Coinstar, Inc. Q2 2008 Earnings Call Transcript

Sep.15.08 | About: Outerwall Inc. (OUTR)

Coinstar, Inc. (CSTR) Q2 2008 Earnings Call July 31, 2008 5:00 PM ET

Executives

Brian Turner – Chief Financial Officer

Dave W. Cole – Chief Executive Officer

Paul Davis – Chief Operating Officer

Analysts

John Craft – D.A. Davidson

Ali Mogharabi – B. Riley & Company

Simeon Gutman – Goldman Sachs

T. C. Robillard – Banc of America Securities

Bob Evans – Craig-Hallum

Alan Robinson – RBC

Operator

Welcome to the Coinstar Inc. second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Brian Turner, Chief Financial Officer of Coinstar.

Brian Turner

Thank you for joining us today to discuss our results for the second quarter ended June 30, 2008. With me on the call today is Dave Cole, our CEO, and Paul Davis, our COO.

Before we get started 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.

Additionally, all financial information provided for Redbox is un-audited. Actual results may differ materially from expectations, plans, and prospects contemplated in these forward-looking statements as a result of various factors including those discussed in our previous 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, pro forma revenues and EBITDA, and adjusted earnings per share on a historical and forward-looking basis during this conference call. These are non-GAAP financial measures under Regulation G. Definitions of these non-GAAP financial measures, the importance of these measures to investors, and reconciliation’s of these measures to the most directly comparable GAAP measures can be found in today’s earnings release and related slides which are posted in the About Us/Investor Relations section of Coinstar’s website at www.coinstar.com.

A replay of this web cast will also be available on the About Us/Investor Relations section of our website. Let me also note that 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 accompanied PowerPoint slides so that you may follow along with us.

Let me now turn the call over to our CEO, Dave Cole.

Dave W. Cole

As I look at the second quarter three factors rise to the top: oil prices and the affect on consumer confidence; the conclusion of our proxy contests and other unique events; and the continued transition of our business at Walmart to include a broader representation of our 4th Wall products and services.

As shown in Chart 1, excluding proxy and other unique events, our 4th Wall bundle performed well in a tough economy. And combined with our first quarter, the first half of 2008 has been very gratifying. Coin performed well over the first six months, although we did see some softness in the second quarter. Money Transfer continued to show progress. And the DVD investments performed exceptionally well, capping six months of better than expected results. Entertainment, however, continues to face challenges and broadly speaking, we are in a tough retail environment with changing consumer behavior and traffic patterns.

All of these issues affected our business, however, the largest factor is the importance and relevance of our balanced portfolio of products and services that deliver convenience and value for consumers, traffic and profit growth for our retailers, and value to our shareholders. That is the long-term, over-riding value we are creating.

Now let’s get to specifics. First, oil prices. As shown in Chart 2, oil prices have increased significantly over prior years and have seen dramatic increases over the past six months. Over all oil-related expenses are approximately 2% to 2.5% of total Coin and entertainment revenues. And we calculate that for every five dollar increase in the cost per barrel we have experienced an extra $250,000 in our quarterly cost structure.

For the second quarter this increase represented approximately $1.0 million in unanticipated expenses, or $0.02 per diluted share. In my opinion, however, the larger effect of increasing oil prices and other macro economic factors, such as the credit tightening and the housing slump is seen in consumer confidence as measured by the conference board, which as Chart 3 suggests, is hovering around a 16-year low.

Our research indicates that this has had a direct effect on the number of consumer visits to retailers, resulting in fewer impulse entertainment sales, less coin being generated in the economy, and less money being spent abroad. And fewer gift cards being sold.

Conversely, I believe current economic conditions benefit the counter-cyclical DVD business, which at $1.00 per night, is the best value in DVD rental without an additional stop. Therefore, we were not surprised that our DVD business did exceedingly well in the second quarter while other business lines experienced downward pressures.

Although oil prices have abated somewhat in recent weeks, we do anticipate that they will decline further in the fall. Prices will continue to remain higher than we anticipated therefore we expect continued downward EBITDA pressure throughout 2008.

The second issue affecting the quarter’s results was the proxy contest and other unique expenses. As reflected in Chart 4, in the second quarter we settled the proxy contest, which resulted in the addition of one Shamrock representative to our Board of Directors and one additional independent director to be added by March 1, 2009. After-tax expenses related to the proxy contest totaled $2.1 million, or $0.07 per diluted share.

We also settled two income law suits during the quarter. One stemmed from our Omega joint venture that focused on CVS’s ePay business. The second related to an old royalty arrangement in which we paid royalties on certain ePay transactions to Datawave, an InComm sub.

Both were settled extinguishing all past and future obligations. The net, after attorney’s fees was an after-tax settlement from InComm to Coinstar of approximately $1.0 million, or $0.03 per diluted share.

Next, we wrote off certain in-process due diligence legal and other fees in connection with acquisitions that were being considered in the first quarter where discussions have now been terminated. Acquisition fees written off after tax were about $500,000, or approximately $0.02 per diluted share.

Our guidance for the second quarter was earnings per share of $0.08 to $0.15 before proxy expenses. Netting out the proxy expenses and other unique items, our EPS is $0.15, which is at the top end of our second quarter earnings estimate range.

Third, the transition of the Walmart bundle. The first transition step was the de-installation of entertainment machines, which we completed on schedule. Walmart subsequently re-evaluated certain locations, which has resulted in Coinstar being re-installed in approximately 150 more stores with entertainment machines than we had anticipated at the beginning of the year.

Second, the installation of Redbox units is right on schedule with over 1,700 being installed in Walmarts to date. Coin installations are also on track and the good news there is Walmart has once again increased the total number of stores for Coin installations, adding 600 more. These extra stores will be added resulting in total penetration of 3,200, up from the 2,600 we had expected earlier this year. Walmart has approved all U.S. stores for Coin and Redbox installation.

So, despite these moving parts, we still expect total completion of the Walmart launch by mid-2009. Clearly, our relationship with Walmart is growing and we believe our future prospects are very encouraging as we create value for their customers and increase foot traffic, spending power, and profits for Walmart.

With that, I will turn the call over to Brian.

Brian Turner

For the second quarter, turning to Chart 5, Coinstar generated $218.9 million in revenue. We generated EBITDA of $37.9 million. Our GAAP fully-diluted, fully-taxed earnings per share was $0.09.

Revenue for the quarter totaled $219.9 million. As reflected in Chart 6, revenue was comprised of $64.5 million from Coin, $35.8 million from Entertainments, $23.8 million from Money Transfer, $5.8 million from ePay, and $90.0 million from our DVD Kiosk businesses.

EBITDA for the second quarter totaled $37.9 million, our highest ever for a second quarter. As we 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. So in that spirit, as shown in Chart 7, Coin and Entertainment EBITDA was $17.4 million. ePay, including Money Transfer, at about $500,000 and DVD EBITDA was about $20.0 million.

Looking at each business, revenues in greater detail, Coin revenue was $64.5 million compared to $62.4 million a year ago. This reflects a trailing 12-month revenue growth rate of 7.5%, which was driven by two factors: net new installation and same store sales over the past 12 months. As reflected in Chart 9, installs for the quarter were strong with 1,000 net placements. This was primarily due to Walmart along with Roundy’s, Food Basics, and Tessco. This brings our total for the first six months to 1,100 net installs.

Same store sale comps were negative in the second quarter. As shown in Chart 10, this was partly due to the large number of installations over the past 12 months, which we believe caused a cannibalization effect of approximately (1)%. However, in analyzing the data, we find approximately 4x the negative effect from less coin generated in the overall economy.

To that point, we noted an increasing negative effect in May and June of 2008 as gas prices soared past $4.00. We believe high gas prices continue to impact consumer shopping patterns in such a way that they are making fewer trips to the retailers and spending less. This obviously results in less change generated to be turned into our Coinstar units.

Anecdotally, the Fed saw a 9% drop in retail coin orders in May, which independently seems to verify what we’re seeing on the ground. We would anticipate that this would continue throughout 2008 but as oil prices decline, or the consumer adapts to the new, higher prices, we believe this effect may abate.

Moving to Money Transfer revenues in Chart 11, with our acquisition of GroupEx in January 2008 we now have over 36,000 agents in over 140 countries. On a pro forma basis transactions were up 25% for the second quarter and the average transaction was roughly $590, up from $485 dollars last year at this time. As shown in the lower right-hand portion of Chart 11, as transactions and revenues have increased, the cost per transaction has declined. Based upon these trends, we continue to believe that by driving increased volume across our fixed costs we will achieve profitability.

Moving to ePay revenues, as reflected in Chart 12, of the $240.0 million in face value sold year-to-date, $120.0 million was sold in the second quarter, resulting in revenues of Coinstar of $5.8 million, an 11.5% year-over-year increase.

Shifting to DVD revenue, as reflected in Chart 13, second quarter revenues increased approximately 200% to $90.0 million. These results were driven by approximately 1,700 net installs in retailers like Walmart, Giant Eagle, Super Value, and 7-11. This comes on the heels of 900 net installations in the first quarter.

Our pre-tax income from the DVD business was $6.2 million for the period and we were certainly pleased with these results. Factors driving success in the second quarter, and thus far in 2008, are solid unit economics, strong movie titles, and the counter-cyclical nature of DVD rentals to the economy.

Beyond these statistics, we are going to reserve further comment on Redbox, which is a significant part of our DVD business. As you know, Redbox has publicly announced the pursuit of an IPO so we will respect the SEC rules concerning the dissemination of information to the market place.

Turning to Entertainment, revenues totaled $35.8 million for the second quarter, or 16.3% of our consolidated sales. This compares with $61.0 million, or approximately 44% in the prior year’s quarter.

Since December 31, you will notice that cranes, bulkheads, and other equipment installed decreased from 280,000 to 160,000 units at the end of June. The decrease reflects the de-installation of machines from Walmart and de-installations from lower performing accounts. As you recall, we mentioned we would be de-installing unprofitable machines along with our planned de-installation of Walmart machines. These two factors accounted for approximately 60% of the decrease in Entertainment revenues in the quarter.

Additionally, much like the overall trend in 2007, macro-economic trends affected performance, which accounted for the remainder of the decline.

Stepping back, excluding entertainment, on aggregate Coinstar installed 5,100 machines across all product lines in the first six months. This is a record installation period for the company.

Moving to expenses, as a percentage of revenue, direct operating expenses for the second quarter increased to 69.1%. This was primarily due to the inclusion of Redbox which runs at a higher direct operating cost percentage than our legacy businesses.

We also saw rising freight and handling costs from China, along with extra coin transportation and handling charges due to the dramatic increases in fuel prices. Together these expenses represented an unfavorable $1.0 million variance from our budget in the second quarter.

General and administrative expenses increased as a percentage of revenue to 10.4% from 9.8% in the prior year period. This increase was primarily due to Money Transfer, which runs at a higher G&A percentage than other lines of business due to anti-money laundering and regulatory compliance costs.

Depreciation and other for the second quarter totaled $18.9 million versus $14.5 million in the second quarter of 2007. The increase was primarily due to the installation of 1,900 Coin units and 4,800 DVD units in 2007.

Moving to interest expense, during the second quarter our average interest rate was 4.39%, or LIBOR plus 1.25%. This compares to our expected interest rate for the second quarter which was approximately 4% to 4.5%, right in line.

Moving to taxes, our effective tax rate in the second quarter was 49.1% which also was right in line with our expectations.

At the net income line for the second quarter we reported $2.7 million, or $0.09 GAAP earnings per fully-taxed, fully-diluted share. Excluding the non-cash and unique charges detailed in our earnings release, Coinstar reported adjusted, fully-taxed, fully-diluted earnings per share of $0.23, or $6.5 million, for the period. This is illustrated in Chart 14 along with all the unique items I mentioned earlier.

With respect to CapEx for Q2, which is reflected in Chart 15, the company spent $25.5 million of which the majority was for new Coin, DVD Express, and coffee units.

Before I turn the call back to Dave I would like to comment on full-year 2008 guidance. Starting with guidance for 2008 as shown in Charts 16-19, our revenue guidance of $850.0 million to $900.0 million is unchanged. Our consolidated EBITDA guidance of $135.0 million to $145.0 million remains unchanged. Our annual tax rate guidance of 50% to 52% remains unchanged. Our CapEx guidance of $70.0 million to $80.0 million remains unchanged.

Now let’s turn to specific guidance for the third quarter of 2008. Upon the assumption that the general economy will continue to see pressure from oil prices, the credit crisis, and the housing slump, management estimates that revenue for the third quarter ending September 30, 2008, will range from $240.0 million to $250.0 million with GAAP earnings for fully-taxed, fully-diluted share ranging from $0.11 to $0.17.

I will now turn the call back to Dave for closing remarks.

Dave W. Cole

To summarize, our fourth-wall-product bundle is even more important and relevant to busy cost-focused consumers and retailers struggling with soft comps, less foot traffic, and a squeeze on margins. Our ability to sell and execute our portfolio has made us a leader in the space. And in a tough economy we see even more demand for a bundled, managed approach to help maximize store traffic and profitability.

In that spirit, we have a great opportunity to increase our market share by adding new customers and upselling additional profit generating products to our entire customer base. And our results prove that is happening.

Since the beginning of 2008, as reflected in Chart 20, we have seen significant selling success. Coin, Tessco, a world-leading retailer rolled out Coin units in 31 stores in Ireland, which is on top of the 300 stores installed in the U.K. in 2007. And we were pleased that this launch extended our Coin processing technology to the Euro coin set.

Sweet Bay and two of their divisions added eCert to their coin units. All Stop ‘N Shop and Giant of Maryland Coin units were upgraded with coin-to-card products bringing 644 coin-to-card upgrades across all retailers. Premier West Bank was rolled out with Coin. Loblaw’s, a leading Canadian retailer, is launching Coin in Quebec under the Provigo and other Loblaw’s banners. Metro Food Basics, a part of A&P, is expanding Coin into 72 locations. Roundy’s signed a multi-year contract, including adding 70 more Coin locations.

In financial institutions we signed Coin agreements with nine banks, including RBC Centura, a division of the Royal Bank of Canada. Harrah’s, a leading casino operator, installed Coin units under a pilot agreement.

In DVD we installed over 2,600 DVD kiosks in the first half. We rolled out the first pilot kiosk in the UK with Tessco. We signed a contract to initially install over 2,000 kiosks in Walgreens, of which approximately 250 have already been installed. We signed pilots or roll-out agreements with 15 new convenience store chains that have over 10,000 potential locations in total, some of which may not be viable for DVD kiosks.

We have DVD kiosks installed in over 9,000 locations at June 30, with recent install activity with Raley’s, Price Chopper, Super Value, and Save Mart. Giant Eagle, High V, Food Lion, Roundy’s, D’Agistino’s , Harris Teeter’s, Lowe’s Foods, Love’s Travel Centers, Marks, Topps, Buehlers, and Shop Rite. Ingle’s, John’s Market, Constantino’s, Food Circus, Gurland’s, Penn Traffic, Winn Dixie, Royal Farms, Hugo’s, Fiesta Marts, Foodland, Pueblo, K-Mart, Hagan’s, Brookshire Brothers, Manyard’s, and King Cullen.

In Coffee, we continue running our pilot with 85 machines in eight markets. Based on earlier results, we are now expanding the pilot to include another 50 locations.

In ePay we will be installing in the majority of Travel Centers of America locations. In the second quarter we installed our ePay products in more than 850 S-Express stores in 11 states. Also in ePay we have added 11 new cards to our largest account, Walgreens, for their mid-year plan-o-gram changes.

And we continue to expand our product relationships in the U.K. Gift Card mall program with a wider variety of cards distributed in almost 3,400 stores, including Clinton Cards, W. H. Smith, and Somerfield’s. Locations have increased 30% in just the last six months.

In Entertainment, Meiers, with super centers throughout the Midwest, entered into a multi-year contract renewal covering approximately 180 locations.

All these success prove our product portfolio, sales force, marketing effort, and service have all really come together in the last 12 months. So in closing, we think we are ideally suited for the current environment because the retail community, more than ever, needs to monetize under-utilized space and create incremental consumer traffic. It’s that simple.

We will be able to capitalize due to our market leadership, our ability to manage an optimal product mix for our customers and our financial strength. So with that, we will open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from John Craft with D.A. Davidson.

John Craft – D.A. Davidson

Nice work with the Walmart rollout. It sounds like things are going very smooth there. And I guess my question is what is the mechanism, who controls the speed? Is that something that you’re doing as fast as you can and as you get more resources then you’ll be faster than expected, or is Walmart somehow using some discretion in how fast you roll these out?

Dave W. Cole

Certainly Walmart has asked us to go as quickly as possible, John. Without breaking our organization or delivering less than quality service to their stores, we are going almost as quickly as we can.

John Craft – D.A. Davidson

And then, Brian, you reiterated all the guidance pieces but the GAAP earnings per share and I was wondering if that would maybe, what’s the latest there?

Brian Turner

Well, GAAP earnings, we give quarter to quarter, we don’t give GAAP earnings guidance for the full year. We do give EBITDA guidance, which I reiterated.

John Craft – D.A. Davidson

I thought you had given some full-year guidance last time. How about in the U.S. to Mexico? There’s obviously been a lot of talk about pressures there. How have the pricing trends been, as far as you can tell?

Paul Davis

In general, we’re seeing some price pressures. We monitor our progress north and south with our GroupEx business and we’ve seen, even though in aggregate some of the transactions are down, we’ve actually been growing our absolute transactions. So we’re seeing positive movement but there continues to be pressures there, hopefully it doesn’t get more pronounced.

John Craft – D.A. Davidson

And, Paul, can you remind me again the percent of your transactions in that quarter?

Paul Davis

If you look at U.S. to Mexico of our overall Money Transfer business, it’s a little north of half.

Operator

Your next question comes from Ali Mogharabi with B. Riley & Company.

Ali Mogharabi – B. Riley & Company

Brian, really quickly, can you provide a little more detail on the 1% cannibalization effect that you guys saw?

Brian Turner

Yes. When we were looking at the roll out Walmart, we said that as Walmart rolled out, we would expect that they would cannibalize about 2% of the overall transactions from the existing machines. So we’re partially through that roll out and indeed, at this point, we’re seeing about a 1% cannibalization from the rest of the machines, of not only those machines being installed but machines being installed elsewhere.

Now certainly anything that’s going to Canada is not cannibalized, not anything going to Ireland is not cannibalized, things going into banks really aren’t cannibalizing that. So it’s either machines going into Walmart that are nearer than the suburban ones or machines that are going into suburban stores around it.

So right at this point we are seeing about 1% cannibalization. But again, the bigger impact isn’t that, it’s just less coin being generated in the economy because people are doing less transactions overall.

Ali Mogharabi – B. Riley & Company

The ePay, the year-over-year growth that you mentioned, I think it was over 11%, can you explain that? It’s good to see that but it’s something that we didn’t expect, especially given the current macro environment.

Brian Turner

It’s an interesting fact. I mean, ePay is largely driven by Gift Cards, which is really a fourth quarter phenomenon. So I’m not sure you can draw a lot of conclusions off the first two quarters. But, yeah, I think it’s very heartening to see that we’re seeing positive growth there, given the overall macro economy, both in gift cards and in telephony cards.

So I would attribute that to just more consumer adoption than the general economy. Plus we have more locations. As we expand to the U.K. we’ve got more locations there. But it does seem like we’re bucking the trend there.

Ali Mogharabi – B. Riley & Company

I don’t know if you can help me with this but the climb in Entertainment, as expected, do you guys have same store sales figures for those?

Brian Turner

You know, there’s not really same store sales because what you see in like a gumball machine, when you put it in, it pretty much ramps up right away. People see it, they use it. Or a crane machine. So it’s not like a coin machine which has a continuous ramp or a DVD machine. But that’s it.

We do track something similar. You know, machine averages, and machine averages were down in the second quarter. We do attribute that to foot traffic. I think this is a continuing trend over the last couple of years that we’ve talked about. I don’t think it’s a new trend.

So the machine averages were down somewhat.

Ali Mogharabi – B. Riley & Company

What is that? Can you give me the Q2 and this year and last year figure for that?

Brian Turner

To be honest, I don’t have that at my fingertips. I apologize.

Operator

Your next question comes from Simeon Gutman with Goldman Sachs.

Simeon Gutman – Goldman Sachs

Brian, to elaborate on the traffic in the ticket, can you tell us what Coinstar saw with respect to number of transactions in the Coin business and maybe break down that 3.2% decline a little bit better?

Brian Turner

Sure. If you look at the overall traffic we actually didn’t see significantly less. We saw a little lower average volume per transaction. I would attribute that, people are still turning in their coins, they’re just not generating as many coins as they were before. And so that is the effect there. I assume you mean the negative 3.2%.

Paul Davis

I can add a little color on this. We obviously track these comps real closely and we are constantly studying it and by far the biggest driver, as Brian said, is what’s happening in the supermarket channel, less foot traffic. And it’s by far the largest driver of the negative comps, what we’re experiencing right now.

The good news is we are establishing strategic relationships with key accounts, where a lot of the customer base is moving. Primarily in sort of the mass merchant channel. So I think the partnership we have with Walmart will definitely help us downstream.

Simeon Gutman – Goldman Sachs

And if you look at the 3.2% across geographies, how could you analyze it? Is it Walmart, is it broad-based or can you point out a couple of the geographies that might be seeing worse consumer spending, or traffic slow down?

Brian Turner

Sure, absolutely. And so I would say it’s broad-based across the economy but there are certainly certain areas that are hit harder. So if you look in the Southeast, as an example, unemployment has gone up there. Certain parts of the Southwest where the housing slump if worse than other parts. We definitely see effects there.

So where you’re seeing the individual, in cities affected disproportionately to the national average, we are seeing that same effect in those geographies.

Simeon Gutman – Goldman Sachs

I think in the prior quarter you provided an EBITDA margin for the Coin business, or theoretical. Is that something you can provide for this quarter?

Brian Turner

Sure, absolutely. So we’re seeing it 30+%, just like we always have. So we’re doing a good job of modulating the costs where we can, to that. And that’s despite increased field costs. So we are seeing Coin being hit by increased fuel costs, both in our own fleet at the pump, but also by the people who process for us.

Now, the good part about that is it’s only 2% to 2.5% of our overall cost structure, it’s not 30% of our overall cost structure. So, yeah, we’re still maintaining 30+% estimated EBITDA margins in Coin.

Simeon Gutman – Goldman Sachs

Is there a tradeoff between increasing route density due to Walmart versus more stops or is there something else there?

Dave W. Cole

You’ve actually got two countervailing ones. Remember when we picked up Walmart we said really you’ve got two sets of routes here, because Walmart for the most part is near rural and our existing coin machines are suburban. And you’ve got a little crossover, maybe 5%, as those two bump up against each other.

But we’re actually establishing all new route structures to service Walmart. So the good part about that is Walmart is ramping very nicely. Also, that will allow us to go after the independent grocery stores in that near-rural so it will actually open up more markets for us.

So I don’t think we’re seeing a huge effect from route density because of Walmart. Because you just don’t see the overlap there. That’s also why you don’t see the cannibalization.

That said, though, we are always trying to find out ways to maximize route density. All of our vehicles have GPS on them and any place we can maximize density in this gas price economy, we’re doing.

Simeon Gutman – Goldman Sachs

I don’t know what you can answer on Redbox. Nothing about transaction potential but more about fundamentals, I’ll just throw them both out, I don’t know what you can comment on. First, I think you previously talked about a same store sales performance or a comp for that business, and then second of all, if you look at a sequential run rate for revenue, and I tried to find a pro forma number, it looks like you’re at around a 20% sequential run rate, Q2 to Q1. Is that a realistic number, based on installs, for the rest of the year?

Dave W. Cole

Let’s go to both of them. As far as same store sales comps, because we’re in the quiet period, Redbox has determined that they’re not going to disclose that at this time. And so I apologize but I can’t answer that one.

As far as the run rate, that’s going to bounce up and down. You’re absolutely right, that’s due to installations. As you can see in the Coin business, it’s lumpy. It doesn’t go evenly every single quarter. Redbox is going to be no different. You know, retailers allow us to install a chain, they don’t want you around Christmas. So sure, we’re going to get lumpy installation. As you get that lumpy installation sequential growth will bounce up and down.

Simeon Gutman – Goldman Sachs

Maybe another way of asking that same store question, I mean the counter-cyclicality of that business remains, I mean, the idea of people spending a little bit less on other items but still picking up the dollar DVD, that makes sense.

Dave W. Cole

That’s something from the very start, we tried to provide balance in the portfolio, so this business, when you intersect the lines of convenience with great value, it’s magic. And the business is doing very, very well.

Operator

Your next question comes from T. C. Robillard with Banc of America Securities.

T. C. Robillard – Banc of America Securities

This is [inaudible] for T. C. With regards to Redbox, I know they’re in the quiet period, but what’s the IPO, what does that do to your ownership state?

Dave W. Cole

It depends on the percent that the IPO adds. You know, we’re at 51% so if we sold no shares in the IPO, of course that would drop us below 51%. But that determines on market conditions and pricing and a whole bunch of things as to how many shares they will actually distribute out.

T. C. Robillard – Banc of America Securities

So do you guys have any idea, once the IPO, what that does to your ability to keep Redbox consolidated? Will they still be fully consolidated?

Dave W. Cole

It’s a very interesting question and a very complex one. There’s a 20-step test in GAAP where you are above 20% but below 50% and based on that 20-step test you get your answer. I really hazard to make a guess at this point because that 20-step test, I won’t get any answer out of the auditors until we sit down in a room and we’re actually at that point. So, I think it is possible they will be consolidated, it’s possible that it won’t be consolidated. The way I look at it is the economic value to our shareholders is unchanged, whether it’s consolidated or unconsolidated.

T. C. Robillard – Banc of America Securities

Are you still targeting mid-2009 for the $1.0 billion revenue run rate and $200.0 million EBITDA?

Dave W. Cole

Our thinking on that has not changed.

Operator

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

Bob Evans – Craig-Hallum

Can you comment on Walmart, where are you in terms of units installed for both Coin and Redbox thus far?

Dave W. Cole

Redbox, we’re at about 1,700. And for Coin we’re about 1,100.

Bob Evans – Craig-Hallum

And I believe you said you are approved for all of U.S. for Walmart, so around 3,200, is that correct?

Paul Davis

That’s what we expected, Bob, yeah.

Dave W. Cole

For right now they have planned installations for 3,200. We are actually approved for all domestic, which is 3,800. For both lines of business. So that’s new information this call.

Bob Evans – Craig-Hallum

Over what time frame?

Dave W. Cole

We’re still working that out. So right now with Walmart we have 3,200 for Coin on the installation schedule, we know when they will go in, which stores they are. I think it’s just continue to work with Walmart.

Bob Evans – Craig-Hallum

That 3,200, if I’m not mistaken, I believe that was slated to be done for the balance of the year, is that correct?

Dave W. Cole

Again, we’ve got new information here. We’ve got 2,600, that was after the first call, that said we would get that in by December. That still stands. In this conference call we are saying we are upping that from 2,600 to 3,200 that we’ve got on the installation docket. Those extra 600 will go in the first half of 2009.

Bob Evans – Craig-Hallum

And would you say the revenue per machine at the Walmarts, would you say they’re tracking comparable to machine ramps that you’ve seen at other stores? Or a little above, a little below, can you give us any sense there?

Paul Davis

Revenue per machine is on our expectations and certainly on Walmart’s expectations, and they do very well relative to our traditional model.

Bob Evans – Craig-Hallum

At as it relates to Tessco, any thoughts on further expansion there, either in Europe or Ireland?

Paul Davis

Obviously the 30+ installations in Ireland are a pilot. We and Tessco would both want to see those do well. They’ve only been in a couple of months, Bob. Certainly we believe the relationship with Tessco is building and becoming a multi-product one over time.

Bob Evans – Craig-Hallum

As it relates to Redbox, again, I’m not sure what you can and can’t say, but it looks like you did about, if I’m not mistaken, 1,700 units quarter-over-quarter, is that right?

Dave W. Cole

That is correct.

Bob Evans – Craig-Hallum

Which is, to my knowledge, the biggest number yet for Redbox. Does that mean that the total number of units added for the year has increased?

Dave W. Cole

Unfortunately we can’t comment on that one. That’s in the quiet-period realm.

Bob Evans – Craig-Hallum

Could you say what your original guidance was for this year in terms of how many units for Redbox?

Dave W. Cole

Unfortunately, the lawyers will not let me repeat that either.

Bob Evans – Craig-Hallum

And on Money Transfer, what was year-over-year, if you will, kind of same store sales?

Dave W. Cole

I’ve got transactions on a pro forma basis, and why I’m doing that is you take apples to apples as if we had owned them for both years. So if we had owned everything, I’ve got transactions up 25% for the same year. And then I’ve got the average transaction, which would be your sort of same store sales, going from 485 to 590. So we’re seeing both more transactions and then we’re seeing them be bigger.

Bob Evans – Craig-Hallum

And is that a trend you expect to continue?

Dave W. Cole

I would hope so but we’re not making that prediction quite yet. Let’s get a couple of more quarters under our belt.

Bob Evans – Craig-Hallum

And where is Money Transfer in the realm of getting to be close to profitability?

Dave W. Cole

We’re still going the same thing. We expect it to go EBITDA profitable in 2009 so we haven’t deviated from that thinking.

Operator

Your next question comes from Alan Robinson with RBC.

Alan Robinson – RBC

Given your fairly full plate, with respect to Coin installs over the next 12 months or so, combined with the tough market conditions at the retail level, how are you approaching your plans to expand your Coin counting machine based apart from the Walmart expansion? Are you trying to sort of cut back there a little bit? Are you trying to digest the Walmart installs? Can you just give us some color about how you’re thinking about Coin counting machines there?

Paul Davis

There’s still a lot of accounts that we don’t have distribution in. You know we have a high share of self-service kiosks. We still say we’re really handling or processing about 28% to 29% total. So, yes, it is a plate full to execute what we’ve already pre-sold. But there are still other channels that we see.

Dave talked earlier about the casino channel. We’ve talked about the financial channel. There are a lot of these channels that we have a number of pilots in that we think there’s still significant upside.

Alan Robinson – RBC

Expanding on your Euro Coin test program in Ireland, is that something that can be rolled out to other European countries, or logistically would it be tough to do that beyond the British Isles and Ireland?

Paul Davis

No, it’s something that could scale. We’re always looking for, you know, you need to have the right kind of key account support in order to pull that off so you can get the critical mass to give you operational leverage. But the team is always exploring the most efficient way to enter these countries. So I think the test in Ireland is an important learning for us.

Alan Robinson – RBC

I recall that you transport your coins based on where the Federal Reserve tells you is short. The municipalities that are short of coin at any one time get the coins that you transport, if I understand it correctly. Do you have an ability to sort of reclaim transportation costs from the Federal Reserve in that capacity?

Dave W. Cole

That would be so very, very nice, but no.

Alan Robinson – RBC

That’s not something that you’re even sort of considering negotiating, that’s just off the table, right?

Dave W. Cole

Well, you know the government doesn’t have any extra revenue as far as we can see and they don’t seem to be willing to give us any rebates here.

Alan Robinson – RBC

On the theme of government revenue, I know you’re loathe to predict taxation rates, but is 50% a reasonable rate for next year as far as you know right now?

Dave W. Cole

That’s a really good question. We’ve said generally we should be somewhere around 40% to 45% taxation rate when you get to normalized. And really that’s a combination of federal plus the states. Right now we’re running at a higher tax rate because of the non-deductibility of foreign losses against domestic profits.

And so certainly once the Money Transfer division goes profitable, that will start to reverse itself and you will start to see that tax rate normalize. So, will 50% to 52% continue? I would expect over the years it would come down. But we’ll just have to wait and see.

Alan Robinson – RBC

And what’s a reasonable time line for the Money Transfer business, the foreign aspect of it, to become profitable?

Dave W. Cole

That’s a really complex question because Money Transfer overall could turn profitable but you’re looking at each individual country. So let’s say you’re losing money in the Cameron but you’re making money in the Ivory Coast. Well, unfortunately, you can’t offset the two. And so that’s really a problem when you’re operating in 140 countries, you may be losing money in one and making money in the next, and you’re paying taxes on the one you’re making money and you’re getting no benefit yet from the one you’re losing money in. And so that’s just a scale issue by 140 countries. It’s a very complex issue.

Operator

Your next question is a follow up from Ali Mogharabi with B. Riley & Company.

Ali Mogharabi – B. Riley & Company

Brian, I don’t know if you can tell us this, but I do remember that you guys provided top-line guidance for Redbox for this year between 270-305. Can you comment on that? Has that changed?

Brian Turner

Unfortunately, I can’t reiterate it, I can’t update it, I can’t do anything under the quiet period rules. Sorry, no comment.

Ali Mogharabi – B. Riley & Company

Is there any way to break down the Coin revenues in terms of how much actually in the United States and how much in the U.K. or Ireland, or is that amount outside the United States not significant?

Brian Turner

I think it followed historic, I’m trying to remember our last disclosure on this, in our last 10-Q. It will be in the next one. But if I recall, international is about 10% of our overall revenue, excluding Money Transfer. So, I think you’ve got about 10% outside, and that will probably make up, say, 9% in the U.K. and 1% in Canada, Puerto Rico.

Ali Mogharabi – B. Riley & Company

So is it safe to say then that actually that 10% accounted for most of the year-over-year top line growth?

Brian Turner

No, no. I think that we saw good growth in Canada and great same store sales growth and the U.K. and the U.S., installations, there’s more installations in both of them. So, no, I think it’s probably proportionately distributed. Maybe a little more to Canada.

Dave W. Cole

Before we sign off I have one final thought. The vision that we began years ago is really beginning to be realized. Our success is proof-positive, we’re a market leader, we’re creating convenience and value for consumers and traffic and profit for retailers and value for shareholders. And we thank you for calling in today.

Operator

This concludes today’s conference call.

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