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Blockbuster and Netflix: Revenue vs. Profit

31 Mar, 2009 By: Erik Gruenwedel

When Blockbuster Inc. recently said it would soon rent movies and TV shows digitally through TiVo set-top boxes, analysts applauded the decision.

Some called it a win-win scenario for Blockbuster despite the fact TiVo also offers rival Netflix’s Watch Instantly streamed content — a direct competitor to Blockbuster OnDemand (formerly Movielink).

While Dallas-based Blockbuster briefly enjoyed a respite from Wall Street bears and the assumption it is a 1980s brand trying to extend its relevance in a digital age, investors didn’t care as the No. 1 DVD rental service’s stock languished nearly 80% below a 52-week high of $3.55 per share.

Indeed it appears there is little Blockbuster can do to satiate the wolves at the door. It generated $5.29 billion in revenue in fiscal year 2008. Excluding the non-cash charge of $435 million for the impairment of goodwill and other long-lived assets, Blockbuster had adjusted net income of $79.3 million. Same-store sales for year increased for the first time in eight years.

By comparison online DVD rental pioneer Netflix produced about $1.4 billion in fiscal 2008 revenue, nearly 74% less than Blockbuster. It posted net income of $83 million.

When Netflix announced it would soon up monthly Blu-ray rental prices by $1 to $9, depending on the plan, Wall Street rejoiced sending shares up near a 52-week high of $44.42 per share.

Luke Shagets, research associate with Sterne Agee in Dallas, which covers Blockbuster, said Netflix continues to favor acclaim because it operates a “completely different” business model without the substantial overhead with which Blockbuster contends, operating more than 7,400 stores globally.

“Obviously, the margins are a lot higher with Netflix, and thus it generates a lot more interest from the Street,” Shagets said. “It doesn’t really matter high much revenue you generate. It depends how much it costs to generate that revenue.”

Perception aside, Blockbuster’s albatross involves about $854 million in debt (accrued when it was spun off by Viacom in 2004), including a $200 million credit revolver that comes due in August. It had $95 million in cash at the end of the year.

Netflix, which ended the fiscal year with about $300 million in cash, including $117 million in free cash, has just $39 million in debt — largely due to the rollout of its streaming service.

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, which covers Blockbuster, said the company’s debt was close to $4 per share, which made its enterprise value (an economic measure reflecting the market value of the whole business) actually reasonable.

“But [Blockbuster’s] equity has very low market value at present,” Pachter said. “It is pounded because of the debt.”


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