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Executives

Kellie Nugent – Director, IR

Jim Keyes – Chairman and CEO

Tom Casey – EVP and CFO

Analysts

Karru Martinson – Deutsche Bank

Tony Wible – JMS

Carla Casella – JP Morgan

Mary Gilbert – Imperial Capital

Dominique Mielle – Canyon Capital

Colleen Burns – Oppenheimer & Co.

Charlie Wolf – Needham & Company

Blockbuster Inc. (BBI) Q4 2009 Earnings Call Transcript February 24, 2010 4:30 PM ET

Operator

Good afternoon and welcome to the Blockbuster’s Fourth Quarter and 2009 Fiscal Year Financial Results Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded today, Wednesday, February 24th, 2010.

I would now like to turn the call over to Kellie Nugent, Blockbuster’s Director of Investor Relations. Kellie, please go ahead.

Kellie Nugent

Thank you, Jasmine and thank you, everyone for joining us today to discuss Blockbuster’s fourth quarter and 2009 fiscal year financial results. With me on today’s call are Jim Keyes, Chairman and CEO; and Tom Casey, Executive Vice President and CFO.

As Jasmine mentioned, this conference call is being recorded. It is also being broadcast live in voice mode over the Internet and may be accessed within Blockbuster’s website at blockbuster.com.

After the market closed today, Blockbuster issued a press release regarding its financial results for the fourth quarter and 2009 fiscal year ended January 3rd, 2010. By now, everyone should have access to that press release and the financial tables. However, if you do not, they are available via the company’s website.

Please be advised that matters discussed in today’s teleconference contain forward-looking statements relating to the company’s operations and business outlook, financial and operational strategies and goals, including expectations regarding the company’s financial and operational performance in 2010 and other matters that do not strictly relate to historical or current facts.

We caution you that statements are, in fact, predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially. Actual –additional risks and uncertainties that could cause actual events or results to differ materially from these forward-looking statements may be found in the company’s filings with the SEC on Form 10-K.

Forward-looking statements are based on the Blockbuster’s beliefs as of today, Wednesday, February 24th, 2010. Blockbuster undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as required by law, even if new information becomes available or other events occur in the future.

Additionally, in the company’s press release and during this teleconference, management will discuss certain measures and information in both GAAP and non-GAAP terms. A reconciliation of GAAP to non-GAAP is provided in the financial tables following the text of the press release.

I will now turn the call to Blockbuster’s Chairman and CEO, Jim Keyes.

Jim Keyes

Thank you, Kellie and thank you, everyone for joining us this afternoon. We appreciate your patience. We feel that many of the questions that have come in in the last 30 days or so since releasing our guidance and we have now finally closed our books and we are hopefully going to be able to provide answers to virtually all of those questions, but we will allow time at the end of our – my remarks and Tom's remarks for further Q&A.

Well, clearly, there are two sides to the Blockbuster story. The first is a company perceived by many to be a video store chain with declining sales, a challenged capital structure and headwinds that the company faced last year certainly did fuel that perception.

In 2009, we like so many other companies were faced with a challenge of refinancing debt in a very difficult capital market environment. The resulting need to manage our liquidity caused us to aggressively reduce cost, close stores, and sacrifice top line growth. Meanwhile, our DVD-based competitors didn’t stand still. Both Netflix and Redbox captured market share while we were focused on the balance sheet.

There is a second, very different side though to the Blockbuster story. The second is a company in transition that's spent the last year building new distribution platforms that transform Blockbuster into the only multichannel provider of retailer rental movies and games. This is a company that's moving from a historical reliance on capital and labor-intensive brick and mortar to new distribution channels without walls or geographic boundaries.

While we believe the future is bright, the next 12 to 18 months will certainly remain challenging as we strive for balance between the managed decline of a single channel and the ascension of emerging channels. The studios also endorse our multichannel approach, especially our a la carte approach to digital video-on-demand and have remained very supportive throughout our transition.

Before outlining our plans for 2010, I'll briefly reference the results for '09 and explain the shortfall in the fourth quarter. Our unit purchases of movie – domestic movie rental inventory decreased about 17% in 2009 as compared with 2008 while we managed the business to preserve liquidity during our refinancing. With the October 1st completion of the $675 million senior secured notes offering, we shifted gears somewhat, redirecting our efforts to restore top line performance and to leverage the 2009 holiday season.

We increased rental inventory levels to support higher in-stock availability for the holiday season, but also because Fox, Warner, and Universal titles were important part of the slate for the quarter. And just as a reminder, Fox and Universal have just announced a 30 to 45-day window for the vending channel and Warner announced a 28-day window that includes both vending and subscription. In other words, Redbox and Netflix would both have to wait at least 30 days for those titles.

We believe that those windows could benefit brick-and-mortar stores making it easier for the customers to find those titles available at Blockbuster and increasing advertising by $17 million to $36 million for the fourth quarter. We did both of those things in an effort to drive traffic and also to target new online customers.

Since over 30% of our full-year EBITDA has historically been generated in December, we strongly believe that this investment in both inventory and advertising would contribute to our achievement of guidance. We typically don't disclose in a quarter comparable performance, nor will we plan to going forward, but in an effort to provide you with additional color on what we experienced during the fourth quarter, I'll share a little.

Domestic net rental revenues, for example, excluding online and the impact of closed stores, moved from minus 15.4 in October minus 12.6 in November to only minus 9.4 in December. While we had same-store comparables moving in the right direction, we didn’t achieve the return to our goal of flat rental comps in December. We received benefit from the incremental advertising and inventory, but it was simply not enough.

Contributing to our shortfall in sales and earnings were primarily two factors that we simply could not have predicted. First, in spite of the 30 to 45-day window put in place by Universal and Fox for the vending channel and a 28-day window announced by Warner that included both vending and subscription, that is our DVD-based competitors, it turns out that our DVD-based competitors were successful in their ability to buy around the 30-day window restrictions by purchasing diverted product from competing retailers.

Secondly, big box retailers would heavily discount the Hangover – titles like the Hangover, Harry Potter, other strong titles in the month of December to, for example, an online price by Wal-Mart of about $9.99, which affected both retail and rental traffic at our stores, as well as facilitating the buy around the DVD-based competitors.

We had every reason to believe that December, especially the holiday season, would provide its historic contribution to EBITDA with newly announced studio windows – from the studios, we saw a competitive advantage actually for Blockbuster and tried to take advantage of that favorable circumstance. However, improvements came too slow, holiday sales were far below expectations and as a result, slower inventory turns contributed to the shortfall in rental margin.

This triple-negative, lower sales, lower margin, higher expenses, was further compounded by lower-than-expected international performance, which resulted in adjusted EBITDA of $196.4 million for the full year of 2009.

We successfully managed the first three quarters of the year within our expectations with the majority of our focus on maintaining liquidity and debt refinancing. We took decisive actions to reduce our cost structure and our efforts resulted in a year-over-year G&A expense decrease of $306 million.

We also made progress during the year towards the continued transformation of Blockbuster, closing several hundred stores, but adding over 2,000 new Blockbuster Express branded kiosks. In addition, we introduced a new a la carte by-mail program that provides our in-store customers with access to over 95,000 titles and we launched BLOCKBUSTER On Demand, making streaming video-on-demand available to over 2 million households. We completed these initiatives in spite of a challenging global economy and the practical constraints of limited liquidity while we were refinancing the company's debt.

Looking forward to 2010, we remain cautiously optimistic. Business transformations of this magnitude are not easy, nor do they occur overnight. The tailwinds, however, are becoming clear. Over the longer term, we believe the recent announcement of store closings by Movie Gallery will affect favorably hundreds of Blockbuster locations as Movie Gallery liquidates and closes a number of their U.S. locations.

In addition, we believe the recently announced transaction between Warner and both Netflix and Redbox will provide Blockbuster with a 28-day head start on Warner titles in our stores. This reinforces an important element of differentiation and enhances Blockbuster's consumer relevance since 60% of the industry's $22 billion rental and retail business represents new releases during the first 30 days of street date. We believe that other studios are actively working on similar arrangements.

Given the uncertainty and timing of studio participation on the creation of vending or by-mail windows though, we are not counting on that advantage, but instead, we remain focused on a number of innovative programs that we've put in place, including exclusive content through Blockbuster Premieres, the launch of our new by-mail initiative, Direct Access.

While working towards improvement in top line performance, we recognize the importance of preserving liquidity and we've begun to execute further cost efficiencies. The recent senior management departures, for example, were part of a comprehensive organization change to realign corporate resources and ultimately reduce salaries and benefits by over $17 million. In addition, for the full year of 2010, we expect to reduce G&A expense by over $200 million.

We will build on the continued progress with – that we've made in the past year with NCR to establish a presence in the vending market and as our footprint expands through this alliance, the vending channel becomes an increasingly important part of our operational strategy. With our partner NCR, we are working together to create a sustainable model for vending that benefits our consumers and our respective stakeholders, including our studio partners. We remain excited about this emerging distribution channel as we begin to selectively integrate vending into our offers, our distribution systems, and our marketing in 2010.

In '09, we increased our reach and presence in the digital arena, launching the BLOCKBUSTER On Demand service on TiVo DVRs and more than 30 different Samsung products, providing millions of households with the movies they enjoy at the touch of a button on their remote control.

In the mobile space last year, we announced an exclusive agreement to provide entertainment content through Motorola's mobile devices. And most recently, we announced that Blockbuster will be the premier movie download experience embedded in the upcoming HTC HD2 smartphone in the US. This will be the first download and multi-screen mobile application for Blockbuster and it is part of the Blockbuster multi-channel offering to connect customers with both physically and digital access to our movies.

To be clear, Blockbuster has a lead already in the mobile space. We are the only movie retailer with a presence that spans both home and away. Our at-home and our digital capabilities in conjunction with Direct Access, our iPhone application, and alliances with cable MSOs allow us to truly take our get-it function in our multi-channel offering to the next level.

Longer term, we are committed to the transformation and diversification of Blockbuster into this multi-channel provider of media entertainment. But in the near term, as we execute our plans for 2010, I can assure you that your leadership team recognizes the importance of improved profitability of enhancing liquidity and of regaining the confidence of our stakeholders.

I’ll now turn the call to Tom who will review the fourth quarter in more detail and several of our action items in addition to that, and then we will go to Q&A. Tom?

Tom Casey

Thanks, Jim. I will focus my comments on a brief discussion of the Q4 EBITDA shortfall and then discuss optimization of liquidity and cash flow for 2010.

Jim highlighted the contributing factors to the shortfall in EBITDA on the fourth quarter of 2009 relative to the midpoint of our previous guidance; and in an effort to quantify the miss for you, I will break it down into three parts; essentially, there is $46 million shortfall in domestic revenue and margin for the reasons Jim discussed; we invested an incremental $14 million in domestic advertising specifically related to radio, direct mail, and newspaper circulars to drive traffic; and third, we experienced a $24 million shortfall in international results primarily driven by a rental miss in Canada and a retail miss in Europe.

Moving to the balance sheet; our principal source of liquidity starts with our year-end cash balance of $188 million cash and cash equivalents, that’s at 2009 year end. After year-end principal and interest payments and the elimination of Viacom LC, our pro forma cash balance would be $170 million. It is important to note that at any time, over $40 million of our consolidated cash balance is comprised of either deposits and transit, or store bank accounts that should not be considered a part of liquidity.

Looking into 2010, our goal is to preserve liquidity and optimize our capital structure while we continue the transformation to a multichannel platform.

We are not providing adjusted EBITDA guidance for 2010; however, I will discuss how we will manage the business to optimize cash flow and liquidity. The key elements of this operational strategy are, first, to optimize our domestic rental gross margin. Second, reduce G&A by over $200 million in 2010. Third, reduction of advertising spend. Fourth, maintain global capital expenditures at $30 million.

And fifth, optimize our asset portfolio in two ways; first, domestically our store closure program results are consistent with the September 15, 2009 8-K filing and for the full year of 2010, we expect to close a range of 500 to 545 underperforming domestic company-owned stores of which 253 closed in January and we have identified 150 that will close in April. The second part of asset optimization is international. We continue to make progress on our divestiture of Europe, and are in discussions with multiple potential buyers. All of our international assets are well managed, operated independently and are unlevered and comprised approximately 24% of 2009 adjusted EBITDA.

The venture to the 11.75% senior secured notes includes a provision that requires repayment of debt with a 100% of the first $100 million of proceeds from asset sales and 75% of proceeds of asset sales beyond the first $100 million.

Moving to working capital; we expect working capital to be a source of cash in 2010 due to our aggressive management of working capital primarily as a result of ongoing store rationalization and the sale of less productive rental and retail inventory. Historically, the first quarter is a use of cash, second and third quarters is the low seasonality, and the fourth quarter is a significant source.

In the fourth quarter of 2009, working capital was a source of cash of $71 million. Looking back to the first quarter of 2009, it was a $150 million use of cash due to larger-than-normal decrease in accounts payable which resulted from paying down fourth quarter of 2008 inventory purchases and our aggressive payment of studio and vendor payables.

In the first quarter of 2010, we expect a significantly lower use of cash for working capital. As Jim mentioned, our studio partners continue to be a support of Blockbuster and embrace our multichannel approach. We will continue to work closely with our studio partners to improve revenue sharing arrangements, and we expect to increase our consigned retail product.

Let me take a moment to outline how to satisfy our debt service requirements in 2010. The key assumptions based on 2009 results are as follows. First, after reporting a $196.4 million of adjusted EBITDA for 2009, the most important determinant for our 2010 EBITDA will be assumptions about top line, specifically domestic rental comps. A sensitivity that’s important there is that every 1% change in domestic rental comps represents approximately $11 million change in EBITDA for the year.

Our operating plan domestically is to reduce costs to mitigate deterioration of top line performance. And the elements of that are that we’ve taken action to eliminate $70 million of corporate and field overhead in store G&A. Those actions have been taken. The adjusted EBITDA benefit from revenue transfer and loss of volumes from store closures in 2009, 2010 will be approximately $50 million. And in 2010, we will reduce domestic advertising by $20 million.

Also looking to 2010, global capital expenditures will remain at the maintenance level of $30 million. Interest payments on the 11.75% senior security notes and the 9% senior sub notes will be approximately $105 million. 2010 taxes will be similar to 2009, which were $12 million.

So subtracting CapEx, interest, and taxes from 2009 adjusted EBITDA, would provide free cash flow of $49 million prior to cash from working capital. We expect that the combination of cash from operations, including cash from working capital and liquidity will be sufficient to meet our debt requirements in 2010.

We continue to actively explore various recapitalization opportunities which may include a restructure of the company’s outstanding debt or equity securities. Rothschild has worked with us since February 2009, and they continue to assist us regarding our capital structure opportunities.

Now, that concludes our prepared remarks. Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Karru Martinson with Deutsche Bank. Please proceed.

Karru Martinson – Deutsche Bank

Good afternoon. In terms of the $200 million incremental SG&A savings that you’ve referenced, how does that fit into the numbers that you are just going over time, $70 million from store and corporate cuts, $50 million for store closures? Is that incremental on top of that or how should we look at that?

Jim Keyes

The $200 million, Karru, is – you are correct, that’s a number that we intend to achieve. And that includes cost savings from store closings and so the important thing is the net out the loss of revenue and gross profit dollars associated with those closings and netted out to the EBITDA benefits of the real estate rationalization program, which I said, is $50 million. That’s when you take into account revenue transfer and loss avoidance, you have a $50 million pick up in EBITDA there on top of the $70 million in corporate savings.

Karru Martinson – Deutsche Bank

So net-net, we are looking at like $140 million of EBITDA when we add all those things together.

Jim Keyes

Yes. And you add the advertising piece of $20 million, you are correct. It’d come to $140 million.

Karru Martinson – Deutsche Bank

Okay. When you guys made the announcement on January 20, and you’re saying that this was somewhat of a surprise that this numbers came in. Where were you on first quarter order rates for DVDs in terms of the inventories? Were you still at an elevated level? Or had you already ratcheted that back?

Jim Keyes

Karru, you mean where are we now on inventory levels or –?

Karru Martinson – Deutsche Bank

I would guess now or for the first quarter. What I am getting at is that if we were unaware that the top line had deteriorated as much, is it likely that here in the first quarter we’re still going to be over-inventoried relative to the traffic and we are still going to see that margin pressure flowing through the numbers?

Jim Keyes

Well, it’s bit of a balance. We are not as aggressive anywhere near as aggressive as we were in December in trying to take advantage of the holiday season. We’ve got a little bit of a normal seasonal slowdown in January anyway. Right now, we are up against the Olympics for example, so we’re a little bit on the lean side. But we are trying to walk this balance between heavy enough inventory, so that we can restore our top line slowly over time; perhaps not be as aggressive as we were in the month of December trying to get it back too quickly.

Just as a frame of reference, I’ll take you back to 2007, a bit of a broken record about this but it did take us some three quarters to go from about minus 15% trend in the second quarter of ’07 to what was slightly positive comp in the first quarter of 2008. It will take at least that long in our case now to restore positive comps, and it may even be a little more difficult because we have increased competition today versus what we had in 2007. So we are just not expecting to get it overnight, and as a result we are not being as aggressive to try to get it back too quickly by filling the shelves.

Karru Martinson – Deutsche Bank

What are you seeing from the Movie Gallery liquidations and closures there?

Jim Keyes

Not much yet. Not a lot has happened and what the natural impact would be is for a period of time as they are aggressively liquidating. In fact, I was just at a store on Venice in LA last week, and I have never seen stores quite in such proximities. There is literally a Hollywood store attached to a Blockbuster store and it had a store closing sign and they were clearly liquidating the inventory.

During that period of time while that inventory is being sold, it’s going to have an adverse effect on the sales of that store as you would probably expect. Once it does close, it will be a big advantage. So there will be a temporary impact we expect, probably a 2-month to 3-month effect as Movie Gallery does liquidate inventory of individual stores. But then, once they do close the store, of course there is a significant advantage in being able to have that Blockbuster store be able to pick up a significant number, we hope, of the previous Movie Gallery customers.

Karru Martinson – Deutsche Bank

In terms of the costs cutting that you’ve been doing at corporate and the executives to the ones in 8-K who have resigned from the firm, what’s the plan here either to replace or assume those duties – and I am assuming that that’s part of the $70 million of store and corporate savings that you are targeting.

Jim Keyes

There is no plan in the near term to replace that layer. Basically, we took out a layer of management. And frankly, in 2008, we were encouraged by the success of the transformation to date by the last quarter of 2008; and we actually added to our staff. We increased at some levels and brought in a CMO, or Chief Merchandising Officer. Eric Peterson had previously been our GC and took on the additional role of Chief Administrative Officer.

And in the environment we’ve been in the last 12 months and certainly with the need for liquidity going forward we decided we couldn’t have the luxury of that additional layer of management. So we have pulled back, not in terms of replacing those people as opposed to taking the entire layer out and filling those responsibilities by reassigning the roles within.

Karru Martinson – Deutsche Bank

Well, I’ll get back in the queue. I am sure you’ve got a long line of people here. Thank you.

Jim Keyes

Thanks, Karru.

Operator

Your next question comes from the line of Tony Wible with JMS. Please proceed.

Tony Wible – JMS

Good afternoon. I was hoping we could start off, Jim, by continuing that trend line that you talked about the acceleration, or the slower deceleration of growth. The first quarter to date, have you seen that trends continue, and if you could maybe comment maybe even what January is or what February is pacing for.

Jim Keyes

Tony, we were debating whether or not to put out early results. But there is so much dynamic going on this month between good things and bad things. And I will give you an example. The Olympics, we were a little bit worried about. So far so good and we are half way through and the impact hasn’t been as negative as we had been concerned. It could be – in March, we’ve got a bit of a positive on the horizon as we look at the upcoming releases, Up In the Air, will be a good rental tile.

We’ve got a couple in March that are Warner titles, Blind Side and Sherlock Holmes are both Warner titles, and now as of today, both Netflix and Warner have willingly agreed by contract to a 28-day window. So we are really anxious to see the impact of those two titles in our stores. So bottom line, there is so much noise in the data both good and bad that we have decided to wait until the end of the quarter to give a color on trends.

Tony Wible – JMS

Thanks. On the international asset sale, I guess you guys were talking about having that done by the end of the first quarter, are you guys still on track with that? What are your thoughts about foreign exchange moving against you as a catalyst for getting that done?

Tom Casey

Yes. Tony, I would just reiterate what I said. We have a process; any M&A process is subject to negotiations with buyers on important points relative to the brand and future digital rights. But we are pleased with the interest from a number of buyers. The timetable that we are on is the same timetable we’ve been on for the past several weeks. I think we said in the end of third quarter last year was that we expected it to happen in early this year. But again there is a caveat, if it is an M&A process it is to a degree out of our control. But it’s a quality asset, well-managed, and we are pleased with the progress.

Tony Wible – JMS

What is the scope of the restructuring that you are considering? NCR, I guess, made a comment that it would be willing to buy a by-mail service presuming that would be your asset, are you looking at taking some of the operations apart. Where do you kind of draw the line in what’s not being considered?

Jim Keyes

Tony, we are looking at a broad range of alternatives. We’ve discussed in the past the opportunity to bring on strategic partners into the various elements of our business. NCR is a great example of what we are doing out on the vending side. Could we have a broader relationship with them, could we have a broader relationship with some of the MSOs that we are working with; on the cable side, there are many opportunities that we are exploring.

Good news is we have alternatives, both on the balance sheet side and on – financial side and strategic side. We have a number of alternatives that we are exploring that will allow us to in some combination recapitalize the balance sheet and give us a good solid strategic partner to move forward with this multi-channel initiative.

Tony Wible – JMS

Are you guys are looking at the restructuring? I guess the in-store business is one where the deterioration has accelerated more recently. Do you guys think about I guess scaling down the in-store at a faster rate or when you look at that percentage of EBITDA that you disclosed in the older 8-K, do you guys say that that number is a moving target and you are trying to I guess cut and restructure it to get to a more aggressive, slimmer store count and thus have more of the new distribution.

Jim Keyes

Tony, the simple answer is it depends. It will very largely depend on how the other studios over the next six months will respond to the move that was a bold move and we think a good move that Warner and Netflix and Redbox agreed to, to take those channels to at least a 28-day window. What that does is it more clearly defines the use occasion for those various channels. The by-mail, Netflix does a terrific job of providing its customers with access to that long tail and a very good search engine. We think we do a pretty good job as well. And the difference between Netflix is most of their product is that longer tail older titles. Most of our product is the newer releases.

So what we are finding is that the stores could end up being a place that the new release between rental and retail – because remember we do both – is a place that the customers can be assured that they will find the latest new releases in-store; and perhaps by-mail, they will have to wait 30 days wherein the convenience of lending is there, is a different use occasion but it may not be the newest releases as envisioned in the current Redbox and Warner deal. So if that happens, you wouldn’t keep more stores because if the other studios follow suit, we could find ourselves with pretty good improved consumer relevance, let’s say, for that brick-and-mortar location.

If, in fact, that studios don’t go that direction and it ends up only being Warner and Redbox or Netflix do continue to have new release availability from most of the other studios. Then you probably need fewer stores to be able to satisfy that demand. The use occasion for the store in that circumstance is somewhat different. And we would be a little bit more aggressive in closing that stores and more aggressively pursuing the other channels faster on our own.

So I hate to be – to hedge on the question. But this is an industry that is now in very dynamic change and subject to that change over the next six months we have the option to either keep more stores opened or more aggressively close stores depending on how this evolves.

Tony Wible – JMS

Last question I have here is, I guess, part of what contributed to the problems having to cut back on costs to get the debt worked out, these incremental cost cuts that you are looking to do, how do you prevent them from impairing the top line again? Do you believe that you are underinvested in advertising?

Jim Keyes

I would say right now, yes, we are underinvested in advertising and until we finish more of our work towards the multi-channel approach, it’s probably the best place to be. In another words, there is always a temptation to get out and start shouting about our competitive advantage.

We are, in fact, today the only retailer that has the ability to go cross-channel, by-mail, in-store, vending, digitally, etcetera; and yet, we don’t have enough critical mass in vending. We don’t have yet the full integration of our by-mail system and our vending system. The number of households yet with BLOCKBUSTER On Demand really don’t warrant much advertising at this point. So we are being pretty conservative until we see where both the industry ends up in terms of windows and until we further develop our multi-channel approach.

So bottom line, we being overly conservative? We don't think so. We think now for the next 12 months is probably time to be conservative as these things evolve, as these industry developments evolve and as our capital structure improves.

Tony Wible – JMS

Of the $200 million, I guess, my first half of that question is how much that’s customer facing? What is the potential that some of that $200 million comes at the expense of revenue?

Tom Casey

But for advertising, very little is customer facing. And there was a $20 million reduction in domestic stores advertising, Tony, so –

Tony Wible – JMS

Great. Thank you.

Operator

Your next question comes from the line of Carla Casella with JP Morgan. Please proceed.

Carla Casella – JP Morgan

Hi, one follow-up on the international. The Ireland, what is the status of the earn-out? What would be the timing if there was any and does that expire?

Tom Casey

Yes. We can’t comment on that yet, Carla. That will be disclosed in our 10-K, which will be filed later this month.

Carla Casella – JP Morgan

Okay. Did you say how much of your corporate expenses are related to the international business?

Tom Casey

The corporate reduction – the $70 million reduction I mentioned which was corporate field cost and store costs, those are principally domestic numbers.

Carla Casella – JP Morgan

I guess, I am looking at – if you look at last year where you broke out in your segment reporting you gave international segment and domestic segment. And in those two numbers I think there is still about $117 million that must have been corporate overhead between domestic, that must be spread some – non-allocated? If you had to allocate those, how much of that would go to international?

Tom Casey

That number – I would start with an assumption of spreading it by EBITDA; as I said, 24% of our 2009 EBITDA was international. I mean, you wouldn't be far off starting with that assumption.

Carla Casella – JP Morgan

Okay. When you say that 24% of ’09 EBITDA is the international businesses that are for sale or that’s all international, including Canada and Mexico.

Tom Casey

Including Canada and Mexico.

Carla Casella – JP Morgan

Okay. Then you mentioned about a year ago that 35% of the stores generated 80% of EBITDA. Did that hold true in 2009 or how has that changed?

Tom Casey

That’s the number that we haven’t provided public update to. But it’s – so I guess I wouldn’t want to comment on more than that.

Carla Casella – JP Morgan

Then if you were to close another chunk of stores after this 900, is it safe to assume the same type closing costs that we saw with these 900 stores, which I think was a little over $60,000 per store.

Tom Casey

Yes, if you go back to that 10-K, Carla, it was the lease termination costs estimated for that 300 to 385, the first wave of accelerated closures in ’09; it’s $39 million. And then for the 130 to 150 that accelerated in ’10, that’s $21 million. So, obviously as you move forward, and if you do more accelerated, the lease termination costs could go a bit higher because you are pulling forward stores that have an LED that's further out in the future.

Carla Casella – JP Morgan

Okay. Then from the cash perspective, you mentioned where cash was at the end of the year. Q1, I know you made the payment on the bonds and working capital should be a use of cash. So we should see, I am assuming, at least a $50 million or so decline in cash into Q1, is that true? Or that you would see at least a cash decline.

Tom Casey

Yes. I can’t comment on more than I walked through some specific, some numbers, to help you think through it for the year. I think I have to leave it at that.

Carla Casella – JP Morgan

Okay. Then you are doing some trials with Mediacom and Suddenlink. How are those going? Are you up and running now as their VOD interface, any vision? Have they seen any pickup in the tax rate from that?

Jim Keyes

We are very excited about those results. We’ve got a very good relationship with both the MSOs. We have done a little more in the early days than a couple of things. One is we’ve branded their existing video on demand channels. So instead of channel 999 video on demand, it’s now BLOCKBUSTER On Demand. And it has produced some favorable results. I think they are pleased; we are pleased taking it to the next step, which is providing our backbone and search engine, user interface, etcetera. But we have not yet done that.

We also are getting some good success with selling their cable services in our stores. Again, there is a collaborative relationship here that isn’t just providing our video on demand name to their service but also selling their service out of our stores through a kiosk in our stores; and that’s going quite well.

So, so far so good. Stay tuned, we think we have more to come on the cable channel. And we think it’s an exciting opportunity for us to partner and leverage their needs and ours.

Carla Casella – JP Morgan

Okay. I have just one that’s picky kind of financial question. On the rental library, when you sign a new rev share agreement and say you pay $2 upfront or $1 upfront for that. Do you immediately book out $1 in inventory or when does that disc actually come into your inventory into your rental library.

Tom Casey

The minimum guarantee, Carla. It goes into our rental library.

Carla Casella – JP Morgan

Okay. So if you sold back that disc you would collect all – well, actually the rev-share would dictate the studio would get the rev-share percentage.

Tom Casey

Yes.

Carla Casella – JP Morgan

Okay. And it comes in at the minimum guarantee level, not the full cost of the disc.

Tom Casey

Yes.

Carla Casella – JP Morgan

Okay. Thank you.

Operator

Your next question comes from the line of Mary Gilbert with Imperial Capital. Please proceed.

Mary Gilbert – Imperial Capital

Good afternoon. Could you give us an update on your subscription for your by-mail service and where that stands?

Jim Keyes

We haven’t provided any numbers Mary. And frankly, the subscription business as with our store business has been a bit treading water for the past year as we pull back on our advertising and didn’t drive programs. Our competitors probably took pretty good advantage of our need to sit on the sidelines for a while in 2009 and pretty aggressively drove their business. We are looking forward though in 2010 and we made brief reference to it to a little bit of a different approach, we think we’ve got some good strategic partnerships teed up that will allow us to grow that by-mail business in a different way.

And in addition, one of the things that we think is a more studio-friendly approach to our by-mail business is what we launched somewhat quietly in the last quarter, program called Direct Access. We haven’t made a lot of noise about it. We haven’t done any advertising. But basically, we’ve got this infrastructure for by-mail. The subscription business is really not our core; our core is the a la carte movies by individual title as you wish. And so what we did is opened up our entire library of some 95,000 titles to any customers.

So if you walk into a Blockbuster store and you are looking for Dog Day Afternoon, there’s pretty good chance we won’t have it in our inventory of the 8,000, 10,000 titles in the shelve, but we can get it to you in 48 hours by mail for a VOD like price, you keep it for five days, turn around, mail it back to us. We think that that a la carte Direct Access by-mail program is going to both enhance the stores and the use occasion of the stores and complement our existing subscription business.

Mary Gilbert – Imperial Capital

Okay. So, no plans to change it and make it more in line with Netflix, at least with regard to older titles?

Jim Keyes

We have most of the same titles we think in our library that Netflix has today.

Mary Gilbert – Imperial Capital

Okay – I am sorry, go ahead.

Jim Keyes

We still think we have a pretty good competitive advantage. We are definitely guilty of not letting enough people know, but the ability to exchange the movie that you get in the mail for what you might want to prefer to see by just coming into any Blockbuster store, we think is a pretty compelling competitive advantage. We just have done very little to make people truly aware of that advantage, (inaudible) program is very similar.

Mary Gilbert – Imperial Capital

So that could be a growth opportunity and that would involve a partnership, a strategic partnership?

Jim Keyes

No. Two different things; strategic partnerships are possible in terms of finding others in the subscription business that have a shared desire to enhance their subscription and work with us on ours. So that’s what we mean in terms of a strategic alliance. Separately, we have a whole different dimension to our by-mail business. As you know, we are testing games by mail. That’s a little more difficult challenge, but we do think it is an opportunity in the future.

And Direct Access is just a very different approach; it is an approach that’s actually much more consistent with our core customers’ needs, in other words wanting the movie they want, not wanting to still to be tied down to a monthly subscription, but when we you want to see a unique movie having access to it when you want, where you want, which is the convenience of by-mail. So, the combination of those things, we think, provide us with a compelling reason for the by-mail business to grow, and we are hoping to enjoy that growth in 2010.

Mary Gilbert – Imperial Capital

Okay. In looking at the international business and the $46 million EBITDA attributed to international, how much of that represented the Americas being Canada, Argentina and Mexico. Do you have plans to potentially sell those operations?

Tom Casey

Well, we haven’t disclosed the breakout of international EBITDA. I would say Canada is the largest; you can tell that by looking at the stores. But I wouldn’t want to give more detail on that.

Mary Gilbert – Imperial Capital

And then what about plans to sell those operations?

Jim Keyes

Think of it this way, our physical assets are potentially a stepping stone to the future of cross-channel opportunities. So if you think about digital – I mentioned it is just words – but the digital opportunity for Blockbuster, we think, is tremendous. It is literally without laws, without geographic boundaries. Once we have the studio rights to go into different country, we have the infrastructure already in place.

The Internet in the U.K. is the same Internet that we have here domestically. We have to get studio rights and we have to work with local partners, but the opportunity that we have on international assets, either in Europe or potentially in Mexico or Canada, is to find the right kinds of strategic partners that will help us expand that digital opportunity.

So, while we haven’t announced anything in particular in any country other than the European assets, we are open to findings strategic partners in virtually any of our international countries that will help us advance the digital initiative as well as help us do a better job at stores.

Mary Gilbert – Imperial Capital

Can we infer by that with the potential sale of Europe, which is underway, that you would not give up the digital rights and the brand, correct?

Jim Keyes

Well, this is what Tom referenced. It is a little bit of a more challenging sale process. We are not just dumping assets. We are actually looking for a partner to retain those assets in a market and help us bridge to digital. Because the digital solution, you wouldn’t want to see 10 different digital Blockbuster solutions worldwide. We think there is one natural digital solution that extends into virtually any country.

So what we bring to the table with the strategic partner is the digital solution and the studio relationships. What they would do is to leverage the continuity of stores and allow those stores to be the bridge to digital. So the reason it is a more challenging negotiation process is those digital rights and the rights to the trademark beyond the physical stores are need to be negotiated, so that we do have some continuing relationship with whoever we sell those assets to.

Mary Gilbert – Imperial Capital

Right. Okay and I just want to make sure I understand, but does that essentially say that you are going to keep those or it could be shared in some cases?

Jim Keyes

I would look at it as a sharing probably. There is a chance if somebody came in and they didn’t want the digital assets, simply wanted the stores, we could do a straight sale. Would we take a lower multiple, if we had an ongoing digital relationship, probably; so it really comes down to who the buyer is and what they’re willing to pay.

Mary Gilbert – Imperial Capital

Okay. And then finally, the NCR business, are there opportunities in terms of growth outside the US with NCR in opening up kiosks in foreign markets where Blockbuster already has the brand presence?

Jim Keyes

Absolutely. It is one of the hidden advantages we think with the Blockbuster brand. We understand that Redbox has begun to explore kiosks in the UK. They start from scratch as they did here in the United States with no brand recognition. Blockbuster has been in the UK for over 20 years. We are known in – we are actively licensed or direct in some 17 different countries and we are known in as many as 20 or 30 countries because of the brand presence either today or in the past.

So we are talking with NCR about that international opportunity. Frankly, I think the European market is a terrific market for vending. It is much more smartcard and credit card friendly, and lend itself nicely with that development. But first things first, primary challenge is to address the vending channel here in the United States and that’s what they and we have been focusing on.

Mary Gilbert – Imperial Capital

Great. Thank you.

Operator

Your next question comes from the line of Dominique Mielle with Canyon Capital. Please proceed.

Dominique Mielle – Canyon Capital

Hi. I think a statistic was given about the percentage of business in new releases in the first 30 days. Is that the percentage of rental business?

Jim Keyes

Rental and retail, and these are our estimates. They are not from Adams or anyone like that. But we believe it is 30% of both combined rental and retail business in the first 30 days. 60% I am sorry, I said 30%.

Dominique Mielle – Canyon Capital

Okay. That was what I heard, 60%. So that would be including Redbox, Netflix, Wal-Mart, everything.

Jim Keyes

Correct.

Dominique Mielle – Canyon Capital

Do you have a sense of whether this number has changed over time? What I am trying to get at is as the window is playing positively for you, has the consumer taste changed so that he doesn’t care anymore whether he is seeing the movie in the first 30 days or not.

Jim Keyes

Yes. There hasn’t been any change in windows that have had any material effect because both Netflix and Redbox were buying around the studio restrictions until just recently. So I don’t think we have had any titles come out yet that have had the – any big titles that have had the impact of the windows. But that will be coming up. It will be interesting to see.

We are big believers in the vending channel. We think the vending channel serves absolutely a need and that there will be continued demand for movies but we do think it is exciting for us in terms of the opportunity to provide that uniqueness for the Blockbuster store in a role that we have really played for many years, being the primary place that you go for the new release.

Dominique Mielle – Canyon Capital

Okay. So the answer is, yes, you think the consumer still has a strong preference for the first 30 days?

Jim Keyes

We do. We think that that is going to be a big piece of the business, and if you look at the video-on-demand window, the video-on-demand window has been a 30-day window for most titles for quite some time. And in contrast, the in-store physical rental business and retail is $22 billion; of that $22 billion, only about $2 billion to $3 billion has been traditionally video on demand.

So is that the window, is it availability of access to video on demand, is it the user end, search engine or whatever, who knows but there has been historically a strong preference for the new releases. And that’s been big part of Blockbusters’ business. We have for a long time had the vast majority of our sales been in the new release area, particularly in the first 30 days.

Dominique Mielle – Canyon Capital

Got it. And one more question on the European assets sales, at least the process. I would have assumed that with the EBITDA miss in the business, the process would have slowed down or changed or the momentum sort of at least taken a step backward. Am I mistaken where potential bidder is fully aware of the developments as they were happening? Have you lost any bidders?

Jim Keyes

All the bidders are under NDA, and so they are more aware of what we are doing and we have been in close communication with them. So, we don’t really see a material change.

Tom Casey

Dominique, I would just say that we did point out that there was a retail miss in Europe. So I am implying a reduction in EBITDA in Europe. To the extent that buyers focus on multiples of EBITDA, may have an impact but the quality of the group of buyers is good and that hasn’t changed as a result of that.

Dominique Mielle – Canyon Capital

Okay, thanks.

Jim Keyes

Thanks, Dominique.

Operator

Your next question comes from the line of Colleen Burns with Oppenheimer & Co. Please proceed.

Colleen Burns – Oppenheimer & Co.

Hi, thanks. On the $24 million EBITDA shortfall on the international side in the fourth quarter, how much of that was Europe versus Canada that you mentioned, give or take?

Tom Casey

Yes, I'm sorry. We are just not in a position to disclose that.

Colleen Burns – Oppenheimer & Co.

Would you say it was more on one side than the other or you don't have any comment?

Tom Casey

Canada is a bigger business than Europe to the extent that that both were soft. You can draw your conclusion about it. But I can't – I'm not at liberty to say more.

Colleen Burns – Oppenheimer & Co.

Okay. And then on the working capital comment you made about the first quarter this year being significantly below the first quarter last year, is it safe to assume that's going to be over 50% below? I mean – or just adjusting for the inventory and the payable work-down that you had last year?

Tom Casey

Well, a couple of things. One is we have good visibility on it since it's 24th of February and we have pretty good – we have very good visibility on where we are with respect to payments and working capital for the quarter. So I would reiterate significantly, however, one interprets significantly, but I would hesitate to quantify because it wouldn't be appropriate.

Colleen Burns – Oppenheimer & Co.

Okay. And then just on your current liquidity, how much cash do you have on hand today currently?

Tom Casey

Well, we didn’t say that and really – again, cannot say that. But wanted to give you some guidance for what the year-end would be if you made the appropriate adjustments for things that have been disclosed since year-end and that's what the $170 million number was.

Colleen Burns – Oppenheimer & Co.

Okay. And then just to follow up on the rental library, just to clarify, the movies that you have on rev share with the studios, are those movies in rental library? Where do those rev share movies go? Where do you – ?

Jim Keyes

Yes.

Colleen Burns – Oppenheimer & Co.

They are. So you don't technically own?

Jim Keyes

Yes, we don't take a title to rev share titles for 26 weeks.

Colleen Burns – Oppenheimer & Co.

Okay. And they are all in – and so – what percent of your rental library then is rev share currently?

Jim Keyes

Yes, we – let me see if I can help you through that.

Tom Casey

Historically, it's been 80%.

Jim Keyes

No, we purchase about 85% of our product domestically on revenue sharing deals is what we – that would be a good assumption.

Colleen Burns – Oppenheimer & Co.

Okay. So 85%? Okay. And then just on the studios, just can you remind us your studio contracts, how are they structured? Are they month-by-month basis or?

Jim Keyes

They are varying, some are years, some are shorter terms, sometimes title by title, it's really across the board. And we – and we've been working with our studios closely over the last couple of years to come up with new structures that provide more of a win-win and allow us to have more inventory at a lower threshold, which have been a bit different. Traditional rev share has always had a very high minimum. So many of our new agreements with studios come with a significantly lower minimum, allowing us to put more products on the shelf.

Colleen Burns – Oppenheimer & Co.

Right. Have you seen any changes in those minimum purchase agreements as of late?

Jim Keyes

We keep trying, we are working the studios trying to get the ultimate vision is about $1 stick is what our objective is. The ultimate plan – I'll tell you what the ultimate would be if I could ever get them to agree, we'd be on a straight consignment, we'd fill our shelves and we would never disappoint the consumer with either rental or retail purchase. So we are trying every single day in every conversation that we have to get closer and closer to those deals and we made pretty good progress in the last year.

Colleen Burns – Oppenheimer & Co.

And you haven't seen any changes in terms from your studios, correct?

Jim Keyes

No.

Colleen Burns – Oppenheimer & Co.

And then just lastly, the coupon on the 9% senior subs is due next week. Do you plan to make that payment?

Jim Keyes

Yes.

Tom Casey

Yes.

Colleen Burns – Oppenheimer & Co.

Thank you.

Operator

Your next question comes from the line of Karru Martinson with Deutsche Bank. Please proceed.

Karru Martinson – Deutsche Bank

Hi, in terms of the acquisition of Vudu by Wal-Mart, what impact do you see that having on your digital business and the potential for partnerships?

Jim Keyes

Well, we think it's a positive thing. We've looked very closely at that Vudu asset for some time and it has some advantages and disadvantages, but the good news about Wal-Mart jumping into this is that now Best Buy has declared, Wal-Mart has declared, so they are going to help us actually by working with the consumer electronics companies to advance the idea of Internet-ready video-on-demand.

When that happens and why do we think that will be fine? Well, we are pretty confident – we've had a lot of discussions with Wal-Mart as well about our service and their ability to have devices in their store that sell our service. We don't think they will go exclusive and this could be like Wal-Mart deciding they are going to have Wal-Mart Cola and not stock Coke and Pepsi.

It's likely that they'll have their own private brand, but they'll also have the leading brands in their consumer electronic devices is what we expect and we think – we think that Blockbuster fares quite well in the Internet world when we are given the opportunity to have your Wal-Mart-purchased Internet-ready TV boot up and the logos there are Netflix, Vudu, Blockbuster, we think we do quite well, perhaps Amazon. The Blockbuster brand is such a well-known brand and people know what they get there. The Netflix offering is quite different. Being a subscription offering, it has much longer-tail titles available versus the new releases that Blockbuster will have in the video-on-demand window.

So we think we do quite well in that world and to the extent they help accelerate the number of households with connectivity, it is that balance that I referenced earlier, the faster we can take advantage of our video-on-demand offering, then the more flexibility we have in terms of offsetting any potential decline in the stores business.

Karru Martinson – Deutsche Bank

Okay. And in terms of rental library, Hilco did the appraisal back in the September.

Tom Casey

Yes.

Karru Martinson – Deutsche Bank

I thought the number was included in some of the presentations, but it seems to have disappeared since then. Is there a number that you are willing to tell the market of how we should look at that rental library?

Tom Casey

Karru, not at this point. So I guess I can't comment on it any further than that.

Karru Martinson – Deutsche Bank

So we should just kind of use the 328, or I think like 400 or somewhere in that ballpark range that was in the prospectus?

Tom Casey

Well, the prospectus was a 144 offering. So it's not a – that's not a public document. So I can't comment on that.

Karru Martinson – Deutsche Bank

Okay. In terms of the timing of the European asset sale, you guys have originally talked about whether it's first quarter or early 2010.

Jim Keyes

Yes.

Karru Martinson – Deutsche Bank

Do you still feel that that is the timeline that we are looking at here for Europe?

Jim Keyes

As I said in the response to an earlier question, it's an M&A process with quality group of potential buyers. It's a complex sale process and we are pleased with the progress and I wouldn't say anything different than we said early in 2010 and that's where we are.

Karru Martinson – Deutsche Bank

Okay. Just a housekeeping. I thought I heard – if I heard correctly that the – there is about $40 million of cash that is kind of in transits or is not available to you out of that cash number. Is that correct?

Tom Casey

Correct.

Karru Martinson – Deutsche Bank

Okay.

Tom Casey

Deposits in transit and our store bank accounts.

Karru Martinson – Deutsche Bank

Okay. And then in terms of the liquidity, you guys have reiterated multiple times you feel you have the liquidity for 2010 and there is a lot of stuff that you can do. I mean, looking beyond that, how do you guys approach 2011 and eventually that's springing maturity of 2012?

Tom Casey

Well, I think the goal of preserving cash flow and enhancing liquidity through 2010 is to keep the opportunities for transformation of the company going, because it will be in 2011 that the other channels will contribute in a larger way to EBITDA and there are a number of opportunities along each of those four distribution channels that we are excited about. So obviously, as time goes on, we are fortunate to have relatively short-term leases. So as we expand the points of presence through transformation of the physical footprint from just stores to more kiosks than stores, it's a question of what's the optimal balance of kiosks and stores as time goes on.

Karru Martinson – Deutsche Bank

Okay. Just lastly, on the rent – on the leases, as you guys have gone through the store closing process, are you seeing landlords be more flexible with you or can you update us on certain stores that you may not be closing, but because now those stores are becoming more profitable as you renegotiate those leases or is that not an option here?

Tom Casey

Yes, it's a great question and it is an opportunity, one that we've – as gone we've gone through our numbers, I think we are conservative about. I think most importantly, we reiterate the assumptions of the September 15, 2009 8-K filing about contribution to EBITDA, but certainly when you go to close a store, it's a different conversation with the landlord and we have that potential to lower our lease cost savings on an ongoing basis.

Karru Martinson – Deutsche Bank

All right. Thank you very much, guys.

Operator

Your next question comes from the line of Charlie Wolf with Needham & Company. Please proceed.

Charlie Wolf – Needham & Company

Yes. I wonder if you could give us an update on your listing issues with the New York Stock Exchange. And in the event you are de-listed, what do you plan to do?

Tom Casey

Yes, I would just say that we watch out as our financial advisor and they are advising the company and the Board on those issues and evaluating alternatives including a potential reverse stock split that will be voted upon at the upcoming Shareholder Meeting. We've obviously already announced the collapse of the A's and B's. Together with that, we'd be enhancing to the equity profile of the company. But we haven't made definitive decisions about the reverse split obviously.

Jim Keyes

But I think it's safe to add to that, Tom, we don't really plan to be de-listed. We think there are another number of steps we can take to avoid that. We want to stay on the New York Stock Exchange; we think that is very important to us.

Charlie Wolf – Needham & Company

Thanks a lot.

Operator

Your next question comes from the line Tony Wible with JMS. Please proceed.

Tony Wible – JMS

Hi, guys. My – most of my questions have been answered, but I did wanted to see any comments that you had a The Journal article that indicated you guys had an interest in some Movie Gallery assets. Can you help frame what you would have interested and why?

Jim Keyes

Yes, Tony, actually we thought it was a pretty balanced article. So we were pleased in general that it did have that balance. It did reference Movie Gallery and this is – it's just a normal thing. If the Movie Gallery is going to close stores, they have inventory, they have assets that we might be interested in. Frankly, we don't have the balance sheet to do a lot with those assets or with that business. So we made it clear that we weren’t looking to acquire Movie Gallery. On the other hand, if there is something we can do, we've entertained their proposals for anything they may have on the table that they may wish to sell.

Tony Wible – JMS

Okay. And actually one other question that did pop in the mind, but any discussions between NCR and yourselves about expanding outside of the U.S. with the kiosks or breaking the dollar a day and doing something that is a modest premium to that?

Jim Keyes

Not specific discussions yet, but internationally, we are looking in that direction. I can tell you, we are delighted with our partnership with NCR. They are the premier worldwide provider of self-service devices and so they have very broad and deep relationships with retail partners all over the world. So we are delighted to have them as our partner for the Blockbuster brand on the international side as we look internationally for the kiosk deployment.

As far as the pricing on their Blockbuster Express units, they've tested a number of different things. They, as we, are looking at how the studio windows shake out and how they will best be able to compete. What our objective is with NCR and they share this objective, we want one integrated solution for the Blockbuster customer so that they have ease of movement from channel to channel and they see the Blockbuster Express kiosk is complementary to the store.

They've got one account. The ability to exchange product, pick up product in one place, drop at another, there are so many advantages of our combined distribution systems that we haven't yet taken advantage of because we are just simply in the early stages of deployment that we are working with NCR on all of those things. But as far as pricing right now, we are all in sort of a wait-and-see situation to see how the windows shake out and what our ultimate role will be with vending and with NCR in those windows.

Tony Wible – JMS

Great. Thank you.

Operator

Your next question comes from the line of Mary Gilbert with Imperial Capital. Please proceed.

Mary Gilbert – Imperial Capital

I wondered if you could give us a little more clarity on the composition of the rental library in terms of the average cost per DVD. So for example with revenue share, if you are purchasing let's say $2 per stick, how that's amortized down? And so, if you are saying 85% of the rental library represents DVDs on revenue share, is it at that average rate of cost? Could you kind of walk us through the accounting and how we should look at that?

Tom Casey

Yes, I can't give specifics, but just to help paint the picture for you, yes, the choice of buying wholesale products – I won't give you a price on that, but it's let's say mid-high teens in that zip code or you can buy it on rev share for something in single-digit dollars with a wide variation in there as an upfront payment and then you share a percentage of the revenue every time the title turns – every time it rents. So that's really the very basics of it. And on those rev-share deals, as I said before, you don't take title to it for 26 weeks and I don't know what else to tell you about it.

Mary Gilbert – Imperial Capital

Yes. So after 26 weeks, what would be the average rate of cost in the library? And have you had any need take any write-downs because I understand that Movie Gallery had to take a write-down this past summer on their rental library. So that's why I wanted to understand also the quality.

Tom Casey

No, we haven't had to take any write-downs on our rental inventory.

Mary Gilbert – Imperial Capital

Okay. So would you say the quality of the library is very good?

Jim Keyes

I would.

Mary Gilbert – Imperial Capital

Okay. And then with regard to lease termination costs, the $60 million, the $39 million associated with 2009.

Tom Casey

Yes.

Mary Gilbert – Imperial Capital

What portion of the $39 million was paid in 2009 and what portion gets paid in 2010? And then does the $20 million associated with the 2010 closings get paid in 2010 or would they get paid beyond 2010?

Tom Casey

The one thing I would say, Mary, is that you've seen the press release that we closed 253 of the stores that started closing October, actually fell over into 2010 and those are the accelerators that – if you go back in the 8-K, that's associated with the $39 million. And the lease termination costs get paid out over time. It wouldn't be appropriate to give you more specifics. You could look at it; you can calculate an average on that group of stores. The $39 million relates to the 253 for the most part, but I wouldn't want to tell you more than that.

Mary Gilbert – Imperial Capital

Okay. And then what is the status of aligning yourself with additional consumer electronics companies?

Jim Keyes

Continued progress. You might recall that Best Buy announced that they were going to work on a – that they were going to adopt the Sonic Solutions' CinemaNow platform as their platform of choice for their own offering. We – that was actually a good thing for us, because we are in the same platform, we use Sonic Solutions for our back-end and now, many of the consumer electronics companies are working at Best Buy's request to build that foundation – that platform into all of their devices. So more to come, but we hope to have more announcements here in the next few months as we believe we will be in many devices.

And we did just announce, didn’t get much attraction on the – with the press, but we did just announce the HTC HD2 smartphone. We think this is a big move for us, because Netflix has said that they don't have any intentions to move into the mobile space for now. We think it's a big opportunity for Blockbuster; it's very consistent with our ability to have portability and cross-channel flexibility for our customers. So that was – that we think was a pretty big step for us.

Mary Gilbert – Imperial Capital

Yes, that makes sense. And then what about with major cable MSOs? After viewing the offering that you had at the Consumer Electronics Show for cable companies, it was pretty impressive. Do you think there is an opportunity with any of the major cable MSOs and could we see something get announced this year and are you in test with any of the majors or in discussions?

Jim Keyes

Well, thank you. We were pleased with the CES presentation and we have, we think, made some good progress with a number of others. I can't give you any specifics yet, but we do think that we are on the radar screen of both cable and telecom. Interestingly, both have looked at us as a potential partner, rather than adversary.

The unique thing about Blockbuster being that our service is we believe additive to the cable service, in other words, the Blockbuster customer doesn't turn off their HBO or premium channel subscription instead of the cable service. Instead, what they do is use Blockbuster to supplement that service, we believe. And the cable companies know that and we wanted to start small with two the MSOs, very pleased with their cooperation and with the progress that we've made with them. So we are moving somewhat slowly and methodically here, but we do think that it is a very big opportunity for us going forward.

Mary Gilbert – Imperial Capital

Okay. I just wanted to get a clarification on that, because I was thinking that you would become the video-on-demand solution for their cable subscribers.

Jim Keyes

We can. The ultimate vision – there are basically several legs to this platform. The first is just as we've done with the two MSOs that we started with. All we did is brand their video – their existing video-on-demand offering. The brand awareness has now been demonstrated that customers recognize that Blockbuster brand and what it stands for, which is often the availability of new releases.

The second step in this opportunity is to share potentially in our subscription base and offer their customers new releases via subscription. That's something else that we have looked at and considered. Where in other words, we can provide an end-to-end movie access to the cable customer, what's not available in even video-on-demand window, we can send via by-mail, especially now with our Direct Access, we can send individual movies to that cable customer if they wish.

The third leg of the platform is the ultimate video-on-demand because with all of the hubbub around digital, ultimately, video-on-demand has been in the market for a long, long time. The digital component of it, in other words, using the Internet to access video or enable video-on-demand simply provides a better tool, a better user experience, a search engine, the ability to search your favorite movies by director, by title, by genre, and this is what we bring to the table.

So we – it's a little more complicated for the cable company because they already have their existing head in [ph], their existing cable capabilities, but we do believe that we can bring to cable the ultimate video-on-demand experience for their consumers and help them differentiate their other competitors in the marketplace. Now, you end up sharing what is ultimately a smaller margin, but will gladly share a smaller margin in exchange for a much, much broader consumer opportunity if that has no physical boundaries or geographic boundaries.

Mary Gilbert – Imperial Capital

Right. And so that – is Sonic Solutions part of that too, so that they are the backbone software and Movielink is the consumer interface?

Jim Keyes

That's exactly right, yes.

Mary Gilbert – Imperial Capital

Yes, okay.

Jim Keyes

When the – when Sonic Solutions acquired CinemaNow, we decided to team up and to share our core competencies, theirs being the technology side and they've done a terrific job for us in helping us build that technology, having the ability for example that we have today. You've heard about the Disney KeyChest and other forms of a digital locker. That is actually not only live, but operational today with BLOCKBUSTER On Demand and Sonic Solutions.

So we have a very solid technology platform today that combined with the Movielink user interface and now, rebranded Movielink if you will, to BLOCKBUSTER On Demand, we think we've got the best of both worlds, a world-class technology platform and a world-class consumer experience with the Blockbuster brand that go along with it.

Mary Gilbert – Imperial Capital

Great. And this works around the world, right?

Jim Keyes

Well, subject to studio rights, yes, it will work. We believe it will be – it will translate nicely to an – a worldwide application. We have to go through the process country by country of securing the rights from the studios and there are some technology modifications relatively minor country-by-country, but the basic platform will work virtually anywhere in the world.

Mary Gilbert – Imperial Capital

Great. Thank you.

Operator

Your next question comes from the line of Carla Casella with JP Morgan. Please proceed.

Carla Casella – JP Morgan

Hi. One question on the digital. Have you – any comment you can give us on the attach rates you are seeing from the devices that were sold and activated over Christmas?

Jim Keyes

Not yet, but we can say it's growing exponentially versus the Movielink offering and what we found is that watching movies on the PC versus making them available with a button on the remote control is a dramatically different user experience and the take rate is tremendously better. It just hasn't been in the market long enough; we've really only been out there since the holiday season and so we are excited about the ramp. Probably by the first quarter, we will have a little bit more color around what that ramp rate is looking like.

Carla Casella – JP Morgan

Okay, great. And then you mentioned there is $40 million of cash that you need to run the business. Is that – does that include the international as well?

Jim Keyes

It does.

Carla Casella – JP Morgan

Okay. And then on the revenue sharing and have you –

Jim Keyes

Carla, just – can I just – when you say $40 million, (inaudible). What I said was – is there is $40 million on our – of our consolidated cash is either deposits in transit or store bank accounts and that's – that is the global number.

Carla Casella – JP Morgan

Right. So you wouldn't have –

Jim Keyes

That is a global number, yes.

Carla Casella – JP Morgan

Okay. Since Movie Gallery's bankruptcy filing again, have the studios changed their stance with revenue share? Are they – meaning, are they trying to structure more agreements where there is more upfront payment or more minimum guarantees?

Jim Keyes

Now, we are – we continue to talk with the studios all the time. We've been – we stayed very close with them last year through our liquidity crunch in the first quarter of last year. We continue to talk with them virtually daily. And so we are comfortable that they are going to continue working with us.

Frankly, the last quarter around, we used our liquidity challenges to be able to negotiate different kinds of deals with the studios. The – it worked to some extent to our advantage in being able to get a lower minimum guarantee for example. And so that's the nature of the dialog now. What can we do to create a win-win to have the studios want to support us, which basically they do and find a way to give them the necessary assurances on a go-forward basis.

One thing that is often missed is this idea of why would the studios care and I would – I'd love to have one of them say it in their words, but I'll try to paraphrase, many of the studios make let's say a 100 movies a year and of those 100 movies a year, only about 20 of them find their way to the theaters. The rest of the 80 need a home and they probably – Redbox won't have the capacity for many of those or vending one of the capacity for many of those movies. In Netflix, they may never be seen unless they are searched and you know about the movie. They don't get the kind of visibility, they could show up with the – on the shelves of retailers, but retail presence is generally much more limited.

And so with many of these movies, the place that they get the broadest distribution and greatest amount of awareness is in the local brick-and-mortar store and that is a role that we think the studios continue to embrace and want to see us find a way to be successful. So they are of course concerned about the short term and will work with us through the short term, but for the long term, I think they are aligned with us in wanting to see our brick-and-mortar survive and to help us facilitate the cross-channel transformation.

Carla Casella – JP Morgan

Okay, great. That's a good point. I have one other question. Just to – and I hate to believe at this point, but for looking at the inventory on the books, if your upfront payment on a rev share is included in inventory, if the amount of the whatever the upfront payment is or the minimum guarantee, is your rest of that books is in accrued liability?

Tom Casey

The current rev share?

Carla Casella – JP Morgan

Accrued rev share.

Tom Casey

– other assets, yes.

Carla Casella – JP Morgan

Okay. And then once you hit that 13 to 26 weeks, you would take the full value of that disc into your inventory, but it would be $4 because new releases are depreciated down to $4 over a six-month period, is that how it would work?

Tom Casey

Yes, it depends on what the – contextually or a right order of magnitude, residual value anywhere from $8 to zero, depending on the title, depending on how it's rented.

Carla Casella – JP Morgan

Okay.

Jim Keyes

Carla, we might suggest taking the detailed questions offline.

Carla Casella – JP Morgan

Right.

Jim Keyes

We've – I think last we heard, we had 250 people on.

Carla Casella – JP Morgan

Yes, that's it. That was the end of mine, anyway. Thank you.

Jim Keyes

Okay. Thank you, Carla. Well, thanks everybody. I know this ran a little bit longer than we normally would, I appreciate your patience with it. We wanted to get to as many questions as we could. I hope we've addressed everyone's questions and concerns. Please feel free to reach out if we haven't, we are here. We continue to be focused on transforming this business, the core business especially, and making those necessary adjustments to position Blockbuster for the future.

As – I believe it was Mary referenced our presence at CES. Well, in January, we were able to ignite quite a bit of new interest among potential partners who see the unique role that Blockbuster can play in satisfying the customers across three physical channels, in-store, by-mail, and vending and across three digital channels, PC, mobile, and television.

So we have new reason and a strong passion to survive the challenges for the next 12 to 18 months to see this bright future come to pass. And I hope you agree with us that the opportunity is there and we appreciate everyone's support. Thank you for your continued patience. We look forward to updating you in the very near future.

Operator, you can go ahead and disconnect the call. Thank you.

Operator

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Have a great day.

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Source: Blockbuster Inc. Q4 2009 Earnings Call Transcript
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