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Executives

Rosemary Moothart - Director of Investor Relations

Paul D. Davis - Chief Executive Officer and Director

J. Scott Di Valerio - Chief Financial Officer and Interim President of Redbox Automated Retail, Llc

Analysts

Darren Aftahi - Northland Capital Markets, Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

John Kraft - D.A. Davidson & Co., Research Division

Paul Coster - JP Morgan Chase & Co, Research Division

Corey Barrett

Eric Wold - B. Riley & Co., LLC, Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Steven B. Frankel - Dougherty & Company LLC, Research Division

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

Coinstar (CSTR) Q3 2012 Earnings Call October 25, 2012 5:00 PM ET

Operator

Welcome to the Coinstar Q3 2012 Earnings Conference Call. My name is Tricia, and I will be your operator for today's call. [Operator Instructions] Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Rosemary Moothart. Please go ahead.

Rosemary Moothart

Thanks, Tricia. Good afternoon, and welcome to Coinstar's 2012 Third Quarter Earnings Call. The call today will be hosted by CEO, Paul Davis; and CFO, Scott Di Valerio. Following Scott, we'll make introductory remarks, which will be followed by Q&A.

We have posted several documents related to earnings on the Investor Relations section of our website at coinstarinc.com. They include the earnings release, prepared remarks and supplemental slides. The 10-Q was filed and is also available in the SEC section.

During this call, Paul and Scott may reference non-GAAP financial measures. A reconciliation of differences between GAAP and non-GAAP financial measures is provided in the appendix of the earnings release. 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 Paul.

Paul D. Davis

Thanks, Rosemary, and I'd like to thank each of you for joining us today. Let me start by saying it was a challenging quarter. Like others in the entertainment industry, Redbox was impacted by the Olympic Games' record viewership that drew people away from their regular forms of entertainment, including movie watching. The large viewership negatively impacted virtually all entertainment channels with the exception of NBC. This includes theaters, TV networks, VOD, iVOD and physical sell-through.

Our rental volume was also affected by a weak movie slate in Q3. However, even with softer rentals, I was pleased that we grew our Redbox business by 18%, delivered core EPS of $1.26 and free cash flow of $61 million, all signs that the underlying business is solid. As a result, Coinstar aggressively bought back $59 million in shares. Another positive sign is our ability to continue to gain market share in the DVD rental market. Each quarter, we increased our leadership position, and year-over-year, we gained 9.4 percentage points and have a 44% market share, beating out our next -- our nearest competitor, the online by mail category at 27%.

I want to be clear about our position relative to the longevity of the physical disk and why we believe it will have vitality for years to come. The Entertainment Merchants Association reports that the home entertainment market is $18 billion, and physical media is dominant with $4 out of every $5 spent on physical content.

Rental represents 31% of all physical media consumed, and that's a big market. This report also lays out a strong future for physical rental revenue with a temporary trough in 2012 and then a rebound with expected growth and revenue of $6 billion by 2016. With more than 40,000 Redbox kiosks, we are in a great position to continue to meet consumer demand and support our studio partners, where the physical DVD is still a significant source of revenue.

Today, we announced a multiyear agreement with Warner Bros. that gives us access to Warner titles 28 days after the retail release. This agreement allows us to deliver new release content at the levels we need to our consumers while supporting our studio partner. We believe there's a long runway for physical media, and we plan to protect our core while anticipating and building for consumer migration.

During the quarter, Redbox Instant by Verizon began alpha testing, and together, we're gaining great insights that will lead to a strong product offering. Testing has moved into beta tests and will continue to expand throughout this quarter. It's important to understand the JV's content acquisition strategy that we believe is structured in a very smart and efficient way. The way it works is the JV buys content on a per-subscriber basis, which helps them avoid a large capital outlay. Since physical rentals are a part of the subscription package, the JV buys nights [ph] at the Redbox kiosks from us, which is accretive to our business. It's a win-win as we control costs and the studios enjoy the upside as we gain subscribers.

We think about Redbox as more than a box taking up a few square feet of retail space. We consider Redbox an entertainment destination. And Redbox is where consumers go. We estimate that 1.5 billion consumers walk by our kiosk every month. Our latest offering is Tickets that we just launched in Philadelphia, where consumers can discover events and attractions in their area. Regardless of the ticket price, Redbox Tickets will be sold at face value or below with a flat $1 fee per ticket. Now when consumers go to Redbox, they have choices and will ask, "What entertainment do I want this weekend?" It could be a movie, a game or a live event. We see a lot of potential to leverage the Redbox kiosk and bring even more value to our customers, along with new revenue streams.

Redbox is well positioned for growth, and we're pleased to have our new Redbox President, Anne Saunders, at the helm, driving the business. Anne's background in consumer marketing, brand building and optimizing businesses are assets to the business. She's a terrific leader and is rethinking what's possible. So we are really delighted to have her on board.

Outside of our core businesses, we have a number of growth initiatives, including our 6 organic ventures that address unmet consumer needs. These range from affordable refurbished electronics, to coffee, to fresh food, to a photo experience kiosk. We launched our Rubi coffee kiosk with Seattle's Best coffee in a few markets. The acceptance is strong from both the consumer and retailer perspective.

We have planned to accelerate the rollout in 2013 and expect a few thousand by year end. We've also made 2 strategic investments in innovative kiosk concepts that focus on electronic recycling and health management, both very relevant in today's society. We will continue seeking enduring automated retail opportunities that address unique consumer needs.

So Coinstar's growth has put us in good company, and I'm pleased that for the third consecutive year, Coinstar has ranked among FORTUNE Magazine's 100 fastest-growing companies at #15. I am confident in the future of Coinstar and our ability to continue to deliver value to our shareholders.

With that, I'll now turn the call over to Scott for his remarks.

J. Scott Di Valerio

Thanks, Paul. As Paul indicated, the Olympics impacted viewership across-the-board, at home, in theaters, both physical and digital. With this headwind, we delivered solid Q3 results with revenue over $537 million, up nearly 16%, and EPS of $1.26, which includes $0.16 of dilution from the NCR acquisition. We also generated free cash flow of $61 million, a good indicator of the power of our automated retail model and focus on operational excellence.

We continue to execute on our disciplined capital allocation strategy that has yielded an increase in ROIC from a little over 8% in 2009 to a little over 15% in 2011. This strategy has allowed us to make investments in our core business, bringing Redbox Instant and Redbox Tickets to life, invest in our seed businesses, preparing Rubi for launch and repurchasing 1.1 million shares for $59 million of our common stock during the third quarter. The purchases of our common stock was executed through our 10b-5 program as well as open market buys through the quarter. Looking forward, in Q4, we will be opportunistically aggressive with our stock buybacks, both structured and in the open market.

Another key aspect of our focus on disciplined investment is around the continuing drive of higher IRRs on investments in our Redbox kiosks. We have not changed our hurdle rate each Redbox kiosk must obtain in order to be installed. Earlier installs [ph] far exceeded that hurdle rate, and as we continue to expand out the network, the new installs are coming closer to that hurdle rate. Paul and I will stay focused on driving the team to achieve the hurdle rates and being judicious on installs of new kiosks.

Redbox Instant by Verizon has been securing content for our soon-to-be launched streaming service. The first subscriber model, it helps keep the investment in content in line with the subscriber base and is a win-win proposition for us, consumers and the studios as they'll share in the upside as we add more subscribers.

Viewership with entertainment was down pretty much across-the-board this quarter as a result of the popularity of the Olympics and a lack of new-release content. While we factored in these items, the Olympic viewership far exceeded our expectations, putting further pressure on our business.

While we look at content, we had 9 weeks with 2 or fewer titles in a time period that historically is one of our highest rental periods. We are encouraged by the fact that our unique credit cards increased to $38.9 million -- to 38.9 million unique credit cards. However, we did see a decrease in frequency this quarter, which we believe was driven by the low level of content over an extended period of time.

As we move into the fourth quarter, we are buying a bit deeper than we have in previous 4 quarters to bring back the frequency by having the product available. We have seen the beginnings of the return of our frequency. But as Paul has indicated, the return is more on a U shape versus a V shape. And we expect frequency to build as we move through the quarter.

We continue to have strong confidence in Redbox and believe we are positioned well. Our rental volume is up year-over-year. Blu-ray was growing. In Q3, it represented 11% of revenue and 9% of our volume. And we're making good progress on the NCR transition of kiosks. And finally, we've come to agreement with Warner on a multiyear, 28-day deal that further highlights the importance of physical rentals to the studios.

Looking out a bit, we're pleased with the early results on our pilot of Tickets in Philadelphia, bringing great value to our consumers, and we're in employee beta with Redbox Instant and moving toward a public beta. And finally, we're making progress in establishing the Redbox business in Canada.

So turning to guidance. And guidance includes the release schedule and strengthened titles in Q4, which, of course, were stronger than those in Q3. We're looking at a more U-shaped recovery of frequency of our consumers building through the quarter. And our focus will be on increasing frequency of our over 38 million unique credit card users. And key way we're doing this is by buying deeper, which will put pressure on margins in Q4, but we believe will benefit the business as you move through Q4 and into Q1 of 2013.

As it relates to the acquisition of the assets of NCR's entertainment business, we have included net operating losses of $9.7 million, or $0.19 of EPS, a bit lower than we expected due to being able to swap out the NCR kiosks faster and a change to capitalizing installation costs rather than expensing.

We're expecting to replace between 400 and 500 blue kiosks with the Redbox kiosks and removing 700 to 800 kiosks this quarter. At the end of the year, we should end up between 1,900 and 2,100 kiosks and remain confident that this will be accretive sometime in 2013.

Looking to the full year. Full year 2012 revenue will be between $2.19 billion and $2.24 billion. Full year core EPS from continuing operations will be between $4.50 and $4.65. For the fourth quarter, revenue will be between $552 million and $602 million. And at that midpoint, it's about 11% growth while we're lapping that price increase. Q3 core diluted earnings, EPS, from continued operations will be between $0.62 and $0.77. And for the full year, free cash flow is expected to be between $185 million and $210 million.

So as we're focusing on ending the year strong and positioning ourselves for 2013, we're really focused around improving the frequency of visits and rentals, continue to being disciplined in our capital investment strategy by investing in core and new businesses to drive short-, mid- and long-term growth and by being aggressively opportunistic in our stock buyback.

With that, Paul and I would be glad to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Darren Aftahi from Northland Securities.

Darren Aftahi - Northland Capital Markets, Research Division

Just a couple of quick ones. Is there any way you can kind of quantify the Olympics' impact to your business in the third quarter? And then secondly, this looks like one of the more wide ranges of revenue you've given. In the past, it's $50 million. Typically, it's been around half that. Can you explain a little bit about why the range is so wide? And then third, the roughly $10 million NCR expense, is that included in the core EBITDA and EPS number to be clear? Or is it excluded?

J. Scott Di Valerio

Thanks, Darren. Yes, the NCR amounts are included in the core EPS and EBITDA numbers. I think I will take your questions. I’m trying to think it was in what order. If you look on Page 6 of our prepared remarks, there are 2 graphs that they give a good indication of the impact of the Olympics and lack of content, both in the rents as well as in the revenue reconciliations. So we estimate about $19 million in rents for Olympics and content and equates to about $48 million in revenue was the impact of those 2. And your other question was around the range in revenue on guidance. Yes, we're -- certainly, as we're trying to build back the frequency and such, we've set the guidance up based off of where we were looking at full year guidance and felt that was the right range for Q4.

Operator

Our next question comes from Mike Olson from Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

It seems that the Q4 title release schedule is pretty decent. The revenue guidance is coming down. You mentioned a U-shaped recovery versus a V-shaped. But if the Olympics are over and content is strong, why would it not be more V shaped? Is there kind of a lag for customers to come back to Redbox for some reason?

Paul D. Davis

Yes, Mike, this is Paul. So it's a great question. And as Scott hit on in his opening remarks this notion of a -- the U-shaped curve, what we found is clearly, we're a momentum business. And we found we did not lose customers. What we found was that actually, the frequency of our customers when the box was left [ph] dropped off, and there was quite a gap in content in the second half of Q3. It's starting to build back. And a lot of the content starts to really build in November. So a bit of gap and then it built strong towards the end of December. So we're starting to see really positive signs. The revenue is picking up. We are anticipating a lift in revenue in Q4. But it's what we saw at the tail end of Q3 and the front part of Q4. That's why we're trying to be as accurate as we can as we talk about this.

Michael J. Olson - Piper Jaffray Companies, Research Division

Okay. And then just to recap why EPS will be kind of below what was previously expected for Q4, it's partially higher content spend and then the $10 million that you just mentioned on NCR swap-outs. Is there anything else?

J. Scott Di Valerio

Yes, that's primarily it. The kind of the content really drives. And particularly, in Q4, we usually have a little lower margins in Q4 around -- because we do go deeper on the content because we're going a little bit deeper than what we traditionally do in order to drive that frequency. It has put some pressure on margins, and that's certainly dropping down to the bottom line. And then as you mentioned, the NCR amounts are doing that as well.

Michael J. Olson - Piper Jaffray Companies, Research Division

Okay. And then maybe I'll sneak one more in on the Redbox Instant by Verizon. Last I had heard, it was kind of in alpha mode. Are we still at that point? And maybe you said in the press release, but any update on when we'll see it other than just by year end?

Paul D. Davis

Yes, so we are out of alpha and we're in beta, and beta is focused right now on internal beta. We plan to expand that beta to the public. We've not specifically talked about the week, but we're committed that it will be out before the end of the year. But we've been really pleased with the progress. We were excited about being able to talk about Warner, and we're getting the content secure. So making great progress.

Operator

Our next question comes from John Kraft from D.A. Davidson.

John Kraft - D.A. Davidson & Co., Research Division

Just one -- another clarification on the guidance. You talked about the NCR impact and content acquisition. But I'm assuming that there's a drag here based on the coffee rollout. Can you quantify what sort of an impact that might be in Q4?

J. Scott Di Valerio

Yes, yes, there is a little bit of a drag with the coffee rollout shifting a bit, but it's not significant given that those kiosks were coming in. We're planning coming in, in this quarter and more towards the tail end. And since we made a decision to not try to disrupt our retailers in their heavy period during the holiday period as we're getting the kiosks finalized, the things will just move out into Q1 and Q2. So it wasn't a huge impact from the drag on coffee.

John Kraft - D.A. Davidson & Co., Research Division

Okay. And then if I could drill down a little farther in the deal with Warner. It sounds like it's crossing a bunch of boundaries here. Are you going to have content available in the kiosk at the same time it's going to be opened up for VOD with them? Or is there going to be sort of the first few months is going to be in the kiosk, then it's going to be VOD, and then after that, it may be SVOD?

Paul D. Davis

Well, so we negotiate those separately. So the Verizon or the JV team actually leads the negotiation on the digital stuff. So relative to the -- our physical content, we are -- we'll transition, and we'll -- by the first of the year, we'll be at the 28-day delay. And then relative to the -- it will be the normal windows on the digital.

J. Scott Di Valerio

Yes. I mean, the -- we won't get into great detail at this point other than what's been put out on the press release around the Warner deal with Redbox Instant. But it's -- we're pleased to be able to get access to the content for the normal streaming. And we'll talk more about what the other offerings will be when we go public. But again, the deals -- as Paul said, the deals are negotiated separately, right, 2 different teams -- and actually 2 different teams within Warner. So I think this was intuitive in some ways that the deals got done or were able to be announced simultaneously.

John Kraft - D.A. Davidson & Co., Research Division

I was just really worried about or wondering whether or not there was going to be an overlap there.

Paul D. Davis

No.

John Kraft - D.A. Davidson & Co., Research Division

And then just lastly on the Warner, if I could. The pricing with the new deal for the 28, the purchasing price for the release or that -- and the structure, is that pretty similar to what you had before with them?

J. Scott Di Valerio

Yes, it's pretty similar to what we had with them before. And so we're pleased to be able to have that deal and get access to some deeper content across the Warner platform. And it's good that we were able to do well and to work around and then come to an agreement that made sense for both parties.

Operator

Our next question comes from Paul Coster from JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

My first question is did you trim CapEx for the remainder of the year relative to the prior guidance?

J. Scott Di Valerio

Yes, we did. Yes, we did. We took it down about $45 million, Paul. Some of that is because we -- the Canadian rollout kiosks were a little less expensive than what we expected. And we also took down because coffee kiosks are rolling out or moving out into 2013. And a few other areas in the corporate side of systems and things, we just refined that. So we took down corporate CapEx by about $45 million, which is driving the increase, the majority of the increase, in the free cash flow estimates for the fourth quarter through the rest of the year.

Paul Coster - JP Morgan Chase & Co, Research Division

And in today's prepared remarks, you referred to some external studies that suggest that physical media is around for long term. It may even start growing again. And it seems to align with some of your own internal analyses. I'm not sure I understand where this is coming from. Can you just sort of explain why you think that the physical rental market is experiencing a temporary decline?

Paul D. Davis

Yes, what we're referencing in our prepared remarks was a study recently released by the Entertainment Merchants Association. And they do source -- they make reference to it in a number of sources where they pool these studies together. But when they look at it, in the home video entertainment space, the size of that category in 2011 was right at $18 billion. And physical media, so think about sell-through and rentals, made up about 81% of that, or $14.6 billion. And the space that we compete in is a subset of that, obviously, and that's just under $6 billion. It's -- they peg it at $5.7 billion. And they said that -- their projection that there would be a trough, this would be the year of the trough, it'd be as low as it gets. And they actually project that what is $5.7 billion will grow to $6 billion by 2016. And so we believe that given the price point that we compete at, the presence that we have, our footprint across the U.S., that it's going to be a very viable, long-term business, and we're very bullish on the space. And we also -- regardless of the numbers, and you can draw your own conclusions on what you think the numbers will be, and this is a -- and this study said it'll grow to $6 billion, we believe that our share of what is today on a unit basis, call it 40%, can grow to 60% to 80%. We think that we will continue just given our competitive positioning, that we're well positioned to continue to grow share in that category.

J. Scott Di Valerio

Yes. So Paul, I think one of the things in the report, the reason why there is a trough is in '12 down to about $5.5 billion is because it's -- the market is kind of consuming or absorbing the closure of the brick-and-mortar, higher-dollar rental brick-and-mortar stores that have happened over the past couple of years, where they see the rental market beginning to grow back up in revenue out over the next 5 years. There's a number of things. As more people shift into the kiosk business, though, it's lower cost. You're getting more rentals. But also, as Blu-ray penetration gets larger and larger, it's a higher-dollar rental. And that's where they see the -- a big chunk of the growth coming in, as Blu-ray becomes more and more prevalent as the choice -- rental of choice.

Paul Coster - JP Morgan Chase & Co, Research Division

So, I mean, the point is that basically, it's a supply-side problem at the moment, and it's a supply-side problem that you address. And so the implication, which is pretty important, is that you believe you're in growth mode for the foreseeable future for years to come. Would that be a fair statement since this projection is through 2016?

Paul D. Davis

Yes, the answer is yes. And it's not necessarily by thousands and thousands of more kiosks. We think instead it could be around how do we get more out of the existing footprint. We're in a really good spot. We're going to focus -- our continued expansion will be primarily on the NCR swap-outs. So we'll get the right locations and put the Redbox kiosks in those top-performing stores, if you will. Secondarily, we'll focus on the dollar channel, and then we'll continue our expansion into Canada. And then we'll start to likely slowdown. We'll look really long and hard about how many more kiosks do we want to add. But when we look at this category and just the -- how close we are to such a high percentage of the U.S. population, and given our price advantage versus all the other options, we think we'll continue to grow share and be in a growth mode.

Operator

Our next question comes from Corey Barrett from Pacific Crest Securities.

Corey Barrett

First, I saw the couple of slides outlining the impact of the Olympics and the content on the quarter. I was hoping you could just provide some color on what transaction volume looked like during the periods that were more normal relative to the previous quarter?

J. Scott Di Valerio

Well, I think that as we talked about and as we went through 9 weeks of very low content around the shoulders of that, it took us -- it's taken us a while to get that frequency back. What we -- what we're pleased about is that our number of unique credit cards grew and -- which means that we maintained our customers and growing our customers that are transacting with the kiosks. But they're not transacting -- renting as many disks or renting as frequently as they had in the past. So we certainly have seen, particularly coming out of that 9-week time period -- have not seen the recovery in the normal pattern that we have seen in previous periods. So we have not had 9-weeks periods where we have light content, nor have we had 9 -- an extended period of time where we had really light content in a period that is traditionally a very high or if not one of the highest rental periods for us, which is the July and beginning of August time frame, during the holidays. So there's no -- one of the things I know about this business, there's no normal. But we certainly haven't seen a V-shaped recovery that we typically have seen. It's more in the U. But with what we're -- the strategy we're deploying, with additional content, we have the marketing programs, the national marketing programs, we feel confident that we'll build that frequency back as we move through Q4 and into Q1.

Corey Barrett

And how actively are you able to adjust your purchasing to maintain disk turns during slower periods?

Paul D. Davis

We do have the flexibility to do that, and we do it on a real-time basis. So that's not an issue for us. Scott mentioned in Q4 we're buying a bit more aggressive because we think it's really important to get the momentum back in the business. And a lot of that is driven by a good quantity of new, high-quality movies, which we'll start to see on the tail end in Q4. But if we hit soft periods, we have good visibility. I mean, we've been in the business 10 years, so we're able to buy quarterly.

J. Scott Di Valerio

I mean, one of the things to that effect, Corey, is in the third quarter, we saw that we were -- we had about 23% less titles. We have also made an assessment on the quality of the titles and the timing that's coming in. And we ended up buying about 34% less -- between 32% to 34% less content in Q3 than we did the previous quarter in Q3 because we just didn't see it there. And that's one of the ways that we can impact that, which is why our margins were in pretty good shape for Redbox this quarter.

Corey Barrett

And then lastly, can you provide any more detail on time line expectations for cash contributions in the JV?

J. Scott Di Valerio

We did make a contribution this quarter, in Q3, of about $10.5 million. And I think you can see from the losses that we're being pretty -- the JV has done a good job of managing as it drives toward launch and public launch. But we may have to make another capital investment sometime in the fourth quarter. But again, that's still up in the air. And if it is, it will be a relatively small one.

Operator

Our next question comes from Eric Wold from B. Riley.

Eric Wold - B. Riley & Co., LLC, Research Division

One follow-up question on an earlier question and another one after that. On the Warner deal, I know you mentioned that it's similar to what was in place. The deal expired in January of this year. Can you give a sense, kind of on an apples-to-apples basis, for content flowing through Warner under the workaround and under this new deal, what we should think about in terms of revenue and contribution margins?

J. Scott Di Valerio

Yes, I mean, I think that we typically don't give out what we expect revenue from each of the studio deals. Clearly, we will have -- in a bit, we'll have more copy depth than we have under -- when we're doing the workaround in the large titles, even that’s 28-day, and we have access to a broader set of product from Warner Bros. The margin for the 28-day -- because we are so efficient and effective with the workaround, the margin is actually lower on a percentage basis than it will be under the 28-day, but the margin dollars will be higher. So we'll have both a bit of a revenue lift and a margin dollar lift as a result of us transitioning into the 28-day, though, again, we're transitioning into a -- in this quarter, we've already had a few -- we've had 5 workaround titles in the quarter between Disney and Warner Bros., and we'll be transitioning a few of the Warner titles in as we get through the quarter.

Paul D. Davis

Okay, Eric, in the -- so another way of saying it is we're -- most -- all of the revenue lift we'll realize next year. It'll be minimal this quarter as a result.

J. Scott Di Valerio

And we factored that into our guidance.

Eric Wold - B. Riley & Co., LLC, Research Division

Okay. And then my last question. On the Blockbuster kiosks underperforming, maybe walk through the decision on replacing versus removing some of these kiosks. And has something changed from when you took these over in terms of locations you thought may be replaceable are now being removed? Or why weren't some of these kiosks removed prior to the closing of the deal? And then lastly, a second part of that, the $0.19 impact you have in Q4, when you initially gave guidance after the deal closed on the last quarter call, how much of an impact were you looking for in this quarter from those kiosks? Is that -- what's the magnitude of difference between what you thought initially and what you’re -- the $0.19 now?

J. Scott Di Valerio

I'll answer the EPS side and then let Paul take the other part. But between Q3 and Q4, we'll have -- we're indicating roughly about a $0.35, $0.36 impact on EPS from the NCR acquisition. When we talked about the deal on our call at the end of the second quarter, we talked about a $0.40 to $0.50 drag on EPS. So it's a little bit lower than what we had originally anticipated. That's for a couple of reasons. We have accelerated some of the deinstalls or the -- taking them out and replacing -- not replacing the kiosks. As we went through the quarter, we've been able to do the ones a little quicker. We've been more efficient at the Publix and Safeway rollout. So taking the blue kiosks out and replacing the Redbox kiosks. And so we're a little ahead there. And third, there was a -- as we looked at the accounting and worked through some of the accounting, some of the installation costs that we originally thought we would have to expense are being capitalized as part of the replacement. So that's taken some of the pressure off of that. So it's a bit -- it's going to be about $0.35 for the year versus the $0.40 to $0.50 that we had originally thought.

Paul D. Davis

Yes, and just to add a bit more color to this, I mean, we're at -- we started at 6,200. We'll end the year at around 2,000. I think Scott said between 1,900 and 2,100 kiosks. The major focus is we want to get Publix and Safeway set. And then across the rest of the network, so the delta between 6,000 and 2,000, if you will, are -- a big chunk of that are with Publix and Safeway. And then you also have a number of banners that we took over and we're doing pilot tests. Because in some cases, they might have put the Blockbuster Express kiosks inside the location where ideally, it should be outside. So we're going to measure the traffic. We're going to see if on a pilot basis with the Redbox kiosks it works and it's sold, then we would agree to the parameters that would be a win-win for both retailer and us. That takes a bit of time. There are some locations that are obvious that we don't think even with a better location, even with our Redbox, that we can get it to the right spot. And that's the focus of the deinstalls that Scott talked about.

J. Scott Di Valerio

What I will say is the Redbox that we have replaced the blue kiosks with have performed as we expected with the ramp rates that we expected them to have. And we're pleased about that. And some of the underperformance on the blue kiosks could be attributed to the fact that they're in locations where we've -- close locations where we’ve replaced Redbox kiosks and people are utilizing those more. And we also -- as we indicated, 2 weeks before they get replaced or pulled out of the market, they're in return-only mode. And I think that's -- the impact of that we probably might have -- maybe underestimated the impact of that as we originally set up. But all in all, we're moving very quickly to take out the kiosks that we don't -- we're not going to replace, and we're being very structured around making sure where we're going to put new Redbox kiosks in as replacements, that they're hitting their hurdle rates, that -- hit and exceeding or hitting the hurdle rates that we set up for the original Redbox business.

Paul D. Davis

Yes. And in those markets, so if you think about the Southeast and Publix, we measure new credit cards, so customers that we've never had before. And in the case of Publix, we're seeing rates that are much, much higher than typically when we go into a market, which is a very good, healthy sign that it was a terrific acquisition and getting us into pockets that we really could we'll really benefit from. Not just seeing it with Publix; also seeing it with Safeway.

Eric Wold - B. Riley & Co., LLC, Research Division

That's great. And I apologize...

J. Scott Di Valerio

We're getting twice the number of new -- percentage of new customers coming into the kiosks, which is great.

Paul D. Davis

That's great news, yes.

Eric Wold - B. Riley & Co., LLC, Research Division

If I may, just a real quick follow-up on that. Any updated thoughts on what you may do with those blue kiosks as you -- after you pull them out?

Paul D. Davis

Yes, we have a small team that's focused on re-purposing those kiosks. We're focusing international, in markets that we don't plan on extending out the Redbox brand in. And in those markets, we will do direct sales to folks that are in or want to be in the DVD rental business. And some of the other international locations where it may make sense for us to extend the brand or potentially with the studio areas where some of those studios may -- would like to have a low-cost rental option there because they're not making a hit on legal sales. We might partner in [indiscernible] a variety of different options that we're looking at. We're pleased with the progress on both fronts. And so we're feeling pretty good about being able to re-purpose those.

Operator

[Operator Instructions] And our next question comes from Ronald Bookbinder from The Benchmark.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

On the gross margin on Redbox, it seems like it was the highest it's been since Q1 of 2008. That was purely from the workaround and the lower amount of new content. Is that correct?

J. Scott Di Valerio

Yes, we -- when we take a look, we were really -- as we looked at the content and the availability of content and what was the nature of the content coming into kiosks during that time period in the summer, we really did do more optimization toward margin than revenue because we didn't think the revenue was going to pull through. So that was one. And the workaround titles certainly did help the margins a little bit as well. So those things are the main factors as we went through.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

So with the new Warner Bros. contract and the purchase volumes that are in that contract, should we be expecting gross margin at Redbox to go back to a 2010 level? Or how should we be thinking about that?

J. Scott Di Valerio

Well, margins are always going to fluctuate a bit quarter-to-quarter depending on the release schedules and the allocation between day-and-date studios and 28-day studios and the like and then how deep do we want to buy based off of how the content is coming in. So margins tend to fluctuate a point or 2 across the different quarters. And so it's hard to go back and say, "Well, it's going to be like 2010." What I will tell you is we're pleased with the deal we have with Warner. It gives us access to deeper content across their variety of platforms. The margin percentage will be lower than what we experienced under the workaround, but the margin dollars will certainly be higher. But again, the deal is kind of structured more in tune with what we had previously. And so there could be some settle into margins maybe back to more normal terms when we had a 28-day deal with them. But we do buy in different allocations based off of how the content is coming out between the day-and-date and the 28-day studios. So it's really hard to say there's a normal because there isn't a normal release schedule necessarily each and every quarter.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Okay. And on the tickets, is Ticketmaster pushing back on the events that are listed with Redbox?

Paul D. Davis

Yes, there's not as much overlap as you might think between what Ticketmaster offers and then what we are offering. There is so many events out there that are still available. I mean, on occasion, there might be some overlap. But this is all about hyper-local. It's about thinking about the kiosk, the Redbox kiosk, as being --defining entertainment versus just movies. It's a terrific service fee of $1. And we're in the early days in the test in Philadelphia. It's all about getting the right content, driving awareness and getting consumer adoption. But we're excited about the possibilities. But we'll be able to tell a lot more as we start to expand beyond Philly.

J. Scott Di Valerio

And I think one of the things that's probably not well known is 30% to 40% of event tickets go unsold across the stack. And so while we're focusing on hyper-local and we also can focus on that 30% to 40% that typically goes unsold because of lack of awareness, people don't know about it, which gets back to that hyper-local. And so there's lots of opportunities there to work through that and build that out. And so I don't think we're in the head-to-head battle that people want to try to put us through.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Well, I'm -- there was a theme on Carrie Underwood in Philadelphia that Ticketmaster, while they carry all of her other concerts, wasn't carrying the Philadelphia one. But also, your $1 fee compared to approximate $20 fee is an incredible value that you could end up going head-to-head down the road. Is that a possibility?

Paul D. Davis

Well, anything is possible. We think there's so much business out there that there's a great way to coexist. The brand is all about value, simplicity and convenience. And I think Ticketmaster, of the entertainment universe, represents about a 10% share of it. So it just gives you a feel for there's a lot of inventory out there that the event or the content providers really want to work with us to take advantage of the access that we have to consumers.

Operator

Our next question comes from Steven Frankel from Dougherty.

Steven B. Frankel - Dougherty & Company LLC, Research Division

First, could you clarify for me on Redbox Instant? Are you launching just public beta this year? Or will the service be up and running and fully available to all consumers by the end of this year?

Paul D. Davis

Yes, we are -- we'll be in the public -- I mean, right now, it's going to a public beta, and then we're evaluating that. As we get closer, that call will be made. But for sure, it's going to be in the public domain and we'll -- customers will have access and be able to start to look at what's available.

Steven B. Frankel - Dougherty & Company LLC, Research Division

The negative trend in rentals per kiosk, do you think that starts to turn and go positive next year or in Q1? Or it will take longer than that to get the frequency up and to drive growth per kiosk?

J. Scott Di Valerio

We're seeing growth from a revenue perspective per kiosk as we -- certainly as we move through the process. As we talked about in the past, with the price increase, we did have a demand decline. But net-net, the overall revenue per kiosk was increasing, and we see that continuing as we move through. Our revenue will, at the midpoint, will grow 11% when we're lapping the price increase in Q4. So we feel pretty good about that. And one of the key things, I think, to keep in mind is -- and we talked about this, we have our hurdle rate that each of the kiosks have to exceed, meet or exceed in order to be able to be planted. And so that hurdle rate really takes into account a whole number of things, including productivity at the kiosk. And we can drive a lot of business and revenue growth and bottom line growth and cash flow in this business for quite some time with the -- even at the rates that we're at today. So we do expect to see comps which were in the single digits to be in the high single digits in Q4, and we'll continue to look to drive those up as we move into '13.

Operator

[Operator Instructions] And our next question comes from Steve Dyer from Craig-Hallum.

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

One question on Redbox and then I'll move to something else. Can you quantify maybe the impact of the copy depths in Q4, just increasing that? Are you able to quantify that?

Paul D. Davis

Relative to the Warner additional contract? Or what are you specifically asking?

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

No, just in general, the buying additional content in Q4, which, I think is -- there's going to be an impact there. And then maybe a follow-up on that would be I think it was last year, Q4, you had overbought and maybe kind of misjudged demand on some of the titles. And is there confidence there that you can overbuy, I guess, or buy a lot of where you'll see demand?

J. Scott Di Valerio

Yes, I think -- well, I think you're referencing back 2 years ago to 2010, the Q4 2010. In that situation, Steve, we actually did not know that we overbought without insight into where the rentals were coming from, and that was one of those operational misses that we had. However, based off the models -- and we've refined our models and done a lot of work along that, which, I think, has been evident as we move through 2011 and 2012 -- what we're doing is a very targeted, structured, additional buy in order to drive frequency back within -- in our business as opposed to just kind of buying out at a real deep level and hoping they come. So we're pretty structured and pointed on that based off of our -- the various different models that we're running. So we feel pretty confident in the guidance that we've given that the rentals will return at that level and also begin to build and help us out as we move into Q3. Quantifying the actual dollars and things is not something that we'll do, but we do have -- they are incorporated in there, and we do feel confident in the numbers where we are. The thing that we've always talked about on this business, if we get a half return or an x return out of these things than what we were expecting, it has a high impact both on top line and bottom line. And so we're working hard to see if we can’t get that x return, but we're very confident where we're at in our guidance and as it relates to how we're buying this quarter.

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

Okay. And then just jumping over to coffee. I think you had said that the rollout was maybe happening a little bit slower. Some got pushed into next year. Could you -- is there a reason why in particular? Or anything you can share?

Paul D. Davis

Yes, we're not concerned. The consumer proposition with coffee, with Rubi, we have that figured out. The sell-in with the retailers has been great. As we've -- we were working through some production issues just to get it ready for the big-time scaling. And as we were doing the final tweaking, we started inching up on the blackout windows of the retailers. Retailers typically will shut down kiosk additions during -- around Thanksgiving and some of them as much as 2 or 3 weeks in December. So given all of that, being respectful of our retail partners, we will get some additional kiosks in the market for sure, and then we'll really start to hit the gas in Q1 next year.

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

Okay. And I know -- I think it was maybe at your Analyst Day you gave some metrics just on some revenue that you were doing an average on the kiosks out there. Are there any additional, whether it's ROIC or profitability metrics on kind of some of your early kiosks, that you can share?

Paul D. Davis

Well, in general, the numbers that we shared at the Analyst Day on coffee, we're still sticking to those. So if you think about -- was it $11,000?

J. Scott Di Valerio

$11,000 to $12,000.

Paul D. Davis

$11,000 to $12,000 on an annual revenue basis per kiosks, the cost of the kiosks, we're working hard to get that much lower than some of our other businesses. So what you'll end up with is a business that's got a really nice margin and a great internal rate of return. But now, it's just a matter of getting them into the marketplace, and our plans are to have a few thousand into the market next year.

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

Okay. And then the last question. With respect to the CapEx, the lower CapEx number for this year, how much of that $45 million is simply deferred until a later period versus for whatever reason, you're more efficient, you don't need it, it's gone, period?

Paul D. Davis

I would say we've really streamlined what we're doing from a CapEx perspective as you look into Q4. So a big chunk of it is because we are able to put kiosks up in Canada at a lower cost, as well as some of the costs that we mix in the Redbox kiosks here in the U.S. The piece that did push out relates to the coffee kiosks ramp. And certainly, that'll move into next year. From a -- the other enterprise work, it's not a push. It's just a refinement of what our CapEx requirements will be for Q4. As we look out into '13 -- I think Paul alluded to this fact is you know, we're going to be focused in the Redbox business and finishing out the rollout for the NCR replacements as well as taking those out. We're going to focus on finishing out the dollar channel and our Canadian launch. And then we'll be, after that, be very judicious about where we put Redbox kiosks. But we're also shifting our focus from it being primarily Redbox kiosks being out the door to our new ventures in coffee in particular. So we expect that CapEx, as we look out into '13, to be a bit lower than what it is in '12. But we certainly will provide more information around that as we roll into our February call.

Operator

Thank you. That was our last question. Now I would like to turn the call back over to Paul Davis.

Paul D. Davis

Yes, thank you. And I appreciate everyone's time and attention and the terrific questions, and we look forward to talking to each of you in the near future. So thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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