Blockbuster continues its tough figures and descent in the eyes investors with its latest third quarter results with revenues falling 5.7% to $1.31 billion compared to last year, ending in a net loss of $35 million, up from a loss last time of $24.7 million, although to be fair, that was more or less in line with last year’s performance after taking into account the $9.6 million in severance and lease termination charges that Blockbuster filed, which only happened because it’s trying to cut costs.
CEO Jim Keynes said that going forward the company would remain focused on its core rental business, by which we take it to mean that you can rent videos and games from Blockbuster either from the shop, or online ordering a DVD like Netflix or through its online downloads. But a key change has been made here. Previously the company was only interested in growing its online business, now it will focus on total customers, whichever of the three service formats they use. This reeks to us of driving the business back towards physical retail, which would be a disaster.
The management team has already cut overhead costs by around $45 million by cutting in-store jobs and online costs and will now look to outsourcing to rid itself of further costs.
The company has also fiddled with pricing on its Total Access offering because that has meant giving away free rentals costing around $29 million, denting both revenues and profitability, and it will reduce advertising spend associated with pushing online. The company said that some subscriptions had been inherently unprofitable and that this price change will reduce the number significantly.
“During each month this quarter, over 20 million customers around the world used the Blockbuster brand to satisfy their needs for media entertainment, and that customer base presents us with a tremendous opportunity,” said Keyes. “Our goal is to continue to increase our membership base by providing even more ways for customers to get the entertainment they want through our stores, through the mail and through new technologies.”
He also said that revenues had fallen primarily because of the closure and sale of 526 company operated stores. This decrease was partially offset by a $79.2 million year-over-year increase in revenues from Blockbuster’s online rental service resulting from growth in the subscriber base, which totaled approximately 3.1 million total subscribers at the end of the quarter, although how much of that is Movielink business we’re not sure.
All in all the picture is a little confused, and investors are selling the stock, and its market capital is now down to $913 million, under 25% of the company’s revenues. What appears to be going on is that a number of non-US stores were not profitable and they’ve been sold, cutting overall revenue, but that those which were profitable are gradually adding console game rental to the mix, a business which is still taking off rapidly. The net effect is that same-store rental revenues for the third quarter increased 1.1% from the same period last year and if no more stores are sold, revenue should continue upwards.
It was only last month that US DVD rental rival Movie Gallery filed for Chapter 11 bankruptcy and re-organization, primarily because it has failed to change its business model and is still hell bent on trying to make money out of the moribund process of renting DVDs through retail stores.
It was back in August that Blockbuster bought online video download store Movielink, perhaps the lamest online film service on the planet, in a price that was universally touted as around $50 million, but not officially released.
In our view Blockbuster is worth far more than its current market capitalization, but only if it can avoid the same fate as Movie Gallery, and not run out of money. Better execution will only get it so far, to the point where it is running a profitable but declining business, and it has to ramp online sales at a similar rate to the decline in its traditional business. However as it does this it will have layoff costs and early termination lease costs every time it makes a retail reduction and may never make a profit that way. A bolder move is required to release cash and focus management’s mind on the online business, such as selling off its retail arm outside the US, or vice versa. But it cannot do this until the whole business can be shown to be profitable and predictable.