July 21, 2014

Outerwall (OUTR) - Long Thesis from 2014 Annual Meeting

Before making an investment decision, investors are advised to read carefully the Offering Memorandum, including the description of the risks, fees, expenses, liquidity restrictions and other terms of investing in the funds. Performance data has not been prepared to meet any specific requirements applicable to the presentation thereof and should in no event be viewed as predictions or representations as to actual future performance. Investment may involve a high degree of risk and should be considered only by investors who do not require access to their capital and can withstand the loss of all or part of their investment. Return targets in this document are subjective determinations and do not reflect either actual past performance or a guarantee of future performance. Referenced benchmarks may fail to provide a meaningful comparison. Forward looking statements are based upon assumptions which may differ materially from actual events. This information should not be relied upon in making an investment decision.

DISCLAIMER

• Focus on out-of-favor Stocks

Out-of-favor stocks that are mispriced due to uncertainty or fear, misunderstanding or obscurity; conduct significant due diligence to overcome those hurdles; invest only at a deep discount to intrinsic value

Limited to 10 to 15 best ideas

• Preserve Capital

Achieved by focusing on stock with poor scenarios built into the stock so risk of permanent loss is low

• Minimize taxes

Focus on long-term gains over short-term gains and capital growth over income

Investment Strategy – Brief Summary

• Pillar stock – will hold a long time

Durable competitive advantage

Trustworthy management

Industry we understand with favorable characteristics

Available at a deep discount

• Work-out – shorter time frame & catalyst driven

No durable competitive advantage required

Trustworthy management

Industry we understand

Available at an even deeper discount

Near-to-medium term catalysts required

Two Types of Investments

• We look for companies with specific issues:

Turn-around situations

Spin-offs

Post-reorganization equities

Debt covenant concerns

Recently lowered guidance

Hidden or unappreciated assets

Misunderstood business model

Recent negative headlines unfounded, short-term in nature, or unrelated to the actual operations of the company

Out-of-favor industry or country (best source for pillar stocks)

• No particular market cap or sector focus

Thorough understanding of the industry and sufficient liquidity required

• Increasingly looking abroad for ideas

• Special situations will arise regardless of overall market

Where we look for ideas

• Volatility is a measure of the price swings in a stock

• Modern portfolio theory assumes greater volatility means greater risk to the investment

Nothing could be further from the truth

• Only risk that matters is the permanent loss of capital

Short-term fluctuations in the stock price in no way indicate probability of permanently losing capital

• Since we focus on out-of-favor stocks, our investments often go down further after we invest before eventually rising to our valuation

We invest into negativity and negative sentiment can increase in the short-term, but eventually cooler heads prevail

• Increased volatility means we have a greater chance of buying a stock we like at even lower prices

Volatility Is Our Friend

In-Depth Analysis

• Outerwall (ticker symbol: OUTR) is U.S. leader in automated retail

Self-service, stand-alone kiosks in heavily trafficked locations

• Founded in 1989 as Coinstar

• Changed name to Outerwall in 2013

• $1.1B market cap

• Over 100 patents

Profile

• Flagship Brands – cash cows

Redbox

Coinstar

• Developmental Concepts – growth stage

ecoATM

Coinstar Exchange

SampleIt

Redbox Instant by Verizon

Brands

• Stock selling <7 times 2013 free cash flow & for <6 times expected 2014 free cash flow

• Despite the fact that free cash flow is still growing

• Capital expenditures to decline substantially over next few years

• Highly variable cost structure

• Available at less than 50% of revenue despite high margins

• Revenue still growing

• Margins expected to grow even faster

Available at very low multiples

• Maximum negativity from market due to Redbox

Face of the company

Seen as another Blockbuster-in-waiting

• Very high short interest

44% of float shorted – 10 days to cover

• Shifting investor base from growth to value-oriented

• Market cap down 37% YTD

Down 25.5% in last 2 months solely on negative analyst reports

• Work-out investment

Expect company to beat lowered market expectations, overcome market’s fear, & likely cause short squeeze

Opportunity

• Self-service, stand-alone kiosks in heavily trafficked areas

• Strong role in future of retail

• Allows convenience for fulfilling immediate need at lower costs than traditional brick-and-mortar retail, even lower cost than e-commerce

• Limited overhead

No large rent expense (take up 12 square feet of space)

1 part-time employee can service multiple kiosks

Automated Retail

• No competitor can come close to matching Outerwall

• Outerwall has prime real estate no competitor can get

Ex. just about every Wal-Mart has a Redbox and Coinstar

It does not make sense to have a second kiosk from competitor in same location offering same service

Lends itself to natural monopoly within a store

• Long-term relationships with major retailers throughout the country creates high barrier to entry for competitors

Wal-Mart, Walgreens, Kroger, Target, malls, gas stations

Retailer receives percentage of revenue

Drives foot traffic to store

Automated retailer of choice for any new concept

Outerwall Rules Automated Retail

• 86% of Outerwall revenue in 2013

• Kiosks offering physical DVD, Blu-ray, & video game rentals

• 43,000+ kiosks in U.S. and Canada

68% of U.S. within five minute drive of a kiosk

• Only option available in most areas for physical rentals

Redbox

• Can be summed up by one brief paragraph:

Pacific Crest negative report note on July 1, 2014:

“Total DVD/Blu-ray rental volume in the U.S. has declined for six consecutive years. We have found no physical format in the past 40 years that has stabilized after five or more consecutive years of decline, which makes a stabilization at Redbox seem highly unlikely.”

Bear Thesis

1. Physical DVD/Blu-ray volume declined mostly due to extensive retraction in supply as opposed to demand

B&M stores going bankrupt but Redbox has continued to grow rental volume throughout this period

2. One format emerged previously because single device could only play one format (VHS vs Betamax, HD vs Blu-Ray)

Many devices used to stream movies can also play DVD or Blu-ray

3. Generally new format was better quality – DVD over VHS

Blu-ray quality exceeds anything possible via streaming today or near future while DVD has same quality as streaming

4. Ignores sustainable and growing price difference in physical versus streaming rentals and new release availability

Faulty Reasoning

“Total DVD/Blu-ray rental volume in the U.S. has declined for six consecutive years. We have found no physical format in the past 40 years that has stabilized after five or more consecutive years of decline, which makes a stabilization at Redbox seem highly unlikely.”

• Paints the picture of a free fall at Redbox – revenue and margins tell a different story…

Bear Thesis Dissected

Revenue Growing

$-

$500

$1,000

$1,500

$2,000

2009 2010 2011 2012 2013

in millions

26.4% CAGR

12+% Operating Margins

Revenue per Kiosk Stable

in dollars

$42,853

$44,110

$47,610 $48,263

$45,029

$37,500

$40,000

$42,500

$45,000

$47,500

$50,000

2009 2010 2011 2012 2013

2013 decline due primarily to Canada expansion

Market Share

Can still take market share from brick-and-mortar

Should only increase

Slide from Outerwall 2014 Analyst Day

Home Entertainment

Slide from Outerwall 2014 Analyst Day

• Natural urge to compare Redbox to Netflix or Amazon Prime because each offers movies, but that is a mistake

• Netflix and Amazon Prime do not get new releases for some time and must maintain large and growing library of older movie titles and TV shows plus original content

• Redbox focuses primarily on new releases and does not carry any TV content

• Result is little to no content overlap with subscription services

• Proper comparison is Redbox vs. Amazon Instant Video, iTunes, and Cable Video on Demand (CVOD)

How to think about competitive landscape

• Advantages

1. Sustainable Price Gap

2. New Releases

3. Higher Quality

• Disadvantage

1. Convenience

Redbox vs Streaming

Price Advantage

Slide from Outerwall 2014 Analyst Day

• Redbox – no price increase since 2010 yet maintaining margins

• Amazon, iTunes, & CVOD have all raised standard video on-demand prices at least $1 since then

• Studios retain ownership of digital content and have significant say in price charged for video on-demand

Want to maximize revenue by selling DVD or digital copy instead of renting

Think highly of the value of their content

• Redbox has far greater control over pricing due to First-Sale Doctrine

Upward Pricing Pressure

• Enables distribution of legally purchased copyrighted material

Once sold, copyright holder (i.e., studio) has no say in what purchaser does with product as long as purchaser does not reproduce material (i.e., create additional copies)

• Allows Redbox to purchased DVD or Blu-ray and rent it out at whatever rate it and as soon as it desires in the absence of a contract with the studio

• Court rulings within the last decade determined that First-Sale Doctrine does not apply to digital copyright material

Results in studios maintaining significant control in streaming pricing

First-Sale Doctrine benefits Redbox

• New Releases usually available at Redbox well before subscription services Netflix, Amazon Prime, Hulu, etc.

Studios want to maximize revenue by selling or renting individually for a time

• Amazon and iTunes sometimes do not have new release available for rent immediately

Only able to buy at higher price

Studios concerned about hurting sales

• Redbox has all of the new releases either the day of release or, at most, 28 days after release

First-Sale Doctrine prevents studios from stopping Redbox from renting DVD’s, so sign agreements with Redbox, giving discount

2nd or 3rd largest source of DVD revenue for Studios

New Release Advantage

• Blu-ray is higher quality than HD streaming

Only available in physical format and at fraction of the cost

• Only costs $0.30/day more at Redbox than DVD rental

HD is $1 more than standard on streaming

• Blu-Ray at Redbox introduced in 2012

Currently 17% of Redbox revenue

Expected to grow to 25% by 2015

Higher margin than DVD

Blu-ray – Higher quality

• Only 12% of purchases reserved online

Very easy process with app or website

• 45-50% of DVD’s returned to different kiosk

• Indicates an impulse transaction as leaving grocery store or getting gas

Prominent kiosk display near front door grab attention

Greatly reduces “convenience” advantage of streaming

Not So Inconvenient

• Rent 4+ DVD’s/quarter on average

• 25% of customers

• 60% of revenue

• Core customer base

“Movie night”

Want new releases and/or Blu-ray

• Would take long time to erode this base

High Frequency Renters

1. VMZ – expanded capacity & inventory efficiency in kiosks in 2013 – added equivalent of 4,000+ more kiosks

2. New CRM & customer understanding

• Increased interaction with customer via e-mail and app already paying dividends

3. Increased Blu-ray mix

4. Increased video-game mix ($2/night vs $60 for new game)

• Only 2% of revenue currently

5. Expansion into Canada – new market

6. Potential rate increase

• Currently testing in a few markets

Growth Initiatives

• 13% of Outerwall revenue in 2013

• Kiosks that convert coins into cash

• 20,000 kiosks in 4 countries

U.S., U.K., Ireland, and Canada

• 80% market share, excluding banks, in U.S.

33% when including banks

• Counted four times as many coins as processed by U.S. mint in 2013

• 91% of population within 5 miles of a kiosk

Coinstar

• Prime real estate and retailer relationships

• No threat from e-commerce

• Even banks are beginning to put Coinstar kiosks in their branches

• Raised price from 9.0% of transaction amount to 10.8% and consumers did not bat an eye

Exceptional pricing power

Clear Advantages

• 50% of cash received from converting coins is spent in store kiosk is located in

• Customers have option for gift card to store in lieu of cash

Retailer pays the fee instead of customer in this instance

Retailers Love Coinstar

1. Possibility for future fee increases

2. Expand bank presence

3. Considering variable pricing by region or transaction size

4. New ways to deliver funds

• PayPal

• Blackhawk

• Charity Donation

• Gift Card

Mature but some growth initiatives

Slow and Steady Revenue Growth

$230

$240

$250

$260

$270

$280

$290

$300

$310

2009 2010 2011 2012 2013

3.7% CAGR

20+% Operating Margins

• New kiosk concept in test phase

• Exchange gift cards for cash

Many retailer gift cards accepted

Gift cards are then sold by Blackhawk to other partners

• Blackhawk takes a fee and remits rest to Coinstar

• Difference between what Coinstar receives from Blackhawk and pays to customer is recorded as revenue

• Only 440 kiosks at end of Q1 2014

Expect 700 by mid-year 2014

• Benefit from Coinstar brand

• Revenue and profitability not released

Coinstar Exchange

• 1% of Outerwall revenue in 2013

• Kiosks give customers cash for used electronic devices

Phones, tablets, MP3 players – 4,000 devices allowed

• Devices sold wholesale to other companies

• Over 30 patents issued or pending

• Invested in 2009 when concept won Outerwall best idea contest

• Acquired remaining interest in July 2013 for $263M

• 900 kiosks in Q1 2014

Expect 2,000 by 12/31/14

ecoATM

• 370M devices sitting idle in U.S. alone

Only 59M recycled in 2013

• Recycled device market $1.4B in 2013

Expected to grow to $7.6B and 174M devices by 2018

• Trade-in at store most popular option, typically buying newer device

Only receive store credit

• Online trade-in requires shipping in product and waiting for cash or owning a PayPal account to receive amount, subject to later adjustment

• ecoATM only option for instant cash

Could serve as best option for unbanked and underbanked

ecoATM Opportunity

• Unprofitable currently but expect Redbox-type operating margins at scale

• High capex during rollout phase eventually settling to maintenance levels

• Expect to grow from 1% to 12-15% of total revenue by 2015

• Expect 6,000 kiosks in U.S. at maturity

Predict $600M-$720M in revenue and $120M to $182M in operating profits

• Given it is mostly unproven at this point, we assume concept is drain on free cash flow in both upside and downside valuation

In Roll-Out Phase

• Couples movies-only streaming service by Verizon with rentals from Redbox into subscription service

• Redbox is 35% owner in the JV with Verizon

• $157M capital commitment, of which $63M already spent

Unproven concept, so we deduct entire amount of required future investment from both upside and downside valuation

OUTR can put interest to Verizon if certain subscribers levels not reached by March 2015 – recoup some costs

Redbox Instant by Verizon

• SampleIt

Kiosks offer $1 samples of products in skincare, fragrances, health & wellness, hair, cosmetics, & household categories

Retailers like it because gives insight into consumer

Earliest stage concept – immaterial

• SoloHealth

Outerwall owns 10% of company

3,500 kiosks nationwide offering free health and wellness screening

Services 130,000 customers daily for free – paid via advertising, referrals, other

Not yet profitable or material to OUTR

Example of continued search for next great kiosk concept

Other Concepts

• Disposed of 4 unsuccessful concepts in December 2013

Reducing headcount 8.5%

$40M in total annual savings

• Took on debt at reasonable rates to buy back 20% of stock at below our assessment of intrinsic value in March 2014

• Committed to returning 75-100% of free cash flow to investors via buybacks going forward

• New, more conservative approach to new concept testing

Recent Shareholder Friendly Moves

• Debt issued previously to fund growth and, more recently, to buyback stock

• Debt easily manageable

Leverage ratio = ~2.0 • Target is 1.75-2.25

Net debt to free cash flow = ~4.0 • Ratio declines as capex settles to lower maintenance level

• No pension or unrecorded liabilities

• Current ratio ~1.0 due to low cash conversion cycle

Outerwall receives cash from customers about the same time the cost of the product is due to the vendors and payroll due to employees

Rent expense based on percentage of revenue, so not paid until after cash received from customer

Solid Balance Sheet

1. ecoATM

2. Coinstar Exchange

3. Redbox Canada expansion

4. Redbox Blu-ray expansion

5. New Redbox CRM and customer understanding/targeting

6. Potential Redbox rate increase

7. Recent Coinstar price increase

8. Expanding Coinstar bank presence

9. Automated Retail of choice for any future high potential kiosk concept

Sum of Major Growth Initiatives

Cash Cow

$135

$237 $256

$166 $200

$171

$179 $208

$158 $125

$-

$100

$200

$300

$400

$500

2010 2011 2012 2013 2014*

CAPEX

FCF

$464

$325

Operating cash flows – in millions

* Low end of 2014 guidance – high end is $240M in FCF

$306

$416

$324

• 18% avg. FCF yield

• 25% FCF yield at maintenance CAPEX levels

1. Discontinued 4 test concepts Dec. 2013 – saving $40M in annual expense

2. Highly variable cost structure

Minimum guarantees for Redbox only material fixed cost

Rent, credit card fees, marketing either based on revenue or adjustable

3. Recent Coinstar price increase and potential Redbox price increase

4. Blu-ray expansion

5. Substantially reduced CAPEX for Redbox from 10+% of revenue to 1 - 2% of revenue

6. Potential for ecoATM profitability – currently cash drain during rollout

7. Limited working capital requirements – current cash conversion cycle around 0 days

8. Limited advertising required (~0.5% of revenue) – rely on point-of-sale and word-of-mouth

Sustainable & Improving Free Cash Flow

1. E-commerce threat – factored into assumptions, particularly for downside valuation

2. Major retailer (Wal-Mart) deciding to offer same service and kick out Outerwall

Highly unlikely due to Outerwall scale advantages, business complexity, and the fact that retailer already profiting from service via Outerwall

3. Studios deciding to eliminate DVD all together

Highly unlikely because too large a revenue stream

Risks to Consider

• Valued using two methods

1. Projecting company-wide financials to determine free cash flow

2. Sum of the parts analysis

• Completed upside and downside valuation

Upside conservative

Downside aggressive to incorporate worst case scenarios

Valuation Methodology

Valuation

Upside Analysis Method 1 Method 2

Intrinsic Value $115 $94

Stock Price $55.32 $55.32

Upside 108% 70%

Downside Analysis Method 1 Method 2

Intrinsic Value $46.95 $46.05

Stock Price $55.32 $55.32

Downside 15% 17%

Invest based on the lowest number for both upside and downside

• Should understand investment well enough to be able to calculate a rough valuation using simple methodology

Used as a sanity check for valuations calculated on previous slide

• Key Data points:

Starting revenue of ~$2.3B

Avg. OCF/Revenue last 4 years = 19.7%

• Redbox began establishing dominant position in 2010

Avg. CAPEX/Revenue last 4 years = 9.5%

• Project next 5 years average free cash flow - assumptions:

Upside: no growth, lower margin (higher tax and interest, no credit for higher rates), less capex (still well above maintenance level)

Downside: 35% revenue decline, even lower margin (high variable cost structure limit margin decline), slightly higher capex

Back of the Envelope Calculation to Support Valuation (1 of 2)

Back of the Envelope Calculation to Support Valuation (2 of 2)

Key Data Point Upside Downside

Revenue $2,300 $1,500

OCF/Revenue 16.0% 12.0%

CAPEX/Revenue 3% 4%

Free Cash Flow $299 $120

Multiple 8 8

Valuation $2,392 $960

Market Cap $1,100 $1,100

Upside/(Downside) 117% (13%)

• Project average cash flows over next 5 years and apply appropriate multiple based on business risk

• Key is capital expenditures – elevated for Redbox rollout and currently for ecoATM rollout • Strong boost to FCF as settles at maintenance level

• Not appreciated by market at all

In descending order of probability:

1. Primarily beating lowered expectations

Short squeeze

2. Positive surprise from ecoATM

Either ignored by market currently or viewed negatively

3. Buyout by private equity firm

Beaten down cash cow in the under $2B range hits the private equity sweet spot

Catalysts

• Redbox to some degree reliant on popularity of new releases

Fluctuates from quarter to quarter

Evens out over time

• Next earnings release July 31, 2014

Not a great quarter for new movie releases Expectations already so low, so hard to predict how market

would react to one quarter

If stock drops further, we will be happy to add assuming no drastic change in fundamentals Volatility is our friend

UPDATE: Proven correct subsequent to annual meeting – terrible quarter for new releases & market initially down on the news before finishing up

Near-term Expectations

Appendix

• Passed CPA exam, ABV exam, and all 3 CFA exams on first attempt

• 2006 Elijah Watt Sells Award (top 10 CPA exam score in the world out of 50,000+ test takers)

• 2008 Baton Rouge Business Report “Top 40 Under Forty” Award

• B.S., Accounting and M.S., Accounting from Louisiana State University

• 3+ years of auditing experience with two of the Big 4 accounting firms

• Exceptional performer every year & early promoted

• Lead senior of Fortune 500 audit client

• Former Assistant Director of State Economic Competitiveness under Governor Jindal

• Accredited Member magazine and SeekingAlpha.com contributing author

About the Managers: Jonathan Booth, CFA, CPA/ABV

• 7 years of accounting and auditing experience with

• KPMG – Big 4 accounting firm

• Postlethwaite & Netterville – largest accounting firm in Louisiana

• The Edgen Group – Manager of Financial Reporting

• Edgen-Murray Corporation – Assistant Controller

• B.S., Accounting from Louisiana State University

• M.B.A. from Southeastern Louisiana University

• Louisiana Society of CPA’s Business & Industry Committee

• 2012 AICPA Leadership Academy – one of 36 selected from across the nation for prestigious 4 day event

About the Managers: Kevin Laird, CPA

Contact Information

Booth-Laird Investment Partnership

9005 Westlake Avenue

Baton Rouge, LA 70810

(225) 767-1439

Jonathan Booth, CFA, CPA/ABV

Chief Executive Officer

Cell: (225) 978-1532

jonathan.booth@boothlaird.com

Website: www.boothlaird.com

Blog: www.boothlaird.com/boothlairdblog/

Twitter: http://twitter.com/#!/BoothLaird

Kevin Laird, CPA

President & Chief Operating Officer

Cell: (225) 229-6567

kevin.laird@boothlaird.com