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RENT > SEC Filings for RENT > Form 10-Q on 4-Nov-2011All Recent SEC Filings

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Form 10-Q for RENTRAK CORP


4-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Certain information included in this Quarterly Report on Form 10-Q (including Management's Discussion and Analysis of Financial Condition and Results of Operations regarding revenue growth, gross profit margin and liquidity) constitute forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking words such as "could," "should," "plan," "depends on," "predict," "believe," "potential," "may," "will," "expects," "intends," "anticipates," "estimates" or "continues" or the negative thereof or variations thereon or comparable terminology. Forward-looking statements in this Quarterly Report on Form 10-Q include, in particular, statements regarding:

• our future results of operations and financial condition and future revenue and expenses, including declines in Home Entertainment ("HE") Division revenue and increases in our Essentials™ revenue;


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• the future growth prospects for our business as a whole and individual business lines in particular;

• continued contraction in the major "brick and mortar" retailers' share of the home video rental market;

• opportunities that could potentially benefit our customer base of retailers ("Participating Retailers") participating in the Pay-Per-Transaction system™ (the "PPT System");

• expanding our product and service capabilities;

• future acquisitions or investments;

• our relationships with our customers and suppliers;

• market response to our products and services;

• the impact of changes in the timing of movie releases;

• the impact of fluctuations in foreign exchange rates or yields on the tax-exempt bond funds in which we invest; and

• our recent business acquisitions.

These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied by such forward-looking statements. These risks and uncertainties include, in no particular order, whether we will be able to:

• successfully develop, expand and/or market new services to new and existing customers, including our media measurement services, in order to increase revenue and/or create new revenue streams;

• timely acquire and integrate various third party databases into our systems;

• compete with companies that may have financial, marketing, sales, technical or other advantages over us;

• successfully deal with our data providers who are much larger than us and have significant financial leverage over us;

• successfully manage the impact on our business of the economic environment generally, both domestic and international, and in the markets in which we operate, including, without limitation, the financial condition of any of our suppliers or customers or the impact of the economic environment on our suppliers' or customers' ability to continue their services with us and/or fulfill their payment obligations to us;

• effectively respond to rapidly changing technology and consumer demand for entertainment content in various media formats;

• retain and grow our Participating Retailers;

• continue to obtain home entertainment content products (DVDs, Blu-ray Discs, etc.) (collectively "Units") leased/licensed to home video specialty stores and other retailers from content providers, generally motion picture studios and other licensors or owners of the rights to certain video programming content ("Program Suppliers");

• retain our relationships with our significant Program Suppliers and Participating Retailers;

• manage and/or offset any cost increases;

• add new clients or adjust rates for our services;

• adapt to government restrictions;

• leverage our investments in our systems and generate revenue and earnings streams that contribute to our overall success;

• enhance and expand the services we provide in our foreign locations and enter into additional foreign locations; and

• successfully integrate business acquisitions or other investments in other companies, products or technologies into our operations and use those acquisitions or investments to enhance our technical capabilities, expand our operations into new markets or otherwise grow our business.

Please refer to Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011 as filed with the Securities and Exchange Commission on June 10, 2011 for a discussion of reasons why our actual results may differ materially from our forward-looking statements. Although we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.


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Business Overview

We have two operating divisions within our corporate structure and, accordingly, we report certain financial information by individual segment under this structure. Our Advanced Media and Information ("AMI") operating division includes our media measurement services. Our HE operating division includes our distribution services as well as services that measure, aggregate and report consumer rental and retail activity on film and video game product from traditional "brick and mortar," online and kiosk retailers.

Our AMI Division encompasses media measurement services across multiple screens and platforms and is delivered via web-based products within our Entertainment Essentials™ lines of business. These services, offered primarily on a recurring subscription basis, capture consumer viewing data which is integrated with consumer segmentation and purchase behavior databases. We provide film studios, television networks and stations, cable, satellite and telecommunications company ("telco") operators and advertisers insights into consumer viewing and purchasing patterns through our thorough and expansive databases of box office results and local, national and on demand television performance.

Our HE Division services incorporate a unique set of applications designed to help clients maintain and direct their business practices relating to home video products. Entertainment content is distributed to various retailers primarily on behalf of motion picture studios. We track and report performance of home entertainment products leased directly to video retailers or through our PPT System. Within this system, video retailers are given access to a wide selection of box office hits, independent releases and foreign films from the industry's leading suppliers on a revenue sharing basis. By providing second- and third-tier retailers the opportunity to acquire new inventory in the same manner as major national chains, our PPT System enables retailers everywhere, regardless of size, to increase both the depth and breadth of their inventory, better satisfy consumer demand and more effectively compete in the marketplace. We lease product from our Program Suppliers; Participating Retailers sublease that product from us and rent it to consumers. Participating Retailers then share a portion of the revenue from each retail rental transaction with us and we share a portion of the revenue with the Program Suppliers. Our PPT System supplies both content providers and retailers with the intelligence and infrastructure necessary to make revenue sharing a viable and productive option.

Our HE Division also includes our rental Studio Direct Revenue Sharing ("DRS") services, which grants content providers constant, clear feedback and data, plus valuable checks and balances on how both their video products and retailers are performing. Data relating to rented entertainment content is received on both physical and digital product under established agreements on a fee for service basis.

In addition, beginning in the first quarter of Fiscal 2012, Home Entertainment Essentials™ is reported as a component of the HE Division.

AMI Division

Our media measurement services, offered primarily on a recurring subscription basis, are distributed to clients through patent pending software systems and business processes, and capture data and other intelligence viewed on multiple screens across various platforms within the entertainment industry.

Our current spending, investments and long-term strategic planning is heavily focused on the development, growth and expansion of our AMI Division, both domestically and internationally. As such, we continue to allocate significant resources towards our Entertainment Essentials™ services and product lines, both those that are currently operational, as well as those that are in various stages of development. Our AMI Division revenue increased $2.4 million, or 15.0%, in the first six months of Fiscal 2012 compared to the first six months of Fiscal 2011.

The AMI Division lines of business are:

• Box Office Essentials™,

• OnDemand Essentials™, which includes Mobile Essentials™ and Internet TV Essentials™; and


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• TV Essentials™, which includes StationView Essentials™.

Typical clients subscribing to our services include motion picture studios, television networks and stations, cable and telco operators, advertisers and ad agencies.

HE Division

The financial results from the HE Division continue to be affected by the changing dynamics in the home video rental market as well as overall economic trends and conditions. This market is highly competitive and influenced greatly by consumer spending patterns and behaviors. The end consumer has a wide variety of choices from which to select entertainment content and can easily shift from one provider to another. Some examples include renting product from our Participating Retailers or other retailers, purchasing previously viewed Units from our Participating Retailers or other retailers, renting or purchasing product from kiosk locations, ordering product via online subscriptions and/or online distributors (mail delivery), subscribing to at-home movie channels, downloading or streaming content via the Internet, purchasing and owning the Unit directly, or selecting an at-home "pay-per-view" or "on demand" option from a satellite or cable provider. Our PPT System focuses primarily on the traditional "brick and mortar" retailer.

The popularity of the other choices an end consumer has to obtain entertainment content has been growing, and our Participating Retailers' market share has been negatively affected. Thus, for the foreseeable future, we expect our revenue in the HE Division to continue to decline.

Also, the landscape of the home video rental market for "brick and mortar" retailers has seen significant changes. Over a year ago, a major retailer, Movie Gallery, closed all of its 2,000 stores. Also, Blockbuster Entertainment ("Blockbuster") filed bankruptcy and closed approximately 1,000 retail locations. In April 2011, Blockbuster's assets were acquired by DISH Network Corporation, and it is expected that the remaining locations will continue the delivery of home entertainment content. Although Movie Gallery and Blockbuster were not direct customers of ours, we believe the major "brick and mortar" retailers' share of the overall industry is contracting as a result of these closures and related financial events. It is difficult to predict what effect, if any, this will have on our Program Suppliers, the performance of our Participating Retailers, and our future financial results.

For the many regional chains and independent retailers who rent home entertainment products (DVD, Blu-ray and video games) to consumers, it is more effective to acquire "new release" rental inventory on a lease basis instead of purchasing the inventory. Our PPT System provides Participating Retailers the opportunity to increase both the depth and breadth of their inventory, better satisfy consumer demand and more effectively compete in the marketplace.

Many of our arrangements are structured so that the Participating Retailers pay reduced upfront fees and lower per transaction fees in exchange for ordering Units of all titles offered by a particular Program Supplier (referred to as "output" programs). Additionally, after the initial release of a movie to theaters, Program Suppliers historically have exclusively distributed the movie to the home video retail market prior to distributing it in other forms throughout the industry, such as video-on-demand, which created a competitive advantage for our Participating Retailers. There is no assurance that Program Suppliers will continue to release films in this manner, and a change in the timing of releases may cause our revenue to decline. For example, one of our Program Suppliers, Warner Brothers, continued its strategy to emphasize retail sales instead of the rental market, which has hindered our ability to provide Warner Brothers titles to our customers at the same time the movies are available in retail stores for purchase.

In general, we continue to be in good standing with our Program Suppliers, and we make ongoing efforts to strengthen those business relationships through enhancements to our current service offerings and the development of new service offerings. We are also continually seeking to develop business relationships with new Program Suppliers. Our relationships with Program Suppliers typically may be terminated without cause upon thirty days' written notice by either party.


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Sources of Revenue

Revenue by segment includes the following:

AMI Division

Subscription fee and other revenue, primarily relating to custom reports, from:

• Box Office Essentials™;

• OnDemand Essentials™, which includes Mobile Essentials™ and Internet TV Essentials™; and

• TV Essentials™, which includes StationView Essentials™.

HE Division

• Transaction fees, which are generated when Participating Retailers rent Units to consumers. Additionally, certain arrangements include guaranteed minimum revenue from our customers, which are recognized on the street (release) date, provided all other revenue recognition criteria are met (please refer to "Critical Accounting Policies" at the end of this Item 7);

• Sell-through fees, which are generated when Participating Retailers sell previously-viewed rental Units to consumers and/or buy-out fees generated when Participating Retailers purchase Units at the end of the lease term;

• DRS fees, which are generated from data tracking and reporting services provided to Program Suppliers;

• Subscription fees related to Home Entertainment Essentials™; and

• Other fees, which primarily include order processing fees, which are generated when Units are ordered by, and distributed to, Participating Retailers.

Results of Operations

Certain information by segment is as follows (in thousands):



                                           AMI           HE         Other (1)        Total
 Three Months Ended September 30, 2011
 Sales to external customers             $  9,256     $ 12,596     $        -       $ 21,852
 Gross margin                               5,657        4,704              -         10,361
 Income (loss) from operations                831        2,616          (3,830 )        (383 )
 Three Months Ended September 30, 2010
 Sales to external customers             $  7,940     $ 16,192     $        -       $ 24,132
 Gross margin                               5,666        5,375              -         11,041
 Income (loss) from operations                858        3,433          (4,050 )         241
 Six Months Ended September 30, 2011
 Sales to external customers             $ 18,313     $ 25,947     $        -       $ 44,260
 Gross margin                              11,384        9,237              -         20,621
 Income (loss) from operations              2,623        4,960          (7,720 )        (137 )
 Six Months Ended September 30, 2010
 Sales to external customers             $ 15,929     $ 32,764     $        -       $ 48,693
 Gross margin                              11,399       10,299              -         21,698
 Income (loss) from operations              1,863        6,310          (7,966 )         207

(1) Includes corporate expenses and other expenses that are not allocated to a specific segment.

Revenue

Revenue decreased $2.2 million, or 9.4%, to $21.9 million in the three month period ended September 30, 2011 (the "second quarter of Fiscal 2012") compared to $24.1 million in the three month period ended September 30, 2010 (the "second quarter of Fiscal 2011"). Revenue decreased $4.4 million, or 9.1%, to $44.3 million in the six month period ended September 30, 2011 compared to $48.7 million in the six month period ended September 30, 2010. The decreases in revenue were primarily due to declines in revenue from our HE Division, partially offset by increases in AMI revenue primarily related to growth in our existing lines of business. These fluctuations are described in more detail below.


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AMI Division

Revenue related to our Essentials™ business information service offerings increased primarily due to our continued investment in, and successful marketing of, these offerings. We expect continued future increases in our Essentials™ revenue as a result of further investments, development and expansion of new and existing services, both domestically and internationally.

Revenue information related to our AMI Division was as follows (dollars in thousands):

                              Three Months Ended Sept. 30,        Dollar
                                2011                2010          Change        % Change
   Box Office Essentials™   $       5,189       $       4,429     $   760            17.2 %
   OnDemand Essentials™             2,092               2,302        (210 )          (9.1 )%
   TV Essentials™                   1,975               1,209         766            63.4 %

                            $       9,256       $       7,940     $ 1,316            16.6 %

                               Six Months Ended Sept. 30,         Dollar
                                2011                2010          Change        % Change
   Box Office Essentials™   $      10,216       $       8,868     $ 1,348            15.2 %
   OnDemand Essentials™             4,383               4,409         (26 )          (0.6 )%
   TV Essentials™                   3,714               2,652       1,062            40.0 %

                            $      18,313       $      15,929     $ 2,384            15.0 %

The increases in Box Office Essentials™ revenues in the Fiscal 2012 periods were primarily due to the addition of new clients and rate increases for existing clients, as well as our acquisition of Ciné Chiffres in the third quarter of Fiscal 2011, which contributed $53,000 and $110,000, respectively, to the increases in the three and six month periods ended September 30, 2011.

The decreases in OnDemand Essentials™ revenues in the Fiscal 2012 periods were due to lower custom projects and the loss of a client who went out of business, both of which were partially offset by the addition of new clients and rate increases for existing clients.

The increases in TV Essentials™ revenues in the Fiscal 2012 periods were primarily due to the addition of new clients.

HE Division

Revenue information related to our HE Division was as follows (dollars in
thousands):



                           Three Months Ended Sept. 30,          Dollar
                             2011                 2010           Change        % Change
    Transaction fees    $        7,228       $       10,343     $ (3,115 )         (30.1 )%
    Sell-through fees            2,027                2,552         (525 )         (20.6 )%
    DRS                          1,877                1,427          450            31.5 %
    Other                        1,464                1,870         (406 )         (21.7 )%

                        $       12,596       $       16,192     $ (3,596 )         (22.2 )%

                            Six Months Ended Sept. 30,          Dollar
                             2011                2010           Change        % Change
     Transaction fees    $      15,081       $      20,966     $ (5,885 )         (28.1 )%
     Sell-through fees           4,071               5,219       (1,148 )         (22.0 )%
     DRS                         3,554               2,803          751            26.8 %
     Other                       3,241               3,776         (535 )         (14.2 )%

                         $      25,947       $      32,764     $ (6,817 )         (20.8 )%

The decreases in transaction fees were primarily due to fewer rental transactions at our Participating Retailers, which decreased by 22.9% and 24.4%, respectively, in the three and six-month periods ended September 30, 2011 compared to the same periods of the prior fiscal year. Units with minimum guarantees also declined, resulting in a decrease in revenues of $0.8 million and $1.0 million,


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respectively, in the three and six month periods ended September 30, 2011 compared to the same periods of the prior fiscal year, primarily due to the timing and quality of releases. The decreases in rental transactions were due to fewer Participating Retailers, fewer available Units and fewer theatrical titles in the Fiscal 2012 periods compared to the Fiscal 2011 periods, as well as continued changing market conditions. Also, as noted above, we expect that Warner Brothers' recent decision to release its video content in the retail channel before offering it to the rental market will have a negative impact on our PPT business for the remainder of Fiscal 2012.

The decreases in sell-through fees in the Fiscal 2012 periods compared to the Fiscal 2011 periods were due to a 24.3% and a 25.1% decrease, respectively, in sell-through volume as a result of overall declines in Units available for sale. The rate per transaction increased 1.3% in the three month period ended September 30, 2011 compared to the same period of Fiscal 2011 primarily due to a shift in the mix of available Units from our Program Suppliers, but decreased 0.1% in the six month period ended September 30, 2011 compared to the same period of Fiscal 2011.

The increases in DRS revenue in the first six months of Fiscal 2012 compared to the same period of Fiscal 2011 were primarily due to a higher number of transactions from kiosk distributors. The increases also reflect our acquisition of Media Salvation in the fourth quarter of Fiscal 2011, which contributed $0.3 million and $0.5 million, respectively, to the increases in the three and six-month periods ended September 30, 2011 compared to the same periods of Fiscal 2011.

The decreases in other revenue in the Fiscal 2012 periods compared to the Fiscal 2011 periods related primarily to reduced order processing fees as a result in the overall reduction in available Units.

Cost of Sales and Gross Margins

Cost of sales consists of Unit costs, transaction costs, sell-through costs, handling and freight costs in the HE Division and costs in the AMI Division associated with certain Essentials™ business information service offerings. These expenditures represent the direct costs to produce revenue.

In the AMI Division, cost of sales consists of costs associated with the operation of a call center for our Box Office Essentials™ services, as well as costs associated with amortizing capitalized internally developed software used to provide the corresponding services and direct costs incurred to obtain, cleanse and process data and maintain our systems.

In the HE Division, Unit costs, transaction costs and sell-through costs represent the amounts due to the Program Suppliers that hold the distribution rights to the Units. Freight costs represent the cost to pick, pack and ship orders of Units to the Participating Retailers. Our cost of sales can also be affected by the release dates of Units with guarantees. We recognize the guaranteed minimum costs on the release date. The terms of some of our agreements result in 100% cost of sales on titles in the first month in which the Unit is released, which results in lower margins during the initial portion of the revenue sharing period. Once the Unit's rental activity exceeds the required amount for these guaranteed minimums, margins generally expand during the second and third months of the Unit's revenue sharing period. However, since these factors are highly dependent upon the quality, timing and release dates of all new products, margins may not expand to any significant degree during any reporting period. As a result, it is difficult to predict the impact these Program Supplier revenue sharing programs with guaranteed minimums will have on future results of operations in any reporting period.

Cost of sales decreased $1.6 million, or 12.2%, in the second quarter of Fiscal 2012 compared to the second quarter of Fiscal 2011, and decreased $3.4 million, or 12.4%, in the first six months of Fiscal 2012 compared to the same period of Fiscal 2011.


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Cost of sales information related to our AMI Division was as follows (dollars in thousands):

                                           Three Months Ended Sept. 30,          Dollar
Costs related to:                           2011                 2010            Change         % Change
Amortization of internally
developed software                      $         482        $         339       $   143             42.2 %
Call center operation                           1,230                1,053           177             16.8 %
Obtaining, cleansing and processing
data                                            1,887                  882         1,005            113.9 %

                                        $       3,599        $       2,274       $ 1,325             58.3 %

                                            Six Months Ended Sept. 30,           Dollar
Costs related to:                           2011                 2010            Change         % Change
Amortization of internally
developed software                      $         934        $         664       $   270             40.7 %
Call center operation                           2,383                2,160           223             10.3 %
Obtaining, cleansing and processing
data                                            3,612                1,706         1,906            111.7 %

                                        $       6,929        $       4,530       $ 2,399             53.0 %
. . .
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