Taking Lovefilm’s Pulse: Company Snapshot As DVDs Become Downloads

With M&A murmurs still bubbling and the great IPTV opportunity beckoning, DVD and online movie service Lovefilm is one of the more interesting digital operators out there. So how is the company faring? Let’s look at the fundamentals for the “European Netflix”…

— Annual pre-tax losses at Lovefilm International Ltd, which the company says is the main reporting entity, slimmed from £7.4 ($11.89) million to £900,000 in 2009, ($1.44 million) while adjusted operating profit nearly tripled to £8.9 ($14.3) million.

Sales had risen by a third to £97.2 ($156.17) million, and customer base grew by 29 percent, 1.25 million of them being subscribers. Indeed, the group reduced its statutory operating loss from £4.2 ($6.75) million to £300,000. ($482,000)

— But costs grew by nearly a quarter to £53.5 ($85.95) million on continued marketing investment. And Lovefilm recorded a final annual loss that nearly doubled to £2.2 ($3.54) million, because it unwound a big £1.2 ($1.92) million, non-cash tax provision that had been created when it absorbed Amazon’s European DVD rental businesses in 2008.

Amazon (NSDQ: AMZN) is Lovefilm’s largest shareholder, having swapped its businesses for equity. As an indicator of how the privately-listed firm, which has grown up from a patchwork of mail-out DVD rental businesses, regards itself, it now says in its 2009 annual accounts: “The primary activity of the group is the provision … of subscription-based online home entertainment services” (emphasis mine), and not DVDs.

The firm launched its online on-demand offering in May 2009 and is now getting carriage on IPTV platforms like Samsung [email protected], Sony (NYSE: SNE) Internet TV, PlayStation 3 and likely YouView.

The group took a £10.5 ($16.86) million loan from Lloyds in 2009 to fund the new online business, and must repay it in three instalments due in July 2011, 2012 and 2013. Lovefilm says…

“Significant innovation is occurring in the arena of internet-enabled content distribution. Whilst distribution to the PC is now commonplace, the next generation of televisions, games consoles and Blu Ray players all have internet connectivity, which allows content to be streamed directly from the internet to consumers’ televisions.

“We believe that such services will complement our current offering, and over the medium term, will form part of a hybrid solution whereby consumers are able to watch content either on the DVD or on demand.”

But atoms, not bits, are still king today – DVDs and video games remain Lovefilm’s most popular products. The company must depreciate the value of this stock of discs by a third each year. It fell from £338,000 ($543.06) to £130,000 ($208.88) in 2009).

And Lovefilm has identified the state of the ageing Royal Mail as a risk to its business, saying: “In each of our geographic markets, there is only one provider of post delivery to the doorstep. The business is vulnerable to protracted industrial action within a national postal service. The gradual increase in digital delivery will lessen the importance of post delivery.”

The company told paidContent:UK in 2009 it was considering sale offers; this September, The Sunday Times reported the company was both considering an offer from its largest shareholder Amazon and preparing for an IPO. The prospect either of Amazon taking Lovefilm Stateside in its online movies odyssey or of some kind of roll-up with Netflix (NSDQ: NFLX) is certainly intriguing.

The firm claimed five million monthly web uniques from the UK, Germany, Sweden, Denmark and Norway, and now employs 427.

According to accounts: “The group has an option to acquire DVD rentals ie Limited, which trades as Screenclick in Ireland.” Irish reports in 2006 already reported that Screenclick had “sold” to Lovefilm in a deal valuing it at €3 ($4.18/£2.6) million – but Lovefilm tells paidContent:UK these reports were incorrect; it had merely become a minority shareholder.