Analyst: Outerwall Should Lose Redbox Instant

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Q1 revenues were largely in line, with EPS upside from cost control and share repurchases. Q1 revenue was $600 million, compared with our estimate of $605 million, the consensus estimate of $587 million, and guidance of $570 – 600 million. EPS was $1.27 (excluding a $0.31/share net loss), compared with our estimate of $1.03, the consensus estimate of $0.93, and guidance of $0.77 – 0.97.

The company narrowed FY:14 guidance range for revenue to $2.378 – 2.488 billion from $2.358 – 2.498 billion and increased EPS guidance to $6.68 – 7.18 from $5.16 – 5.76 (essentially unchanged for net income, but adjusted for the sharply lower share count). The company provided initial Q2:14 guidance for revenue of $546 – 576 million and EPS of $1.24 – 1.44.

Redbox is expected to see its first year-over-year quarterly revenue decline in its history. The DVD release schedule is underwhelming in Q2, but is expected to materially improve in Q3 and Q4, allowing the business to rebound to modest growth. Notwithstanding the setback, we think that the Redbox business is approaching full maturity, and we expect annual growth at the rate of GDP growth going forward, plus some potential for international expansion.

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