Blockbuster Announces Q4 2006 Profit; 3 Million Subs Goal

Press release: Blockbuster Q4 2006 revenues increased slightly over the same period last year to $1.51 billion, including approximately $30 million from the Total Access program, but profits declined 28% over the previous quarter due to increased costs related to Total Access. Blockbuster has also set an aggressive goal of 3 million Total Access subscribers by the end of Q1 2007.

"2006 was an exciting year for Blockbuster. We delivered four consecutive quarters of positive same-store domestic movie rental revenues. We also significantly reduced operating costs, sizably increased our online subscriber base and substantially improved our profitability and cash flow," said John Antioco, Blockbuster Chairman and CEO. "In the year ahead, we anticipate online subscriber growth to exceed 2006 levels. Specifically, we expect to have a total of 3 million BLOCKBUSTER Total Access(TM) subscribers by the end of the first quarter, which would mean that we will have nearly doubled our subscriber base in the five months since we launched our new integrated offering. This growth will require some investment in the first half of the year, but we believe this investment is the right strategy to deliver value to our shareholders and should result in more online customers, more in-store customers, a larger share of the overall domestic rental market and increasing revenues."

Blockbuster CEO John Antioco is contesting bonuses worth $7.65 million, according the earnings release.

Comments

[Ricklogic]

It's funny, just this morning I was thinking about how frequently the Netflix ads are about the free trial lately.

For awhile, the ads were only showing the $5.99 plan and then the $4.99 plan. Netflix is giving up some amount of revenue, maybe a million or so. They typically have over a million gross additions each quarter so each free trial taken in place of $4.99 has some brief effect.

I knew Blockbuster was going to get really aggresive, but this is stunning. Since it is the end of February, their projection of subscribers for the quarter is based on 2 months and should be pretty accurate.

Obviously, some of this is existing in-store customers. But with all the press Blockbuster has gotten, there has to be a significant affect on Netflix? Some people from Netflix going to or adding Blockbuster, some new people picking Blockbuster instead of Netflix.

[leonardodicrapio]

in·vest·ment /ɪnˈvɛstmənt/ Pronunciation Key - Show Spelled Pronunciation[in-vest-muhnt] Pronunciation Key - Show IPA Pronunciation
–noun 1. the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.

Blockbuster cannot make money on Blockbuster Online Total Access under the current terms. They will likely raise the price, which Antioco alluded to in the conference call. If Blockbuster thinks they can raise the price and not have a large defection of subscribers, they are sorely mistaken. IMHO, Blockbuster is going to end up losing $20-$30 Million in the First Quarter.

It's nice to see that Antioco "gave away" the Total Access service in November and December so that Blockbuster Online could hit its year-end target of 2 Million, cutting into Blockbuster's only profitable quarter of 2006. Now the CEO (Antioco) is contesting his bonus for the year. He thinks he should give 7.5 Million, but the board has cut that amount to 2.5 Million. Blockbuster lost millions of dollars in 2006 (I don't consider benefits for taxes a consideration in year-end profit), and Antioco wants a bonus that is more than half of Blockbuster's profits in their only profitable quarter of 2006.

"Specifically, we expect to have a total of 3 million BLOCKBUSTER Total Access(TM) subscribers by the end of the first quarter, which would mean that we will have nearly doubled our subscriber base in the five months since we launched our new integrated offering. This growth will require some investment in the first half of the year"

[leonardodicrapio]

meant to say "he [Antioco] think he should get 7.5 Million dollars..."

I can't wait for Blockbuster to try the "Bait and Switch" on its Blockbuster Online Total Access customers. How about 3-Out for $25?

[Aron]

In the follow-on conference call they did little to hide their intention to raise prices. 70% of customers they say come in an average of 3 times a month. This would be in addition to the 3 movies always checked out via mail. That is a LOT of product to be giving away for 18$\month and comes close to confirming the hedge fund figures.

The only question is WHEN the price increase will come which I couldn't quite divine. I'd bet that they don't know but they might be leaning towards 2008, which is later than I had thought. At this point, after 4 months of operation, its hard to predict most things with accuracy. By the end of March the bulk of Netflix customers will likely have already made a stay or go decision, and the bulk of store customers will have been asked at least a half-dozen times to join. When growth slows, but the losses don't, we'll see what they do.

It's possible BB + Netflix will cross 10M subscribers within a month which means online is closing in on 25% of the rental market. Not bad. Hollywood/Movie Gallery is toast. How can they possibly survive this?

[leonardodicrapio]

Aron, The current Blockbuster price structure makes no sense to me. I am on a free four-week trial that I am going to cancel in less than a week, but if I need to rent a movie anytime in the near future (until Blockbuster raises their rates at least) I am going to: 1) Join BBO for $5.99 (1-Out 2-per month limit), 2) Print out the rental coupon, 3) Go to the local Blockbuster store and get the movie I want. That would get me five rentals (one coupon, two exchanges, and two in the mail) for $1.20 per movie. I could see a lot of "light" renters "abusing" this plan without much of an outlay. I would probably watch all five movies and cancel with a couple of days to spare in the month I paid for at $5.99 plus tax.

[Edward R Murrow]

"Blockbuster CEO John Antioco is contesting bonuses worth $7.65 million"

The board has stated that he will get no bonus if he contests what he gets. I hope that board at Blockbuster follows through and he gets nothing.

Further, it looks like Icahn needs to give Antioco a kick in the butt to restore discipline.

[Edward R Murrow]

"I can't wait for Blockbuster to try the "Bait and Switch" on its Blockbuster Online Total Access customers"

Leonardo, are you the Master of "Bait and Switch"?

[leonardodicrapio]

the biggest problem i see with the bbota is there were approximately 300 bbota customers per store that could exchange movies in-store in early november. there were approximately 450 bbota customers per store that could exchange movies in-store in early january. there will probably be upwards of 600 bbota customers per store that can exchange movies in store.

i seriously doubt there will many copies of borat for an average joe to go in and rent for $5 at any time next month. my best advice to blockbuster customers is go to blockbuster on wednesday in april (borat is released next tuesday, march 6th).

and if blockbuster continues the current price structure, there could be 750 bbota customers per store that can exchange movies in-store. and that means hire additional cashiers (if there are even available open registers), or let the lines get longer in-store. of course there comes a time when the line gets too long, and potential paying (the $5 rental crowd) and bbota customers either stay away from the stores, go to hollywood video, or cancel their monthly memberships. giving away too much is not always a good thing.

[leonardodicrapio]

complete thought...

"there will probably be upwards of 600 bbota customers per store that can exchange movies in store" [by the end of next month.]

[Edward R Murrow]

Regarding the investment thread part of this discussion - there's short term investment where you need to show a profit as quickly as possible. And there's long term investment where you can take some losses in the short term because you know your strategy will lead to higher profits in the long term.

It appears that Blockbuster is more than happy to take small losses with BBOTA over the next few quarters in order to quickly have the same number of customers as Netflix.

[leonardodicrapio]

2/23/2006

"If the minimum performance goals for Adjusted Operating Income are met, then the Senior Bonus Plan Participants may also become eligible to receive an additional bonus payment depending on the satisfaction of the approved BLOCKBUSTER Online ® subscriber growth performance goals."

Blockbuster (specifically CEO Antioco) has gone on record for at least the past 4 straight quarters that their year-end 2006 Subscriber goal was 2 Million subscribers. How is it not a conflict of interest to "give away" TA to BBO customers?

$2.5 million bonuses paid out to four officers (CFO, etc.). $2.25 Million offered to CEO (if he would take it w/o objection) -- Antioco is holding out for $7 Million (or nothing).

[leonardodicrapio]

Link to 8K from a year ago...
http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?FilingID=4232314&Type=HTML

[Edward R Murrow]

I would think that if Blockbuster management didn't make their goals, then they could lose their jobs. From my quick scan of their financial announcement today, Blockbuster did make a profit and have added hundreds of thousands of paying customers through BBOTA.

BBOTA is taking Netflix to the woodshed for an ass whipping right now using their integrated offering; it's not good or bad, it's just part of capitalism.

Since Antioco is holding out for $7 Million or nothing, let's all raise a glass and hope he gets nothing.

[leonardodicrapio]

blockbuster made money in the fourth quarter of 2006. blockbuster also made money in the fourth quarter of 2005 (but they lost a lot of money for the entire year of 2005), and from what i have read they always make money in the fourth quarter because it is seasonal (i can only assume that this is because of christmas). blockbuster lost money for the entire year of 2006 (a $6.3 Million for the entire year of 2006 to be exact).

http://biz.yahoo.com/prnews/070227/datu014.html?.v=78

"For the full-year 2006, net income totaled $54.7 million, or $0.23 per diluted share, as compared with a net loss of $588.1 million, or $3.20 per common share, for 2005. Excluding the favorable resolution of multi-year tax audits, store closure and severance costs as well as certain other items, as shown on page 5 of the financial tables, adjusted net income for the full-year 2006 totaled $6.3 million, or $0.03 loss per common share, compared with an adjusted net loss of $73.6 million, or $0.40 per common share, in 2005."

Antioco is fighting over $520,000 pre-tax earnings that he claims he will keep (or about $300,000 post-tax). And he is risking $2.28 Million pre-tax. Not a fight I would make.

From WSJ.com:

"The board told Mr. Antioco it will pay him a $2.28 million bonus on top of his compensation of $2.5 million. What's more, it said it would pay him no bonus at all if he contests its decision. Mr. Antioco says his 2004 employment contract and other board-approved performance targets entitle him to a $7.65 million bonus. (See a related document.)

Mr. Antioco is in negotiations with the board and says he has no plans to file a legal challenge. "I'm reasonably optimistic the discussions will work out and resolve the issue," he said.

Mr. Antioco pledged to donate any bonus money more than the $2.8 million to charity."

[Firstlawofnature]

Yeah BBI had profits but without a big increase in payables they would not have generated any cash in Q4. Payables balloned from Q3 to Q4 well beyond the increase in inventory.

[type-cast]

"Hollywood/Movie Gallery is toast. How can they possibly survive this?"

According to the IHBB blog, that is the main goal of Total Access. They are going to wipe out Hollywood Video and Movie Gallery. It is working too. Their parking lots are empty at 10-3, while Blockbuster's are full. Once the biggest rival of Blockbuster folds, they can gain a few million more customers. HV and MG have passed the point of no return.

[leonardodicrapio]

actually i forgot that the $4.85 Million Antioco wants to give to charity will probably still be subject to Medicare taxes (at 2.9%). that's $140,000 -- so he is contesting approximately $1.35 Million take-home for $1.5 Million potentially. would you risk your entire principal for a 10% return?

[leonardodicrapio]

this is like there being two amounts on the board of deal or no deal $0.01 and $1,000,000. the banker offers you $900,000. howie says, "you'd have to be a m.f. idiot not to take that offer!"

[coach purses]

The best formula for happiness is to be able to develop the ability to tolerate frustration , to have a personal involvement and commitment , and to develop self-confidence and self-esteem.

[coach bags]

actually i forgot that the $4.85 Million Antioco wants to give to charity will probably still be subject to Medicare taxes

[Supra Shoes]

Once the biggest rival of Blockbuster folds, they can gain a few million more customers.

[2011 Head Snowboard]

It sounds like you're creating problems yourself by trying to solve this issue instead of looking at why their is a problem in the first place.

[2011 Head Snowboard]

ohhh nice info

[Web Services]

I heard Blockbuster was going to get a really aggresive campaigne, but this is stunning. Since February, their projection of subscribers for the quarter is based on 2 months and should be pretty accurate.

That is proof of how bussiness will be manage now on!!

[Web Services]

Blockbuster has to chance terms of use at the Online Total Access if they want to be in bussines by the end of the year!!

A pretty good change because if it starts to compite as it is right now.. they are gonna lose, big time!!