Bill Wolf

Long/short equity
Bill Wolf
Long/short equity
Contributor since: 2011
Read the article my friend. Its about substitute products and time allocation. I didn't say that people are necessarily watching movies on their tablet!
Zorba, this new article answers your first question and shows how their $$ restaurants are categorically inferior in terms of economics to OPEN.
Fellas, if you think seated diners is vastly outstripping restaurants and will in the future, why is revenue per restaurant stagnant and seated diners per restaurant decelerating rapidly?
Thanks for comment.
Its a saturation multiple, not relevant to today. It is when they have 28,000 restaurants vs. 19,000 today. Do you think they are growing seated diners 26% when they have 28,000 restaurants?
Also remember that they have stated many times some of the R&D costs will partly move to the COGS line since they are shipping product to the end customer. OPEX will likely come down a smidge vs previous run rate given this fact. Happens all the time for Intel as they bring new geometries online. (just about every other year in fact.) Materials, labor to run equipment for prototypes, and new equipment Depreciation is expensed as R&D until they ship to customers and then put through COGS.
Sorry John, you've reached the point when you do have something on the line and I think you know it.
Congrats, that was a great trade.
Lemme guess, you were shorting EXPE at $13 in march 09 on slowdown and margin fears?
Just compare Ctrp and LONG revenues. Ctrp 6x the size of LONG which is controlled by EXPE. LONG a nuisance but not a long term threat to CTRP.
Around the world each geography has 1 winner that accrues a majority of profits from the online travel business. EXPE in US, PCLN in Europe and CTRP in china. Margins are down temporarily while they solidify lead. At this price, don't be surprised to see BIDU, taobao or PCLN make a run at CTRP. BIDU said on call they want to expand via acquisitions in adjacent verticals.
Long CTRP since $16.
and the "future returns to shareholders" are derived from profits of selling products and services. You can't estimate future returns without having a view on the product. Its tough to have a view of the product if you don't go try and experience it. To say its of no interest is intellectually lazy. Best of luck to you too, sincerely.
So you can pontificate on stocks (especially on a one product company) without thinking about their products? Genius, John. Companies are the sum of the products and services they sell, no?
Also, no comment on the "sales statistics" of A6 and BMW 5 series bc they don't fit your thesis? Hmm...
Your comparisons to Leaf and Volt are ludicrous. Look at the volumes of audi A6s sold and compare the cachet of that luxury vehicle vs the Tesla Model S. your buyers of this vehicle are not the Leaf buyers. They are luxury car consumers, that like the added perceived value of being environmentally conscience on top of having a vehicle with better performance. it's the brand that has the value going forward. They have proven they can technically build them. I believe they can build them at a profit given their timely purchase of the NUMMI factory. If volumes ever come close to Audi A6 numbers in the next 10 years a $3B market cap will look like a pittance.
PS, Audi sold >200,000 A6s in 2011 at about $50-55k. BMW sold 300,000 5 series (touring and sedan) in 2011. (pg 25)
Finally, John, have you sat in one of the cars? If you haven't, you should as minimal due diligence before pontificating on their product on a daily basis.
If you detest the for profits so much, why do you work for one? There are some bad actors as there are in every industry. Bernie Ebbers, Aubrey McClendon and Andrew Fastow didnt work in the for profit space. But that doesnt mean everyone in telecom, and natural gas exploration is a crook. Realize the for profits price at a level under that generally set by "non-profit" schools that pay huge salaries to administration level employees and provide large pensions to a broad employee base. Without the non-profits trying to cover a bloated cost base, for-profits wouldn't have the ability to price an education that provided profits for he entities. E blame belongs in many places...
Comparing statistics on education between the population served by these schools and students at Ohio State where parents pick up part of the bill is laughable. Look at some community colleges with similar demographics and you will see similar results. Comparing apples to oranges is silly.
I wish I knew. I thought Netflix struggles, especially with lower than expected streaming adds in the future, was a large positive for Cstr. Also, costs to add subs is increasing greatly for Netflix. If streaming was gonna dominate, this cost should be going down. Ie, it should be easier for Netflix to get subs as consumers should be "naturally" migrating, IF Chanos' thesis was right. But, it's not, and streaming works only for library (OLD) content and not new releases which is cstr's bread and butter. Evidence pointing towards errors in Chanos' analysis.
Yes, demographics are a large factor as well. its going to be the cheapest form of filmed entertainment for a long time to come.
I struggle with NFLX b/c as shown above, the profits in the industry with streaming go to the studios. NFLX has very little power relative to their suppliers. VZ recognized this and teamed up with CSTR to provide a differentiated offering to consumers, opting to bundle what NFLX unbundled. Some day Reed Hastings may be shown to be a genius, but I fail to see the logic in his strategic moves. I am thinking that this Verizon JV will just boost CSTR's topline while the expense base stays pretty steady. Watch the profits explode further when that happens. There is massive leverage in this model.
Andrew, i appreciate your comment. i think we are on the same page but not totally clear on your comment. the crux is that the studios are stuck. yes they would like to move to streaming, but they are stuck in the rental market. they have to keep a relative premium on rental price / sale price, otherwise they kill their very profitable sale business. they may want to, but the cost to do so isn't even close to being worthwhile. if they weren't stuck it would have changed a long time ago.
sounds like you steal movies and i don't.
according to this article, pirated downloads were 74.5mm worldwide for 2011 and were down from 2010. ( Why are pirated downloads down when they are going to take over the market? Redbox rented 684mm movies in the US alone in 2011. So, add up Netflix, Redbox and the dinosaur stores and you have maybe 5% of the market and the number is shrinking...
different product. consumers think that music gets created for free but know it takes $100mm to make a movie. again, on the fringe of course. if you really think that's mainstream for movies, think you are out of touch. again, read the article. music and movies are two different products despite the desire of people to lump them into the same bucket.
Most people actually don't like stealing. And, the mainstream populace isn't going to get that involved in downloading 1TB files on a weekly basis. Will it happen on the fringe. Of course. Enough to kill the business off? Focusing on the wrong thing...
Interesting article and nice job doing detailed work. Make sure you read these articles. While your marginal analysis is relevant, remember boxes mature over time...
Please read these articles to see how the kiosk economics are performing. It's actually much better than you portray.
why hasn't that happened to date? they moved to delay and no effect on business despite many saying it would hurt them. As they gain clout with increased size and no blockbuster competing, seems counter-intuitive that they will pay a ton more. The first sale doctrine likely keeps a lid on these costs unlike for streaming.
caz12, thanks for reading. if you read through the other comments and my replies you will see most, if not all, of your issues addressed. Make sure you don't extrapolate your own, likely higher income, situation to others.
Thats the point of the article. Per kiosk per month expenses are wildly overestimated give past trends and thus the Street is drastically underestimating the extent of margin improvement the company will see due to the 20% price increase. My revenue estimates are 2,229 and pre-tax profit is 277. Not sure where you got your numbers of $218 and $4.24...
Introspection, to reply to this statement, "Keep in mind that streaming hasn't been made available to the masses 4-5 years ago, and arguably has not been made available to the masses now, but could it accelerate and trump the kiosk demand in the near future?"
see below.
According to this article, broadband penetration has reached 78% of households in the US. That means there were basically ~ 85mm broadband subscriptions and 110mm households. Obviously, this can go up but looking at the tables, all of the countries that are significantly higher in % penetration >90% are extremely small countries with high GDP/Capita. Norway, Hong Kong, Singapore, Bahrain, etc.
So, maybe the pool of potential Netflix subscribers has actually been introduced to streaming more than is evident.
Also given the economic environment and ubiquity of smart phones, I wouldn't be surprised to see a lot of people bypass cable modems and DSL and satisfy their browsing needs through their phone, especially as LTE rolls out. Probably not going to happen for readers of seeking alpha, but I could see it limiting broadband penetration in lower income households.
Thanks for your comments because they are factors for this stock.
Introspection, great questions.
Remember, there is a seemingly slight, but actually massive difference, vs. Netflix. Netflix had to license bleeding edge content for streaming without the "first sale doctrine" (coinstar can always buy the discs from retail or distributor) which limits what one has to pay on the physical side. So, Netflix had to pay up because there was no substitute good. Verizon/Redbox are using the physical kiosks for new releases and providing library material for streaming. Verizon contributed much of this library to the JV. Therefore, don't expect mega deals from the JV to be announced with the studio. They are licensing old stuff and Verizon already has most of the agreements. Here is what management said about the financial aspects of the JV at the Pac Crest conference yesterday:
"Saul M. Gates
Sure. From a CapEx side, we achieved our goal, which was we've got a partner whose got a big stake and already has a big access to content. So as you look at this we laid out what the contractual terms are and a lot of people have looked at that and said, holy cow that's a big number that you guys are on the hook for. But you got to realize that's not what our business plans say, that's simply what the contract says and we put the terms in there to help prevent us from being diluted in case something happened. So we got the safeguards and the rails that we wanted to protect us. We've got the right split and we've got the right partner who's already bringing a lot of the content to the table. So when we look at it, we expect the ongoing cash flows of the JV to be able to fund a lot of that once it gets out of the start-up phase. In the start-up phase before we're actually selling to customers, before we've got subscribers signed up, we're going to have to fund that but that's just the front-end piece.
Andy Hargreaves
So the expectation is for it to be cash flow neutral or above that fairly quickly?
Saul M. Gates
Absolutely, yeah."
Don't think of the JV as Netflix, think of it as new release nights at kiosks with a long tail of movies provided by streaming to provide more selection to Redbox customers. (should drive more volume to kiosks helping the cover the fixed costs more quicly = higher profits per kiosk).
Finally, on the demise of physical DVDs, don't forget that CSTR rented out 21% more physical DVDs in Q4 2011 vs Q4 2010. That doesn't seem like a business that is dying anytime soon.
2. Management estimates there are 60,000 kiosk locations available in the US. They have 35K, will buy 10K from NCR, add 5K new kiosks this year and so will be at 50K at the end of the year. That gives them 2 more years of 10% growth in units. But as they reach saturation watch for them to go international, including Canada (this year) and Europe. They said yesterday, "So we'll work with them (NCR) on new kiosk technology. Also, we can leverage their organization to open doors outside of the U.S. because they have a terrific international footprint as we think about expanding." NCR wants to sell them physical kiosks, so expect this to bear some fruit. Europe is much different than Canada, obviously, so I would discount that growth opportunity at this point. Don't forget that for awhile they will also get comp growth as well as the current population of kiosks age. This will push up margins as well. Finally, they are pushing hard on new concepts and believe that the coffee and photo booth concepts are going to reach high return hurdle rates. They will put in 650 kiosks this year. Watch for that concept to fuel growth in the future.
Comments today at Pacific Crest Conference regarding windowing of content:
<Q: Andy Hargreaves>:
Windowing, it's been controversial I guess. It's come up a few times recently. When you had to implement it back in 2009 for three studios for a short while there, it clearly impacted your ability to manage inventory. Do you think that if Universal and Fox decided that they want to fix 56 days, and I'm not asking you to comment on that, but if they did do you think the processes are in place now to manage that better or would you still have a pretty big issue?
<A: Paul D. Davis>:
No. I think it's much, much better. We have a lot more sophistication around engineering and our capabilities in the marketplace even where we were a couple of years ago. So we're comfortable that we could deal with that. We're - I don't believe that's where we'll end up but when we ask the frontline team, as we started in this workaround that - put together a long-term solution, not a short-term.
<Q>: (21:11) Can you quantify that at all?
<A - Paul D. Davis>: What did we say on the...
<A - Saul M. Gates>: Well, the workaround will be margin percentage-neutral but lower margin dollars. So we won't have as many copies of the movies in the kiosks and we won't have as many direct-to-video movies. So the margin dollars will go down because of this but the percentage will be neutral.
<A - Paul D. Davis>: Yeah, one of the key differences is when we're in this sort of workaround situation is we're not buying every single movie from the studio. We're pretty selective and just getting what we think will really do well in the kiosk.
<Q - Andy Hargreaves>: You did say that the margin dollars would come down but the assumption there is that volume of rentals actually comes down. Is that accurate?
<A - Paul D. Davis>: Right.
<Q - Andy Hargreaves>: So if volume didn't drop, your dollars wouldn't drop?
<A - Paul D. Davis>: That's - yes. So you kind of have offsetting things. And this is - we'll learn a lot more after we get through the quarter. You get the product in the box sooner than what you had it before but secondarily do you get 100%? You might not. So we just - from a forecasting guidance standpoint, we thought it's prudent to talk it about this way and then the more we learn, we'll make adjustments but...
Don't see how credit card companies reduced rates last quarter, but wouldn't this quarter. think it was a way to keep expectations lower and nothing else. could i be wrong, of course!
I think the street also misses the fact that the obsolescence risk is much lower than estimated. There are a lot of people who use this service because of 1) price, which streamers haven't figured out how to match with similar content, and 2) they don't pay for broadband. I bet a ton of people won't have broadband given our economy for quite some time.
Finally, people underestimate how counter-cyclical this model likely is. Cheap entertainment is always valued in a downturn.
Michael, I appreciate your comment. My guess is you are partly right that over time management gets better at its job, adds blu-ray, games, etc. I think there is a significant age effect, as the model implies. Is it exact? Nope! Controlling for seasonality with dummy variables could obviously be done but given n is still pretty low, I think it would be over-fitting the data. I would rather be directionally correct than precisely wrong. Obviously I am trying to estimate revenues / EPS using multiple methodologies and see where they come out. The conclusion is a lot higher than consensus no matter what method I try....
Mr Investor, its just a one-factor model so those would have to be qualitative adjustments as the 20% price increase was.
My take on the factors:
1) Given it wasnt much of an issue in Q4 and they were granted reduced rates, I don't see a big impact going forward. Moreover, the workaround to do only 1 charge should be done in April, further mitigating the impact of the interchange.
2) NCR kiosks are a boon that isn't counted. It may be slightly dilutive in year 1 as they rebrand the boxes. They are buying them for $10,000 per kiosk while it costs them $15-20K to place a new kiosk. If the can re-use the boxes and put new ttrade dress on them, should be a big coup, Remember, Wal*mart and Kroger dont have a credible alternative now so it should bring down their space lease costs over time.
3) Studio releases will be what they are just as they were in the past when the data was fitted. Over enough observations it all evens out.
4) Those will likely dent earnings as they said those disks will have lower gross profit dollars per rental. The movie costs will bounce around over time, but as I showed in previous article, it almost always washes out to a similar number.
5) Verizon JV not included
Think of this exercise as finding the baseline earnings power of the redbox business. it may vary around that baseline but the macro drivers for improved performance will likely outweigh these one-offs over time.