Coinstar Inc. Q3 2009 Earnings Call Transcript

Coinstar Inc. (CSTR) Q3 2009 Earnings Call November 5, 2009 5:00 PM ET

Executives

Paul Davis -Chief Executive Officer

John Harvey - Chief Financial Officer

Gregg Kaplan - President & Chief Operating Officer

Rosemary Moothart - Director of Investor Relations

Analysts

John Kraft - D.A. Davidson

Eric Wold - Merriman Curhan Ford

Bob Evans - Craig-Hallum

Ari Black - Thomas Weisel Partners

Mike Olson - Piper Jaffray

Alan Robinson - Royal Bank of Canada

Steven Frankel - Brigantine

Operator

Good day and welcome to the Coinstar, Inc. third quarter earnings conference call. My name is Makita and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session. (Operator Instructions)

I will now turn the conference to your host for today, Rosemary Moothart, Director of Investor Relations; please proceed.

Rosemary Moothart

Thank you, Makita. Good afternoon everyone and thanks for joining us today. The speakers on the call will be Coinstar’s CEO, Paul Davis; and our CFO, John Harvey. Before I turn the call over to Paul there is important information I need to review with you.

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 provision 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 previous 10-Ks and 10-Qs filed with the SEC.

In addition, during this call we are referencing both GAAP and non-GAAP financial measures. Definitions, a note about the importance of these measures to investors and a reconciliation between GAAP and non-GAAP financial measures are available in the press release announcing third quarter financial results that is posted in the about us section of our Investor Relations section of Coinstar’s website.

For the call today we have posted a slide presentation that Paul will reference during his remarks. You will find a link on the home page of the Investor Relations website. The slide presentation as well as the webcast of the call will be available on the website for approximately one year. Also posted and filed as an 8-K is the investor update.

Now I’d like to turn the call over to Paul.

Paul Davis

Thank you, Rosemary. Good afternoon and thank you for joining us on the call today. Last quarter I outlined our plans to focus on automated retail. This important growing space appeals to both the consumer and retailer all the while leveraging our core competencies.

We are pleased with our performance this quarter on both the top and bottom line which once again speaks to the strength of our core businesses, DVD rental and coin counting. In a few minutes John will go into more detail in the settle entertainment business which is now classified as discontinued operation in our financial statements. Next I’d like to highlight a few key points on our Q3 results.

For the third quarter from continuing operations, Coinstar posted revenue of $296 million, adjusted EBITDA of $55 million, and GAAP EPS of $0.31. All substantial achievements for the company, I’d like to take a deeper dive into our core businesses and let’s start with DVD. As you can see on slide three, we ended the quarter with 20,600 kiosks installed or an additional 2700 Redbox kiosks for the quarter and that breaks down to more than one per hour for the quarter, a record pace for our incredible operations and sales teams.

Now to revenue, DVD revenue in the third quarter was $198 million up 90% versus a year ago. We continue to see very strong top line momentum with an average of 31.6 million DVDs rented per month in Q3 alone. Recently, we set a new two day rental record by renting nearly 3.2 million DVDs on a Friday, Saturday which was over 1100 DVDs rented every minute for 48 hours straight.

In addition to strong top line momentum, slide four points out how our ever growing national footprint has driven both brand awareness and market share. At the beginning of 2009 we had aided awareness scores of 17%. At the end of Q3, just nine months later, we stood at 56%. Brand awareness tightly correlates with our national market share which is increased from 7% a year ago to 14.6% at the end of Q3.

As you would suspect, we have some markets where we’ve exceeded 30% market share whereas other major metro markets where we’ve only just begun. Given our projected year end footprint, nearly 200 million consumers will be walking by one of our kiosks every week, a powerful brand building opportunity not only for Redbox, but for studios who decide to partner with us to drive sales of their new movie releases, given our thousands of kiosks studios are now able to reach audiences that had not rented movies before due to the lack of convenience and high price points.

Our consumers have consistently told us, they like to try it before they buy. A study by NPD earlier this year indicated that 41% of Redbox consumers reported, they actually prefer to rental movie at one of our kiosks before purchasing the DVD at retail. Redbox consumers not only rent DVDs at an amazing rate. According to data from research firm interpret. They will purchase an estimated 120 million new DVDs in 2009. This represents about 13% of the estimated overall sales of DVDs and a significant source of revenue for the studios.

In fact, conversion to purchase for Redbox consumers is approximately 10% higher than conversion at other leading retailers. We are very fortunate to have a loyal consumer base. We closely track consumer satisfaction by measuring our net promoter scores. As you can see on slide five, we continued to hoverer north of 80%, which puts us with such companies as Apple, Google and Amazon.com, iconic brands that have been established over a much longer time.

Even with these high scores, we are constantly looking for ways to improve the consumer experience by shrinking wait times, providing a better user interface, offering a broader title selection, and introducing innovative promotions. We also are constantly tracking consumer demand for various new technologies and continue to explore other methods of delivering movies, all in the spirit of extending the useful life of our kiosk network.

As I said on our last call, we understand the importance of fostering collaborative relationships with the studios. Last week, Redbox signed distribution agreements to Summit Entertainment and NCircle Entertainment that will broaden the DVD titles offered at our kiosks. Summit is best known for its highly popular Twilight series and NCircle is a leading distributor of children’s films with popular including Sid the Science Kid and Dr. Seuss’ The Cat in the Hat.

During the third quarter, we announced agreements with Sony, Lions Gate and Paramount that insured our consumers will continue to receive affordable access to new release DVDs on street date. As each of you know, since December of 2008, we’ve been forced to implement a work around plan with Universal in order to give our consumers new release titles on street date and at the end of October, we added 20th Century Fox and Warner Brothers to our work around process.

Although we have been able to provide our consumers with titles from each of these studios in the same week that movies are available through other channels. We oftentimes have difficulty in obtaining the quantity of each title that we believe fully satisfies consumer demand. Our goal however, remains the same, to provide our consumers with timely access to affordable new release titles. We simply want to be treated like all other retailer by having access to new releases on the same date as they are afforded.

I’d like to spend a few minutes talking about why we believe we’re well positioned to realize continued growth in the DVD kiosks space. On slide six, as per Adams Media Research you can see kiosks are projected to grow going from a 10% share of movie rentals to 16% by 2013. Our research tells us that Redbox’s share of movie rentals has already eclipsed their projections since as I mentioned we stand at 14.6% market share through Q3 of 2009.

As you move to slide seven, we foresee the viability of physical media for years to come and believe the digital video landscape is still in a nascent state. The winning business model has yet to emerge as consumers lack clarity on what they can watch, when and where they watch it and at what price. There are four points I’d like to highlight.

First, although broadband penetration is an approximately two thirds of U.S. households, internet connections are not universally fast enough to stream a movie with uninterrupted play. Movies currently take hours to download.

Secondly, studios remain motivated to prolong the life of high profit DVD sales. Within digital, studios are focusing on digital sell through rather than rental, even holding back rental titles in an attempt to increase sell through. Windowing prevents digital rental from being available on release date.

Third, the general population still prefers watching movies on their TV rather than on their computer. Only an estimated 20 million U.S. households or about 17% have a device, which allows them to watch streamed or downloaded movies on their televisions.

Lastly, digital content can be accessed across multiple devises and due to differing technology standards moving content from one device to another is not always possible. Content can be downloaded allowing off line access or streams requiring continuous connectivity. Emerging solutions such as cloud storage and access lockers encourage content access across multiple devises and platforms, but are not common place today or in the near future.

On slide eight you can see that studio profits are heavily weighted to DVD so as long as that’s the case we believe physical media and DVDs will be around for many years to come. Before turning to Coin we are very excited about the growth opportunity for Redbox. Our sales team has been aggressively securing commitments for the upcoming year.

We are broadening our footprint both geographically and into multiple channels. Our operations and procurement teams have continued to sharpen their skills on getting the right product and the right machines at the right time. The fact that we’ve been doing this for seven plus years gives us a distinct leg up on our key competitors.

Moving now to our Coin business. Revenue for the quarter was $70 million down slightly from a year ago, but relatively flat when we take into account, the impact of foreign exchange rates. We continue to see a strong correlation between our Coin business and the consumer confidence index. Lower foot traffic coupled with fewer cash transactions continues to have an impact on our top line.

As we’ve discussed with our Coin business we are focused on maximizing our resources and optimizing the market leading network of kiosks that we’ve installed. As part of that process, we have been redeploying under performing assets to higher traffic locations with greater opportunity to generate higher revenue for both Coinstar and our retailers. We’ve also intentionally slowed down our install plans and are instead focused on improving same store sales.

Considering we realize approximately 90 transactions per store per week and we estimate that our average retail partner has traffic north of 15,000 per store, per week, we see the opportunity as significant. One more transaction per store per day has considerable bottom line impact. So we continue to test a wide array of new options including advertising, broader card offerings, and a new look and feel for the machines.

It’s still early to share results so stay tuned. Last quarter, I announced we are considering strategic alternatives for both e-pay and money transfer. These are strong businesses in themselves, but they do not leverage our core competency in self service automated retail. So we are considering a wide range of options that in the end will be based on what will provide the best return to our shareholders, the same as we did with the entertainment business.

As for new businesses we will continue to explore in a cost efficient basis new ideas that leverage our core competencies. Some that I’ve mentioned in the past that we continue to fine tune are coffee, video games, digital and bill pay. We’re also plant in a few other seeds that we feel could have nice upside in the future. These are all too early to talk about but I want to reassure sure you that we’re focused on growing to the space and establishing ourselves as the innovation leaders in automated retail.

I’ll now turn the call over to John.

John Harvey

Thanks Paul and good afternoon everyone. Before turning to the numbers, I want to point out as Paul mentioned that the operating results of our entertainment business as well as the net gain from its sale are reported as discontinued operations and as such, are excluded from continuing operations in our income statement.

In addition, all prior period results have been adjusted to reflect the entertainment business at a discontinued operation. For the third quarter, total net income was $41.4 million and GAAP EPS on a fully diluted basis was $1.34 per share, including a one time after tax net gain of $1.05 per share from the sale of our entertainment business. Net income from continuing operations was $9.7 million or $0.31 per share. This compares with $7.9 million or $0.27 per share last year.

Net income from discontinued operations was $31.7 million or $1.03 per diluted share, which includes the after tax net gain on the sale of entertainment of $32.4 million or $1.05 per share and a loss on the discontinued operations of $700,000 or a loss of $0.02 per share. Adjusted EBITDA from continuing operations was $54.9 million compared with $39.2 million last year.

Turning to results from continuing operations. For the third quarter, consolidated revenue was $296 million up 45.5% on a year-over-year basis. This increase was driven by an increase in the number of DVD kiosks as well as DVD same store sale comps. DVD revenue was $198.1 million compared with $104.2 million a year ago. At September 30, we had 20,600 DVD kiosks in the field, an increase of 75% from 11,800 kiosks a year ago.

For the quarter, DVD same store sales were up 26%. Coin revenue was $69.5 million compared with $71 million a year ago, a decrease of 2%. As we have highlighted in previous quarters, this decrease is primarily due to the impact of the declining foreign exchange rates, if rates had been constant year-over-year, revenue would have been flat compared with the same quarter last year. For the quarter, we had net installations of approximately 400 Coin kiosks bringing the total at quarter end to 18,800. Coin same store sales were down 5.4% for the quarter.

Money transfer revenue was $22.5 million up 2.3% compared with $22 million year-over-year. The increase is largely due to an increase in transaction volume of approximately 16% year-over-year offset by a decrease in average transaction size of approximately 3% or $20 compared with last year. E-payment services revenue was $5.9 million compared with $6.3 million a year ago.

Turning now to expenses. For the third quarter, direct operating expenses were $203.7 million, an increase of 51.6% year-over-year reflecting variable expenses associated with increased DVD revenue. As a percentage of revenue, direct operating expenses were 68.8%, approximately 280 basis points higher than a year ago. This was primarily driven by higher DVD product costs due to the decline in DVD salvage value.

Marketing expenses were $5.8 million or 2% of revenue compared with $7.4 million or 3.6% of revenue last year. This decrease was primarily due to the timing of marketing activities in our Coin business. G&A expenses were $32.6 million up 41.8% year-over-year largely due to increased cost to support the rapid growth of the DVD business. As a percentage of revenue, G&A decreased slightly to 11% compared with 11.3% a year ago. Depreciation and other expenses increased largely due to increased net installs and finally amortization expenses was $2 million, consistent with prior years.

Turning now to segment operating income and loss, which we define as segment operating income and loss prior to depreciation, amortization, stock based compensation, and share based expenses. Segment operating income from the DVD business was $34.5 million which equates to a 17.4% margin compared with $17.7 million or a 17% margin last year.

Margins improved during the third quarter as the unfavorable impact from higher product costs largely resulting from the declines in salvage value was more than offset by reduced marketing spend as a percentage of revenue and the favorable impact of leveraging general and administrative expenses. Segment operating income from the Coin business was $23.4 million which equates to a 33.7% margin compared with $25.4 million or a 35.8% margin in the prior year period.

The decrease was driven by lower revenue due to the impact of declining foreign exchange rates. Money transfer had a loss of $2.2 million which equates to a negative 9.8% margin compared with a loss of $2.7 million or a negative 12.3% margin in the prior year period. The margin improvement reflects the increased transaction volume and finally, our e-pay segment had a loss of approximately $600,000 which is about the same as last year.

As we have said on previous calls, in determining segment operating income and loss, we include an allocation of the direct operating and general and administrative of costs for services shared among the business lines. This allocation is based upon managements estimate of the proportion of shared services supporting each segment as of the beginning of each year and thus is subject to change.

With the sale of entertainment, certain shared service costs remains with the company and these expenses will be reallocated to the full remaining business segments as required under GAAP in this and future quarters.

Turning to below the line, foreign currency losses improved compared with a year ago due to the unfavorable movement in foreign exchange rates in our overseas subsidiaries during 2008. Interest expense was $9.4 million compared with $5.4 million last year. Interest expense includes $500,000 of non-cash interest expense related to the convertible notes offerings that I will discuss in a few minutes.

Since part of the proceeds from the convertible debt offering was used to extinguish our term loan we recorded a pre-tax non-cash charge of $1.1 million related to the write off of deferred financing cost with respect to the term loan. Our effective tax rate from continuing operations for the quarter was 41.2%.

Going forward, our effective tax rate from continuing operations for the year is expected to be approximately 42%, had we not sold entertainment, our tax rate would have been approximately 45%. While the reported tax expense from continuing operations in the quarter was $6.8 million, cash taxes paid in the quarter were only 300,000 due to the use of federal bonus depreciation and net operating loss carryforwards.

Before we turn to the balance sheet, I would like to review the convertible debt offering we completed during the quarter. We were extremely pleased with the 4%, five year convertible senior notes offering we closed on September 16, as it was eight times oversubscribed and priced 25 basis points below that lower end of our initial price range. This transaction eliminated refinancing risk associated with our term loan that was due in 2011, diversified our financing sources beyond commercial bank debt, and created additional capacity under our revolver.

Pursuant to the new accounting rules, at the issuance of the notes, we booked a liability of $165.2 million. The remaining $34.8 million, which was recorded as equity will be recognized as non-cash interest expense over the life of the notes and a created to the liability as it is recognized. Including this non-cash component our effective interest rate going forward will be approximately 8.5% and again for the quarter, $500,000 was recognized as non-cash interest expense and added to the liability.

Turning to the balance sheet, the loss realized on the sale of entertainment resulted in the recording of $82 million of additional net deferred tax assets composed of net operating losses that will be available to offset ordinary U.S. taxable income in future periods. During the quarter, we paid $11.5 million including the remaining principal and accrued interest of $1 million on the McDonald’s notes related to the acquisition of Redbox.

This was the last payment of the deferred consideration for the purchase of Redbox and the consideration is paid in full and we assumed $30.4 million additional lease financing to help build kiosks growth in the DVD business. As of September 30, our outstanding revolving line of credit balance was $235 million.

Total CapEx for the quarter was $29.6 million, which includes continued investment in DVD of $20.7 million as well as an investment of $6.9 million in Coin. We provided updated guidance for the full year 2009 in an investor update we filed as an 8-K earlier today. Our guidance has been adjusted for the sale of the entertainment business, which I mentioned is classified as discontinued operations.

Allow me to share the highlights. For the full year 2009, we expect consolidated revenue from continuing operations of $1.115 billion to $1.165 billion which represents a tighter range compared to last quarter’s guidance. The revenue ranges in millions for the segments are DVD, 760 to 780; Coin, 255 to 265; E-pay, 20 to 30; Money Transfer, 80 to 90.

On a consolidated basis we continue to expect adjusted EBITDA from continuing operations between $200 million and $210 million. As a result of the sale of the entertainment business, we expect full year GAAP EPS of $1.90 to $1.96 on a fully diluted basis, which does include discontinued operations.

Backing out discontinued operations, we expect full year GAAP EPS from continuing ops of $0.98 to $1.04 per share, which includes the benefit of four sets in Q4 from removing entertainment from continuing ops and that’s partially offset by $0.03 of convertible debt non-cash interest expense.

For the quarter, we expect shares outstanding between $31 million and $31.5 million and an effective tax rate of approximately 42%. Based on these assumptions, we expect the impact of the Sony share based payment expense on EPS will be approximately $.01 for the fourth quarter assuming a share price of approximately $34.

Turning to kiosks installations for the year, we have not changed our guidance, which is net Coin kiosks installs in the range of 800 to1000 and net DVD kiosks installs in the range of 7500 to 8500. We expect CapEx for the full year in the range of $150 million to $160 million, which is lower than guidance provided last quarter as a result of removing both the CapEx related to our entertainment business, as well as approximately $9 million in direct DVD Kiosks leases executed in Q3.

Finally, we have had a work around in place of the Universal over the past three quarters and beginning in late October, we began implementing work around for Fox and Warner Brothers as well. As a result, we have included additional work around costs in our guidance. While we believe our assumptions will be sufficient to cover these additional cost, this will be the first time we have three work arounds in place for studios concurrently.

In closing, we had a solid third quarter and with the sale of the entertainment service business, we are better positioned for revenue and earnings growth as well as increased shareholder value. Now I’d like to turn the call back over to Paul.

Paul Davis

Thanks, John. Before we open up the floor for your questions I’d like to thank John for his contributions to our company during his tenure at both Redbox and Coinstar. We wish hip well in his future endeavors.

Today, we announce that our board has appointed Jim Blanda as Interim Chief Financial Officer effective November 10, 2009. Jim is a partner at Tatum, an executive services and consulting firm and has experience in this type of role. He has been working with John for several weeks and is prepared to fill in as we continue a nationwide search for a new CFO.

With that I’d like to open the lines up for questions.

Question-and-Answer Session

(Operator Instructions) Your first question comes from John Kraft - D.A. Davidson

John Kraft - D.A. Davidson

John, just going back to what you were talking about last, the debt and the non-cash interest expense you said $0.03 roughly in Q4. Is it going to be fairly steady throughout the life and as we, analysts, I think most of us are using some sort of a pro forma number to exclude that we kind of need that.

John Harvey

Yes, it’s probably going to trail up through the life, it’s sort of an amortize or like a capital lease, but built upon an 8.5% effective interest rate and as we come out with 2010 guidance, we’ll kind of give you guys an annual feel for that.

John Kraft - D.A. Davidson

The interim $0.03 is…?

John Harvey

$0.03 in Q4, yes, sir.

John Kraft - D.A. Davidson

Looking at the same-store sales on DVD, last year in Q3, we saw a dip too. Is there some seasonality here that we should be thinking about?

John Harvey

Well there is seasonality in same-store sales, that’s definitely the case, but DVD sales are impacted tremendously by events over and above seasonality. For instance, August of last year, you had the Olympics in place, you also had some political conventions late August, early September and that was a tremendous dip in same-store sales.

This year we didn’t have those events in August and September, so we had probably what looks like a little more traditional. The hard thing with Redbox is we haven’t been around that long and so we don’t exactly have a lot of data points quarter-over-quarter over say a five to 10 year period where we can give you exact numbers especially given the growth of the company in which we’re basically doubling it year-over-year.

So yes, there is some seasonality, but that dip last year or the improvement year-over-year a lot of that last year was driven by people watching the Olympics in the month of August.

Paul Davis

Also our retail partners, we saw a similar kind of comp dip during the same quarter. I mean granted there was a fairly big delta here, but that had some softness during the same timeframe.

John Kraft - D.A. Davidson

Last question here and I’ll let someone else jump in. It maybe a bit early to really read this, but with your experience at Universal, the difficulty getting the Fox and Warner titles, when a customer comes up to a Redbox and doesn’t find what they’re looking for, are you finding that they’re just picking another movie or are they going to Blockbuster to get that title? Is there any way to track that?

John Harvey

We’ve been staying close to this. There is some impact. There’s no doubt about it, and we do our best to have other titles in the machine so that they can substitute if necessary. Sometimes it happens, sometimes it doesn’t so that’s why when you look at our forward guidance, I mean we tried to address that on a going forward basis.

Operator

Your next question comes from Eric Wold - Merriman Curhan Ford.

Eric Wold - Merriman Curhan Ford

Again, kind of following on the last question I know again it’s early with Fox and Warner just starting up, within the past few weeks or so. I don’t know how much guidance you want to give but kind of generally looking at your EBITDA margins have been kind of that 16% to 17% range recently.

Do you think that’s reasonable to be able to maintain going forward and is it a concern with work around, if you had to kind of rank it, is it more a concern about getting enough copies of the DVDs or is it the extra expense of going out and getting the DVDs?

John Harvey

I’ll take the margin question and then I’ll turn it over to Paul. Right now, Eric, beyond 2009, we’re not giving guidance. So again, when we come out at the end of the year you’ll get a 2010 number. Paul, do you want to take the other part of the question?

Paul Davis

Yes, relative to having the titles that we need, it’s difficult when you’re working with three studios to have 100% of the titles that you need. So there will be some impact, of course we have a number of studios that are working with us. Consumers will have choices there, but against the titles that we have to go out and find on our own retail and through some other distributors, it will be a challenge for us.

Eric Wold - Merriman Curhan Ford

Then since you’re getting I assume the most of the DVDs still in the work around program from retailers out there, whether it’s Best Buy’s, Wal-Mart’s, Target’s, whoever maybe getting copies of these, is there an opportunity for you to have a relationship with one of these retailers and get kind of a corporate level supply deal kind of get you the copies you need to save you the hassle of running around there?

Paul Davis

That’s always a possibility, Eric and we definitely have considered that, but nothing really to publicly report.

Eric Wold - Merriman Curhan Ford

Lastly, on the coin-counting side, seeing Coin sequentially dip in Q3 into the same store sales from Q2, again is this going to be like a guidance question you can’t answer, but how quickly can those get back to positive comps? I know you’re working a lot on the marketing to get the free counting Coin to card kind of out there. Is that something that’s going to take a little while or with the Wal-Mart machines come into the mix in Q4 and Q1, is that going to be a big enough boost?

Paul Davis

I think you should probably expect again negative comps in this quarter. There’s a fairly tight correlation that we’ve shown in the past scripts between consumer confidence index or the economy and our machine performance. As you talked about testing a number of things, Eric, that we think could have some nice promising upside. We plan on sharing that plan in our findings at the next conference call.

Operator

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

Bob Evans - Craig-Hallum

First, can you talk about the pricing on the Redbox trials? I know it’s early there, but maybe just what the potential might be?

Paul Davis

We’re testing in a few markets. It’s really still early. So we’re not only testing in the market, we’re also doing separate research, where we’re talking to our consumers and talking to our competitors consumers, but it take a bit before we’re able to really share that on a broad scale basis.

Bob Evans - Craig-Hallum

Paul, you made a comment earlier in your comments that the access to the depth of titles for certain titles maybe wasn’t what you want. Could you just elaborate a little bit more and how much of an impact do you think that had on same store sales or other volumes?

Paul Davis

We’ve built this into our guidance, our best thinking on the impact. It’s hard to know exactly, Bob, because we haven’t dealt with three studios as John talked, we’ve dealt with one. We’ve done that and candidly the team has done a pretty good job to-date, but there’s always can you get 100% of what you need on a big release? Not always sometimes, on the smaller releases we usually get what we need but there is an impact with the larger releases, and then the question mark gets down to the substitution factor.

Bob Evans - Craig-Hallum

Would you say was there much impact in Q3 given, I know the work around is really more of a Q4 impact.

John Harvey

Given the litigation present right now Bob, we can’t get into the details of that.

Bob Evans - Craig-Hallum

Can you give us any sense, I think you said you budgeted or guidance includes costs for the work around. Can you give us any sense of magnitude or materially?

John Harvey

I understand the question, but given the active litigation right now we can’t share that.

Bob Evans - Craig-Hallum

One detail item, because I missed it. What did you say your Coin segment income was and percentage?

Paul Davis

Coin was for the quarter $23.4 million and a 33.7% margin.

Bob Evans - Craig-Hallum

33.7%, okay. So down modestly, but it was mainly just due to I assume the lower volume.

Paul Davis

We also had an impact again of declining foreign exchange rates, which was from the revenue top line, mathematically folds into that equation.

Bob Evans - Craig-Hallum

Can you tell me how much the foreign currency hurts your same-store sales?

Paul Davis

Not off the top of my head, but I can get that for you.

Operator

Your next question comes from [Ari Black - Thomas Weisel Partners].

Ari Black - Thomas Weisel Partners

I’m hearing that the DVD resale price is now around a couple of dollars and in some other cases that you’re getting next to nothing for some of the titles. Can you comment on what you’ve been seeing?

John Harvey

I can’t comment on the exact sale back price we’ve been getting, because we don’t give that detail of information, but certainly those prices have been dropping all year. Now we knew that, we baked that into our budget in the beginning of the year and we’ve been baking into our guidance all year as we assess 2010, obviously, we’ll do the same in 2010, but with respect to specific numbers I can’t give that detail.

Paul Davis

Remember too, Ari, that all of our copied debt deals we destroy. That’s part of the arrangement, so where you might be hearing that there’s no value it could be its intentional, because there’s a lot of decent percentage of the product we just get rid of after we reuse it. Right now in, Q4 given the deals we’ve announced and the test with Paramount, the fact we have an informal arrangement out with there with Disney you’re probably doing over 50% of our volume is on copies in Q4, give or take.

Ari Black - Thomas Weisel Partners

Going forward for the next few quarters, now that you no longer have a distribution deal with Warner Brothers and Fox, how are you going to sell those previously viewed DVDs since you can no longer sell it back to Ingerman DVD? What’s the strategy there?

Paul Davis

We have an organization that we’ve created internally that go out and find the end-users so think about dollar stores, convenience stores, there’s a number of different outlets and channels that would still buy these, and that’s what they’re responsible for.

Ari Black - Thomas Weisel Partners

Would there be a large impact now that there’s all of the new titles coming from Fox and Warner Brothers or should that not change?

Paul Davis

I don’t think it will change that much. Greg Kaplan is with me. Greg?

Ari Black - Thomas Weisel Partners

Nope. Nothing should change.

Paul Davis

Yes, in many ways our distributors, we had a good handle on where they were selling the product when they handled it before, so it’s just we work directly with the retailers versus the distributors.

Ari Black - Thomas Weisel Partners

Just switching over to the window that’s being discussed by the industry of retail sales only window. Can you comment on whether you’d commit to this kind of window if you don’t have copy agreements from Warner brothers, Fox and Universal?

Paul Davis

Now you’re probably making reference to what Reed Hastings mention about putting all rent tailors on a similar window. Is that correct?

Ari Black - Thomas Weisel Partners

Exactly.

Paul Davis

Yes, we haven’t publicly commented on what our position might be, especially in light of the litigation that’s going on.

Ari Black - Thomas Weisel Partners

Okay, are you able to comment though on what you think the impact would be to your revenue if everyone participated in a deal like that? Do you think that assuming all rental companies are three weeks after the DVDs sell-through release date, what would be the impact to you guys?

Paul Davis

Yes, it’s a great question and unfortunately, we can’t comment, but as you might imagine, we’re studying all of these possibilities to have a really good hand on, but it’s something we’re not in a position to share.

Ari Black - Thomas Weisel Partners

Just lastly, on the different pricing trials, are you able to comment on when you think you might be able to come to a conclusion on whether you’d be able to raise the price or not?

Paul Davis

Any effective test you want to do it for a few months. I think our decision is if that was a path we decided to go down and you should not read between the lines and say that’s a path we decided to go down. I don’t think I’d like to state, when we might play that card, but it’s all the different options that we’re considering. That’s the reason we’re testing it.

Operator

Your next question comes from Mike Olson - Piper Jaffray.

Mike Olson - Piper Jaffray

I think we’ve exhausted a lot of things here, but just a couple quick ones, any thoughts of potential timing on divesting the remaining non-core businesses?

Paul Davis

We’re actively engaged in it right now, it’s going to take a while, let’s say in the first half of the year. We should have a decent handle on it, probably a good spot to do something.

Mike Olson - Piper Jaffray

Then do you guys have any data, you could share what percent of your customers are coming from retail stores or DVD by mail or other sources?

Gregg Kaplan

This is Greg Kaplan. There’s no specific data anecdotally. We find that most of our customers are coming more from brick and mortar, than from by mail subscription, but we’re getting customers from all sources including folks that weren’t renting before so we’re definitely expanding to buy.

Operator

Your next question comes from Alan Robinson - Royal Bank of Canada.

Alan Robinson - Royal Bank of Canada

Just to refer back to Eric’s question earlier on Coin and same store sales. You mentioned that consumer confidence was clearly a factor there. How is that consumer confidence expressed in terms of the impact on your business model, because you’ve spoken before in terms of the decline in the float of coins out there? Is that principally, how the consumer confidence is expressed or perhaps you can give us more color on that?

Paul Davis

It’s a separate measure, and it’s independent measure and not tied. We just have discovered that as consumer confidence dips, so do our comps and that’s where we point the correlation. Probably another way to think about it is just cash transactions in the marketplace.

So we’re impacted by fewer people pulling their bill fold out and using cash. We’re also impacted by traffic in and out of the scores. So as people start making fewer trips not using as much cash, it does impact us. So we’ve been tracking this for quite a while and it’s a pretty tight correlation.

Alan Robinson - Royal Bank of Canada

Just to develop on that, have you been tracking statistics in terms of coins in circulation? Are we starting to see a rebound there as well?

Paul Davis

I know the team. I just don’t have one of our leaders from the Coin team in here. I’m certain they have tracked that, but I just can’t comment right now. I can get back to you though.

Alan Robinson - Royal Bank of Canada

Then looking out longer term, could you give us some color. I guess longer term expansion views for the DVD business? How much longer can you go on increasing the kiosks installation base and what kind offer runway do you have before you move from a growth mode in DVD rentals into a harvest mode for this business?

Paul Davis

We think there’s still a lot of white space and as we look at U.S. and even abroad, there’s a lot of opportunity. We did the study initially. We said that an independent third party said there was between 60 and 90,000 kiosks opportunities just in the U.S. alone. We candidly think that’s pretty aggressive, I don’t think the numbers is that high.

So if you said the numbers 40 to 60, that would tell you you’ve got a lot of ramp left here, but we really stay in tune to all of the leading indicators of a place to where you start to slowdown and think about other things that you can move through your kiosk to extend the useful life.

Alan Robinson - Royal Bank of Canada

I assume you get the eventual ideal goal of installations. Could you give us some color on how you think you should proceed in terms of the speed of the ramp up? I mean clearly, if the rate of ramp is fairly slow you run the risk of new products coming into compete there. Can you give us some perspective on how you’re thinking there?

Paul Davis

I don’t think we’ve laid out any future installation plans. I don’t think we’re going to do that now, but there’s certainly a lot of criteria that we look at on a regular basis. We’re constantly monitoring comp sales for different classes of machines, ones that were older as well as ones that are less mature.

We’re constantly monitoring the shifts of digital and video on demand, so those are all of the factors that would play into it and as well as what we think our organizational capability is and the demand that’s out there among retailers. So that’s the process that we go through, but we’re not going to comment now on the amount of locations that we’ll do in 2010.

Operator

Your final question comes from Steven Frankel - Brigantine

Steven Frankel - Brigantine

Give us some insight into the length of a typical rental at Redbox and how is that changing if it’s changing?

John Harvey

Average ticket price is about $2, and it’s been $2 now for quite a while. It moves a $0.01or $0.02 on either side of that given whatever quarter we maybe in but as a general rule think $2.

Steven Frankel - Brigantine

How about some insight into how the Paramount test is going?

Paul Davis

It’s thus far, it’s going well. I mean I think that’s a question relative to their plans beyond December 15 something you should probably ask Paramount, but we’re pleased with it and it’s in market and still kind of early because we just really took off with that deal not long ago, but I think we’ll know a lot more in a few weeks.

Steven Frankel - Brigantine

Are they asking for data that maybe you don’t have or didn’t look at it that way or is it the other way around that you’re giving them insights into the behaviors and geographies in things they don’t normally get about consumer behavior?

Paul Davis

We obviously look at it, we study the business with all of our studios all of the time and I think in this case, Paramount is doing their own independent research looking at the impact this deal is having on their business, but that would be a good question to ask them.

Steven Frankel - Brigantine

Can I ask the interest question a different way? I know you talk about $0.03 but from a pre-tax number what are we looking for in Q4 for all in interest expense between the line of credit and the non-cash interest?

Paul Davis

Yes, I wouldn’t know that, for Q4. I don’t know the all in number off the top of my head. We can get back to you on that.

Steven Frankel - Brigantine

If you go back a couple quarters, there was a thought process that said the Coin to card program would turn comps. Has that not lifted the business as much as you thought or is it the economy is getting in the way and the Coin to card should work overtime.

Paul Davis

I think the answer is yes to both. Coin to card should work overtime and the economy is continues to have an impact on our business. What we talked about I think in the last conference call was really that we were testing a number of ideas to drive both awareness of Coin to card as well as looking at our broader card offering and that was the intent, but still we’ve never disclosed it.

It’s a fairly low percentage of our business, so even if it doubled it wouldn’t dramatically move the number but we think just untapping a lot of this business and because on our best day we’re only getting a third of the business out there, but that’s something that we really need to improve on and that’s where we’re putting a lot of organizational focus around it.

Steven Frankel - Brigantine

Could you give us an update in the convenience store channel of kind of how far have you rolled out some of your recent wins there and are the rentals there any different than your typical grocery store channel?

Paul Davis

I’ll start and Gregg is the expert here but we’ve announced doing deals with 7/11 and Circle K, both leaders in the space and in almost every instance, the kiosk would be an outdoor kiosk to enable a lot more traffic to the machine and because we have such stringent internal rate of return hurdles, it needed to have the kind of traffic that it was at least as good as supermarket and it’s close, so we are really pleased with the performance in the convenience stores.

The mix inside the machine might be slightly different based on the demographic but that’s one of the core competencies of the company in being able to adjust the mix down to machine level.

Gregg Kaplan

The only thing I would add is just that to date, the numbers from convenience stores are performing according to model, so we’ve been happy with the results.

Steven Frankel - Brigantine

Would you share any insights on your experiments in the video game space?

Gregg Kaplan

It’s still fairly early because we’ve just been really out there for a few weeks, so maybe in the next conference call we can talk a bit more about it.

Steven Frankel - Brigantine

I’ll try one more. Is it seen as a standalone kiosk or a use of slots in DVD kiosks.

Paul Davis

It could be both. We’re testing both integrated so we mix the video games with the DVDs as well as a dedicated, so where it would just be video games so we’ll be testing both.

Operator

We have now reached our allotted time for question-and-answers. I’ll now turn the presentation back to Paul Davis for closing remarks.

Paul Davis

Okay, I really appreciate everyone taking the time to join us this afternoon. We’re proud of what all of our teams have accomplished and are very excited about our future. We believe our core businesses of DVD and Coin form a solid foundation for future growth. We aren’t standing still. We are focused on maximizing our position in the long term and leveraging our core competencies to lead in automated retail. Thank you.

Operator

This concludes today’s presentation. You may now disconnect. Good day.