on the cash.

Brian V. Winter

That's correct. That's gross debt.

Bob Evans – Craig-Hallum Capital

Gross debt. Okay.

Operator

There are no further questions at this time.

Paul Davis

Okay, on behalf of Coinstar we'd like to thank you for your attention and we look forward to talking to you soon. Thank you.

Operator

Ladies and gentlemen this concludes the Coinstar, Inc. first quarter 2009 conference call. This conference will be available for replay after 4:00 pm Eastern Time today through midnight, June 7, 2009. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and enter an access code of 4060678. Thank you for your participation. You may now disconnect.

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