Blockbuster profits up, but revs dip

Antioco looks for fresh start

NEW YORK — Blockbuster’s profits soared last quarter, but revenue continued to drop on the no-late-fee policy that made 2005 a hellish year for the troubled vidtailer.

Last year “was a challenging year, but we dealt with everything that was thrust upon us,” CEO John Antioco said during a conference call. That included heavy spending to ramp up its online rental service, an industrywide slump due to rotten box office and the controversial no-late-fee plan with its accompanying ad blitz.

Blockbuster also tried unsuccessfully to take over rival Hollywood Entertainment and was the target of a proxy battle by corporate raider Carl Icahn, who managed to get himself and two allies onto its board of directors. Antioco himself seemed close to losing his job at one point.

Antioco and chief financial officer Larry Zine talked of a fresh start in 2006. “The industry will continue to be challenging, but from what we’ve seen of the trends so far, we are optimistic,” Antioco said.

Net profits in the fourth quarter surged to $18 million from $2.8 million, largely on cost-cutting as Blockbuster shutters stores, slows down new openings and slashes overhead.

The cost-cutting has stabilized Blockbuster’s financial position. Last year, there was on-and-off speculation that the cash-strapped vidtailer would be forced to file for Chapter 11. That appears to be a risk no longer.

Yet revenue last quarter fell 11% to $1.53 billion — below Wall Street’s expectations — sending the stock skidding 7.24% to close at $3.59.

Antioco defended the no-late-fee policy, insisting Blockbuster “will perform better in 2006 and better in 2007 than we would have if we were still charging late fees.”

The fees made up a hefty chunk of the company’s revenue. But management felt fees had to go as the video rental biz faces new competition from personal video recorders, video-on-demand, the Internet and newcomers like Netflix.

Blockbuster’s online service grew from 400,000 subscribers at the start of ’05 to 1.2 million by year end. Execs said they’re on target for 2 million subs at the end of ’06.

Asked about the ubiquitous windows debate, Antioco said he believes “the current windowing is the way to maximize profitability” — meaning studios shouldn’t compress them any more than they have been.

He said Blockbuster is looking forward to next-generation, high-definition DVDs, which he expects will stimulate consumer interest and command a higher retail price. And, he said, the better a film looks on a DVD, the better it can compete with VOD.

Blockbuster also said that after discussions with the SEC, it would restate its financials from 2003 onward to account for changes in accounting for its video library, although net profit and revenue would not be affected.