Brickell Biotech, Inc.
Q3 2009 Earnings Call Transcript

Published: 13 Nov 2009

[Operator:]

Good afternoon and welcome to Blockbuster’s third quarter 2009 financial results conference call. (Operator Instructions) I will now turn the call over to Kellie Nugent, Blockbuster’s Director of Investor Relations. Kellie, please go ahead.

[Kellie Nugent:]

Thank you, Caitlyn and thank you, participants, for joining us today to discuss Blockbuster’s third quarter 2009 financial results. With me on today’s call are Jim Keyes, Chairman and CEO; and Tom Casey, Executive Vice President and CFO. As Caitlyn 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 close today, Blockbuster issued a press release regarding its financial results for the third quarter ended October 4, 2009. By now, everyone should have access to the press release and 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 performance in 2009 and other matters that do not strictly relate to historical or current facts. We caution you that such statements are in fact predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially. 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 Securities & Exchange Commission. Forward-looking statements are based on the company’s beliefs as of today, Thursday, November 12, 2009. Blockbuster undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as required by law, even as 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.

[James W. Keyes:]

Thank you, Kellie and thank you, everyone for joining us this afternoon. Just over a month ago and literally three days before the end of the quarter, we completed a $675 million senior secured notes offering and we are very pleased to have since returned our focus to growing the business. The most important takeaway from the first three quarters of this year is that the strength of Blockbuster's core business allows the company to adapt to changing macroeconomic conditions. In 2008, we demonstrated the ability for Blockbuster to achieve profitable growth. In 2009, the realities of a changing financial marketplace and the unfortunate timing of our debt maturities required us to temporarily change our approach to managing the business. In the third quarter, in spite of the many challenges we faced, we were still able to achieve adjusted operating income of $0.2 million, which is relatively flat year over year. Today I can assure you that we are glad that phase is over and we can now turn our focus to adapting to the changes in the consumer markets rather than changes in the financial markets. There’s really only one threat to Blockbuster and that is if we don’t adapt. I am really pleased to report that our adaptation or our transformation is now continuing. In spite of our change in operating focus for the first three quarters, we did not lose sight of the strategic direction of the company and we have continued on the path toward transforming the company into a multi-channel offering by increasing our points of presence through Blockbuster Express vending kiosks and Blockbuster on-demand digital streaming. I am also pleased to report that we have now returned our focus to transforming the core business. Let me take a moment to review each of our strategic actions in a bit more detail. First, let me address some of the actions we have taken to improve same-store performance. Most important is the addition of inventory. On average for new releases now, in the second quarter, in comparison in the second quarter we had about 100 copies per title per store, 106 copies in the third quarter, and we plan to have at least 130 copies per title per store of movies over $20 million box office during the fourth quarter. Blockbuster Premieres, which is our exclusive movie offering, was officially launched in May of this year. We’ve had eight titles so far with six more planned through the end of the year, and these titles have greatly exceeded our expectations. The best title being, so far, anyway, the thriller The Line, with Andy Garcia and Ray Liotta. This week’s Renee Zellewegger’s film is starting this week with a film called My One And Only, and Blockbuster is the exclusive renter on this title for 90 days. There are other upcoming titles featuring stars like Edward Norton, Uma Thurman, Michael Douglas, Ethan Hawke, Susan Sarandon -- our goal is to have one new exclusive title per week throughout the year of 2010 and for the balance of this year, so stay tuned. We are also expanding our product assortment for the upcoming holiday season with a special 12 Days of Christmas promotion where we will highlight the season’s hottest entertainment items with some of the products that are exclusive to us -- for example, one of the latest gaming opportunities called You Star, it’s a hot karaoke movie system that let’s you star in your own favorite film clip. We are offering customers the ultimate convenience now with these 12 items for their holiday shopping. Games continue to represent the biggest in-store opportunity for growth, with Call of Duty Modern Warfare 2 being released on November 10th and that title is shaping up to be a very successful game rental title and retail title for Blockbuster. We haven’t had a title, a game title certainly this successful since Grand Theft Auto 4 was released last year. On Monday, November 9th, we hosted midnight event parties in 20 cities across the U.S. that included a pre-release of the game demo and in addition to the entertainment, customers had the opportunity to contribute to charities that were assisting U.S. troops and a chance to win Call of Duty prizes, all of course before the official release of that product at midnight. These kinds of events can only be done through the physical presence offered by our stores, which remain the cornerstone of our multi-channel approach and a key access point for the 50 million or more than 50 million customers we serve each year. As you will recall, in 2008 we upgraded approximately 600 stores and beginning in the fourth quarter now also continuing through 2010, we are refreshing some 1700 additional stores, whether through new paint, flat screens or fixtures, and we also plan to undergo transformations across all stores that require little capital investment -- things like charting, top rentals, recommendations, and overall remerchandising of the stores to make them much more inviting. We also continue to evaluate the closure of underperforming domestic company operated stores. We anticipate closing no more than 115 during the fourth quarter of 2009, which will be in addition to the 216 that have already been closed through the third quarter of this year. The physical stores also represent an important point of differentiation for our total access business, with a vast majority of our subscribers taking advantage of their in store exchange privileges. We are pleased with the profitability of that business and we look forward to developing new avenues for growth. For example, we’ve received positive response from our customers regarding games by mail and they are asking for more. We are now testing games by mail in two markets, in Cleveland and in Seattle, and we are on track for a market by market rollout in early 2010. For both our online and our stores business, we had severely limited advertising for the first three quarters of this year but in the fourth quarter, we are increasing our focus on promotions and marketing, all of them designed to drive incremental store traffic and specifically targeting in addition new online customers. Moving beyond the box, we are reaching out to customers in new and exciting ways. You shouldn’t think of Blockbuster as only physical stores because now we have physical stores, a by-mail service, vending and digital download capabilities, and because of that we are more convenient than ever. Given my background, I know a fair bit about convenience, as you can imagine, and if you cut through the noise and clutter of our business, it’s all about providing customers with the most convenient access to media entertainment. I can tell you that convenience is all about providing customers with what they want, when they want, where they want, and how they want. And let’s take a look at these one by one. If you only provide movies through a vending machine, you aren’t convenient. If you only offer streaming content or if you do offer streaming content but only offer older movies, you just aren’t convenient to everyone. If you only provide digital movies to the computer or to the home television, you aren’t convenient. If you only provide movies by mail, you aren’t convenient. If your platform is closed, requires a PC, a set-top box, or if your ecosystem is not interoperable, you are just not convenient. And if your movie offering is through channel 999 video on demand, it certainly isn’t very compelling, descriptive, or entertaining and certainly not convenient. Because of the many changes in our industry, technology changes, distribution changes, channel changes, window changes, it is very easy to lose sight of what is important to the customer and it is our opportunity at Blockbuster to solve this problem for the customer with our goal being very, very simply to make it convenient, make it more entertaining, make it easy to experience, and make it more compelling and personal where the customer gets to control his or her own choices. We are working hard to take the multi-channel approach to the next level by providing the customer with flexibility, control, and ease of use. We’ve enhanced Blockbuster.com with the introduction of online account management and inventory lookup, enabling our customers to find in-store inventory at their nearby Blockbuster. Through our planned integration of stores by mail, vending, kiosks, digital services, we intend to utilize a centralized customer database to realize supply chain efficiencies and ultimately to deliver a superior customer experience. But please keep in mind -- business transformations do not happen overnight. We are methodically building this foundation to a multi-channel customer centric offering that provides the most convenient access to media entertainment. We will have more exciting news surrounding each of our distribution channels and how they will interact with the customers and end with each other, so please stay tuned for that. Blockbuster's move beyond the box though began with by mail and continues now with the introduction of vending kiosks. Through our alliance with NCR, we are expanding our physical points of presence with 2,500 Blockbuster express branded kiosks expected by the end of 2009, also as referenced in NCR’s most recent earnings call. In addition, NCR recently announced the launch of its first outdoor DVD rental kiosk and with this new outdoor kiosk, the deployment of Blockbuster express will be expanded to more convenient stores and smaller footprint locations, creating a 24-hour automated retail store. The new solution is built with the future in mind, with flexible architecture that is easily upgradeable and new technologies when they are ready to be deployed, such as digital download capability for video files. This would provide customers with the ultimate in convenience as vending and digital both come together, and speaking of digital, most exciting is that we have now moved from issuing press releases to actually putting product on retail shelves. We’ve made tremendous progress in our digital initiatives in 2009 and we fully expect the Blockbuster brand will be a leading consumer choice as the industry evolves from theory to reality and as customers increasingly demand content in this new format, especially hot new releases that Blockbuster is known to provide. So let’s take a step back to review our recent digital announcements. In July, we announced an agreement with Samsung that would enable customers to access Blockbuster on demand via select new Samsung high definition televisions, home theater systems, and Blu-Ray players. We also announced an alliance with [Roby] to integrate access to Blockbuster on demand directly through Roby’s liquid guide. In August, we announced an exclusive mobile integration deal with Motorola, opening a new channel of distribution for Blockbuster and the important mobility channel. In September, we announced that we were working with two of the top 10 cable MSOs, signaling an opportunity for Blockbuster and cable providers to collaborate not only on branded video on demand but also on in-store customer acquisition. So since then, here is what we’ve accomplished -- there are more than 30 Samsung products, Internet ready televisions, Blu-Ray players, and home theaters, all with Blockbuster on demand as the premiere movie store in those devices that is as convenient literally as a button on your remote control. These devices are on sale today at Blockbuster stores, in Best Buy stores, and all major CE retailers around the country. Also, Blockbuster on demand is now featured as the featured movie service in Tivo devices throughout the U.S. If you have an Internet connected Tivo device, Blockbuster on demand is now available to you through that device. The device is now also on sale at your local Blockbuster store. So as a result, there are now millions of households throughout the U.S. that have access to Blockbuster on demand and our initial results have greatly exceeded our expectations. The cumulative effect of our recent digital announcements is that customers now have the opportunity to engage with Blockbuster in ways they didn’t have before -- Samsung, Tivo, and Motorola are world class partners that provide us with a new level of scale and relevance to the consumer and we anticipate announcing a number of other partnerships within the coming year. Speaking of partnerships, the announcement last week between Best Buy and Sonic Solutions was a validation of our strategy as it endorsed the technology platform and digital locker that we chose when we partnered with Sonic Cinema now nearly a year ago. We certainly hope that the recent announcement that -- that Best Buy’s recent announcement will help us to expand the reach of Blockbuster's digital offering. You may have also recently heard about Disney’s key chest and other studios discussing a digital locker, or storing data in the cloud. Well, we support those studio initiatives and remain excited about the possibility and probability over time of improved industry standards, but while these discussions are about value propositions in the future, this technology actually already exists on Blockbuster on demand. Available today with Blockbuster on demand through Samsung Internet ready TVs, you can actually begin to watch a movie at your home in Manhattan and let’s say drive to Connecticut to your friend’s home, pick up his or her remote, and within minutes you can actually resume watching that same movie at the exact moment, the exact frame in that movie where you paused it in Manhattan. Through our technology partners, Sonic Solutions, we’ll have more exciting features to announce like these in the very near future. As we gain traction in digital streaming, the primary question remains what will become of the stores? Well, the answer is simple -- our stores represent a compelling advantage and a compelling competitive advantage. First, with fewer stores available today in the video store industry, there are just simply fewer places to find the breadth and depth of physical DVD offerings. The Blockbuster store is an important part of the entertainment lifestyle of mainstream America. In addition, we remain an important partner of the studios as we offer them a lucrative revenue stream on the majority of their product that never finds its way to the theater. We are transforming that store from a video rental store to a retail entertainment venue with the fastest growth category in our store being videogames and the more mainstream games, like Beatles Rock Band or Guitar Hero or Wii bowling -- all playing to the sweet spot of our customer demographic. As long as we change the product assortment to meet the changing needs of the customer, our stores will remain relevant. Third is the combination of our stores and vending kiosks that will provide the highest level of convenience with the greatest logistical efficiency for the physical rental of DVDs. Once we achieve scale with our partner, NCR, in the deployment of vending kiosks, the opportunity to leverage a hub and spoke distribution capability will allow us to reduce our physical distribution cost and to balance our inventory availability store by store, kiosk by kiosk, and literally across the entire network. Blockbuster also -- Blockbuster stores also represent a high touch environment where we can introduce customers to the latest and the most exciting connected devices. Making the choice among digital offerings will continue to be very complicated and confusing for the customer, yet we have the ability to interface with millions and millions of customers every month, all looking for entertainment. It’s a very unique opportunity to help our customers make a smooth transition from physical to digital access to their favorite movies and of course, renting or buying these movies all under the Blockbuster brand. In summary, this is all about effective management of our retail portfolio by delivering the Blockbuster brand through multiple channels. Today or physical stores remain the core of our business but relatively short-term leases provides tremendous flexibility to manage that portfolio. The key to our advantages here are flexibility and adaptability. For example, you’ve recently heard news surrounding several of the major studios evaluating various viewing windows. This happens all the time. There are a handful of studios either testing digital day-in date releases at a higher price point than traditional rental or contemplating a retail window or going day-in date on video on demand. If the studios go day-in date on video on demand, it provides a significant boost to Blockbuster on demand. If the studios put a retail window in, it would accelerate the popularity of retail movies available in our stores. If the studios put in a vending window, there is certainly an obvious advantage to our stores and we can provide the vending channel with previously viewed product at a lower cost of goods. So the key here is that given our multi-channel approach, we have the flexibility to adapt, the ability to be supportive of the studios and their current and also in the studio’s future decisions surrounding viewing windows. Bottom line -- it makes us the most convenient source for our customer and hopefully the best partner with the studios and with Hollywood. So with that, I will turn the call over to Tom who will provide a more detailed review of our financial results for the third quarter. Tom.

[Thomas M. Casey:]

Great, thanks, Jim. I will focus briefly on operating margins, cash flow and capital structure and get to your questions. Starting with gross margin, in the third quarter we recorded a 360 basis point improvement which was primarily related to our conservative management of the business as we maximize liquidity, combined with improved studio revenue sharing arrangements for our top domestic DVD releases. For the holiday season, we are expanding our film and game inventory, consistent with a strong product slate so we anticipate fourth quarter gross margin as a percent of revenue will be in line with prior year levels. We met our G&A reduction target ahead of our stated 2009 goal, as evidenced by a $215 million reduction during just the first nine months of the year. And the third quarter we reduced G&A expense by $68 million, excluding the favorable benefit from foreign exchange. Consistent with what we have said in the past, and the largest portions of our G&A reductions are in compensation and occupancy. To give you a few more details on that, the $68 million third quarter savings can be categorized in four areas -- first, approximately $23 million attributable to reduction in domestic compensation expense, $19 million related to lower store count, $20 million from lease cost savings and non-compensation G&A, and finally $6 million from our international operations. Looking ahead, we’ll continue to seek operational efficiencies and closely monitor cost reduction opportunities. Our focus will be on reduced occupancy costs through ongoing lease renegotiation efforts, outsourcing, and continued store rationalization. Interest expense for the third quarter was $31.8 million, which primarily reflects interest on our old revolving credit facility, as well as interest expense on our senior sub notes and amortization of our debt financing fees. After the financing, which closed October 1st, our annualized cash interest expense is approximately at $107 million, including $80 million on the new $675 million senior secured notes and $27 million on the 9% senior sub notes. With regard to cash from operating activities, third quarter is typically a seasonally weak earnings and cash flow quarter. There are two items, though, that should be adjusted when comparing cash from operations in the third quarter of 2009 to the third quarter of 2008. First, we paid $17 million to remove Viacom guarantees from leases in the U.K. and secondly, we had additional interest payments in the third quarter due to the timing of the refinancing. As part of paying off the revolving credit facility, we had approximately $13 million additional cash interest, so when you exclude these items from the third quarter, cash from operations would have been approximately negative $23 million, which is relatively flat to the third quarter of 2008. We expect fourth quarter cash from operations to be strong, reflecting improved product availability with a strong title slate. Regarding working capital, liquidity constraints forced reduction in our year-to-date product investment, which hurts top line performance. Specifically rental library inventory decreased by approximately 13% and merchandise inventory decreased by approximately 41% year-on-year. For the fourth quarter, we are seeking to optimize product availability and cash flow. We expect fourth quarter working capital to be a significant source of cash. We ended the third quarter with $141 million of cash and cash equivalents. We recorded approximately $66 million in restricted cash, which includes the cash [inaudible] for Blockbuster's letters of credit that are primarily related to Viacom and Workers’ comp insurance. Total restricted cash decreased by approximately $58 million sequentially primarily due to the reduction in letters of credit related to Viacom lease guarantees. We plan to further enhance liquidity through the elimination of the remaining portion of our letters of credit related to Viacom combined with the anticipated divestitures of additional international assets. We expect these events to be additive to liquidity early in 2010. Regarding our capital structure, the new $675 million 11.75 senior secured notes provided a significant boost as we reduced our 2010 debt amortization payments by over $300 million and extended our debt maturities. With the next debt maturity date in May 2012, we have over two years to refinance the $300 million 9% senior sub notes ahead of the 11.75% spring maturity date on the $675 million senior secured notes. We will continue to opportunistically evaluate the full range of alternatives. So that concludes my prepared remarks. Operator, we will now open the call to Q&A.

[Operator:]

(Operator Instructions) Your first question comes from the line of Karru Martinson.

[Karru Martinson:]

In terms of where we stand today, perhaps you could give us an update on the cash balance, whether it is pro forma for these transactions or the liquidity that you have today.

[Thomas M. Casey:]

We said we’ve got $141 million of cash and cash equivalents excluding the restricted cash. That’s at the end of the third quarter and that’s what we disclosed. As you think about today, obviously we don’t disclose inter-period cash balances but you could look at guidance previously provided in terms of cash flow to estimate a cash balance for year-end.

[Karru Martinson:]

And in terms of the store closings, I was under the impression that during the deal, you guys talked about 280 to 300 kind of normal closures, plus an accelerated program of 300 plus more. How does that fit with the guidance or the talk that you are giving with us, another 115 targeted for this fourth quarter?

[Thomas M. Casey:]

We are on track for the store closing plan that we discussed and released in an 8-K September 15th. Jim had talked about the 216 stores closed to date and the additional stores for the fourth quarter. And in the 8-K, we talked about accelerated closures and normal closures which will be significantly additive to EBITDA and we are on track with that program. We also find though that as you go through a store closing program, oftentimes it’s beneficial obviously to the lease renegotiation. We oftentimes find it is -- with the rent being such a significant part of the cost structure, if there is a rent break, notwithstanding the benefits of revenue transfer to nearby stores, that it may well make sense to keep a particular store opening but generally speaking, we are on track with our plan.

[Karru Martinson:]

And maybe it’s in this press release and I just missed it, but is there an update on the guidance that you guys gave originally?

[Thomas M. Casey:]

We haven’t addressed guidance on the -- in the press release or on the call.

[Karru Martinson:]

Okay. Should we assume then that I think it was like 270 to 290 of EBITDA is where we stand for the year?

[Thomas M. Casey:]

That continues to be our guidance range.

[Karru Martinson:]

Okay, and then just in terms of the kiosk rollout, where do we stand today and what kind of revenues are we actually seeing coming into the company from this rollout?

[Thomas M. Casey:]

We have today approximately -- it’s just south of 1500 units. Of course, that number is changing every day, that are deployed and as I referenced, we are shooting for something like 2500 by the end of the year, if all goes well. As far as the revenue stream, we’ve pretty much coached everybody not to have much expectation in the early stages of deployment because our agreement with NCR calls for a ramp-up of the box so that we are not pulling down a revenue stream from day one. It gives them time to get the box up to some critical mass before we begin to enjoy the revenue, so as this thing ramps, it will become over time a meaningful revenue source for us but in the early -- I’d say the first 12 months, I wouldn’t count on very much incremental revenue from those devices.

[Karru Martinson:]

Thank you very much. I’ll get back in the queue.

[Operator:]

Our next question comes from the line of Mary Gilbert.

[Mary Gilbert:]

I wondered if you could give us an idea of the model, the business model for Blockbuster on demand. So for example, it has now been launched on Tivo and there is roughly 3 million Tivo subscribers, so do we know what percent of those TV subscribers are actively using the on demand service and do we have any indications -- you know, understanding it’s early, what the average rental, you know, if they are renting like once a month, and what percent of the subscribers are renting? Like, is it 20%, 30%?

[James W. Keyes:]

It is way too early at this stage. We are literally just lighting these devices up and customers now are just discovering them. In fact, if you do, as I referenced if you do have an online capable Tivo at home, I encourage everybody on the call to go try it out and start renting a lot of movies so that we can then on the next call, give you good numbers. But we are just now -- this data is beginning to trickle in and in a similar fashion to vending, I would encourage everyone not to count on particularly this year or for partly into next year not to count on any incremental, meaningful incremental revenue from these movie sales. It’s very early. The business model we think is sound but it’s a relatively small transaction fee that we are able to earn per transaction and these things are going to take a while. It’s mostly trial purposes now that people are using these devices for us. So give us time. Sorry I can't give you much more color on that at this point but there will be more to come and bottom line, we are excited. I mean, we have to date I think it’s safe to say more than doubled our transactions just since lighting up these devices and as you know, MovieLink has been around for quite some time, rebranded as Blockbuster on demand and we are very excited now that we are beginning to gain real live traction. As I said, as we go from reality or form theory about this digital opportunity to reality and as we get off of the PC screen but -- because what we really found was the demand for movies via the PC was just not very great.

[Mary Gilbert:]

I had a question -- don’t you have a revenue sharing arrangement with the studios, so that with each rental -- let’s say the rental is $3.99 if it’s a new release, $2.99 if it’s an older release -- what percent of that revenue do you get? Are you saying you only get like a small fee every time they use it? How does that work exactly?

[James W. Keyes:]

Well, as I said, we are not prepared at this point to share the full economic model details of the economic model. You know, frankly we are just beginning these deals and if you think about it, yes, there is a standard fee with the studio because we, as we would in physical form, basically secure the rights to that movie and then pass it along. But in the case of digital, there are other players in the mix. You have -- first of all, starting out you have a smaller split with the studios than the traditional split you would get on physical form. But then you also have other players -- you’ve got the transportation provider, whoever is providing access to that content into the home, you’ve got the technology partner, you’ve got the consumer electronics partner, all of whom share a piece of that transaction, so the resulting transaction is very different from the traditional, starting with more or less an inverse of the physical disk margin where if you traditionally got 60% on the physical disks, you might get only 30% or 40% in the digital world and then once you share a piece of that with all of the other partners in the process, it ends up with a relatively small margin per transaction. Now, upside here is that we expect just because of the convenience of this and the ubiquity of it instead of limiting ourselves to 4,000 or 5,000 stores, or even 10,000 kiosks will be available through millions and millions of households. We think that the scale will make up for the smaller transaction. Again, sorry I can’t provide more detailed color but this is just an emerging business model for all of us and as we learn more, we’ll be glad to share it.

[Mary Gilbert:]

That was very helpful. I just have one last question with regard to the kiosk model -- it sounds like initially you are not getting any revenues, or if you are it’s very small, but once you pass the 12-month mark and you get up to this certain level of revenue generation from those, then are you getting a percent of sales on the total sales that are generated from the kiosks?

[James W. Keyes:]

It’s not really a time horizon as much as it is a -- the ability for an individual box to reach critical scale. You know, we are looking at this in collaboration -- we want to win with our partner, NCR, on this and so we don’t expect to pull royalties from them in a case where revenue is not sufficient to cover the basic operating costs of the box. So there’s a minimum threshold that we achieve and then once we achieve that threshold, we are able to enjoy a percentage of the revenue, if you will. And that’s about it -- it’s a relatively simple structure. It doesn’t at this stage contemplate the future advantage. I referenced the hub and spoke distribution capability leveraging our substantial relationship with studios. At this stage, as we start up, we are basically trying to get to scale, so we don’t really have a more sophisticated economic model in place that allows for those efficiencies to come into play. But in the future, we do anticipate this being a significant win win for both NCR and for Blockbuster as we are able to build this greater efficiency model by leveraging our stores to help provide both replenishment and inventory to the individual machines.

[Mary Gilbert:]

Great. Thank you.

[Operator:]

Our next question comes from the line of Carla Casella of J.P. Morgan.

[Carla Casella:]

My question is on your studio relationships and the expected expansion you are going to see in the fourth quarter of copy availability -- are you seeing that in the stores today and how is that being funded? Is that through revenue sharing or have you set up a new profit sharing arrangement with the studios?

[James W. Keyes:]

We are. We’ve made good progress. I guess the silver lining in the cloud that we have been through for the last three quarters is it caused us to have to come to grips with our studios to the old business model and frankly the old business model consumed a lot of working capital and so that forced us, you know, really brought home the importance of a different model, creating a different model because we are a very important distribution channel to them and we didn’t want to slow down that distribution -- we didn’t want to create out of stocks for the customer just because of the somewhat artificial cost, if you will, of intellectual property versus the physical cost of distributing and making available that disc. So the net of all this is we have had some very good success, we are very pleased with the studio’s cooperation with us in coming up with innovative new structures that significantly bring down that minimum guarantee per stick and allow us to greatly increase the inventory availability without a commensurate increase in our working capital exposure. So the net of all of this is that yes we are able to -- and I referenced some numbers, moving from an average, for example, on titles that are over $20 million box office titles, we are moving from what was about 100 units per store in the second quarter. We bumped up that a little bit but it was still only about 106 or so units per store in the third quarter, and now by the fourth quarter we are pushing for 130 plus to try to make sure that we are in stock, particularly on that Friday and Saturday night visit for our customers. So so far, so good and as I said, we are very pleased with the studio cooperation in helping us do this.

[Carla Casella:]

So you are at the 130 now or is that more of a December timeframe?

[James W. Keyes:]

We are more or less, we are ramping up to that 130. I’d say it’s pretty safe to say we are there now.

[Carla Casella:]

And so when you look at rental merchandise purchases versus rental amortization, was that the two items netted out where those big use of cash in the quarter, source of cash?

[James W. Keyes:]

The third quarter, Carla, wouldn’t be significantly different with respect to that. There were some -- we had -- it was partly the benefit of some revenue sharing deals on the bigger titles, as I referenced earlier but it was also a mix shift to our margin percentage is higher when we do traditional buys and this happened to be a particular studio and traditional buys that benefited margin in the third quarter.

[Carla Casella:]

Okay, and the third quarter cash flow was a little bit lower than we expected cash from operations. You explained there were a couple of one-time items. One I don’t quite understand, I didn’t realize there was going to be a payment for the Viacom leases in the U.K. -- that was $17 million, you said?

[James W. Keyes:]

Right. Remember, the total target there is $75 million and the way it is structured is a -- those payments relate to the first 50 and then there are additional payments for the remaining 25, which obviously weigh proportionally much smaller so you really have to look at the total payments as a percentage of the total 75 to get a feel for the cost [inaudible]. But really when you are going to a landlord to ask them to remove a guarantee from Viacom, clearly there is a payment involved there over the remaining -- and those, the average remaining lease term on those U.K. releases is more than eight years, so it’s -- that’s why that is a significant payment.

[Carla Casella:]

Okay, so that was $17 million in the quarter, so would fourth quarter be half of that or a similar amount?

[James W. Keyes:]

So the cash was paid, and $3 million was expense and the rest was expensed over the remaining lease term.

[Carla Casella:]

Okay, but the cash from operations, how did that stack up relative to your expectations when you were on the road for the bond deal? Did you expect a $23 million pro forma use of cash?

[James W. Keyes:]

Yeah, I mean, basically what we said previously we are comfortable with and for the third quarter, third and fourth quarter taken together, when you look at both cash flow and working capital are -- and obviously it is dominated by the fourth quarter. It’s a much larger quarter for cash from operations and with respect to working capital. And so taken together, we are certainly comfortable and the third quarter had a couple of unusual items which I pointed out but notwithstanding that, it’s within the range of what we had expected.

[Carla Casella:]

Okay, and then did I understand correctly that you are going to start spending more to gain, grow your online subscriber base?

[James W. Keyes:]

I would say yes -- somewhat modestly in the beginning. What we are really trying to find is better acquisition targets, if you will -- better acquisition methods. I mean, let’s face it -- we’re not going to spend dollar for dollar the way Netflix is. That’s their primary vehicle, that’s their primary business and it’s a channel for us and so we are going to try to be a little bit more nimble and creative in finding other pools to fish in and other ways to add subscribers. I think you will see some innovative things coming in the next few months and we also are excited about a new member of our team -- we have just added to our team Justin Lewis, Senior Vice President of Marketing, and we are pleased with the addition of his capabilities that will now bring us much more strength, I think you will see as we go forward on the marketing side.

[Carla Casella:]

Okay, and then just one other -- the stores that you have renovated, do you have a track record in terms of what you are seeing in those stores?

[James W. Keyes:]

This next, this current round of renovations, we haven’t really got, had the ability to measure. We are just now starting out and these are very modest -- I would hesitate to even call them remodels. We were spending let’s say $30,000 to $40,000 in 2008 doing a much -- much more of a face lift. These would be more -- call it $10,000 to $20,000 cosmetic improvements in some of the stores that -- the addition of flat screen TVs and things like that that are pretty dramatic when you see them, but a little paint and a flat screen TV doesn’t cost as much but it makes a big visual difference to the store. Those are the kinds of things we are doing now.

[Carla Casella:]

Okay, great, thanks.

[James W. Keyes:]

Improved merchandising, displays, et cetera.

[Carla Casella:]

Okay, great. Thank you.

[Operator:]

(Operator Instructions) Our next question comes from the line of Richard Ingrassia of Roth Capital Partners.

[Analyst for Richard Ingrassia:]

This is Gerald [Tram] in for Richard. Are you seeing any pressure to change rental terms, similar to what Netflix and Red Box are experiencing? And if not, why?

[James W. Keyes:]

Change rental terms -- I am not sure I understand.

[Analyst for Richard Ingrassia:]

Netflix and Red Box we found had been getting some pressure from the studios as far as their pricing. We are wondering if you have had that similar experience.

[James W. Keyes:]

You know, we are -- no, simple answer, no. We are not getting any pressure on our prices. Obviously as you know, the bulk of our business is in store and we believe in capturing a value for our offering and we think that the value of intellectual property is very important for both us and the studio so I think we are very much of like mind that rather than fight a price gain, Blockbuster prefers to provide value through convenience and make -- hopefully make customers choose us for something other than just having the cheapest price out there. So I think that makes us more aligned with where the studios are in the long term. Now, when it comes to our by mail service and our vending branded service, of course we have to be competitive in the short-term and that puts more pressure on us, frankly, than anybody else to have some level of consistency on the street but hopefully over time to be able to provide a more compelling consumer offer, especially when we offer the convenience -- a good example being our online service, or by mail service. The majority of our customers actually pay more for the service to have the convenience of in-store exchanges. If you carry that over to the vending world, over time we hope that the ability for customers to easily and seamlessly move between the vending machine and the online service, even perhaps getting a la carte movies by mail, will all provide our customers a reason to shop and be with Blockbuster that makes them willing to pay a slight premium for that service, for that extra level of convenience.

[Analyst for Richard Ingrassia:]

Okay, thanks, that’s helpful. And one follow-up -- you mentioned you are going to increase advertising spend in Q4 -- is there a particular platform you are trying to go after, as far as consumers are concerned, be it by mail, in store, videogames, kiosks, or downloads?

[James W. Keyes:]

I’d say the primary focus you are going to see being both in store and by mail. Both -- well, primarily the in-store will be targeted at customers. We are doing a lot of CRM work, focusing on customers that are perhaps lapsed, that haven’t been in the store for the last six months and we are reaching out to them electronically to bring them back in. We are also online reaching out, as I mentioned before, a little bit different pools of customers than we’ve reached before. We think we have -- between Netflix and Blockbuster, we’ve probably reached 60 million or 70 million or more customers out there, potential customers out there and it’s been deafening noise, if you will, so we think that there are many people that have not been reached in the traditional ways and that’s a big target for us now.

[Operator:]

Our next question comes from the line of Tony Wible of Janney Montgomery Scott.

[Analyst for Tony Wible:]

This is Alan in for Tony. I just have two quick questions -- first of all, how do you plan on promoting the distribution channel options to consumers that are impacted by your store closures? Is there any kind of transition plan in place to try to point people to your different channels, such as when you buy stores and kiosks that you have just recently --

[James W. Keyes:]

Sure, it actually represents a substantial opportunity for us and one thing -- the first thing I’ll mention that we didn’t really highlight very much before is we are finding that our liquidation process in these close stores is much more popular. Perhaps it’s a function of the economic climate that we are in, perhaps a function of the pent-up demand for some of this product. But what we are finding is liquidation sales when we actually sell the inventory off are doing far better than they have traditionally, so it’s one of the reasons that you will notice we actually announced a greater, a higher level of store closures. We are actually keeping some of those stores open throughout the holiday season so we can leverage the success of these liquidations and actually adding inventory to the stores. We are finding we can move a lot of retail product. So step one is to take a hard look at these store, these store closure candidates and perhaps even [inaudible] outlet stores going forward. Step two is that in the immediate term, we have provided even using third party resources in those stores people to sign up our customers for the by mail service because it’s a natural extension if the store is closing, if the nearby Blockbuster store is a little bit farther away, then we hope to convert those customers to the by mail service. A third capability that we are offering is the ability to put vending either in proximity in some cases now that we have the outdoor box where landlords will allow to actually put it on the dock and allow our customers to have access to that vending machine even after the store is closed. And then finally we’ve got the proximity store, so we are making sure every one of our customers know where the nearest Blockbuster store is and we’ve gotten some pretty good transference of customers from one store to another, to the next nearby Blockbuster location. So the net of all of those, we expect to retain a lot of our customers and just one last thing -- I just want to make sure that -- I didn’t want to mislead anybody with the reference to stores that my close after the holiday season. Everything that we are doing is in line with the 8-K filing that we put out a couple of months ago so we are very much on plan and pleased with the results so far.

[Analyst for Tony Wible:]

I know you guys talked about increasing ad spend -- how do you plan on growing your DVD by mail business in light of the strides and the success made with your gaming consoler partnerships and --

[James W. Keyes:]

Could you speak up? We are having trouble hearing you.

[Analyst for Tony Wible:]

Sure. How do you plan on growing your DVD by mail business in light of the strides in the success you have had with the gaming console partnerships and how many subs do you guys have now?

[James W. Keyes:]

Well, we haven’t published a number of subscribers and frankly it is more a question of where we are going to head longer term with the subscription business. The difference between the Netflix offering and ours really primarily today is their addition of subscription content via their streaming service. This is a very, very substantial difference in our Blockbuster on demand offering, by design. You see, our customers, the vast majority of our customers, both our by mail customers and our in-store customers prefer newer releases. Therefore, the subscription offering when we offer it digitally, the restrictions because of the windows on that subscription content that do not allow us to offer new releases make it really a very inconsistent offering with the Blockbuster brand. So we’ve struggled with how to present that offering. The game console providers will gladly invite Blockbuster in with a subscription package and yet until we have a subscription package that is consistent with the Blockbuster brand, that as you can imagine presents quite a challenge given the windows imposed on the digital side of this business. Frankly we’ve sat on the sidelines and let Netflix take that business, preferring instead -- instead of going through the gaming consoles to go directly to the television set, the Internet ready television via the Samsung deal that we talked about, or directly to the Blu-Ray player. So the net of all of this is that we believe much of Netflix’s growth in subscription has become -- has been driven by their streaming offering yet it’s not a consumer proposition that Blockbuster is prepared to offer at this stage. We are still looking at it. We are looking at subscriptions that might be relevant to the Blockbuster customer but at this stage we prefer to stick with the Blockbuster on demand new release offering and go directly to the television set in other forms other than game consoles.

[Operator:]

Our next question comes from the line of Brandon Roth of Pali Capital.

[Brandon Roth:]

A couple of questions -- first, I was wondering if you could estimate how much of your rental comp decline this quarter was from not having enough copy depth?

[James W. Keyes:]

I wish we could isolate the variables that precisely but we can tell you it was a substantial if not we think leading contributor to the decline. We looked at our business, for example, outside of the United States. In Canada, we don’t have a Netflix like competitor, we don’t have a Red Box like competitor with any scale in that country and the comps were not dissimilar. So we think the single biggest -- two single biggest factors on our delta in comps for the first three quarters this year were one, the inventory availability; secondly, the macroeconomic environment and just the fact that we are not that different from other retailers, where customers are pulling back on their -- certainly their retail purchases but also to some extent their rentals per transaction. And then the third is the title strength -- this year, interestingly the theatrical pull has actually taken business from us on our most important nights, on Friday and Saturday night. We attribute that delta on the Friday and Saturday night business to specifically that, the popularity of theatrical now is an escape for customers trying to get away from the challenges of their day to day issues. So given all of that, we are relatively optimistic that improving our inventory position, doing the -- back to the fundamentals that we practiced in the year 2008, will get us back. I do -- I had reminded everybody in my comments earlier that in the year 2007 when we started this initiative to get back in stock and to really satisfy the customer in different ways, it did take us three quarters to go from what had been negative comps for really some five or six years previously to positive comps in about a three quarter transition period, so I don’t expect that our efforts now will be any different. We closed this deal, as I mentioned with three days left in the third quarter, so we didn’t really start to build inventory in any meaningful way until the fourth quarter. We expect it will take us some time into 2010 before we are able to enjoy positive comps again but that is the path that we are striving for and hopefully we will be able to have more progress to show you next quarter.

[Brandon Roth:]

Okay, and a follow-up to that question, how did comps, rental comps trend throughout the quarter?

[James W. Keyes:]

Same-store comps within the third quarter is your question?

[Brandon Roth:]

Yes, perhaps month by month or --

[Thomas M. Casey:]

We don’t disclose that. You can imagine that we are cycling -- you know, we had the Olympics in 2008, so cycling that made for an easier comparison during that particular month but I wouldn’t want to give you numbers that we don’t previously disclose.

[Brandon Roth:]

Okay, and my second question is would you guys at this point consider collapsing the A and B share classes?

[James W. Keyes:]

We’ve discussed that I think on these calls previously. The question has come up in the past. We have told investors that we would look at that opportunity. It is a carryover from the Viacom spin-off a number of years ago. It is of less relevance today. And yet there are costs associated as you can imagine, so we are looking at the timing of that kind of transaction and we will continue to consider it going forward.

[Brandon Roth:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Mary Gilbert of Imperial Capital.

[Mary Gilbert:]

I just wanted to go over your working capital and rental library, the changes in that. So given that you are going to be ramping up your inventory to make sure that you are high in your units of new releases, we are going to expect to see that getting ramped up, right? So I wanted to -- I wonder if you could sort of help us in how we are looking at that potential use of cash on a go-forward basis, and then how we look at the business from that perspective going forward with the decline in the retail store base with your planned store closures in combination with ramping up inventory in your rental library and addressing your new markets?

[James W. Keyes:]

First of all, I wouldn’t expect, notwithstanding the ramp-up, remember we have revenue sharing deals with the studios and that the fundamentals of the film rental business are with respect to working capital, it doesn’t -- because of the way in which you pay for it, we typically have 60 day terms and movies turn before you actually pay for it in many cases. So the issue is balancing gross margin versus availability but the upshot of all that is as you look at the working capital accounts in Q4, we stand by what we had said earlier that there is a seasonal pattern that we expect to predominate here in Q3 and Q4 that is consistent with what we said previously.

[Mary Gilbert:]

Okay, yeah, so that you will be generating cash -- you will have a net cash generation associated with that.

[James W. Keyes:]

That’s correct.

[Mary Gilbert:]

Right, but what about on a year-over-year basis? So if I were to look at -- let’s go into 2010, you are going to be closing more stores plus you have this new arrangement with the studio, so does that also result in less working capital requirements? So would the overall contribution from the change in working capital, would it be a contribution or a net use? That’s what I was trying to figure out, on a go forward basis.

[Thomas M. Casey:]

Well, typically going forward to the extent that the business consumes a degree of working capital and the ups and downs will be less as the -- if you reduce the number of stores by some percentage and somewhat proportionately and the good news is the other points of presence that Jim talked about are those that really don’t consumer working capital. So we have the advantage of being able to grow a business and the brand in ways that don’t consume cash.

[Mary Gilbert:]

Yes, that’s what I thought -- so it will be a source of cash rather than a use of cash going forward.

[Thomas M. Casey:]

That would be the goal.

[Mary Gilbert:]

Okay, great. That’s very helpful. Thank you.

[Operator:]

Our next question comes from the line of Karru Martinson.

[Karru Martinson:]

In terms of the store closure program, I think originally you guys had talked about a EBIT to impact, positive EBIT to impact of about $50 million to $60 million over the next 2009, 2010 -- I mean, is that still the objective of where you see those savings coming?

[Thomas M. Casey:]

That’s right. That’s a balance of revenue transfer and loss avoidance and our experience so far has supported that.

[Karru Martinson:]

And at the time of the deal, I think you guys talked about total access having roughly 1.6 million subscribers. A competitor of yours, Netflix, was just doing a deal and they were talking about you guys being around a million subscribers. Can you help us just kind of reconcile the two numbers?

[James W. Keyes:]

It’s false.

[Karru Martinson:]

Okay. That helps. And I’m assuming the false is the million?

[James W. Keyes:]

Yes.

[Karru Martinson:]

Okay.

[James W. Keyes:]

We had previously disclosed 1.6 million and that excludes doors, it’s just online. We’ve not updated that number on this call but our objective is to grow it.

[Karru Martinson:]

Okay. And now, do you guys think the asset sale would be in the first quarter here? I mean, what gives you the confidence on that and what are you seeing in terms of interested parties?

[James W. Keyes:]

Well, first, those are solid businesses. We are pleased. They’ve got great management and they are doing just fine. And we do have interested parties and we have a process underway. That said, any M&A transaction is -- has risk to it and important aspects to it that are subject to negotiation, so we wouldn’t want to say more than that publicly.

[Karru Martinson:]

Okay. Now, when we look at the cost cuts that you have to date, you’ve achieved the target -- do you believe there are material additional cuts yet to come or is this kind of where the run-rate, where we should be looking at this going forward?

[Thomas M. Casey:]

Well, remember, you have this somewhat controllable cost structure where it is roughly 80% compensation and store labor, kind of evenly split. And then overhead. And so as you rationalize the store base, there is opportunities to reduce costs through that program and then derive greater efficiencies in overhead as well through outsourcing, so we would expect our costs to continue to decrease. I mean, I guess as far as the single biggest contributor to that would be lease costs savings through continual negotiation of existing leases, as well as the rationalization program.

[Karru Martinson:]

And just lastly, as Red Box has issues with certain studios in terms of the window in getting movies, are you seeing increased availability for yourself and is there an update on kind of how the kiosks side and the window will be proceeding going forward?

[James W. Keyes:]

You know, it’s anybody’s guess right now on how this will shake out. Bottom line, as I referenced before, we’ve got complete flexibility on this matter. Certainly the windows, to the extent that they do stick, they help the stores because it gives the stores yet another reason to be and makes them more relevant for the consumer. But to the extent that a window works for us and for our vending, we think that the -- frankly the consumer’s awareness of movies that are one week old, two weeks old, I challenge most of the people on the call to tell me what movies were released last week. I mean, I know it was UP!, that was in the store but the average consumer probably won't realize that the movie UP! was out last week -- it will be two or three weeks before they think of it as a new release and that is somewhere in that level of relevance to the consumer, there’s a sweet spot that in our vending environment, we hope to be able to move product from the shelves into that vending machine in collaboration with NCR to provide an improved cost of goods and still timely and relevant releases to the consumer. So net of this, in the short-term NCR is the primary -- drives the primary economic model and they are forced to compete with Red Box side by side, so they are going to do what they have to do in the interim and we are on the sidelines on that matter as it relates to the vending window but we can go either way as it ultimately unfolds. You know, there's one point I would like to go back to on this subscription -- it has been really probably the number one point of confusion we think with investors between the Netflix offering and the Blockbuster offering. Since this new management team came to the company a couple of years ago, we were puzzled by the fascination with subscription numbers and bottom line, it’s this -- we offer our customers multiple ways to pay for their product. We offer product by day, by week, or by month. And the by month subscription is actually pretty limiting -- it’s extremely limiting when you look at the digital availability and the fact that we can't offer anything near a new release in subscription form. So for that reason, it’s far more important for us to count our total customers than our subscribers and our subscribers frankly are also customers, so they are as I mentioned before, paying a -- the majority of them are paying a little higher subscription for the flexibility to also be in-store customers to have that added level of convenience. Many of them also supplement their subscription with a la carte purchases as well, either in digital form or in the store. So bottom line is the focus on subscription service we don’t think is a relevant measure for the Blockbuster business. It’s a data point, an interesting one but it is not one that we think is of great meaning to our future. It’s far more important that we build that overall customer base.

[Karru Martinson:]

Okay. I guess in looking at subscription though, I guess an important database would be is that business still profitable for you?

[James W. Keyes:]

Absolutely.

[Karru Martinson:]

Perfect.

[James W. Keyes:]

We are very pleased with it and to the extent that we can grow our subscribers profitably, we absolutely want to do it.

[Karru Martinson:]

Thank you very much, guys.

[Operator:]

Our next question comes from the line of Carla Casella of J.P. Morgan.

[Carla Casella:]

On the revenue sharing question, for fourth quarter, as we look at how much you will be doing revenue share versus straight purchasing of product, would that compare to last year, higher or lower amounts of revenue sharing? Or is it more fair to compare it to 2007 fourth quarter?

[Thomas M. Casey:]

It would be consistent with last year’s experience.

[Carla Casella:]

Okay, and then the merchandise gross margin this quarter was a lot higher than we expected -- is that sustainable or was the one-time based on a mix shift during the quarter, and did it include any liquidation type sales?

[Thomas M. Casey:]

It is a mix shift, Carla, relative to last year when there was a higher proportion of lower margin products, so the 29% compares favorably to the 19% last year, as you had noted.

[Carla Casella:]

So the mix should be more in -- in fourth quarter should be more similar to this quarter than last year though?

[Thomas M. Casey:]

The fourth quarter would be more similar -- what happens is typically the fourth quarter shifts more to retail because retail is stronger proportionately in fourth quarter than third, so that would tend to have a -- the effect of reducing domestic gross margin overall. And as a margin percentage, merchandise margin would be expected to be a bit lower than third quarter, though a bit higher than 2008.

[Carla Casella:]

Okay. And then it sounds like we are starting to get some more discounting on DVD sales from Walmart and there has been some talk over at the Movie Gallery, liquidate more stores. I guess are you seeing anything out there in terms of any pressure on previously viewed product, prices or new DVD prices?

[Thomas M. Casey:]

I would just say that our experience has exceeded our expectations so far, I think as Jim alluded to before. We are very pleased with the results of where we have been bundling and doing some store liquidation events, they have gone quite well. I think it maybe is reflective of the economy or the excitement that is created with these kinds of sales but we were experiencing good success.

[Carla Casella:]

Okay, and then --

[James W. Keyes:]

Frankly, we are also a little amused with retailers discounting their price, selling below cost and having Red Box go out and buy them to fill their machines. It’s kind of an amusing situation in the industry right now. We think eventually they are going to discover that it’s probably not good to use a loss leader that somebody else is using for their wholesale price.

[Carla Casella:]

And then just one last one, on the NCR and the kiosk, can you disclose what that minimum threshold is or at what point do you expect you ought to hit that? Does that mean that you probably don’t receive any royalty from the kiosks until late 2010 or is it 2011 type of time frame?

[Thomas M. Casey:]

We haven’t given any guidance around the revenue streams coming from the kiosk channel. I’d say give us until some time in probably the first or second quarter of next year to provide a little more color on that but as I said before, I wouldn’t bake much revenue from the vending channel into your 2010 expectations.

[Carla Casella:]

Okay, great. Thanks.

[Thomas M. Casey:]

As we grow the business. Perhaps in the back half of 2010 some material contribution but we will give you further guidance on that as Jim said in the near year.

[Carla Casella:]

Great, thanks.

[Operator:]

Our next question comes from the line of Doug Pardon of Brigade Capital.

[Doug Pardon:]

Just -- most of my questions have been answered but just as it relates to you mentioned growing the online business profitably and could you just talk about how you balance sort of investments going forward versus other things? I mean, from my estimation, you guys are going to be sitting on over $300 million in cash at end year. I know that is just my estimate, plus you guys generate over $100 million of free cash flow a year. I know you are constrained by the CapEx a little bit because of the covenants but just as you -- can you just talk about how you balance profitability versus growth, just given how much runway you guys -- isn’t it like -- just how much -- you guys have a real lot of liquidity here. Could you just talk about that a little bit?

[Thomas M. Casey:]

If you look at the various channels, most of the channels are capital light, investment light. Vending is zero capital investment. At this stage, it’s all NCR and it’s basically a license or a royalty arrangement with them. The digital side of this is primarily investment in the technology side, so there’s a little capitalized expense as we do the software development. But again, it’s not a significant pop on the capital investment side. That leaves us with the by mail service is already built, the infrastructure is built. We’ll upgrade the distribution capabilities a little bit but there is not much capital investment necessary there. It brings you back to stores and so really we’ve -- as we have describe, we have a relatively modest approach to upgrading the physical plant. The nice thing about these stores is there is very little -- there’s no plumbing or a lot of electricity to move around so it’s a pretty inexpensive proposition. Probably the biggest cost to the remodels that we are looking at when it comes to upgrading our stores is putting up flat screens versus the old TVs that were in the store. Other than that, there is not a lot of heavy lifting on the capital expenditure side.

[Doug Pardon:]

And that said, given there is a lot of free cash flow here, as well as a lot of on balance sheet cash -- I mean, I think there are some constraints on the ability to pay back some of the sub notes and capture the discount but is there an opportunity to pay down maybe additional debt rather than the mandatory amortization that exists? It just seems a little bit inefficient to be carrying that much cash.

[Thomas M. Casey:]

We evaluate the full range of alternatives and optimize the capital structure. We are comfortable with our plan today. We have, as you know, restricted payments with respect to the senior subs in terms of being able to buy back those bonds but in terms of additional redemption of the senior secured notes, I would say that that is something we would certainly consider as time goes on but for now, the focus is squarely on enhancing the operations of the business while optimizing cash flow and achieving that balance and as time goes on, we become more and more comfortable with that and our liquidity, you know, we’ll certainly consider alternatives but right now, it’s the focus on achieving that balance.

[Doug Pardon:]

Great. All right, thanks, guys.

[Operator:]

There are no further questions at this time. I will now hand the call back to Mr. Jim Keyes, Chairman and CEO, for closing remarks.

[James W. Keyes:]

Thank you, everyone for joining us today. We will be at Morgan Stanley’s global consumer and retail conference on November 20th, wanted to let you know that; Banc of America Merrill Lynch’s conference on December 3rd; and Citi’s EMT Conference in January, as well as several others in early 2010, hope you will be able to attend some of those. We look forward to seeing you at one of or all of these events and encourage you to check the investor relations section of our website for updates on events scheduled with the financial community. And with that, I know it has been a very challenging time. I can assure you for management as well as the investors. We very much appreciate and welcome the new investors to the table and thank you very much for your continued support. Look forward to talking with you soon.

[Operator:]

This concludes today’s conference call. You may now disconnect.