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Analyst: Blockbuster Burning Cash at ‘Alarming Rate’

14 May, 2010 By: Erik Gruenwedel

Faced with $150 million in debt principal and interest payments due this year and $146 million available in cash at the end of the first quarter (ended April 4), Blockbuster’s ability to continue operations through the year has again come under question.

Analyst Michael Pachter with Wedbush Morgan Securities in Los Angeles May 14 said the Dallas-based DVD rental icon has painted itself into corner burdened by a massive ($920 million) debt load (much of it inherited) and striking short-sighted distribution deals with three major studios that could backfire with consumers.

Blockbuster May 13 posted a first quarter net loss of $65 million on revenue of $939 million.

"The company is burning cash at an alarming rate, with free cash flow of $55 million for the quarter," Pachter wrote in a note.

The longtime Blockbuster analyst, who also covers rivals Netflix and Redbox, said the company has increasingly put its fortunes on the success partner NCR Corp. has financing and rolling out 10,000 Blockbuster Express kiosks, in addition to the involvement of unnamed financial and strategic investors (including bondholders) to be disclosed at the annual shareholders meeting next month.

Specifically, Pachter said the deals struck with Warner Home Video, 20th Century Fox Home Entertainment and Universal Studios Home Entertainment give Blockbuster a 28-day advantage over Netflix and Redbox but at the expense of charging consumers higher ($5 from $4) street date rentals fees.

The analyst, who does not believe this advantage to be a “game changer” for Blockbuster, said street dates are irrelevant to the average movie renter seeking inexpensive entertainment.

“If the average value-oriented customer is willing to pass on the more expensive movie theater, video store and [transactional video-on-demand] in order to pay $1 per [day per] rental, waiting another 28 days should not be a problem,” Pachter wrote.

Blockbuster CEO Jim Keyes, in a call discussing the financial results, reiterated that kiosks and video stores are primarily driven by new-release movies and that 28 days is “an eternity” in the rental industry.

Pachter also questioned the impact should other studios’ (Paramount Home Entertainment, Sony Pictures Home Entertainment, Lionsgate, etc.) titles emerge from the box office as must-see rentals.

“For releases such as The Lovely Bones (Paramount), Blockbuster management seemed unconcerned whether it had sufficient number of copies in stock or not,” he wrote, adding that the full impact of the 28-day window on Redbox and Netflix will not be felt until the third quarter.

In addition, Pachter said rollout of Blockbuster Express kiosks (4,000 to date) lag significantly behind Redbox with more than 24,000 units. But it is more than a numbers game after the analyst found four Express and 33 Redbox kiosks within a five-mile radius of his office — the latter spread out over more than six major retail chains.

The Express units were all found at separate (but identical) 99 Cents Only Store locations.

“We see diversity of locations as a key advantage for Redbox,” Pachter wrote.

He said that regardless of Keyes’ statement that there are 1,400 Express kiosks in Safeway stores in California, he said expansion within the state’s major cities continues to move too slowly.

“Given all of the issues that it faces, it is unclear what (if anything) Blockbuster can do to defend its core [store-based] business,” Pachter wrote.

Blockbuster shares were down more than 21% to 39 cents per share in heavy midday trading.


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