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RENT > SEC Filings for RENT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for RENTRAK CORP


7-Nov-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, the addition of a new retailer and 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;


•          continued increases in end consumers' usage of non "brick and mortar"
           options for obtaining entertainment content, such as kiosks;


•          the impact on our revenue of Warner Bros.' modification to its
           distribution strategy of providing "brick and mortar" retailers with
           new release content on the initial street date;

• future acquisitions or investments;

• our plans or requirements to hold or sell our marketable securities;

• 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;

• expected amortization of our deferred rent; 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
           September 30, 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;


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• 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, 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") Division includes our media measurement services. Our HE 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 Pay-Per-Transaction ("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 $6.5 million, or 33.3%, in the first six months of Fiscal 2013 compared to the first six months of Fiscal 2012.


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

• 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 negatively 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 and provides those 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 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). These programs offer Participating Retailers a way to more effectively acquire "new release" rental inventory on a lease basis instead of purchasing and owning the inventory directly.

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 and, in April 2011, its 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.

Also, 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, contributing to a decline in our revenue. However, we recently added a major rental chain to our list of PPT customers and will provide units to that retailer from at least one major Program Supplier. While we expect to see additional revenue in upcoming quarters as a result of adding this new Participating Retailer, it is too soon to predict what impact, if any, this will have on total revenue in the future.

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 may typically 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
•          PPT revenues include fees generated when Participating Retailers rent
           Units or sell previously-viewed rental Units to consumers and upfront
           fees generated when Units are distributed to Participating Retailers.
           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; and


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


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Results of Operations
Certain information by segment was as follows (dollars in thousands):
                                         AMI          HE        Other (1)      Total
Three Months Ended September 30, 2012
Sales to external customers           $ 13,230     $  9,261    $     -       $ 22,491
Gross margin                             7,764        2,942          -         10,706
Income (loss) from operations          (15,691 )      1,694     (4,421 )      (18,418 )
Three Months Ended September 30, 2011
Sales to external customers           $  9,786     $ 12,066    $     -       $ 21,852
Gross margin                             6,144        4,217          -         10,361
Income (loss) from operations              886        2,561     (3,830 )         (383 )
Six Months Ended September 30, 2012
Sales to external customers           $ 25,841     $ 19,873    $     -       $ 45,714
Gross margin                            16,081        6,137          -         22,218
Income (loss) from operations          (13,749 )      3,493     (8,806 )      (19,062 )
Six Months Ended September 30, 2011
Sales to external customers           $ 19,382     $ 24,878    $     -       $ 44,260
Gross margin                            12,306        8,315          -         20,621
Income (loss) from operations            2,673        4,910     (7,720 )         (137 )

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

Revenue
Revenue increased $0.6 million, or 2.9%, to $22.5 million in the second quarter of Fiscal 2013 compared to $21.9 million in the second quarter of Fiscal 2012. Revenue increased $1.5 million, or 3.3%, to $45.7 million in the six month period ended September 30, 2012 compared to $44.3 million in the six month period ended September 30, 2011. The increases in revenue were due to increases in AMI Division revenue, primarily related to growth in our existing lines of business, partially offset by declines in revenue from our HE Division. These fluctuations are described in more detail below.

AMI Division
Revenue related to our Entertainment 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 Entertainment Essentials™ revenue as a result of further investments and development and expansion of new and existing services, both domestically and internationally.


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

                              Three Months Ended September 30,            Dollar
                                      2012                     2011       Change    % Change
Box Office Essentials™ $           5,735                     $  5,189    $   546     10.5%
OnDemand Everywhere                3,349                        2,622        727     27.7%
TV Essentials™                     4,146                        1,975      2,171     109.9%
                       $          13,230                     $  9,786    $ 3,444     35.2%
                               Six Months Ended September 30,             Dollar
                                      2012                     2011       Change    % Change
Box Office Essentials™ $          11,704                     $ 10,216    $ 1,488     14.6%
OnDemand Everywhere                6,252                        5,452        800     14.7%
TV Essentials™                     7,885                        3,714      4,171     112.3%
                       $          25,841                     $ 19,382    $ 6,459     33.3%

The increases in Box Office Essentials™ revenue in the Fiscal 2013 periods were primarily due to rate increases for existing clients and the addition of new clients.

The increases in OnDemand Everywhere revenue in the Fiscal 2013 periods were primarily due to rate increases for existing clients and increased custom reporting projects.

The increases in TV Essentials™ revenue in the Fiscal 2013 periods were primarily due to the addition of new clients and rate increases for existing clients.

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

           Three Months Ended September 30,             Dollar
                   2012                     2011        Change     % Change
PPT $           8,609                     $ 10,450    $ (1,841 )   (17.6)%
DRS               652                        1,616        (964 )   (59.7)%
    $           9,261                     $ 12,066    $ (2,805 )   (23.2)%
            Six Months Ended September 30,              Dollar
                   2012                     2011        Change     % Change
PPT $          18,385                     $ 21,823    $ (3,438 )   (15.8)%
DRS             1,488                        3,055      (1,567 )   (51.3)%
    $          19,873                     $ 24,878    $ (5,005 )   (20.1)%

The decreases in PPT revenue in the Fiscal 2013 periods were primarily due to fewer Participating Retailers, fewer available Units and lower box office performance from theatrical titles in the Fiscal 2013 periods compared to the Fiscal 2012 periods, in part due to consumers' focus on the summer Olympics as well as continued changing market conditions. Also, during the third quarter of Fiscal 2012, Warner Bros.' 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 six months of Fiscal 2013. However, recently Warner Bros. has indicated that they are returning to a previous distribution strategy of providing "brick and mortar" retailers with new release content on the initial street date. While we believe this change would have a positive impact on our revenue in the future, it is too soon to predict the magnitude of that impact.

The decreases in DRS revenue in the Fiscal 2013 periods were due to fewer transactions processed as a result of Warner Bros.' decision mentioned above, as well as a decline in the number of direct retailers from which to track content performance for Program Suppliers. The modification of Warner Bros.' distribution strategy noted above also could increase our DRS revenue, but it is too soon to predict what impact, if any, this will have on our revenue in the future.


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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 increased $0.3 million, or 2.6%, in the second quarter of Fiscal 2013 compared to the second quarter of Fiscal 2012, and decreased $0.1 million, or 0.6%, in the first six months of Fiscal 2013 compared to the same period of Fiscal 2012.

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

                                      Three Months Ended September 30,       Dollar
                                            2012               2011          Change       % Change
Costs related to:
Amortization of internally developed
software                             $             647     $      525     $      122       23.2%
Call center operation                            1,266          1,230             36        2.9%
Obtaining, cleansing and processing
data                                             3,553          1,887          1,666       88.3%
                                     $           5,466     $    3,642     $    1,824       50.1%
                                       Six Months Ended September 30,         Dollar
                                            2012               2011           Change      % Change
Costs related to:
Amortization of internally developed
software                             $           1,247     $    1,044     $      203       19.4%
Call center operation                            2,510          2,421             89        3.7%
Obtaining, cleansing and processing
data                                             6,003          3,611          2,392       66.2%
                                     $           9,760     $    7,076     $    2,684       37.9%

The increases in cost of sales within the AMI Division in the Fiscal 2013 periods resulted primarily from expanding market coverage with existing data supplier agreements and the addition of new data supplier agreements. The increase in the second quarter of Fiscal 2013 also reflects costs associated with the amendment to our data supplier agreement with DISH, which requires minimum payments relating to predefined net profit sharing provisions of portions of our TV Essentials™ line of business.


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

                         Three Months Ended September 30,             Dollar
                                 2012                     2011        Change     % Change
Costs related to:
Transaction fees  $           4,330                     $  5,327    $   (997 )   (18.7)%
Sell-through fees             1,229                        1,519        (290 )   (19.1)%
Other                           760                        1,003        (243 )   (24.2)%
. . .
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