Video rental veteran Blockbuster (NYSE:BBI) has been through some hard times. Beset by Netflix (NASDAQ:NFLX) on the by-mail rental side, by Netflix and Amazon.com (NASDAQ:AMZN) -- just to name a few -- in the digital movie market, and by both RedBox vending machines and traditional retailers like Wal-Mart (NYSE:WMT) when it comes to peddling physical media on a local level, I'm frankly surprised that Blockbuster has survived this long.

When the company warmed up for this week's earnings report by warning that its credit lines needed reworking, it felt like the writing was on the wall.

But it ain't all that bad, as it turns out. Back out a $435 million charge for "impairment of goodwill and other long-lived assets" and some other items, and Blockbuster's fourth quarter delivered a non-GAAP profit of $80.4 million, or $0.40 per share. That's up from $0.26 per share a year ago, despite revenue falling 12% to $1.38 billion. More importantly, $152.1 million of operating cash flow in the fourth quarter helped Blockbuster generate $51 million of cash from operations in 2008. That reversed a $56.2 million operating cash burn in 2007.

I think Blockbuster should pare down its sprawling operations and just focus on one or two things that it is really good at. CEO Jim Keyes disagrees, and continues to pursue a three-pronged strategy: movies by mail, online video files, and traditional walk-in-and-touch-our-wares video stores.

Fighting back
He recently figured out how to keep by-mail customers happy -- and make some money at the same time. "We don't want to try to aggressively steal share from Netflix," Keyes said. "We think that would be an expensive proposition. There will be better places to deploy our cash." Slow and steady wins the race, I suppose.

Rental kiosks look less like a threat and more like a model to emulate. "We are glad our friends at Red Box proved it out," Keyes said cheekily. Blockbuster is testing the kiosk model with vending machines by NCR (NYSE:NCR). And a new fee structure for in-store rentals promises to increase store traffic without damaging profit margins. That could keep the retail chains at bay.

Finally, Keyes said that the digital market is still in its early stages. "We are hearing a lot about the continued development of product and customers with Apple (NASDAQ:AAPL), Amazon, Netflix, etc., [but] it is still a relatively a small market." Cable giants like Comcast (NASDAQ:CMCSA) will dominate digital video with their on-demand packages, Keyes thinks, but Blockbuster is still looking for partners to "bake Blockbuster On Demand" into more devices and cut a slice of that pie.

Positive cash flows plus ambitious plans should add up to renewed credit lines. The old ones have been extended 'til the end of September, allowing Blockbuster and its lenders to hammer out a new deal in peace and quiet. I think Blockbuster will be all right, after all.

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Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.