"During the first quarter, we captured share of the overall rental market, continued to contain operating expenses and aggressively grew our BLOCKBUSTER Total Accessâ„¢ subscriber base, which nearly doubled in a matter of five months and now exceeds 3 million total subscribers. I am extremely pleased with these accomplishments. Our results were impacted by our investment in the growth of BLOCKBUSTER Total Access and by an extremely tough in-store rental market," said John Antioco, Blockbuster Chairman and CEO. "The first quarter of 2007 was our highest subscriber growth quarter ever, surpassing even the initial success of the program and providing clear testimony to the consumer appeal of our integrated online and in-store offering, which we believe will allow us to achieve our year-end goal of well over 4 million subscribers. While this aggressive growth requires investment this year, we believe it's the right thing for the business and will contribute to our future profitability and to the long-term success of the Company."
First Quarter Financial Results
Total revenues for the first quarter of 2007 increased primarily as a result of strong merchandise sales and approximately $20 million in revenues associated with the termination of Blockbuster's Brazilian franchise agreement. Rental revenues for the period remained essentially flat at $1.05 billion reflecting growth in revenues from BLOCKBUSTER Total Access, which added approximately 800,000 subscribers during the first quarter of 2007 offsetting a larger than expected decline in the in-store rental industry. The Company had approximately 3 million total BLOCKBUSTER Total Access subscribers, including approximately 2.8 million paying subscribers, at the end of the quarter.
Operating loss for the first quarter of 2007 totaled $18.4 million, compared to operating income of $32.1 million for the same period last year. Gross profit decreased $27.7 million primarily as a result of the decrease in rental gross margin. Gross margin for the first quarter decreased 480 basis points to 51.7% as compared to 56.5% for the same period last year largely due to purchases of additional rental product in order to support in-store exchanges resulting from additional traffic generated by the significant growth of BLOCKBUSTER Total Access. Total selling, general and administrative ("SG&A") expenses for the first quarter of 2007 increased $24.3 million from the first quarter of 2006 largely due to a higher level of promotional activities, including an incremental $35 million mass-media advertising campaign aimed at growing the BLOCKBUSTER Total Access subscriber base and increasing customers' awareness of the program. The higher advertising costs were partially offset by an approximately $13 million decrease in general and administrative expenses driven by a smaller company-operated store base and the Company's ongoing cost containment actions.
Cash flow provided by operating activities decreased by $185.0 million from $41.0 million for the first quarter of 2006 to a deficit of $144.0 million for the first quarter of 2007. The decrease was driven primarily by a reduction in payables and accrued expenses and lower net income. This reduction resulted largely from the Company returning to normalized credit terms with its vendors as compared to the same period last year. As of April 1, 2007, no balance was outstanding under the Company's revolving credit facility and the Company's borrowing capacity totaled approximately $295 million.
As part of the ongoing review of its asset portfolio, the Company entered into an agreement to sell its U.K.-based GAMESTATION® chain to THE GAME GROUP PLC for cash consideration, which is subject to certain adjustments, of approximately $150 million, and will use most of the proceeds from the sale to pay down outstanding debt. Additionally, the Company made prepayments of approximately $60 million on the term portions of its credit facilities during the first quarter of 2007 due to excess cash flow generated in 2006 and prepayment requirements from the sale of certain non-core assets and property and equipment during the full-year 2006 and the first quarter of 2007.
Primarily as a result of improved cash flow from the business, proceeds from the Company's November 2005 convertible preferred offering, and proceeds from the sale of GAMESTATION, the Company will have paid down approximately $500 million in debt since November 2005 while simultaneously making significant investments in its online rental business. In order to take advantage of the Company's improved balance sheet and leverage and to obtain additional operating flexibility, the Company intends to put in place a new credit facility that is expected to launch during the second quarter. - Blockbuster Press
