Not many people can boast an office with a life-size model of Indiana Jones complete with whip in reception, but Lovefilm has never been a business that toes the line of convention.
In that respect its CFO, Jim Buckle, is a company man through and through. His route into the accountancy world began as editor of his university paper, which was plagued by wobbly finances. “I think I got more from putting the whole thing together and worrying about where the money would come from for the next edition than writing,” he says.
After the Student Union pulled the paper’s budget, Buckle had to work out exactly how much he had to play with in order to keep the paper going and produce an issue. “That was quite an interesting challenge, so when I thought about something else to do career-wise I thought business isn’t so bad after all.”
He now heads up the finances at Europe’s leading DVD and games delivery business. But, when he joined the company in 2006, Lovefilm was still in its fledgling stages.
It had less than 400,000 subscribers and monthly revenue of approximately £3.5m. It now has more than 1.4m subscribers and monthly revenue of close to £9m.
But it hasn’t all been plain sailing. Even though the credit crunch has largely been kind to Lovefilm in terms of consumers opting for a night in with a DVD instead of splashing cash on going out, the company still had tough talks with accountants when it came to refinancing. “It’s fair to say the business as a whole has changed enormously,” Buckle says.
He faced two major challenges in the form of gaining OFT clearance for a takeover of Amazon’s DVD rental business in the UK and Germany, in addition to securing a refinancing deal as the UK’s economy – excuse the pun – buckled.
The terms it had with the venture capitalist meant Lovefilm would have had to shell out £3.5m in 2009, so Buckle led efforts to secure better financing terms with Lloyds, but had to get through a tough due diligence process with Ernst & Young.
Buckle, with tongue firmly in cheek, describes due diligence as “a fun process”. At the time, reports of accountancy practices being tough on clients and due diligence activities as the credit crunch took hold were widespread. “It was the worst possible timing,” Buckle recalls.
Lovefilm had agreed terms with Lloyds’ credit committee in October 2008, subject to due diligence. Buckle thought it would be a routine sign-off in December, but the Lloyds credit committee had reservations. “The credit committee had a meeting on Christmas Eve. I was having lunch with my in-laws in a Devon pub when I got the call to say they had signed off on it.
“If they had said ‘no’ we would have had to completely change our plans for the year. You get a few moments in life when you just have to hope for the best. Had those decisions not gone our way, then we might not be in the position we are today.”
Lovefilm’s subscribers pay a fixed amount per month determined by how many discs they want at any one time and how often you want to watch them. Packages start at £3.99 for 2 films up to £15.99 a month for 20 films. It seems an incredibly simple business model, but there’s a big, complex business underpinning it.
Buckle represents the new breed of finance director, who is less nailed down to the stereotypical view of the accountant being nothing more than a financial party-pooper, reining in the trailblazers from taking bold steps.
But he still has to deal with the bread and butter parts of the finance director’s job, and IFRS is a key plank of this.
Like many CFOs, Buckle is not the biggest fan of the standards. “I don’t have a great deal of patience for some of the minutiae of accounting rules,” he says. “Mostly, you could boil things down to logic when I was training. The accounting rules were quite general and based on a logical view of the world, whereas now they are very, very detailed and don’t always seem to be logical.
“At least with old accounting standards you had a chance of keeping up-to-date with them, whereas IFRS is a whole new thing. There’s a different logic applied.”
He says one of the biggest hurdles was that Lovefilm’s rapid expansion meant its auditor PwC was going into uncharted territory in signing off the accounts.
“Almost every year we’ve had something challenging in our accounts. In 2008 we had the Amazon deal, an internal reorganisation and the refinancing. The things we were trying to account for the guys at PwC hadn’t actually come across, so they were to work out what the accounting was.”
To add another layer of complexity, Lovefilm still accounts for its subsidiaries under local GAAP. “We’ve done lots of complicated things and we’ve had to work out how to account for them.”
Looking around Lovefilm’s HQ, with its movie quotes emblazoned on the walls and the lifesize models, it is the kind of environment we would all like to work in. But for all of Lovefilm’s off-the-wall style, the company has been nothing less than textbook in terms of business expansion, customer retention and system improvements.
Last year was the company’s best ever according to Buckle, but now it is looking into its crystal ball to see how the market will shift as new technologies become available.
“The challenge now is thinking about digital distribution and how long DVDs will be around for,” Buckle says.
Lovefilm has ambitious targets of 1.6m subscribers by the end of 2010, and a long term goal of 5m in the next five years.
But, as with any business looking to expand on a cross-border level, there are tax affairs to be kept in check. “We have to tread very carefully from a tax point of view,” Buckle says.
Video Island, the company that Lovefilm merged with in 2006, was incorporated in the US, which meant the company came under the gaze of the taxman stateside. “I now know more about US tax than I would have wanted to or expected to as a CFO of a European company,” Buckle says. Part of the reason for the reorganisation was to mitigate risks around US tax, he adds.
Tax is the hot topic at the moment with this week’s Budget,
and Buckle has a pragmatic view of the imminent 50% top
tax rate. “That’s life.”
He adds: “On the company side, a lower corporate tax would be great and better capital allowances but it’s not a big driver.”
All companies look for certainty from the tax regime and advisers are central to this. None more so than auditor PwC, Buckle says.
Lovefilm selected PwC through a tender in 2006. The firm tabled the most expensive bid, but his view was the cheaper pitchers had “not fully understood the requirements and would either not do a very good job or would become unhappy because they would not be recovering their costs.”
“PwC has been very good. My general view is that you get a better guarantee of quality in larger firms – by definition they have a higher threshold in terms of who they recruit.”
With all his key pieces in place, the future looks bright for Buckle who has grand ambitions himself. He says a CEO role could be attractive further down the line and would relish the challenge. “In a CFO role you’ve got to be the right hand-man and, if the shit hits the fan, you’re not the one to get it in the neck – at least you’re not the primary target,” he says. “A CEO role is a bit more responsibility but nothing I couldn’t handle.”
Buckle joined a week after Lovefilm merged with Video Island. Collectively the two businesses were about a quarter the size Lovefilm is now.
He had to sharpen his axe and work out who stayed and who was destined for the exit door. “The initial challenge was to figure out what the finance structure should be, who the people were we wanted to keep, what the gaps were and who we needed to recruit.”
Lovefilm also needed a financial system that was going to work across the whole business. “I think we inherited three systems if not four,” Buckle recalls. “The immediate thing was to introduce some common reporting and some common systems.”
Once that was complete Buckle then went about honing the team. “I’ve developed people into roles as opposed to hiring more. The key thing for me is making sure the business has enough cash to operate. In the early days that was about raising debt. When a business isn’t generating cash and you have a forecast and a point in time when you run out of money you know that x amount of people’s livelihoods depend on it, that tends to focus the mind.”
Now Lovefilm generates cash rather than spending it. The model is simple but effective:
From a distribution centre in Peterborough, 3m discs a month are sent out to 1.1m film lovers in the UK. The company has 200,000 subscribers in Germany and a growing business in the Sweden, Denmark and Norway – where 100,000 people signed up for the smorgasbord of Lovefilm’s discs.
The company is famed for its ‘no late fees’ policy which is based on a simple premise: If you don’t return the discs you don’t get the full benefit of the service. Buckle says: “From our point of view, we don’t really mind if you don’t send the films back or not, but we hope that you do because if you’re sitting on the same film for a month it means that you’re not enjoying the full service and getting value for money.”
Name Jim Buckle
2006 CFO, Lovefilm
2004 Managing director, Propertyfinder.com
2003 Finance director, Propertyfinder.com
2002 Finance transition manager, Europe, CIT Group
2001 VP finance, Netusability
1998 Finance and planning director, Dell Financial Services
1994 Head of finance, planning and analysis, BBC Production
1988 Executive consultant, KPMG
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