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CEO Jim Keyes to Investors: "There are Two Sides to the Blockbuster Story"

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We already knew Blockbuster's fourth quarter was a disaster -- CEO Jim Keyes warned as much a month ago, when, ahead of yesterday's release of FY2009 financials, he said "our performance during the holidays was well below expectations." But the entire year proved a disappointment, as the Dallas-based videotailer said that during '09 it suffered a net loss of $558 million, with domestic same-store sales dropping by 15.6 percent.

Keyes, with whom I spoke at great length right before the holidays, answered questions from investors for nearly 90 minutes yesterday, and during that conference call (which Seeking Alpha has transcribed in full) he insisted he remains "cautiously optimistic" about the company's chances heading into 2010. He pointed to an expanded roll-out of those Blockbuster Express and download kiosks, reduced rents at existing locations and Movie Gallery's shuttering as pluses; and he said Netflix and Redbox's agreement not to carry Warner Bros. titles for the first 28 days of their availability should help when Sherlock Holmes and The Blind Side are released in March.

Still, he won't divulge how many by-mail subscribers Blockbuster has ("Frankly, the subscription business as with our store business has been a bit treading water for the past year"), and, if I read my transcripts right, he didn't rule out getting rid of the stores altogether if someone was interested ("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"). This, though, is the best summation of the company's state at this very moment:

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.

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