Redbox movie rental kiosk operator Outerwall (OUTR) easily beat Wall Street’s expectations in the first quarter, but most analysts remained cautious on the stock.
Outerwall stock rose 3.1% to 41.31 on the stock market today.
Late Thursday, Outerwall said it earned $1.97 a share on sales of $536 million in the March quarter. Analysts polled by Thomson Reuters expected Outerwall to earn $1.33 a share on sales of $508 million.
On a year-over-year basis, earnings per share fell 31% and sales fell 12%.
Redbox generated 138 million rentals in Q1, down from 173 million rentals in the year-earlier quarter. The decline in disc rentals was driven by a secular shift to streaming video services such as Netflix (NFLX) and fewer Redbox kiosks in operation.
Outerwall is planning to launch a new streaming video service called Redbox Digital, Variety reported last month. It would be the DVD rental firm's second attempt in online video. It launched a streaming service called Redbox Instant in a joint venture with Verizon Communications (VZ) in early 2013, but it was shut down after about 18 months.
Redbox contributed 79% of Outerwall’s revenue in Q1. The company’s Coinstar and ecoATM businesses accounted for the rest.
“While share and debt repurchases and other forms of financial engineering are helping the EPS line, the secular decline in DVD demand and execution issues at Redbox are creating significant challenges,” Dougherty analyst Steven Frankel said in a research report Thursday. “We continue to believe that ecoATM isn’t scalable and the combination of box office volatility, shifting viewing patterns toward episodic TV, and the rise of streaming create significant challenges for Redbox.”
Frankel rates Outerwall stock as neutral.
Pacific Crest Securities analyst Andy Hargreaves reiterated his underweight rating on Outerwall late Thursday.
“Outerwall expects Redbox transactions to decline 15% to 20% in 2016, a level that we expect to continue indefinitely,” Hargreaves said. “At this pace of decline, we believe the company will be at increasing risk of negative leverage against its fixed costs and per disc purchasing agreements.”
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