Blockbuster Inc. BBI, posted better-than-expected quarterly operating profit on Wednesday, and signaled it would pour more cash into an online DVD rental service aimed at battling Nexflix Inc. NFLX.
The top U.S. movie rental chain said declines in rental revenue eased in the fourth quarter as customers reacted favorably to its newly launched online service.
Blockbuster, which recently decided to scrap late fees, said its efforts to attract more customers put it on course to improve profitability and fend off competition from Netflix and other rivals.
The company's stock rose 8 percent on signs that its appears to now be reversing a slide in rental revenues at stores open at least a year.
Even so, Stacey Widlitz, an analyst at Fulcrum Global Partners, said the movie rental business continued to face pressure from retailers, like Wal-Mart Stores Inc. WMT, who are selling cut-price DVDs to prospective movie renters.
To fight that competition, the company said it would spend $120 million on incentives and other promotions to add more online renters this year, more than doubling spending from year-earlier levels.
"It's a fight to the death with Netflix," said Michael Pachter, a Wedbush Morgan Securities analyst, who has a "buy" rating on Blockbuster. Commenting on the results he said: "All the metrics are good."
Excluding special items, Blockbuster posted a profit of 7 cents per share for the fourth quarter, 3 cents better than the average estimate among analysts polled by Reuters Estimates. A year earlier, operating profit was 32 cents a share.
John Antioco, Blockbuster chief executive officer, said the company's recently launched online movie rental service had helped stabilize rental demand as more people signed up to use the service.
Blockbuster, he said, would spend $120 million, more than double what it spent last year, on incentives and other promotions to add more online renters this year.
"Based on the strong results we are seeing and the significant profit opportunities we believe await us, we're going to accelerate our subscriber acquisition investment in Blockbuster Online," he told analysts in a conference call.
The online service launched in mid-August to go head-to-head with online renting pioneer Netflix Inc. NFLX, and other copy-cat subscription services, including one from Wal-Mart.
According to Antioco, online users now number more than 750,000 subscribers, prompting the company to aim for more than 2 million subscribers by the end of the first quarter of 2006.
At noon, shares of Dallas-based Blockbuster were up 50 cents at $9.22 on the New York Stock Exchange, where they scored their biggest single-day percentage gain in 4 months.
Same-store rental revenue fell 2.9 percent in the fourth quarter, a much smaller decline than in the third quarter or the year-earlier fourth quarter, according to the company.
Commenting on its bid for Hollywood, it said it had extended its offers for Hollywood shares and notes through March 24 to allow authorities more time to vet the bid, competes with an already agreed merger deal between Hollywood and Movie Gallery Entertainment Corp. MOVI.
Antioco told Reuters in an interview that Blockbuster would be open to any reasonable resolution to get the deal cleared, but declined to say if that could include shedding stores that antitrust authorities found problematic. Blockbuster expected antitrust regulators to rule on its bid by March 21, he added.
On Friday, the regulators said they needed Blockbuster to provide more information about the bid. Quarterly revenue rose 6.3 percent, to $1.72 billion and rental revenue totaled $1.15 billion, little changed from a year ago.
(Additional reporting by Gina Keating)
