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Rentrak Corporation (NASDAQ:RENT)

F4Q 2013 Earnings Conference Call

June 13, 2013, 17:00 ET

Executives

Bill Livek - Vice Chairman & Chief Executive Officer

David Chemerow - Chief Operating Officer & Chief Financial Officer

Analysts

Peter Appert - Piper Jaffray

Matt Chesler - Deutsche Bank

Rich Tullo - Albert Fried & Company

Hamed Khorsand - BWS Financial

Operator

Welcome to Rentrak's Fiscal 2013 Fourth Quarter Financial Results Conference Call. During the call the company will be making forward-looking statements that are subject to certain risks and uncertainties. Please refer to the Safe Harbor statement contained in today's press release and also to Rentrak's periodic filings with the SEC for a complete discussion of those risks and uncertainties that could cause actual results to differ materially from those you might perceive today.

Additionally, Rentrak will be discussing certain non-GAAP financial results. The news release issued earlier today contains a reconciliation of these non-GAAP financial results to their most comparable GAAP measures. These reconciliations can also be found on the company's website at www.rentrak.com. Additionally the website contains supplemental financial information that provides historical trend data in Rentrak's various lines of business. Finally please note that the company has posted slides to accompany today's webcast on its website at www.rentrak.com.

And now I would like to turn the call over to Bill Livek, Vice Chairman and CEO of Rentrak. Please go ahead sir.

Bill Livek

Thank you operator and thank you everyone for joining us today. I am here with David Chemerow, our COO and CFO from whom you will be hearing from very shortly, a number of members of our management team are also with me and they will be participating in the question-and-answer session later.

As you know Rentrak is the census-base currency for measuring movies and TV Everywhere and whenever that content is consumed. By linking that viewership information with the product that Americans consume and prefer only Rentrak provides our customers with the knowledge necessary to manage their businesses and more precisely target their advertising.

With the largest multiscreen coverage anywhere, Rentrak is suited squarely in the middle of a megatrend and that's tracking shipping consumer viewership and entertainment habits, whether the content is being viewed on broadcast of cable TV, OnDemand through mobile devices or over-the-top; Rentrak is measuring it all.

Just think about it. We measured over 200 billion views of the movies and TV Everywhere just last year, that's 200 billion. We merged those views with the products we buy, the cars that we drive and the lifestyles that we have. Rentrak has built a world-class TV advertising targeting machine to help advertise their agencies, the movie industry TV stations and TV networks to understand how to reach consumers more effectively.

In this environment, where CEOs were in charge of brands, wake up in the morning and ask their folks, how can we reduce the cost of new customer acquisition and lower the cost of customer retention? Rentrak is there, helping to answer those questions with high profit margin information solutions.

In the fourth quarter we generated our strongest quarterly revenue growth in six years and our highest quarterly revenue level in more than 10 years. We capped the fiscal year with consolidated revenue growth of 16% over last year's fourth quarter in our Advanced Media and Information Revenue grew at 25%. Each of our business lines performed well positioning us great for fiscal 2014. We told you about our plans to build a world-class information company four years ago and we've been delivering.

Now I would like to start business line review with Home Entertainment. One of the goals we shared with you some time ago with our plan to flatten the revenue in our Home Entertainment business of that industry is facing us secular decline. In the third quarter we began to see improvement. In the fourth quarter, we grew Home Entertainment revenue by 8% over last year. Specifically,

Rentrak benefitted from three factors. First we benefitted from several blockbuster movies that hit the rental market during our fourth quarter. Secondly, we benefitted from the addition on a large rental customer and third, we benefitted as one of our others resumed providing store-based retailers with content on a title initial release date with kiosk and by mail retailers receiving about a month later or 28 days.

Given our success of consolidating the existing brick and mortar video stores around our Pay-Per-Transaction service, we are proud to say that we no longer anticipate the decline in the Home Entertainment revenue in fiscal 2014. We now are assuming the 5% growth rate for the year. Slide four will give you a feel how Rentrak is gaining market share in the industry that we are serving.

The beauty here is that the addition of driving growth from a business that many thought would continue to decline, Home Entertainment will continue to be a cash generator in operating income, which you will see on slide five. It's a win-win for our customers and of course our shareholders.

Now I would like to move over to our box office business, which continues to impress. Today we are a global business measuring movie attendants across the five critical continents as you will see on slide seven. The importance of this coverage cannot be overstated. In 2012, the international box office business grew receipts by more than 6% over the previous year, while industry revenue generated from the international market accounted for almost 70% of the world-wide box office revenue.

Recent box office performance in new releases demonstrates the importance of our international box office information. One of the most exciting developments that occurred in the quarter was our recent move in the Mainland China. As you will see on slide eight, Rentrak is now measuring 95% of the Chinese market across 2,000 theatres and 100% of those being electronically reported to Rentrak.

The market there is going strong with box office receipts of 35% in 2012 to an astonishing $2.7 billion, second only in size to the United States. With a potential market of more than one billion movie goers in China and it's barriers to U.S. content being lifted, our movie clients and Rentrak will benefit greatly in future.

I am also pleased to report that we are now aggressively selling our post track service giving studios in site into real time box office viewing information, combined with information about what consumers think about the movie that they just saw and their propensity for buying that movie or renting that movie in the OnDemand space or with the DVD or Blu-ray disc. We are providing a holistic view with the movie studios about what's occurring in the auditoriums.

We are announcing on this call, we signed a major studio in two significant mini majors to post track contracts with an agreement with another major currently and newly build apartment we are looking forward to continue ruling out post track products throughout the industry in fulfilling the mission that we talked about many times measuring how many people go to movies, how much they spend and what they think about the movies that they just saw,

Now I am going to move to our OnDemand Everywhere business, which is helping change the way that the industry things about television consumption. From our latest state of Video On Demand trend report, we know that in 2012 alone, there were almost 9 billion VOD transactions. What that means is click on the remote control. So watch popular or highly targeted television shows.

This programming was watched from more than 43 million television chefs every month as consumers spend an average of eight and half hours per month watching VOD content. That's more than a half of hour more than last year. You will find on the VOD stats on slide 10. Furthermore within the VOD market, there has been a shift from paid VOD to free Video On Demand while total VOD viewing gained 35% from 2009 to 2012.

Free OnDemand viewing grew almost 7% at the same time period representing more than three quarters of all the VOD transactions for the year. Interestingly you will see on slide 11 less than one third of all the VOD television entertainment transactions happen within the first three days of the show airing, only Rentrak allows our clients to leverage this highly valuable audience information for content watch on day four forward both in linear OnDemand in VOD viewing that occurs out through that month. The power of this information will help create the multibillion dollar advertising opportunity for Video On Demand for our clients.

Some of you have asked why is this potential untapped. It's primarily because historically there has been a lack of transparency in the VOD viewing pattern, transparency being defined as our ability to sell one another's information to advertising agencies and to other television networks.

We believe that as transparency continues to move forward and we busily work on this initiative, Rentrak and our customers will benefit, while dynamic ad insertion is clearly in its early phase, Rentrak’s AdEssentials system provides third party conformation of the accuracy and the timeliness of dynamic ad insertion transactions as we recently proved through a cable labs test, which included participations from NBC, BlackArrow, Canoe Ventures and Vubiquity.

As we see a bright future for Video On Demand advertising as our network clients and cable advertisers know, Rentrak’s measurement is critical to the industry’s success. Also today on this call, we are announcing the expansion of our relationship with Cox Communication to include the measurement of their VOD content on an iPad. We feel great about all of our customers and we feel great about this announcement.

Before moving to our local and national TV business, I would like to tell you about our newest OnDemand service. We have developed and have commercially launched Rentrak's download essentials industry service, which provides studios and television networks with competitive insight into Internet Video On Demand or iVOD as well as electronic sell through for the digital business.

This service includes title level performance, market share and industry trends based on aggregated industry information from iTunes, Sony Playstation, Xbox, Voodoo, Amazon and others in the aggregate. We have signed three major studios for this service and we've several others currently in progress.

I will finish up now by discussing our television business where all of our groups, local and national advertisers and ad agencies are generating solid growth. Starting first with local, we continue to attract new television stations and TV station groups towards census like measurement services. Rentrak remains the only company capable of going beyond sweeps and delivering stable, reliable information all day every day.

Slide 13 highlights some of our many advantages. Our client count now stands at 220 television stations, which is just more than 10% of the total potential market, giving us a wide berth, continue to grow in the local business. We will continue our successful strategy of obtaining an anchor client in each of the local markets than signing additional stations and signing local ad agencies along the way to use our service.

In 30 local markets, we assigned more than three television stations, in 10 markets we signed four of the top five and in six markets we signed all of the major television stations. Yesterday, we announced our 100 and 101 television markets through a new agreement with Rockfleet Broadcasting. Remember, the station groups that we've already signed and are using Rentrak owned 37% of the 2,000 local television stations. That gives us the ability to grow significantly within our existing customer group.

As you know, the local television station ownership market has been consolidating over the last several months around large broadcast groups such as Sinclair and Nexstar both long time Rentrak clients and as they and other consolidators are working to complete their integration process, the pace of our new clients signings has slowed a bit, while we expect further consolidation in the coming quarters, we believe this is a very favorable trend for Rentrak.

For example Sinclair uses Rentrak for 30 of its stations up from seven when we just started to work with them. Nexstar recently added two stations in and of its tenancy. We are confident about our ability to advance our local television business at a rapid pace. Watch us grow and continue to be integrated into the third party traffic billing and sales processing systems operated by some of our great partners.

Now I’ll talk about national television, which includes our network, agency and advertising businesses. We made a name for ourselves by connecting highly granular television viewing to extensive consumer buying demographics for more than 101 sources, such as credit scores from Experian, advanced demographics from Epsilon and car ownership information from Polk and retail expenditure information from MasterCard. No one else can make that claim.

As we discussed before, the national market is extremely fragmented creating the need for our census like currency or executing while our strategy attracting highly targeted networks, most recently from Sony Entertainment Television, the second largest Asian television network in the United States, The World Fishing Network and today we are announcing Participant Media and Playboy.

The significant power that we provide, you can see on slide 14, our network growth is fuelled as more advertising agencies and advertisers commit to our census like currency with our advanced demographics. These agencies and advertisers use Rentrak to gain better information about the value of those advertising. This will have the effect over time for acquiring networks to subscribe to Rentrak in order to do business with those ad agencies.

Our advertising business -- agency business is surpassing our expectations. Our new ad agency clients such as Defimedia and platform advertising joined the growing roster of clients now making TV buying and planning decisions based on Rentrak. We also continue to make big gains with branded advertisers. This quarter we signed two automotive brands, a major telecommunications brand and entertainment brand in the political space of group gubernatorial campaign and a major entertainment brand that of Netflix and advertiser.

Just as the Obama campaign, these companies view Rentrak's services as a competitive advantage and many of them have asked that we maintain their confidentiality. These brands now have the ability to plan, buy and optimize their media spend based on the products that Americans consumer and they plan to consume.

We told you about our plans to signing advertisers and that it would happen, they are happening. Slide 15 outlines the powerful advantages of combining our census based TV measurement with advanced demographics. With international TV group, we formed a digital media and targeting division that is focused on cost media planning and buying analytics tools. This group is working with digital marketing mix modelling and mobile companies as well as real time bidding platforms.

As network set of cross floats the digital and television space to create their new cross platform information, Rentrak is there. As an example of this success is the work that we've done Collective over the past 12 months to create a state-of-the-art targeting machine and analytics tools for them in the world emerging television viewing and digital and online advertising together. Although this area is relatively new, and we are announcing it on this call, it's already been producing substantial revenue for Rentrak and we believe this category will soon be on par with our local station international network business and we expect that it will contribute nicely in the quarters ahead.

At the same time, we are integrating our services with ad agency and software platforms to extend the use of Rentrak in the marketplace. One of our more recent agreement and partnership have led us into the real time bidding systems for television that will allow advertisers and ad agencies to target audiences more efficiently. I am sure some of you read about this, this week in The Wall Street Journal.

Just for example, today we signed a new agreement with a major player in this category, Rentrak providing them with measurement information they need to power their audience based television selling efforts and their platform. More details in this agreement will be in the coming weeks.

Before I turn it over to David, I would like to update you on our Chinese joint venture, Sinotrak. We are now collecting CD viewing data from millions of set-top boxes in China. We've begun the sales process with operators and agencies in the country and believe this strategic initiative will pay off handsomely over the long run. As you can see at every opportunity we’re fulfilling our promise to precisely measure the movies and TV everywhere from the biggest to the smallest screen.

Now I will hand things over to David to review our financial performance. David?

David Chemerow

Thank you, Bill. My comments today will focus primarily on the fourth quarter, a full review of our year-end results can be found in the press release we issued earlier this afternoon. I’ll start with revenue, which you will find on slide 17. Consolidated revenue grew by 16% to $28.5 million, giving us as Bill mentioned our strongest quarterly year-over-year growth in the last six years and our highest quarterly revenue in more than 10 years.

AMI revenue grew by 25% from last year and Home Entertainment revenue increased by 8%. As Bill mentioned, Home Entertainment once again exceeded our expectations, as we benefited from the addition of a major rental chain client and the return of Warner Brothers as a program supplier.

On slide 18, you'll find additional details about our AMI segment, which represented 51% of consolidated revenue, up from 47% from last year's fourth quarter. As a percentage of consolidated revenue, AMI’s contribution declined on a sequential basis, as performance in our Home Entertainment business continue to improve.

By business line, TV measurement grew 60% from last year's fourth quarter as we signed new client agreement and recognized substantial pricing in some of our multi-year contracts. For the full year, TV revenue increased 91%. Box office revenue rose 15% for the quarter, resulting mainly from new client relationships. For the full year, box office was up 14% surpassing our annual growth projection.

OnDemand Everywhere revenue increased 6% from last year's fourth quarter. The shortfall from our prior assumption of 15% growth for the fourth quarter primarily relates to the delay of a new download essentials industry service. As Bill described, that service went live in the first quarter. We are actively selling it in the marketplace and we've already signed three major studios to this service with several others currently in process. OnDemand Everywhere grew 13% for the full year, but we continue to believe that 20% annual growth is a reasonable assumption.

Moving to slide 19. Consolidated gross margin was 43% for the fiscal 2013 fourth quarter versus 48% last year. The decline is from the mix shift to our faster growing TV business. AMI represented 69% of consolidated gross margin dollars, compared with 64% for last year's fourth quarter. Within AMI, gross margin totalled 58% of revenue for the fourth quarter of fiscal 2013, down from 64% a year ago. The decline primarily related to continued faster growth in our TV business which carries a lower gross margin than do our upper [AMI business] [ph].

Home Entertainment gross margin was 27%, which was in line with our projections. Gross margin in this business was 33% for last year's fourth quarter. The decrease principally reflected a higher contribution from our PPT business, which typically is lower margins including the addition of a major rental chain client, which has smaller margins.

Consolidated operating expenses declined to $13.6 million from $16.5 million last year. The decline reflects a $3.1 million decrease in stock-based compensation cost related to our agreement with Dish. Consolidated operating loss for the fourth quarter of fiscal 2013 was $1.4 million versus $4.8 million last year. Operating loss for the fiscal 2013 period included $1.4 million in stock-based compensation cost. Operating loss for last year's fourth quarter included $1.2 million in stock-based compensation cost, $3.1 million in expense related to our dish agreement, $1.1 million in reorganization cost and $189,000 in acquisition related cost.

Excluding these amounts for both periods, operating income would have been $4,000 for the fiscal 2013 fourth quarter, compared with $833,000 for the fiscal 2012 fourth quarter. By segment, which is shown on slide 20, AMI operating income totalled $1 million or 7% of AMI revenue for the fiscal 2013 fourth quarter versus an operating loss of $3 million last year. This improvement demonstrates our ability to generate better operating leverage in AMI.

Home Entertainment operating income totalled $2.1 million or 15% of Home Entertainment revenue for the fiscal 2013 fourth quarter, compared with $2.7 million or 21% of Home Entertainment revenue a year ago. The decline related mainly to the higher proportion of PPT revenue during the fiscal 2014 period as well as the client addition I spoke about earlier.

Our net loss for the fourth quarter of fiscal 2013 was $2 million or $0.17 per share, compared with a net loss of $4.6 million or $0.41 per share for last year's fourth fiscal quarter. Excluding the items previously mentioned for both periods, net loss would have been $644,000 or $0.06 per share for the fiscal 2013 fourth quarter versus net income of $1 million or $0.10 per diluted share one year ago.

On slide 21, you will see the cash used in operating activities was $1.6 million for fiscal 2013 versus cash generated by operating activities of $10.2 million for fiscal 2012. Excluding the impact of the Dish agreement amendment, we generated $4.2 million in cash from operating activities for fiscal 2013. Cash, cash equivalents and marketable securities totalled $20.4 million at March 31, 2013, compared with $27.8 million at the same time last year.

The decline was primarily a result of our $5.8 million cash payment to Dish in the second quarter. Our cash balances include a $2 million investment in the second quarter of this fiscal year in our Sinotrak joint venture. Our Chinese joint venture partner Sinomonitor contributed 51% of this funding.

Of $2.8 million in capital spending for the fourth quarter of fiscal 2013, $1.2 million was related to internally developed software cost in connection with our essential services and the remaining $1.6 million to computer equipment and leasehold improvement. For fiscal 2014, we expect to incur approximately $8.3 million in capital spending, $6 million of which is related to internally developed software with the remaining $2.3 million related to hardware purchases.

Before we move to the Q&A session, I would like to highlight our updated long term business metric, which can be found on slide 22. As we've said before, our guidance is our expected trend line growth. So actual quarter-to-quarter growth will likely be jagged. I think the technical term for that is lumpy. We expect the quarters to average out to our guidance.

Our TV business is expected to grow 50% in the first quarter and 80% for fiscal 2014. We've brought guidance down slightly from 100% growth because of the reduction in the fourth quarter and the expected reduction in the first quarter of fiscal 2014 due to delays in new client signing. However, we are still signing contracts at a vast pace and expect to exceed this guidance. As Bill said, we are making strong progress in local stations, agencies, advertisers, political, real time bidding and digital. All of these will help us make progress on national networks as well.

The run rate from our contracts is currently up 72% over the first quarter of fiscal 2013 due to contract signed late in the first quarter. What this means is that the annualized value of our current contracts is 72% higher than our first fiscal quarter of last year, which reflects the first year impact of these newly signed contracts. Gross margins in TV should be approximately 50% over the long term with variations due to fixed cost agreement.

We continue to believe that our box office business should grow 12% annually with some year-to-year variability. Gross margins are expected to be in the 75% range. We also continue to believe that our OnDemand Everywhere business will increase 20% per year again with some year-to-year variability with gross margins in the 75% range. In our Home Entertainment business, we now anticipate an improvement with revenue expected to be up 5% for fiscal 2014. We continue to believe that gross margins should be approximately 27%.

We feel great about the implications of our assumption. Our guidance implies that AMI revenue should grow 36% in fiscal 2014 and consolidated revenue should grow 22% to $121 million. I will say that again, growth in total revenue of 22% in fiscal 2014, as this ritual, we've transformed on track into a growth company.

Now let me take that a step further. Our new guidance for fiscal 2014 is higher than what we told you at our Investor Day last September by $7 million or 5%, while the revenue mix was a little bit different than what we had talked about. The revenue growth is very significant.

In summary, and as outlined on slide 23, our Home Entertainment business has stabilized and is expected to grow in the coming year. Our global box office business remained industry gold standard. We've realized future growth through international expansion and by launching new products.

Strong increases in OnDemand viewing plays favourably to our viewing measurement strength. Even with its outstanding growth today, our local TV service is still in the early inning. Strength in our advertising agency and digital businesses should drive network growth well into the future.

Bill and I both thank you for your ongoing support and interest in Rentrak. Also please save the date for our 2013 Investor Day, which is scheduled for October 9th. Details will be forthcoming later this summer. In the meantime, we look forward to updating you again next quarter. We are now ready to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Peter Appert with Piper Jaffray. Please go ahead.

Peter Appert - Piper Jaffray

Thanks. So Bill, I was interested in your comments on the consolidation of local TV market and I guess the takeaway is you think that it slows the pace of new signs near term. I am wondering about specifically today's announcement with Belo and Gannett, can you talk about how big each of those players are and how significant that might be to your business?

Bill Livek

We think it's good. Belo and Gannett are both customers of ours and they are both great management teams and I think it plays into a greater trend here as you point out. The folks who are doing the consolidation believe in the power of local advertising. They believe in the power that TV stations are going to be around.

They also have modified how they sell advertising locally over a bunch of years and Rentrak is fed into that trend and that trend is selling retailers direct. So if you look at how the newspaper business is deteriorated, television and internet picked up a lot of that -- of ad dollars. The auto category, as an example, is a huge percentage of many television stations' business.

So by having a demographic of the cars that viewers have in the garage against the local news they watch for an example allows them to go to a car dealer and suggest that they should be paying more for certain specifics schedule. So the consolidation that's happening is very good for us because the consolidators are believers in what Rentrak is doing.

Now as you can imagine, people can only do one thing at a time and when the CEOs are busy with deals of this nature, signing a Rentrak agreement has taken a step down, but we are bullish about this category, but it's slowed down a little bit.

Peter Appert - Piper Jaffray

Any other things Bill that you would call out in terms of factors that might have impacted slower new station signings recently?

Bill Livek

Yeah. We think there is another collateral piece, but -- and it's smaller. The third party integration system for traffic and billing and there are a number of them. Over the last few years, Rentrak has made a concerted effort to have its information configured within those systems. Some of those suppliers have been faster moving than others. We think they are all moving at a very nice pace and that installation was also jagged. Those two variables were the ones that we were driving in the past quarter.

Peter Appert - Piper Jaffray

Okay. That's helpful. Thanks. And then lastly, can you talk a little about what you are seeing from a pricing standpoint in the TV business?

Bill Livek

In terms of the revenue?

Peter Appert - Piper Jaffray

No, the pricing in terms of contract renewals, what kind of pricing lifts you are able to get and just even more generally, what you see happening from a pricing perspective in terms of the contracts in the TV biz?

Bill Livek

Our price are still way below where our customers know they'll be going. I'll let David give you more specifics on that.

David Chemerow

Sure Peter. Our pricing is very similar to what we've seen before. As we have shown more utility and more benefit to our customers, it enables us to charge higher prices. As Bill said, we want to make sure that we are getting fair price and we are not willing to simply grab business by discounting deeply what we we’re otherwise doing, but what I am most enthusiastic about is the embedded increases we have in many of our contracts, which are very substantial on price increases across all our TV lines.

Every single contract has big 25% to 30% price increases, but on average, when we've got multi-year contracts, we have increases of those kinds of sizes embedded in most of those contracts.

Peter Appert - Piper Jaffray

Right. Understood David. I am just wondering if maybe you could give us something more specific as it relates to the fourth quarter in terms of percentage increases you were saying?

David Chemerow

Peter, it's not so easy because many of the contracts we’re signing in the fourth quarter are contracts with new customers and we are again, we are holding well to our rate card and well to making sure we are getting the right kind of pricing.

Peter Appert - Piper Jaffray

Okay. Got it and then just one last thing. Do you PostTrak contracts in the movie biz, can you give us a sense how big a scale that opportunity is?

Bill Livek

The whole area of what people think, PostTrak is [inaudible] [ph] first product iteration. We have a number of new products on the drawing board that will incorporate social media. You know, there is an -- we think there is an multi -- if you take the category, it's a couple hundred million dollars that the studio spend to understand the consumer and what they think about movies and what their reaction is going to be and we want to continue to launch products that feed on our high market share service about how many people go to movies and what they spend.

So post-track was carefully engineered around that unique selling feature and then asking some simple questions of consumers right when they get out of the movie about if you plan on renting this movie seen again on Video On Demand buying it or the like, which feeds into our strength in the whole studio system.

So we think that the big market segment, I am not going to comment on the size of the PostTrak contracts, but I am bullish on our movie business simply because the consumer is bullish on going and it's just you can see if they are in the receipts and how much these studios are spending in large part because now they can leverage their content over a lot more countries including Mainland China.

Peter Appert - Piper Jaffray

And this will really be the last, the 12% number incorporates that correct.

Bill Livek

Yes.

Peter Appert - Piper Jaffray

Okay. Thanks very much.

Bill Livek

Thank you.

Operator

Our next question is from the line of Matt Chesler with Deutsche Bank. Please go ahead.

Matt Chesler - Deutsche Bank

Good afternoon, everyone.

Bill Livek

Hi Matt.

Matt Chesler - Deutsche Bank

Yes, so you had hinted that Home Entertainment was getting better and now it's growing again, so that's good to see I guess Marty was right on that one. So I guess beyond this year, when you have you know may be the Warner Brothers in our cycle through, do you have an updated view on where that goes from there? Do you have confidence that you could sustain that level of growth beyond 2014?

Bill Livek

The one thing we know we've been able to do and we had to earn our comps with the investors including you all. It shows that we could consolidate share in an industry that's clearly contracting. We believe we are going to continue to consolidate share. When that levels off again we are not ready to predict. We are ready to give you guidance for the next year, but I love the Home Entertainment business.

I think it's got far more legs than people believe because if you live out in the middle of American places like Effingham, Illinois or Fort Wayne, Indiana, going to the video store is a recreational activity. You got to get out of the house. So that industry is going to decline I think slower than most folks believe on the East Coast and West Coast.

Matt Chesler - Deutsche Bank

So with the growth this year, does your operating plan still call for you to reduce cost in that division this year or you know will that go up as well because of the stronger revenue overall?

Bill Livek

We are relentless on cost, but I'll let David talk about that.

David Chemerow

Matt, I don’t want to go into exactly what it shows, but we are not, let me say it this way. We can add a lot of business in that division without having to add a single person. So we are able to run that business very tightly on cost.

Matt Chesler - Deutsche Bank

Okay. So you know clearly you've been sealing the business and we are seeing that in the cost of today and you know the revenue following, you know as you look ahead, do you expect to get some leverage on selling the admin cost in your current plan and may be just overall drilling down the comment about getting to near breakeven this year and may be you could talk a little bit about that because that seems to be significant?

David Chemerow

Matt, we feel very strongly that we want to show our ability to leverage our cost and what prevented it so far has been the beginning growth of our TV business. As we continue to grow and as we look at this plan for this year, we feel good that we are going to be able to get ourselves if not to breakeven, awfully close to breakeven as Bill commented in the press release and that's a driving factor for us as we look at it.

And as we look at the continued growth that we expect and if you continue to extrapolate some of that growth out, even as we continue to do the investments that will be needed to support that, we see the leveraging happening and we see therefore us getting to very solid profitability as we continue moving out.

So as I think I have mentioned to some of you before, over the couple of years ago, we spoke about the metrics of number of stations, the number of networks, we've focused then more on revenue, we are now focusing more on getting driving ourselves to operating income and to the right levels of operating performance. So this has been a process and we are moving ourselves through that process.

Matt Chesler - Deutsche Bank

And just to be clear when you guys refer to breakeven, what line are you thinking about? Is it operating income, is it adjusted net income.

David Chemerow

When you -- we are looking at it on a reported basis and as opposed to on a non-GAAP type of basis. So as you know, we have very little in the tax line and the operating income -- I am sorry, the tax line and the interest line. So both of them are relatively close to them.

Matt Chesler - Deutsche Bank

So essentially, GAAP net income is what you are referring to?

David Chemerow

Bill’s comments in the press release was referring to GAAP net income and in the sense it was operating income as well.

Matt Chesler - Deutsche Bank

Okay. A quick question about stock-based comps. Now that we've got the dish in the rear view mirror, may be if you can comment on what to expect going forward there and then just a final one for me, if you guys could just talk a little bit about your play in terms of participating in cross platform that would be helpful.

Bill Livek

Let's see what front platform first. When we talk about the things that we are doing with the folks like Collective out there, we are looking at cross platform a little bit differently and it’s where an advertiser is advertising on internet he knows 100% how they can extend that audience into television. So we've created some criteria system that allow us to merge our television audience with the internet audience that they are there.

Whether that audience is video or whether it is you know through traditional uses of the internet. So we believe our cross platform plan is a very strong one and then you have the other piece of cross-platform where we are taking a true server lot information through the internet of viewing videos. We continue to add new providers all the time to our -- on the network site. So we can help the big networks and the small networks show their total television audience.

So that's an initiative that we launched a while ago and we continue to grind it out. Today I was with one of our large television network clients showing them a new prototype system about how you can look at audience three days out, one week out, 28 days out on the different platforms and every network has a slightly different strategy to monetize that.

So we have a strategy that's not single source based with a sample but one that's senses based with the total audience in their map, David, do you want to respond to the stock-based?

David Chemerow

Yes, the stock-based comp math is you know basically has gone away for dish and our run rate for the executives is about the same as it has been. So there is really no new news on stock-based comp at this point.

Matt Chesler - Deutsche Bank

Okay. So essentially going to annualizing the last three or four quarters is the way to think about it?

David Chemerow

I think it's a fair way to think of it. We've been in the $1.5 million to $1.4 million range over the all last four quarters on it and you can look and see there is a little bit of a tilt and I think you can adjust that with a reasonable estimate.

Matt Chesler - Deutsche Bank

Okay. That's it for me. Thanks.

Bill Livek

Thank you.

Operator

Next question is from the line of Rich Tullo with Albert Fried & Company. Please go ahead.

Rich Tullo - Albert Fried & Company

Hey guys, congratulations for a good quarter. Did DVD performance and the guidance looking ahead, is that -- what percentage would you say of the guidance is due to the new account and what percentage would you say is due to the organic prospects of the industry?

Bill Livek

Rich, that's a hard question to answer and I am really not going to go into that. If the industry as a whole continues to be in a state of decline, and probably similar to what it's been before and obviously there are some variations due to title, but as Bill said, we are working very hard to make sure that we can take share in the industry and we are doing that and some of it was Warner, some was a new client, some of it is we are going to the studios and trying to get them to sell more through us as opposed to some cases where they were going direct to some of the midsized clients.

So we are trying all sorts of things and I take my head off to our Home Entertainment folks in order to flatten out that decline and in some cases, be able to grow it. so this is just executing the strategy we've talked about.

Rich Tullo - Albert Fried & Company

Okay. And would you say the new client is international client or is it a large regional client? I mean, I am trying to...

Bill Livek

We are not going to go into that.

Rich Tullo - Albert Fried & Company

Okay. Fair enough. [Wilkinson Steel] were today, were on the TV and then variety talking about a lot of blockbusters and now that's going to change, sounds to me like they said the industry needs to go to a dynamic ticket pricing model that exists right now for the live events market. How does Rentrak see that? I mean we think you would see that as an opportunity because it creates a big need for your data and you know is this beyond the talk stage or is it just right now two guys are planning about what they think industry should look like and my last question is Video On Demand revenue in the quarter was up just a little single digits, is that facing a tough comp as compared to last year and is there going to be reacceleration of growth because it would seem to me that if you want to change the dynamics of the industry, Nictv everywhere worked that's going to need to be measured because you don’t want to cannibalize your linear ad inventory and so how do you see that unfolding?

Bill Livek

Look, the opportunity there Rich is big and I believe it gets bigger every day the more that we speak with the more senior executives within the network side of the business and in the ad agency and each of them as I said have a different strategy and one thing I know for sure having been in this business my whole life, adult life is that you can’t measure this stuff with a sample currency? It's got to be census based and however they sell it after three days or seven days, it will be the cumulative audience across all the different platforms when someone is watching the great shows that we are just live on TV.

We are bullish on that. We are going to make a lot of money on that. David, I'll let you comment on the comp.

David Chemerow

Yeah, Rich, the comp was hurt a lilt by a very strong number in last year's fourth quarter and I don’t want to take that as an excuse because when number are good, I take them into the number when we have a tough comp, when we have a touch comp. It's the fourth quarter of last year would be the average of the third quarter and the first quarter following it, we would been up 16% this quarter in Video On Demand.

Yes, the real answer is in terms of where are we going is all of last year or I should say prior to the last three quarters, we've been waiting for this new product to come out and it's been delayed, but it is out and sold. We've sold it, we've inter-contracts and that's going to help and that's going to help us as we look at the growth through this year and we feel very comfortable with our ability to achieve 20% revenue growth this year and expect to do that as we move forward.

Bill Livek

Okay. On the Spielberg comment, I want to see him interviewed too and there is a lot going on in the movie industry, I think if you just follow the bouncing ball, why aren’t the cinema buying AMC? They did it not to sit there with the dead [F], but they did it with the idea of reinvigorating what they have in that asset. The studios, there were a bunch of smart folks whether it's going to be a dynamic pricing model of the like, all that bodes as you happily point out to have more measurement within that whole change.

If you think about every movie, it's a little LLC right, it's a little profit center and only Rentrak has the information, so everyone can get paid, it's just not about the press release, which is on Sunday, we are in the middle of the business globally to make sure that all the transactions get trued up and as you guys know from our Investor Day, our information used in real time to figure out how there were just CD buys.

So we feel great about the movie business and the near term and long term prospects. Thank you, Rich.

Rich Tullo - Albert Fried & Company

One -- two real quickies, China, how far away are we going to see revenue if we've not seen it already and second thing is clusters between Belo and Gannett, I would think that's going to create opportunity as well now.

Bill Livek

We are excited about that. When I saw that on the TV screen this morning, a little smile came to my face. China face a great opportunity to profit the revenue and profit are not illusion but we are not going to put a stake in the ground. Amir, who is one of our most senior folks and the designer of most of what we have is heading that with our Chinese partner. We've got a great partnership. It's going to develop over time. Our movie business is in a separate orbit over there. We feel good.

Rich Tullo - Albert Fried & Company

Thank you.

Bill Livek

Thank you.

Operator

[Operator instructions] Our next question is from the line of Todd Mitchell with Brean Capital. Please go ahead.

Todd Mitchell - Brean Capital

Yes, hi. Thank you. I was wondering if you could flush out a little more information on kind of how you price I mean without giving us the details, but just you know theoretically. I mean you talked about how we have multiyear contracts, you have a significant pricing escalator in the box -- in the TV Essentials business, but I would also like to know what can you tell us about in terms of the relative size of a price contract ads as it relates to the size of the customers?

Do you -- are you able to achieve kind of a one to one relationship with every customer that has $1 in revenue or when you have a customer that has $10 in revenue, is your pricing sort of -- are you able to get that sort of magnitude of differential?

Bill Livek

Our pricing philosophy starts with utility. The more utility that we have for our customers, the more that they should pay. Certain networks and you just take the network as an example, some of the smaller networks have far more utility. So as a percentage of their expense or much larger expense than we are for some of the larger networks. So we are not going to get into the pricing model, but our pricing philosophy is one driven by utility and it's going to be difficult to pop that into a model by now.

Todd Mitchell - Brean Capital

Okay. But I mean I guess what my concern here is the kind of the down take in the guidance on the TV essentials product. I understand that there is some slowing in terms of the ability in contract because of consolidation, but at the same time, you know, I think that you've got a quarter in this year, quarter in next year that you kind of guided to install growth level, you have built in escalators in the -- in existing contracts and then at the same time, it seems to me in terms of your announcement, you're moving up market in terms of the size of the market. So I guess, if you look at all of those levers, the escalators, the ability to sign new contracts, the ability to get more from bigger customers versus sort of the expectations for 100% growth in the year, which of those three metrics is kind of falling short of expectations?

David Chemerow

Todd, that's a hard question. I would say, it's not price, it's the ability to get some of the customers signed on the time table. We would like to have them singed. As we've said over and over again, if we are not able to get the right price, we are not going to be signing that customer and I think we've done an excellent job of finding the whole variety of different types of customers who need and want our product. And so we've been focusing in many of those directions and I think very successfully.

Bill Livek

In our growth and we are not going to report categories with the advertisers and agencies, so we are exceeding our expectations there and as more agency's advertisers use us in the planning of TV, the more utility we have not just with the networks but with these new businesses that are developing. Think about these ad exchange platforms, which are going to happen this time even though it's been talked about for generation.

It's got to be driven with ratings on every TV program that is on TV. The sample currency only has information for a fraction of the program. So we are -- we see revenue sources developing and are already based in the cake here, and when Dave is talking about our run rate in the 7% plus area on some of those deals that we are cutting. So we feel really good about the position that we are in and we are operating the business for the long run.

So quarter to quarter, some of the growth will be jagged. I am comfortable with that because we are not going to sign deals that put a noose around our neck in terms of our ability to have utilitarian pricing.

Todd Mitchell - Brean Capital

Okay. Can I ask, was there a big difference between gross and net adds in the fourth quarter?

David Chemerow

When you say gross and net ads.

Todd Mitchell - Brean Capital

Was there any churn, slippage?

David Chemerow

Minor. Occasionally we have some, but it's been very minor. Nothing significant.

Todd Mitchell - Brean Capital

Okay. And then when you look at the differential and the growth rate for Video On Demand for fiscal '14 versus fiscal '13, can you flush out for us a little bit, how much of that is the new product introduction and how much of it is sort of an annualized increases in the pricing?

David Chemerow

Both of those factors are in there. We continue to have good solid price increases in Video On Demand and the new product is helping by being an add-on on top of that. So nothing has really changed in the base Video On Demand business and it continues to perform very strongly.

Todd Mitchell - Brean Capital

Okay. And then on the -- in terms of the -- in terms of the difference between cost of goods sold and SG&A, when you get into some of these more complex projects which are probably pre-revenue, you've had -- I heard you guys talk about some of the work that you're doing for some of your advertising clients, some of the work that you're doing at an early stage for some bigger networks, is that sort of what you call kind of customized work to show people what the system can do? Does that fall into the SG&A category?

David Chemerow

I would say Todd that the bulk of that is not going to be material. If you are looking to try to explain what's happening there, it's not that material. Sure we have some costs if a building product is capitalized, which is doing work and our people are doing work prior to demonstrating product, that's expense but you can’t look at that and say I am going to judge what's happening with the business from it.

Todd Mitchell - Brean Capital

Okay. So, then if I look at sort of the increase year-over-year in the SG&A line, X-ing out sort of the one-time items in the September quarter for fiscal '13, can you tell me what of it reflects a fixed cost growth associated with, the revenues went higher, the sales commissions went higher with that, and what of it represents development capital?

David Chemerow

I can’t break that out for you but what I can tell you is we have added sales people, we've added customer service people, we've added some research people and the like and that's what's been driving it, but as we look at it, we've talked before that our growth and expense in TV is probably in the 25 or so percent range and if our revenues are growing at 80%, that's the creating a very favorable range within our Video On Demand business and similar kinds of relationships where those costs are going up far slower than the expected revenue growth of the 20% or even last year being the 15 or so percent of Video On Demand group. So we are building value in those businesses.

Todd Mitchell - Brean Capital

Okay. Okay. All right. Thank you very much.

David Chemerow

Thank you, Todd. We've time for one more question. We've run a little bit over. Operator please.

Operator

Thank you. Our final question is from the line of Hamed Khorsand with BWS Financial. Go ahead.

Hamed Khorsand - BWS Financial

Hi. Just two questions here. One is, on the guidance for the Home Entertainment side of the business, is much of that growth coming because you have Warner Brothers for a full year in 2014?

Bill Livek

It's an element of it Hamed. We have vast -- we have the large customer that we signed and we also have some of the studios going direct through us as opposed to direct to some of the customers. So all three of those are factors.

Hamed Khorsand - BWS Financial

Okay, and then far as the up operating expense goes, was Q4 a clean number? So, going forward we could use that as a base figure?

David Chemerow

Clean number from just a sampling of -- you can look at it and say I can annualize that. I can look at those kinds of values, is that what you are asking.

Hamed Khorsand - BWS Financial

Yes.

David Chemerow

Yes, you can.

Hamed Khorsand - BWS Financial

Okay. So, just to follow-up on that one. At what point are you guys looking at from a profitability standpoint? Because on the guidance perspective it doesn't look like that, that you guys are going to be profitable.

David Chemerow

As we said in the press release, we expect to be if not at breakeven, awfully close to breakeven this year. We expect to be very, very close to that and we are working hard driving ourselves from an operating perspective to get there.

Hamed Khorsand - BWS Financial

Okay. I'll just talk to you offline and go to the numbers with you. All right. Thank you.

Bill Livek

Thank you, Hamed.

Operator

At this time, I would like to turn the call back over to Mr. Livek for closing remarks.

Bill Livek

Thank you all very much. As always thank you for investing some of your investment capital in Rentrak. We are excited about the future. We'll talk to you on our next earnings release, if not before. Thank you and have a great day.

Operator

Ladies and gentlemen, that does conclude our conference for today. We would thank you for your participation. And you may now disconnect.

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