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RENT > SEC Filings for RENT > Form 10-Q on 9-Aug-2012All Recent SEC Filings

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Form 10-Q for RENTRAK CORP


9-Aug-2012

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," "anticipate," "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 Entertainment Essentials™ revenue as a result of further investments, development and expansion of new and existing services, both domestically and internationally;

•          the future growth prospects for our business as a whole and individual
           business lines in particular, including adding new clients, adjusting
           rates and increasing business activity, and using funds in our foreign
           bank accounts to fund our international expansion and growth;

• increases in our costs over the next twelve months;

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


•          the negative effect on our PPT business for Fiscal 2013 as a result of
           Warner Brothers' decision to release its video content in the retail
           channel before offering it to the rental market;

• future acquisitions or investments;

• our relationships with our customers and suppliers;

• our ability to attract new customers;

• market response to our products and services;

•          the impact of changes in the timing of movie releases and the relation
           between the timing of the release of movies to home video to their
           theatrical release;


•          increased spending on property and equipment in Fiscal 2013 for the
           capitalization of internally developed software, computer equipment,
           renovations to our corporate offices and other purposes; and


•          the sufficiency of our available sources of liquidity to fund our
           current operations, the continued current development of our business
           information services and other cash requirements through at least
           March 31, 2013.

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 into our systems various third party databases;

•          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 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 base of retailers ("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;

• 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;


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•          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, 2012 ("Fiscal 2012") as filed with the Securities and Exchange Commission on June 8, 2012 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 in the future, we specifically disclaim any obligation to do so, even if our expectations change.

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. During the fourth quarter of Fiscal 2012, management moved Digital Download Essentials and Home Entertainment Essentials from the HE Division to the AMI Division effective April 1, 2011 as a result of a change in our internal reporting structure. As a result, all prior periods have been restated to reflect this change.

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, advertisers and advertising agencies 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 grant 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 physical product under established agreements on a fee for service basis.

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 are heavily focused on the development, growth and expansion of our AMI Division, both domestically and internationally. As such, we continue to allocate significant resources to our Entertainment Essentials™ services and product lines. Our AMI Division revenue increased $3.0 million, or 31.4%, in the first three months of Fiscal 2013 compared to the first three months of Fiscal 2012.

The AMI Division lines of business, which we refer to as Entertainment Essentials™ services, are:
• Box Office Essentials™,


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• OnDemand Everywhere, which includes OnDemand Essentials™ and related products, and

• 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 advertising agencies.

HE Division
The financial results from the HE Division continue to be affected by the changing dynamics in the home video rental market. This market is highly competitive and influenced greatly by consumer spending patterns, behaviors and technological advancements. The end consumer has a wide variety of choices from which to select his or her entertainment content and can easily shift from one provider to another. Some examples include renting Units from our Participating Retailers or other retailers, purchasing previously viewed Units from our Participating Retailers or other retailers, renting or purchasing Units from kiosk locations, ordering Units 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 cable provider. Our PPT System focuses primarily on the traditional "brick and mortar" retailer.

End consumers' usage of non "brick and mortar" options for obtaining entertainment content, such as kiosks, continues to increase and our Participating Retailers' market share has been negatively affected. Thus, for the foreseeable future, we expect revenue from our HE Division to continue to decline.

The landscape of the home video rental market for "brick and mortar" retailers has seen significant changes. In the first half of calendar year 2010, a major retailer, Movie Gallery, closed all of its 2,000 stores. Also, Blockbuster Entertainment ("Blockbuster") closed approximately 1,300 retail locations. In April 2011, Blockbuster's assets were acquired by DISH Network L.L.C. ("DISH"). While DISH continues to operate the remaining locations, in February 2012 it announced that it will close additional stores. Although Movie Gallery and Blockbuster were not direct customers of ours, as a result of these closures, we believe the major "brick and mortar" retailers' share of the overall industry is contracting. It is difficult to predict what effect, if any, this will have on our Program Suppliers and/or the performance of our Participating Retailers.

For the many regional chains and independent retailers who rent Units 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. Also, 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).

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.

Sources of Revenue
Revenue by segment includes the following:

AMI Division
Subscription fee and other revenue, primarily relating to custom reports, from
our Entertainment Essentials™ services.

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;


•          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; and


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

Results of Operations
Certain information by segment was as follows (in thousands):
                                    AMI         HE        Other (1)      Total
Three Months Ended June 30, 2012
Sales to external customers      $ 12,611    $ 10,612    $     -       $ 23,223
Gross margin                        8,317       3,195          -         11,512
Income (loss) from operations       1,942       1,799     (4,385 )         (644 )
Three Months Ended June 30, 2011
Sales to external customers      $  9,596    $ 12,812    $     -       $ 22,408
Gross margin                        6,162       4,098          -         10,260
Income (loss) from operations       1,788       2,349     (3,891 )          246

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

Revenue
Revenue increased $0.8 million, or 3.6%, to $23.2 million in the first quarter of Fiscal 2013 compared to $22.4 million in the first quarter of Fiscal 2012. The increase in revenue was due to an increase in AMI revenue, primarily related to growth in our existing lines of business, partially offset by a decline in revenue from our HE Division. These fluctuations are described in more detail below.

AMI Division
Revenue related to our Essentials™ business information service offerings
increased primarily due to the addition of new customers, rate increases from
existing customers and expansion of our systems and service 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 is as follows (in thousands):

                             Three Months Ended June 30,           Dollar
                                   2012                  2011      Change    % Change
Box Office Essentials™ $         5,969                 $ 5,027    $   942     18.7%
OnDemand Everywhere              2,903                   2,830         73      2.6%
TV Essentials™                   3,739                   1,739      2,000     115.0%
                       $        12,611                 $ 9,596    $ 3,015     31.4%

The increase in Box Office Essentials™ revenue in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 was primarily due to rate increases for existing clients and the addition of new clients.

The increase in OnDemand Everywhere revenue in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 was due primarily to rate increases for existing clients. Revenue from our video-on-demand business, which is included in OnDemand Everywhere, increased 10.6% in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012. OnDemand Everywhere growth was 2.6% as a result of the delay of a new product until later in the year.

The increase in TV Essentials™ revenue in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 was primarily due to the addition of new clients, primarily advertising agencies, local stations and networks.


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

                        Three Months Ended June 30,           Dollar
                             2012                 2011        Change     % Change
Transaction fees  $        6,918                $  7,854    $   (936 )   (11.9)%
Sell-through fees          1,677                   2,043        (366 )   (17.9)%
DRS                          836                   1,439        (603 )   (41.9)%
Other                      1,181                   1,476        (295 )   (20.0)%
                  $       10,612                $ 12,812    $ (2,200 )   (17.2)%

The decrease in transaction fees in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 was primarily due to fewer rental transactions at our Participating Retailers, which decreased by 11.4%. Units with minimum guarantees also declined, resulting in a decrease in revenue of $0.2 million in the three month period ended June 30, 2012 compared to the same period of the prior fiscal year, primarily due to the timing and quality of releases. The decrease in rental transactions was due to fewer Participating Retailers, fewer available Units and lower box office performance from theatrical titles in the Fiscal 2013 period compared to the Fiscal 2012 period, as well as continued changing market conditions. Also, during the third quarter of Fiscal 2012, Warner Brothers' decided it would release its video content in the retail channel before offering it to the rental market. This had a negative effect on our PPT business during the first quarter of Fiscal 2013, and we expect that trend to continue.

The decrease in sell-through fees in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 was due to an 18.7% decrease in sell-through volume, as well as a 2.4% decrease in the number of Units sold at the end of the Unit's term, both as a result of overall declines in Units available for sale.

The decrease in DRS revenue in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 was due to fewer transactions processed as a result of Warner Brothers' decision mentioned above, as well as a decline in the number of direct retailers from which to track content performance for Program Suppliers.

The decrease in other revenue in the Fiscal 2013 period compared to the Fiscal 2012 period related primarily to reduced order processing fees due to a decline in the number of Units available and fewer Participating Retailers in the period.

Cost of Sales and Gross Margins
Cost of sales represents the direct costs to produce revenue.

In the AMI Division, cost of sales includes costs relating to our Entertainment Essentials™ services, and 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, cost of sales includes Unit costs, transaction costs, sell-through costs and freight costs. 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 recognition of 100% of the 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 Units, margins may not expand to any significant degree during any reporting period. As a result, it is difficult to predict the effect these Program Supplier revenue sharing programs with guaranteed minimums will have on future results of operations in any reporting period.

Cost of sales decreased $0.4 million, or 3.6%, in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012.


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

                                       Three Months Ended June 30,         Dollar
                                           2012              2011          Change        % Change
Costs related to:
Amortization of internally developed
software                             $           600     $      519     $        81       15.6%
Call center operation                          1,244          1,191              53        4.5%
Obtaining, cleansing and processing
data                                           2,450          1,724             726       42.1%
                                     $         4,294     $    3,434     $       860       25.0%

The increase in cost of sales within the AMI Division in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 resulted primarily from increasing market coverage with existing data supplier agreements and the addition of new
data supplier agreements.

HE Division
Cost of sales information related to our HE Division is as follows (in
thousands):

                         Three Months Ended June 30,            Dollar
                               2012                  2011       Change     % Change
Costs related to:
Transaction fees  $         5,130                  $ 6,011    $   (881 )   (14.7)%
Sell-through fees           1,303                    1,511        (208 )   (13.8)%
Other                         984                    1,192        (208 )   (17.4)%
                  $         7,417                  $ 8,714    $ (1,297 )   (14.9)%

The decrease in cost of sales within the HE Division was primarily related to the decreases in revenue discussed above.

Gross margins as a percentage of revenue were as follows:

Three Months Ended June 30,

                 2012              2011
AMI Division     66.0%             64.2%
HE Division      30.1%             32.0%

The increase in gross margin in the AMI Division in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 was primarily due to the increase in revenues, which favorably affected gross margins since a portion of our costs are fixed. We also amended and extended our data supplier agreement with DISH on August 8, 2012. One of the terms of this amendment requires minimum payments relating to net profits of portions of the TV Essentials™ line of business. Although we expect costs to increase as a result of the DISH agreement, we do not anticipate a significant reduction in gross margin as a percentage of revenue since the increase in revenue over the prior year is expected to more than offset the increase in costs.

The decrease in gross margin in the HE Division in the first quarter of Fiscal 2013 compared to the first quarter of Fiscal 2012 was primarily due to the decrease in DRS revenue and sales to brokers, both of which have higher margins.

Selling and Administrative
Selling and administrative expenses consist primarily of compensation and benefits, development, marketing and advertising costs, legal and professional fees, communications costs, depreciation and amortization of tangible fixed assets and software, real and personal property leases, as well as other general corporate expenses.


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Selling and administrative expense information is as follows (in thousands):

                                 Three Months Ended June 30,          Dollar
. . .
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