Redbox quarterly performance disappoints

Redbox owner Coinstar had a worse-than-expected fourth quarter as it severely underestimated the impact 28-day delays on movie availability, among other factors, would have on its operation.

The company said yesterday that it expects to make between $78 million and $82 million when it announces fourth-quarter earnings next month. Coinstar initially estimated that it would generate a profit of $84 million to $90 million. Moreover, it has revised its 2011 revenue outlook down from $1.85 billion to $1.70 billion.

"Overall, the performance of the Redbox business during the fourth quarter was not in line with our forecast," Coinstar CEO Paul Davis said in a statement. "This was Redbox's first holiday season with 28-day delayed titles, and we underestimated the impact that the delay would have on demand during the fourth quarter."

Davis also said that his company "expected much better performance from Blu-ray and had purchased to a higher level of demand." The company first started offering Blu-ray rentals in July.

Even though it didn't live up to expectations, Redbox still performed quite well in the fourth quarter, Coinstar said. The company said its rental business was up 38 percent year-over-year with 144 million movies rented during the quarter.

Wedbush analyst Michael Pachter was quick to point out that Redbox's lower-than-expected performance in the fourth quarter does not indicate trouble at Coinstar. He said in a note to investors today that the rental company's fourth quarter "was a hiccup attributable to overly aggressive guidance." And he specifically blamed Coinstar management for the mistake.

"We believe today's preannouncement is more a reflection of management's inability to accurately forecast than of a serious deterioration in the Redbox business," he said.

Pachter was especially critical of Coinstar management's underestimation of the impact 28-day delays have on the rental company's operation.

Last year, Redbox inked deals with Warner Bros., Universal Studios Home Entertainment, and Twentieth Century Fox to offer the studios' titles 28 days after they were made available at retail. He said that the studios "took full advantage of their head-start," and helped contribute to his estimate that Redbox had 14 million fewer rentals during the quarter than it expected.

"Prior to yesterday's preannouncement, we believed that the typical Redbox and Netflix customer is unaware of, or doesn't mind, the 28-day window for the majority of the year," Pachter wrote. "It is now clear that the 28-day window can make a difference in spending patterns at the holidays."

Redbox's other issue on the quarter, according to Pachter, was its inability to manage its "rent and return anywhere" offering. The program lets users rent a movie from a Redbox kiosk in one location and return it to another when they're done. He said that the program "caused over-supply of key titles in some kiosks and under-supply in others." The impact of that shift could have turned some customers away.

On Redbox's Blu-ray woes on the quarter, Pachter offered up a solution: "Those selecting Blu-ray should be shown only Blu-ray titles, and those selecting standard definition should be shown only standard definition." Currently, Redbox lets users browse Blu-ray and DVD titles at the same time.

Going forward, Pachter sees strong performance from Redbox. He told investors that Coinstar should "deliver sequential earnings growth throughout the year," and perhaps most importantly, he believes that "management has learned its lesson."