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 April 22 and May 5, including notable rental releases, box office figures, and recent company-specific news.
Movie Rental Industry
Key Redbox (NASDAQ:CSTR) releases this year (with domestic box office total in millions from www.boxofficemojo.com):
o 4/23: Parental Guidance ($77), The Impossible ($19).
o 4/30: Silver Linings Playbook ($132), The Guilt Trip ($37).
Key Redbox releases last year (with domestic box office total in millions from www.boxofficemojo.com):
o 4/24: none.
o 5/1: Haywire ($19), W.E. ($1).
Over the last two weeks, there was one notable rental release compared to four last year (notable releases are those that grossed over $50 million in domestic box office). DVD rentals for the upcoming two-week period should underperform the same period last year, as this year’s DVD releases grossed less than half of last year at the box office.
Redbox should benefit from a very strong summer release schedule. There are 22 films with budgets greater than $100 million scheduled this summer, compared to 15 last year and an average of 12-15 most years. There are going to be several films that people want to see, but the crowding of the release schedule will make it impractical for them to see all of the movies they care about in the theater. As a result, they are far more likely to rent the movies when released on DVD.
The average time from theatrical release to DVD is under five months, and even for movies falling in the 28-day window “around half of Coinstar’s supply”, they will be available within six months of release. That means that the majority of big budget films will be available in Q3 or Q4 for Coinstar, and Coinstar’s guidance implies that they understand this. As a reminder, the high end of CSTR’s guidance calls for Redbox revenue growth from $1 billion in the first half to $1.2 billion in the second half.
Netflix (NASDAQ:NFLX) believes it can grow its domestic footprint to 60-90 million households. However, there are only 90 million households connected to the Internet, implying 66-100 percent penetration. When discussing its margin structure for domestic streaming, the management stated its intention to grow revenues faster than content and marketing spending, suggesting growth at ever increasing profitability. Both comments reinforce our view that the business model is broken.
Only 85 million households in the U.S. pay for access to television currently, so it seems a stretch to presume that 70 percent (at the low end of Netflix’s goal) will add an additional pay layer from ANY provider, especially in light of increased competition from Redbox Instant by Verizon (NYSE:VZ), Amazon (NASDAQ:AMZN), and, most recently, content providers establishing their own services.
Similarly, it seems illogical to presume that Netflix can grow its base by spending less on content per customer; the company appears convinced that it can add 100-200 percent to its domestic subscriber base, yet seems determined to grow content spending by less than this amount. In our view, the content owners are interested in maximizing profits for their stakeholders, and are unlikely to allow this to occur.
Q1:13 box office ended down 12.4 percent year-over-year due to a quiet release slate and a difficult comparison. Regal’s (NYSE:RGC) quarter ended March 28 with Q1 box office down ≈ 10 percent. Q1 was up against a strong +24 percent comp that became progressively more difficult throughout the quarter. January ended down 0.6 percent, led by late-December Oscar-nominated releases. February ended down 24.6 percent due to a particularly quiet release slate. March ended down only 12.3 percent despite a difficult comparison of up 38.1 percent from last year’s release of The Hunger Games.
Both March and Q1 were led by Oz: The Great and Powerful. Regal reported Q1 box office slightly below industry on April 30, while Carmike (NASDAQ:CKEC) will report on May 6 and Cinemark (NYSE:CNK) on May 7.
We expect Q2 domestic box office to end up 5 percent despite a slow April. Q2 quarter-to-date box office is trending down 7.5 percent through May 5. However, May and June include blockbuster releases, Iron Man 3, The Great Gatsby, Star Trek Into Darkness, Fast & Furious 6, Hangover Pt 3, Man of Steel, Monsters University, and World War Z. We also expect a strong Q3, up 8 percent.
We estimate that international admissions revenue was up 7 percent in Q1. According to our estimates, in Q1 Cinemark’s international circuit was up 10 percent in U.S. dollars y-o-y, while the circuit was up 3 percent y-o-y in local currency. Q2 is trending down 1 percent in U.S. dollars y-o-y, and down 3 percent in local currency y-o-y. Additionally, we note that Cinemark is slated to sell its entire Mexican theater base, and, while a sale date has not yet been announced, our model accounts for this sale as of the beginning of Q3:13.
We calculate the concentration of total box office within the top 10 films in Q1 to be roughly flat year-over-year, suggesting stable film rental margins. With that said, the concentration of total box office within the top three films in Q1 is ≈ 200bps lower y-o-y, so we expect film rental costs to be down slightly y-o-y for the exhibitors.
Michael Pachter is an analyst at Wedbush Securities.