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Outerwall (NASDAQ:OUTR)

Q3 2013 Earnings Call

October 24, 2013 5:00 pm ET

Executives

Rosemary Moothart - Director of Investor Relations

J. Scott Di Valerio - Chief Executive Officer and Director

Galen C. Smith - Chief Financial Officer

Analysts

Michael J. Olson - Piper Jaffray Companies, Research Division

Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Darren Aftahi - Northland Capital Markets, Research Division

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

Eric C. Wold - B. Riley Caris, Research Division

Operator

Welcome to the Outerwall Inc. 2013 Third Quarter Earnings Conference Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Rosemary Moothart, Director of Investor Relations. Ms. Moothart, you may begin.

Rosemary Moothart

Thank you, Ellen. Good afternoon, and welcome to Outerwall's 2013 Third Quarter Earnings Call. The call today will be hosted by CEO, Scott Di Valerio; and CFO, Galen Smith. Scott and Galen will make introductory remarks and then open for Q&A.

In terms of Q3 documents, the earnings release and prepared remarks are posted on the Investor Relations section of Outerwall's website, outerwall.com. This quarter, the slides are not embedded in the prepared remarks. They are included as Appendix B and are also posted separately, along with the other documents. And finally, our Q3 10-Q is available in the SEC Filings section of the website.

During this call, Scott and Galen may reference non-GAAP financial measures. A reconciliation of differences between GAAP and non-GAAP financial measures is provided in Appendix A of the earnings release, which is posted on the website.

Also during 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 a result of various factors, including those discussed in our latest 10-K and subsequent 10-Q filings with the SEC.

And now, I'll turn the call over to Scott.

J. Scott Di Valerio

Thanks, Rosemary. We appreciate everyone joining the call. The results we announced today were in line with the revised guidance we provided in September. But I want to be clear that we are not satisfied with the overall results. However, we did respond quickly and appropriately and ultimately improved performance in the second half of the quarter to improve profitability as we head into Q4.

I'll now spend a few minutes talking about our performance in Q3 and how we're positioned to create additional value for our shareholders.

There are key aspects of our business that support our confidence in the near- and long-term future of Outerwall.

First, our core segments, Redbox and Coinstar, are market-leading franchises with strong value propositions and well-managed kiosk networks. We continue to leverage our position by offering consumers value and convenient solutions.

Next, strategies are in place that will drive greater productivity across the organization and returns for our shareholders. Additionally, we have strong, long-standing relationships with both our consumers and our partners.

And finally, we are driving ecoATM to deliver growth and cash flow.

Redbox performance for the first half of the quarter was not to our expectations, as the promotional strategy Redbox executed drove rentals that had discount levels that negatively impacted revenue and gross margins. We reacted quickly by recalibrating the marketing promotions and subsequently saw improvements through the rest of the quarter in net revenue per rental.

We did see several positive trends in the business during the quarter. Same-store sales growth at Redbox was 2.1%, an improvement of nearly 9 percentage points from negative 6.8% in Q2.

Our consumer base of total active credit and debit cards increased 7.9% compared with Q3 last year. This is faster than kiosk growth, which is approximately 2.8%, demonstrating that we continue to win with consumers, particularly when we have strong content. The expanded consumer base gives us additional opportunities to drive incremental rentals across our kiosk network.

We grew the high-frequency rental -- renter segment, our most valuable customers, to 14% year-over-year, far outpacing growth in total consumers.

Lastly, we expect our CRM initiatives to help drive profitable growth, as we capture a higher share of consumers' entertainment time. To that end, we saw a 3% increase in frequency within our high-frequency renters. We will continue to focus on this segment, as we refine and personalize promotions, as we scale our CRM programs.

The Coinstar line of business delivered a solid quarter, with 2.6% revenue growth and a 5.5% increase in average transaction size. The price increase instituted on October 1 will help offset the increased costs we've incurred since the last price increase in 2010.

In April, we started a strategic review of our New Ventures segment, focusing on 2 main areas. The first area was Ventures' process and the time and investment allowed to bring a concept to scale. It became clear, it did not properly leverage the Outerwall platform, and time to scale was too long.

The second area was the level of investment and return profile to ensure capital is being allocated in a way that maximized shareholder value. We continue to work through our review and expect to complete this quarter.

In July, we announced the completion of our acquisition of ecoATM, which provides us with a platform for growth and a business that will further enhance cash flow as it moves to scale. We are pleased with the early results of ecoATM.

We recognize our Redbox business growth maturing to single-digit revenue, just as Coinstar has done. These are very strong cash flow businesses, and we're managing them to drive profitability and free cash flows. We are continuing to focus on aligning our costs with the projected revenue growth of our business, thereby driving additional leverage.

We're encouraged by the opportunities we have to continue to grow our business, with Coinstar, Redbox and ecoATM returning high value to our shareholders.

Outerwall remains a strong company with a strong balance sheet and a focus on operational excellence, while bringing great products and services to our consumers with convenience, value and simplicity.

Now I'll turn it over it to Galen to talk about the quarter and our capital allocation plans.

Galen C. Smith

Thanks, Scott. This quarter, we generated approximately $587 million in consolidated revenue. Underlining these results, we had rental growth of 13.1% at Redbox with both rentals and revenue per kiosk up year-over-year for the first time since Q1 2012.

Furthermore, once we adjusted the level of promotional activity in the quarter, we saw a steady improvement in net revenue per rental, which increased from $2.39 in July to $2.57 in September. This was also the first quarter that we included revenue from ecoATM, which led to solid growth in the New Ventures segment.

We generated $110.5 million in core adjusted EBITDA and $0.97 of core diluted earnings per share. Core adjusted EBITDA benefited from our continued focus on aligning costs with revenue. Core diluted EPS was impacted by a $2.6 million write-off of the remaining Orango assets, offset in part by a $1.5 million benefit from lower share-based expense as a result of a lower share price at the end of the quarter.

We expect the benefit we receive from the share-based expense in Q3 to reverse in Q4.

We continue to work across the enterprise to better align our costs with our expected revenue growth to maximize profitability and cash flow. We are accomplishing this by leveraging resources in our shared services within the business and by reducing direct operating and general and administrative expenses.

As an example, we reduced expected content costs and G&A by $21 million in Q4, and we expect to find additional savings in future periods.

Consistent with our focus on delivering enhanced shareholder value and allocating capital to the highest return opportunities, as outlined in our Analyst Day presentation back in February, today, we announced additional details on our capital allocation plans.

In particular, we expect to return 75% to 100% of annual free cash flow to shareholders. As both Coinstar and Redbox mature to single-digit revenue growth, we believe now is the appropriate time to increase capital returns to shareholders.

To start, we expect to return capital through share repurchases. To date, we've repurchased $95 million of common stock against the original $100 million target for 2013. We plan to repurchase an additional $150 million of common stock, $100 million of which we expect to execute before the end of the year. This will bring share repurchases to $195 million this year, which is in excess of our expected free cash flow. We expect to repurchase the remaining additional $50 million early in Q1.

And going forward, we'll continue to evaluate the merits of a dividend as part of our overall capital allocation plans.

Today, we also announced that we've refined our target net leverage ratio to 1.75x to 2.25x net debt to EBITDA. We believe our strong core businesses can support these levels, particularly given the strength of our cash flows and the investments we've made in our infrastructure over the past few years. We plan to move to this level of leverage in Q4.

As Scott mentioned, we're actively reviewing our New Ventures portfolio to ensure that investments are best aligned with our value creation objectives. While the review is still ongoing, I can tell you that based on our work thus far and excluding the ecoATM build-out, we anticipate a significantly reduced investment in New Ventures. We expect to complete our review of New Ventures by the end of the year, and we'll share additional details with you once finalized. We believe these updates further highlight our commitment to maximizing value for all Outerwall shareholders.

Turning to guidance. We provided additional context in the prepared remarks we posted. For Q4, we expect consolidated revenue between $585 million and $610 million, up 3.7% to 8.1%; core adjusted EBITDA between $117 million and $127 million, up 15.2% to 25.1%; core diluted EPS between $1.09 and $1.24, up 16.9% to 33%.

Finally, we continue to expect free cash flow of $170 million to $188 million, with most of that coming this quarter due to benefits from working capital.

We are keenly focused on maximizing shareholder value by making the right investments in our business to drive enhanced profitability and cash flow. We're taking a disciplined approach to capital allocation. All investments are being thoroughly reviewed to ensure capital is allocated to the highest-return opportunities. Our 2 core businesses, combined with the strong potential we see for ecoATM, provide a significant opportunity for Outerwall to continue to deliver superior value creation.

With that, we'll turn it over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Mike Olson with Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

Can you provide some more specifics on what happened with the pricing in the quarter, like what kind of discounting was happening to drive average check down so much in July? And to what degree do you believe that, that discounting helped Redbox volumes? And then what are you kind of doing now to try to drive volume without overdiscounting?

J. Scott Di Valerio

There are several factors, Mike, that impacted the revenue and the average check. We had a high level of promotional activity in July and the first part of August. And that promotional activity included our traditional -- what I would call, our traditional promotional activities and a little more volume than what we typically would do. So that's rent one, get one free; 50% off on Friday Club, Text Club, those types of things. But we did have too many at one time and put the tonnage in at the wrong levels. And while it did help drive some rentals, we also gave up some full price -- certainly gave up some typically full-price rentals in the quarter. Once we adjusted and recalibrated our promotional strategy, we saw rents come in, in line with what we had expected, and they brought average check up substantially. So we brought average check up. That was at $2.39 in July, back up to $2.57 in September. As well as we saw an improvement in single-night rentals during that time period, where July single-night rentals had moved around 59.6% of our rents. And in September, we had moved them down to 59%, again all by working and adjusting the promotional strategy. So we feel confident that as we move into Q4 and as we begin to roll out our CRM system in greater detail across more customers and those adaptive offers, that we'll be able to drive incremental rents, and as well as drive the right revenue profile as well.

Michael J. Olson - Piper Jaffray Companies, Research Division

Okay. So along those lines, the average check, like you said, had a pretty big swing in the quarter, ending, I guess, $2.57 in September. So do you believe that kind of average check level is sustainable going forward? Or what would cause that to maybe dip back down, if you aren't doing as much discounting?

J. Scott Di Valerio

Yes. Again, I think that we believe that the average check will go back to its more normalized levels, particularly given as we roll out our CRM system more fully, and we're doing adaptive offers that are more personalized to the individual to drive incremental rents. Certainly, our high-frequency renters are back and renting at a high level. Those folks are typically single-night renters, and they don't -- they'd also need a lot of promotional incentive to go through and rent. What we did in the first part of the third quarter is we were providing promotions to folks that would already be going to the kiosks anyway. And again, our high-frequency renters are defined as folks that go to the kiosks at least 4 times a month. Some of those folks are going to the kiosks multiple times during the week. So again, it's around -- as we continue to roll out that we started in Q3, that will complete in Q4, our CRM and adaptive offerings, we believe that, that will allow us to drive the right amount of incremental rent, as well as keep our average check at the levels that will drive the revenue in the levels that we're talking about.

Operator

The next question comes from Steve Dyer with Craig-Hallum.

Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division

I'd like to dig in a little bit to eco, if I could. What would you anticipate for new kiosk installs in Q4? I see kind of the full year CapEx number for New Ventures, a lot of them, obviously, geared towards eco. But it would seem to imply a pretty steep ramp in Q4. Am I reading that right?

J. Scott Di Valerio

Well, I think that -- what we've talked about is building somewhere between 800 and 900 kiosks by the end of 2013. So we're a little -- right around the 800 kiosks or so at the end of the third quarter. So it's about 100 kiosks for ecoATM in the fourth quarter is where we're at.

Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division

Okay. And I know you've talked previously about ramping that, kind of the addressable market, at least in the relative near term to 5,000 to 10,000 kiosks. Is that -- and that would imply a new channel perhaps or something pretty aggressive, more than rolling out 100 additional a quarter. How should we think about sort of the cadence of that rollout over the next year or 2?

J. Scott Di Valerio

Yes. Again, we see the total market opportunity between 5,000 and 10,000 kiosks in the U S. And again, that means we'll be going into channels other than the mall channels. We're beginning testing in the mass channel now, in some of the large-format grocery. And as I look at -- as we look at 2013, assuming we hit roughly 900 kiosks, that's about a 600-kiosk rollout in 2013. I would expect our rollout to be larger than that, as we go into 2014. We haven't provided 2014 guidance. But again, we'd expect our 2014 ramp to be -- to accelerate as we go into '14 and then on into '15. There's a big opportunity, certainly, with ecoATM, 175 million new devices that are sold annually. Around 20% of those are traded in. And so there's a lot of opportunity, a lot of demand for refurbished mobile phones. But the other thing that we don't talk a lot about is that ecoATM machines also take tablets and MP3 players, and we're beginning to see a relatively large refresh cycle on tablets as well over the next year or so. We think there's some very good opportunity, therefore, for eco.

Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division

Great. And then any -- sort of any additional clarity on the margin structure of eco. It's sort of buried in New Ventures, which I think obscures it a little bit right now. But any way that we should be thinking about that as that matures or grows, I should say?

J. Scott Di Valerio

Steve, it's still early days. But as we think about it ramping and maturing, it's got a margin profile similar to Redbox. So again, for Redbox, we've got a target margin of 20% to 25% EBITDA margins, and we would expect ecoATM to be in a similar range. What's really interesting about the business from a cash flow perspective is that the average revenue is about twice the size of a Redbox kiosk. And so the flow-through to the bottom line is pretty significant.

Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division

Yes, okay. And then last question on eco. With the recent release of the new iPhone, there was -- it seemed like every retailer, carrier, et cetera, was coming out with a trade-in program. Did you see any deviation in behavior relative to what you would have expected on your kiosks when that happened?

J. Scott Di Valerio

No. It was relatively in line with what we'd expect. I mean, there is certainly a positive as people begin to understand that you can turn in your phones. As we said, 20% of phones are recycled. So it gives us -- there is 80% out there that need to get turned in. So there's great opportunities for us there. It's certainly a -- one, helps us, but also it's something that we're focused on around from a competition perspective. And again, the eco team and the Outerwall team is really working toward making sure that we continue to drive the business and take advantage of some of the market trends that are going on and the refresh cycles as well.

Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division

Okay. And then last question, kind of an older topic, but anything new on the swipe fee front? Anything new or incremental there?

Galen C. Smith

On the debit card?

Steven L. Dyer - Craig-Hallum Capital Group LLC, Research Division

Yes.

Galen C. Smith

Steve, as you know, that's a hot topic right now in terms of what might happen. There's obviously ongoing litigation surrounding that. There's no news for us to report. We're obviously hopeful that debit card fees will come down. That would be upside to the business, overall, as it flows through to the bottom line. But it's probably going to take 12 to 18 months for this to work itself out.

Operator

The next question comes from Andy Hargreaves with Pacific Crest Securities.

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Quick question on the net leverage. How does it go -- or why are you expecting it to go up in Q4? Because I'm assuming a debt raise would also raise cash. And it seems like your free cash flow should offset the stock purchases.

Galen C. Smith

Yes. So Andy, the reason for moving to the target ratio, we think it's a more appropriate time to take our leverage up for the business. And so it's not meant to fund the share repurchase we have planned in the quarter. We will be able to cover that likely through the free cash flow generation that we have. This is more what's the right target leverage ratio for the business. And then once we've done that, as we said in our prepared remarks today, we'd use the proceeds for general cover purposes or additional share repurchase.

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Okay. Am I -- so sorry, that's it. But -- so you do expect, though, to exit the quarter at, whatever, somewhere between 1.75 and 2.25? Is that...

Galen C. Smith

That's correct. We expect to put the leverage on this quarter.

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Okay. And then on the cost savings, the $21 million that you guys alluded to, could you get any more granular about what that is relative to? Is it just relative to your expectations and what the mix of content versus G&A is?

Galen C. Smith

Yes. So it was about 2/3 content, about 1/3 G&A. And it was really driven -- as we took a look at what our expenses were planned before we took -- or adjusted our revenue, we were able to pull out some additional costs to get the cost structure in line with where the revenue was.

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Okay. And then just my last question. On the Redbox business, it seems like you're expecting sort of flattish gross margins. Obviously, the content savings helped that. Is that the difference between what you're expecting this year and what we've seen in terms of Q4 typical gross margin performance in previous years?

Galen C. Smith

There's a couple of things there. I mean, one is simply some of that savings. Two is, with the amortization change that we made earlier this year, typically in Q4, we'd recognize a lot more of the costs relative to that revenue we generate, so that helps flatten it out a bit. We expect continued benefits as other areas grow, like Canada. And then as it relates to something from a product cost perspective, like NCR, it's no longer in the mix. And so we had product costs attributed to that last year that we don't have attributed this year.

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Okay. And sorry, one more. What -- is there any way to say what the amortization change impact was in Q3?

Galen C. Smith

The benefit was a couple million dollars in Q3.

Operator

The next question comes from Darren Aftahi with Northland Securities.

Darren Aftahi - Northland Capital Markets, Research Division

Just a few. So back to the ASPs in the third quarter. So I think there's about a 7.5% spread between July and September from what you guys said. Did you guys see a drop-off in demand when you kind of stopped the promotion activity? Can you give a little color on that in terms of what you saw in terms of rental demand?

J. Scott Di Valerio

The rentals stayed in line with what we had -- what we would expect, given the seasonal nature of the business. So certainly, in September, the September rents are lower than the August rents as you go -- with back to school, football, new TV schedule and all those kinds of things that go on. So we didn't see any significant difference from what we had expected when we recalibrated the promotions and, again, started to balance out more the average check along with the rentals that we would expect to get.

Darren Aftahi - Northland Capital Markets, Research Division

And then on CapEx, I guess, in your prepared remarks you talked about reductions in Redbox, New Ventures and corporate next year. Can you give any sort of sense in terms of -- kind of quantify what that would be?

Galen C. Smith

We're working through 2014 planning right now, so it's a little early to do that. But we're looking across all of our expense levers, direct, operating, G&A. And we'll continue to be very focused on driving profitability and cash flow to maximize shareholder value.

Darren Aftahi - Northland Capital Markets, Research Division

Okay. And then 2 on eco. One, are you guys still using D&K to manufacture the boxes? Are you looking to jump to more of a scale provider to ramp faster next year?

J. Scott Di Valerio

Yes. I mean, we certainly -- D&K has been a very good partner with us in manufacturing, and we're continuing to work with them and as we resource load our plans for next year. And we'll continue to do that. We feel confident that our manufacturing plans in place will be able to support our rollout needs.

Darren Aftahi - Northland Capital Markets, Research Division

And then did you -- I don't know if I saw it in the prepared remarks, did you actually give what the eco number was in the quarter?

Galen C. Smith

We did not break that out separately. But as you can imagine just from the growth that we had, that it represents the majority of the revenue generated in the quarter.

Operator

The next question comes from Bill Lennan with Monness, Crespi, Hardt.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

I want to go back to this content cost savings for a second, make sure I understand it. On the Q4, is it safe to say the content cost savings is entirely related to taking the revenue down? Or do -- was there some -- are you getting more efficient? Are you buying smarter? Are you implying that there's an opportunity to be more efficient on a per-kiosk content purchase basis? Or are you simply taking it down because the revenue is coming down?

Galen C. Smith

It's a combination of both. So what you -- what we want to try to make sure we do is align our content spend with what our expected rentals and revenue. At the same time, you're always looking for opportunity, as you continue to refine your models, about how do you buy in a smarter way. And so definitely, we're focused on driving margin and how we can create the most profitability.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And looking out to '14, what's -- when you sit down with studios and you talk about minimums, the kind of thing you put in the annual -- in the 10-K, are they aggressive? Are they trying to, for lack of a better term, an undiplomatic term, stuff content down your throat? Or are they going to work with you to rightsize content relative to where demand is next year?

Galen C. Smith

Well, we have very good relations with the studios and we try to work them -- with them as collaboratively as possible, and we'll continue to do that. It's a little bit too early to talk about what that slate might look like and the timing of that. What we found is that there's an openness to do that. As we represent the majority of the rental market today, they tend to be, again, great partners with us.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

So if you find yourself in a situation where you may have overbought 2 quarters in, can you adjust, say, for the back half of the year? We need to -- in other words, you don't sign something on December 31 that can't be altered as the year goes on.

Galen C. Smith

We have long-term deals with the contracts -- with the studios that last a number of years. And so we typically work through a content within a full year. And we buy our content based on what we think is going to rent and what's not going to rent. We typically buy our content 6 to 8 weeks ahead of time. And so if you predict revenue will be at one level and then it ended up being at a different level, you can't adjust immediately in the quarter, but you do have the ability to adjust in future periods. We're buying above minimums today. So there's flexibility to bring that down.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay, got it. Second question, any thoughts on kind of black boxy to try and model deferred taxes? It's been a big contributor of free cash flow. And going back to the textbooks, I'm assuming as the asset base ages, there may be some reversal of that, but it seems impossible to model from an outsider's point of view. Any thoughts on how to think about deferred taxes both for Q4 and maybe broad strokes for next year?

Galen C. Smith

As it relates to taxes, last year, we didn't pay very many cash taxes; this year we have. We moved to it actually being used. So we're working through some of the details. We did have a transaction earlier this year with the way we structured the sales of NCR, kiosks that provided some additional tax benefit. We received some tax benefits, NOLs that came with the ecoATM transaction. And so there's things that you're doing -- we're very focused on how do you maximize value by managing the cash taxes you pay. And we'll continue to look at different opportunities as we go forward to do so. We provide -- we expect to pay somewhere between $55 million and $70 million of cash taxes this year, and it could be higher next year since we've used up those NOLs this year.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And beyond the NOLs, is there any deferred tax impact? Are you doing accelerated depreciation, say, on the kiosks for tax purposes? That's what I'm wondering about, if the asset -- if you're doing that and the asset base ages, will that have any impact?

Galen C. Smith

Yes. So we take advantage of every opportunity we can to accelerate from a timing perspective. A lot of the benefit we would receive would be timing related. So yes, you would be catching that up in later periods. Obviously, it's tough to say whether you'll have accelerated depreciation in future periods, similar to what we've had the last few years.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And just -- I think I'm going from the filings here, is it 5 years on the Redbox kiosks?

Galen C. Smith

That's correct.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. So for tax purposes, it would be safe to assume -- I mean, 4 wouldn't make any sense. Is it 3 years for tax purposes on the Redbox?

Galen C. Smith

It really depends. Again, there's been special depreciation that you've had related to bills the government's passed that we've taken advantage of. And obviously, you accelerate depreciation faster for tax purposes than you do for book purposes.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And then any update on Canada? Just I haven't even gone through all the materials yet. I've had my head in the model in this -- and the Q. I don't know if you wrote anything. But anything you can help us with on Canada, how that's progressing this year, what you expect by year end?

J. Scott Di Valerio

In Q3, we executed contracts with Sobeys, Tim Hortons and 7-Eleven. So we're making progress, solid progress in signing new retailers. And we installed about 240 kiosks in the third quarter, which brings us to about 740 kiosks for -- by the end of the quarter in the aggregate. So we remain on track to hit our target of up to 1,000 installations this year, and feel pretty good about how that business is going. One of the key things that -- as you begin to expand out your network and the marketing that we've been doing, we've been able to increase aided awareness to 58% in August, which is up from 25% in June of last year. So again, over about a year time period, really, as we've expanded out the network, as we've begun our marketing outreach in Canada, we're beginning to see people learn about Redbox and understand about Redbox, and feel good about where that business is at, at this point.

William Joseph Lennan - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And last one for me, a 2-parter on eco. I'm trying to get to the EBITDA margin organically. Any -- could you give us any idea what the gross margin you're expecting is for that? And then secondly, what's the -- how is the retailer payment structured on an ecoATM? Is that a share of revenue? Or do you pay a flat monthly rental, in other words, something that would scale well with great volume?

J. Scott Di Valerio

Again, we don't like kind of talking about how the different contracts are put in place. But the eco model is a little bit different than our traditional model, a rev share model. And so again, the way they're negotiated and the way they're done is a little bit different. But it does afford for a good, healthy business from that perspective. And we don't really talk about the margins at this point in time.

Operator

[Operator Instructions] Our next question is from Eric Wold with B. Riley.

Eric C. Wold - B. Riley Caris, Research Division

A couple of follow-up questions from some of the earlier ones. One, on CapEx, I know it's early in terms of going through your plans for next year. But obviously, a lot of stuff in there -- in Redbox in terms of the CRM, the corporate line is pretty big. Can you maybe just give us a sense then of what you consider kind of corporate-wide maintenance CapEx that we should think about kind of on a recurring level at least in the next year or so?

Galen C. Smith

Eric, we think that corporate CapEx on a maintenance basis will be probably between the range of $20 million and $30 million. Redbox maintenance CapEx is somewhere between $7 million and $9 million, and that will probably grow as the machines age. And then Coinstar is in a similar range. And so we would expect the other areas of CapEx to come down materially across Redbox, Coinstar and New Ventures outside of our investment, as we said, in ecoATM. And we're looking to bring down the overall total corporate CapEx as well.

Eric C. Wold - B. Riley Caris, Research Division

Okay. And then on ecoATM, obviously, you're looking at other sources of manufacturing, 100 kiosks installed for Q4. You expect next year to be greater than the 600 this year. Is any part of your rollout plans for ecoATM right now constrained by the ability to get as many kiosks as you want? Or is that not a hampering factor at this point?

J. Scott Di Valerio

No. Right now, we're -- we believe that we have -- our manufacturing plans will support our rollout plans next year.

Eric C. Wold - B. Riley Caris, Research Division

Okay. And then final question. Now that we've been 2 quarters in since the full public launch of Redbox Instant, anything you can give in terms of metrics there, in terms -- obviously, love to hear better or worse than kind of what you thought since launch. But anything in terms of numbers of subscribers, how much of your transaction growth or transaction [indiscernible] has been driven by usage of the kiosks, anything along that?

J. Scott Di Valerio

It's a bit early to talk about numbers. And obviously, we work closely with Verizon, our partner, on when those numbers get put out. But we have seen increased customer acquisition levels and service engagement, as well as month-over-month increases in time spent and frequency in renting at the kiosks and viewing content within the stream. And we're pleased with our device -- continued device expansion with the Roku and Sony PS3 and PS4 coming -- well, PS4 is coming on in November. Yes, and so we continue to move through and have a large number of CE devices that will work. And the content, again, it's 200 titles roughly at the kiosks and about 7,800 digital movies across the subscription library as well as those available to rent and to purchase. So all in all, we're making progress with RVI. One of the key things as we roll here into the fourth quarter, both Redbox and Verizon are ramping up the promotional materials around Redbox Instant via web, CRM, in-store and kiosk programs. So we should see a bit of work getting done there, more awareness around Redbox Instant, as well as more people coming through top of the funnel should be happening here in the fourth quarter and move into the first quarter as well. I think Galen wants to touch on a -- on his debt comment.

Galen C. Smith

Yes. So just to clarify, going back to the earlier comments, I just want to clarify that we plan to take on the additional leverage in Q4. The actual use of the cash may need to be used in a different period, so maybe used in Q1. But we'll take it up in terms of a gross leverage perspective, up to that 1.75x to 2.25x.

Eric C. Wold - B. Riley Caris, Research Division

Okay. Real quick, just a last thing, do you anticipate -- I know you're not giving guidance for next year, but do you anticipate any more equity contributions into your Redbox Instant next year?

J. Scott Di Valerio

Yes. I mean, it certainly is too early. Obviously, we're just into 2014 planning process, as is Verizon for Redbox Instant. So again, we're not ready to talk about that yet.

Operator

Thank you. We have no further questions at this time. I'd now like to turn the call back over to Scott Di Valerio for closing remarks.

J. Scott Di Valerio

Thank you. I want to thank everybody for joining us today on the call. We are pleased with the progress that we've made, yet we know we have much work to do to continue to drive our shareholder value and free cash flow for the business. We have very strong brands and businesses with our Coinstar, Redbox and as well as our new business, ecoATM. And we'll continue to focus on driving those businesses and bringing great products and services to our consumers that yield the value, convenience and simplicity that we always have done. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes the Outerwall Inc. 2013 Third Quarter Earnings Conference Call. Thank you for participating. You may now disconnect.

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Source: Outerwall Management Discusses Q3 2013 Results - Earnings Call Transcript

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