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Blockbuster (NYSE:BBI) Inc. Q1 Results Raises More Questions Than Answers

Often times when a company is struggling there are two opposing views. One person is looking for proof of failure, another person is looking for proof of life and sustainability. Unfortunately after Blockbuster Inc. (NYSE:BBI) released their first quarter results last week neither would be convinced, yet a strong case can be made for both views. If this sentence is ambiguous, Blockbusters numbers are just as much.

For every place they show signs of life, looming doubts remain, or continued losses grip everything in a base of reality. For instance, they burned threw less cash this Q1 than in 2009, yet they are still burning through cash. Q1 is a cash heavy quarter, paying $45 million dollars to a payment to principle on outstanding debt, as well as interest payments on other notes. So you can see reasons for the cash loss, but yet still there it is. Operating income when your cash on hand is only $110 million being a negative of any kind is dangerous, and hence not surprising to once again see many warnings throughout the report of possible bankruptcy being an option. Going through the numbers and comments from Jim Keyes and Tom Casey may be able to offer some clarification to these questions of viability. As the company transitions into the digital age, the brick and mortar model strengthens with the closing of Hollywood Video, time seems to be all this company may need. Will they get their before needing new capital? Probably not, as they are attempting to dilute their stockholders by giving Class A stock for debt.

Total revenue for Q1 came in at 934 million, down from from 1.09 billion(Q1 of 2009). They attributed this drop to a 7% drop in international sales, and the closing of weaker stores. This revenue drop isn’t altogether surprising due to a lagging reaction to their transition to other cheaper forms of revenue streams, such as mail order and kiosk sales, as well as on demand revenue, which did see an increase year over year. Revenue for Q2 should be down to flat from these numbers.

Operating expenses came in at 531 million, up from last years total of 523 million. This increase was due to one time charges of 20 million associated with the closing of stores, almost 10 million in severance, and 9 million in associated fees from the company’s recapitalization initiatives. I would expect this total to drop in Q2.

Net loss for Q1 comes in at 65.4 million dollars, or .33 cents a share, compared to net loss of 27 million dollars, or .12 cents a share in 2009.

Free cash flow was negative 54.8 million compared to a negative 95.7 in 2009.

Cash on hand came in at 109 million dollars.

Here are some comments on the numbers and their business from Jim Keyes, CEO of Blockbuster:

“During the quarter, we experienced better same-store sales trends and achieved one of our key goals: establishing a significant cross-channel competitive advantage by securing agreements with three of the major studio partners.”

“These are movies that are national competitors like, Netflix or Redbox, will not have for 28 days.”

The company has admitted this advantage will be hard to vocalize for the company until their cash flow position improves, but the realization that only Blockbuster has certain titles early should be noticeable to the consumer. This is a huge advantage for BBI, and will provide a nice bonus to their kiosk sales.

In regards to their recapitalization plans, Keyes said, ” As you know, we’ve delayed the shareholder meeting until late June to have the opportunity to report progress on our recapitalization plans.” Seems we will receive some sort of clarity on this issue soon. As it looks right now, they will indeed need new capital at some point. Just how long can they hold serve with their current metrics? The filing offered this information on this topic, as well as the usual bankruptcy warnings required of a company this close to major cash flow issues and their current debt load versus net income.

“We expect cash on hand, cash from operations, cash generated from our cash management strategy and, if necessary, the liquidity benefit resulting from the recapitalization of our debt and equity structure to be sufficient to fund our anticipated cash requirements for minimum capital expenditures, working capital purposes including rental library purchases, as well as commitments and payments of principal and interest on borrowings for at least the next twelve months. ” – From Q1 Filing

Expecting 12 months of survival without new capital is realistic in my opinion. They should be ok for now, but as I stated earlier, they are looking for new capital for a reason. Sale of their international unit should help this in the near future.

They are experiencing some improvements in same store sales. Closing underperforming stores was necessary to reduce costs, as the company is now focusing more on cost reduction than growth. The growth will come in the kiosk, on demand, and mail order model. Also brand name selling to cable companies and smart phone applications may drive in new revenue down the road.

Here are comments from the conference call on this issue from Keyes.

“During the quarter, we made steady improvement in top line performance with sequential improvement of domestic rental same-store sales comps coming from approximately minus 15% in the third quarter of 2009 to minus 11% in the fourth quarter of ‘09, and now minus 6% in the first quarter of 2010.”

Here are more important comments from Keyes on how their growth model business plans are moving along. These are important areas to the future of Blockbuster and where their recovery hopes may lie once the bleeding from the brick and mortar model stops.

“And with NCR, we significantly increased kiosk deployments recently adding, for example, 1,400 machines in Safeway stores throughout California. Through this alliance, we now have over 4,000 Blockbuster Express kiosks deployed and NCR remains on track to deploy a total of 10,000 kiosks by the end of 2010.”

“Finally, we expanded our digital presence. When looking at video and demand rentals, the first quarter increased 78%, when compared to the fourth quarter. And we expect exponential increases going forward as more and more connected and embedded devices become available in the marketplace.

“Through our alliance with Samsung for BLOCKBUSTER ONDEMAND, we’ve now been embedded in over 60 products, including Internet-ready televisions, Blu-ray players and home theater systems. Most exciting about this service is the access to BLOCKBUSTER ONDEMAND with the simplicity of a button on the remote control. We continue to make progress with all leading consumer electronics and device manufacturers. And we’ll have additional news over the next several months.”

“We remain optimistic about the long-term viability and success of Blockbuster’s iconic brand, especially now with the completion of our cross-channel capability, the emergence of a new rental window and the closing of Movie Gallery and Hollywood stores, our largest brick-and-mortar competitor.”

As you can see, Blockbuster is making strides in expanding their revenue abilities, as well as entering into a low cost model as well. The key issue going forward right now is how they will deal with their recapitalization efforts, and the company sights this avenue as their major focus right now. Appears they are intent on offering Class A shares for removal of debt, which would come as a substantial dilution. Stockholders of this company should be aware of dilution risks. If this way is not accomplished, chapter 11 bankruptcy is warned as an options. This paragraph from their filing might be their focus and plan on getting themselves out of this situation.

“One initiative we are pursuing involves an exchange of all or part of our senior subordinated notes for Class A common stock. We also may seek certain modifications to the senior secured notes from the holders thereof. Consistent with this approach, the holders of the senior secured notes and the senior subordinated notes have been contacted and have formed respective note holder committees, have retained advisors, with which we are engaged in negotiations, and are conducting due diligence. Assuming that we can reach agreement with such holders on the terms of an exchange, we will seek to implement an exchange during the latter part of the second quarter or early part of the third quarter of this year, depending on the timing of SEC clearance of the exchange documentation and when we receive, if necessary, shareholder approval. In connection with pursuing an exchange, we will also be involved in discussions with holders of our Series A convertible preferred stock regarding the possible conversion of such Series A convertible preferred stock into our Class A common stock. We can give no assurance that we can successfully execute an exchange and preferred stock conversion strategy or any of the other strategies we are pursuing and our ability to do so could be significantly impacted by numerous factors including changes in the economic or business environment, financial market volatility, the performance of our business, and the terms and conditions of our various debt agreements and indentures as well as the certificate of designations governing our Series A convertible preferred stock. It is possible that a successful and efficient implementation of an exchange or any of the other strategies we are pursuing will require us to make a pre-packaged, pre-arranged or other type of filing for protection under Chapter 11 of the U.S. Bankruptcy Code.”

As is evident in the numbers and comments from the company, their are clues and signs of life, and definitely reasons to be cautious going forward. As the company continues to transition its model into the digital age, some more growing pains can be expected.

Source: http://www.kingofalltrades.com/2010/05/17/12100.html

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