Redbox May Be Peaking

Outerwall gears up for a disappointing quarter.

May 5, 2014 at 12:08PM

Redbox parent Outerwall (NASDAQ:OUTR) may have held up well in its latest quarter, but the current period isn't going to be as fortunate. Outerwall's guidance suggests that Redbox is about to post its first year-over-year decline in revenue.

Outerwall now expects to generate between $546 million and $576 million in revenue in its present quarter. This is well short of the $600.4 million in consolidated revenue that it posted during this year's first quarter, and the low range of the guidance falls well short of the $554.2 million it posted in the year-ago quarter. 

Outerwall blames Hollywood for this situation. 

"Our second quarter 2014 guidance reflects significantly lower box office and fewer titles than the second quarter of 2013," Outerwall CFO Galen Smith said in the company's earnings release issued last week. "However, we continue to expect that rents and revenue per kiosk will be up year-over-year in the third and fourth quarters."

In other words, Outerwall is bracing investors for declines in disc rentals and revenue per Redbox machine for the current quarter.  

The Redbox movie and video game kiosks are a big part of the Outerwall story. Despite Outerwall's success with its change-collecting Coinstar machines and acquisitions that have added new kiosks to its model, Redbox still accounts for 86% of company revenue. As Redbox goes, so does Outerwall, and the ominous tone heading into this quarter can't be ignored. There is certainly some truth to the weak slate of DVDs hitting the market in coming months, but let's not assume that the headwinds facing Redbox's future can be overcome with better content.

DVDs are on the way out, and Redbox is finally feeling the pinch. Growth in the past has come largely from other players bowing out, whether it was the shuttering of Hollywood Video, Movie Gallery, and eventually Blockbuster, or Netflix (NASDAQ:NFLX) emphasizing streaming over optical discs. Netflix is great at what it's doing in streaming, but it has been shedding viewers who crave DVD and Blu-ray discs.

Netflix now has 6.7 million DVD subscribers. That's down from nearly 8 million a year ago and more than 10 million the year before that. Redbox has made the most of Netflix servicing 3.3 million fewer accounts than it had two years ago. We can also tack on the countless Blockbuster renters. The pie is shrinking, and now that Redbox makes up so much of the pie it can't escape the media's fade from relevance.

Outerwall doesn't see it that way, of course. It told investors to expect year-over-year growth during the third and fourth quarters. That seems naive in light of the growing popularity of streaming and the fact that it has few rivals left to vanquish to gain market share.

Redbox had a great run, but it's time for Outerwall to drum up a worthy second act.

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Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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