The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
This biweekly newsletter lists key events in the movie rental and exhibition industries for the period between October 8 and October 21, including notable rental releases, box office figures and recent company-specific news.
Movie Rental Industry
Key Redbox releases this year (with domestic box office total in millions from www.boxofficemojo.com):
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o 10/9: Snow White and the Huntsman ($155), Dark Shadows ($80), People Like Us ($12).
o 10/16: Madagascar 3 ($216), Rock of Ages ($39), That’s My Boy ($37).
Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):
o 10/7: No notable releases.
o 10/11: Zookeeper ($80).
*estimated release date, **was originally slated for 8/21 but released on 8/28 according to www.redbox.com
Over the next two weeks, there is one notable rental release compared to three last year (notable releases are those that grossed over $50 million in domestic box office). Despite more new notable releases last year, we expect the upcoming twoweek period to perform in line with the same period last year, as The Avengers ($623 million in domestic box office), Madagascar 3 ($215 million) and Snow White and the Huntsman ($155 million) will likely perform well over the coming two-week period. This compares to last year’s new releases, Captain America ($176 million), Bridesmaids ($169 million), and Bad Teacher ($99 million).
We expect Coinstar’s (NASDAQ:CSTR) Q3 earnings report on October 25 to exceed expectations; however we expect details of the Verizon JV to pressure shares once announced. Notwithstanding our expectation of solid results, we expect continued pressure on shares after Coinstar reports Q3 earnings, as it is possible that: 1) Coinstar continues to withhold details on pricing and features for Redbox Instant by Verizon (NYSE:VZ); 2) even if details are provided, it may become apparent that steep capital contributions to the JV are required; 3) management may once again fail to clearly explain the impact and timing of charges related to the NCR acquisition; and/or 4) management fails to pass through Q3 upside to FY guidance. Coinstar may divulge details regarding its JV on its Q3 earnings call, but we expect Redbox Instant to struggle to be competitive due to increasing streaming competition, and we expect Coinstar to contribute as much as $158 million to the JV. We should get greater clarity on the NCR dilution, but we are not optimistic that Coinstar will provide increased visibility into Q4 earnings potential.
We expect Netflix (NASDAQ:NFLX) to report in-line Q3 results on October 23, and lower its currently unrealistic domestic streaming subs guidance. We expect investors to again be disappointed in 2H domestic subscriber additions given unrealistic guidance and increasing competition, and we expect the company to lower net domestic streaming subscriber guidance by 1 – 1.5 million. We think that consensus estimates for domestic earnings power are overly skewed in favor of domestic streaming, which we think is only mildly profitable, and we believe that continued declines in DVD subscriptions will dramatically reduce domestic earnings at the same time that international expansion continues, making profitability in 2013 less likely.
We recently revised our Q3 estimates for our covered exhibitors to reflect Q3 box office of down 6.9%. According to boxofficemojo.com, domestic box office results for the quarter ended September 30 were down 6.9%. Regal’s quarter ended September 27, resulting in Q3 box office down ≈ 5%. The few Q3 hits did not offset a number of misses at the domestic box office. July began well, with late-June releases performing above expectations, but July releases mostly disappointed. The Dark Knight Rises was the standout summer blockbuster, as expected, but was negatively impacted by the Colorado incident. August was plagued by cannibalization from the Olympics and a generally weak box office, while September releases were uncompelling.
We estimate that Latin American box office trended down in Q3 in U.S. dollars, while trending up in local currency. According to boxofficemojo.com and our calculations, and after weighting each market, we estimate that Cinemark’s combined Latin American markets were up 2% in local currency after accounting for the additional theaters Cinemark (NYSE:CNK) acquired last year.
Q4 quarter-to-date box office is trending up 33%. Taken 2 has been the surprise hit of October, earning over $105 million in its first three weeks, compared to last year’s Real Steel, which earned ≈ $85 million over the same period. Frankenweenie was slated to appear on IMAX (NYSE:IMAX) screens for the full month of October, however after a disappointing opening, IMAX announced it will also include October 19 release Paranormal Activity 4. We expect Taken 2 to lead October releases, the Twilight finale to lead November, and The Hobbit to lead December releases. We view our Q4 box office estimate of up 6.2% as conservative.
Michael Pachter is an analyst at Wedbush Securities.