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Rentrak Corporation (NASDAQ:RENT)

Q4 2014 Results Earnings Conference Call

June 3, 2014 5:00 PM ET

Executives

Bill Livek - Vice Chairman and CEO

David Chemerow - COO and CFO

Analysts

Peter Appert - Piper Jaffray

Todd Mitchell - Brean Capital

Rich Tullo - Albert Fried & Company

Hamed Khorsand - BWS Financial

Thomas Le - Kings Point Capital Management

Jonathan Brolin - Edenbrook Capital

Operator

Please standby. Good day, everyone. And welcome to the Fourth Quarter 2014 Rentrak Corporation Earnings Conference Call. Today’s call is being recorded.

And at this time, I would like to turn the call over to Mr. Bill Livek, Vice President -- Vice Chairman and CEO of Rentrak Corporation. Please go ahead.

Bill Livek

Thank you, Operator, and thank you everyone for joining us today. David Chemerow, our COO and CFO will be providing our financial update shortly and members of our executive management team are also on the line with me to participate in the question-and-answer session.

I am very pleased to report another quarter of great progress with improved financial results. The top level quarterly financial results are 40% total company revenue growth compared with last year’s fourth quarter, 94% revenue growth in our Television Everywhere line of business and achieving operating profitability in our TV Everywhere business, excluding iTVX-related expenses that David will chat about later.

We also are surpassing our growth expectations in most of our lines of businesses and we significantly improved our net income from continuing operations, excluding one-time cost.

Before I begin the review of our business lines, I’d like to spend a moment on our Home Entertainment business or more specifically our Pay Per Transaction business or what we have always called PPT.

We are on track to sell our PPT operations as soon as practical. We are taking our time to find the right buyer for this business, one who is fully equipped and commit to providing our content partners and our retailers with the first-class service that they have come to expect from us.

We believe this business will continue to provide outstanding value for both the studios and brick-and-mortar video store retailers and we are confident in our ability to find the right buyer who will enable our home video customers continue to receive the benefits of the PPT program for many years to come.

We achieved our desired outcome with this business, generating more than $100 million in cash since 2006 and Rentrak management has successfully redeployed that capital into building our high-margin, our high growth information businesses.

This has allowed us to focus on building superior cloud-based software and information business that caters to the entertainment and advertising industries. Our PPT team should be proud of what they’ve accomplished. I personally thank them and tell them once again, job well done.

Because we plan to sell this business, we have revised our financial statements to treat PPT as a discontinued operation. This should allow our investors to better track us as a pure play information or SaaS business.

I’ll begin our business line of review first with our TV Everywhere business, starting with national, which continues to do great. As you can see on slide five, we have built a remarkable client network list, which stands at more than 85 network clients and growing.

On this call we are announcing for the very first time an expanded agreement with Cox Communications. As you know Cox has been a valued Rentrak data partner for video-on-demand and very recently for iPad VOD.

They have recently become a latest in our list of multi-channel video programming distributors or what our operators now call MVPDs to provide Rentrak with total television audience data.

Cox and Rentrak have signed a new agreement that extends our partnership to include the anonymized privacy compliant information on linear television viewing from all Cox markets that will be integrated with our other partner information, including our two national footprints and Rentrak is the only company to have these national footprints with DISH and Direct together with AT&T charter and others to be integrated in all of our television products.

Cox will also use Rentrak internally for advertising sales programming in marketing decisions. When Cox and DirecTV are fully integrated later this year into our product, Rentrak will be measuring nearly 50 million television sets every second of every day for all TV viewing.

Also in news been announced on this call, in the quarter we signed Viacom to an agreement for some of their most recognized network brands, including their Nickelodeon properties, several MTV properties, Country Music Television, Comedy Central logo and TV Land.

This agreement actually covers 16 networks and they are using our information right now in the 2014 upfront. Viacom at the same time also reaffirmed its commitment to Rentrak’s video-on-demand services by signing a new multi-year agreement.

Another very exciting new client for us that we announced this morning is Sony Pictures Television, which includes our national, local and Rentrak’s newly released syndicated television services built from our existing databases. This groundbreaking agreement includes subscription for Sony Movie Channel, Sony Pictures Television, which distribute some great TV shows.

The agreement will give Sony access to our complete television and insights information both nationally and in all of our 210 local markets. One ways that Sony will be using our information is actually to sell their programs to television stations which includes programs like Seinfeld, Dr. Oz, Jeopardy and to help sell advertising also.

Also on this call, I'm pleased to announce for the first time that we just signed an agreement with Newsmax Broadcasting as a TV arm of multimedia publisher, Newsmax Media to our national television service, as it prepares for its national television debut on June 16th in approximately 35 million homes. Rentrak’s granular television information will help Newsmax understand television viewing behaviors and allow them to monetize their television audience across platforms.

As slide six demonstrate our branded entertainment capabilities became more and more a mature reality as we entered it through our acquisition of iTVX. We recently signed an agreement with Dick Clark Productions as a new customer.

As you know Dick Clark owned assets such as the American Music Awards, New Year's Rockin' Eve and Golden Globes. And they are using Rentrak’s capabilities to better determine the value derived from brands that are embedded within those television shows by gaining important insights into the level of audience engagement.

Now I want to talk about our local television business, which continues to make strong progress and it continues to impress me and we set some high standards here at Rentrak. We recently passed the 300 client mark and now have approximately 315 local television stations using Rentrak census like currency as you can see on slide seven.

We added nearly 100 stations in the last year. Our client base represent 16% of the available 2,000 television stations in this market, showing tremendous growth opportunity that still exist for us and our shareholders. To date we have signed three or more stations in 54 markets, four of the five largest stations in 27 markets and all major affiliates in eight markets.

Now also we are announcing first on this call our first stations in Los Angeles. We are pleased to announce the expansion of our contract with the CBS-owned television stations, KCBS and KCAL in Los Angeles.

That extends our current CBS-owned and operated agreement. In February, you will recall we began working with the CBS-owned television stations in Dallas, Minneapolis, Miami and Pittsburgh. We are excited to see this partnership grow.

Also in the quarter Bonten Media recently became a client for all 13 stations in the group across eight markets as did Capitol Broadcasting for one of their stations. We expanded our agreement with Nexstar to include 27 new stations within their group in 13 new markets. Remember when we began our relationship with Nexstar in 2010, we just were working with them for three of their stations and today we have 40. Now that’s success.

As you know both our national network business and/or local station business growth is driven by the increase usage by ad agencies and advertisers who use Rentrak's advanced TV demography within their business.

On slide eight, you will see a sampling of our current clients. We now have more than 100 national and regional ad agencies as clients and that number is growing quickly. Among our latest clients are the Yaffe Group, Wyse Advertising, which both are now Rentrak exclusive agencies. We also began working with a host of new agencies including Hill Holliday, which is a top 15 ad agency based in Boston, Cramer-Krasselt, PM Group and Ad4.

I would also love to tell you about the advertisers that we had in the quarter, but I am simply never going to do that. Because our advertisers do not want their peers to know too early about the competitive advantage that they are deriving from Rentrak. But in the quarter we are pleased to have added several America's largest national retailers to our fast-growing list of advertisers using Rentrak to make smarter decisions.

As you now our IRI partnership is helping us to attract advertisers too by linking our census-based TV currency with the definition that brand owners used to describe their customers.

As you know, IRI is the leader in providing insights to the consumer packaged goods industry. The partnership is creating an integrated platform, which brings together key data insights across multi-platform viewing up against actual consumer packaged goods sales data and our partnership is growing great with them.

With Rentrak evaluating the changing patterns of how consumers watch television both the big TV shows and the small TV shows, and the movies that they consume and IRI providing their definition that they've agreed on with the brand owner of the consumer. We can look at both online and off-line information to give those advertisers a complete picture for their television plan.

I also want to mention that a work in the political category continues to do quite well. We recently began working with Targeted Victory, a leading company specializing in digital advertising in targeting. They’ve worked on over 130 political campaigns. We continue to deliver our promise in this category and clearly have become the currency and are the currency for political advertising on television.

Before I moved to OnDemand Everywhere, I want to discuss a very important trend in advertising and that is the automated television buying or often times you hear referred to as programmatic television buying, which falls under a larger umbrella of media analytics.

EMarketer suggest recently that nearly it’s $3.5 billion market, up from $2 billion last year. And Strategic Analytics recently said it expects 20% of the TV ad dollars to be spent via programmatic by 2018, up from less than 1% last year. One very large agency holding company recently said on its earnings call that it’s targeting 50% of TV buying to happen in the next couple of years.

Whatever source you use, this clearly is a growing trend and a trend that Rentrak is catering into, where our data information, because we’re measuring every place you can put a commercial in and we’re the only company doing that, are the fuel that are driving these programmatic engines. Programmatic buying is the method by which ads are being bought on this computerized systems that help advertisers more precisely target the television audiences with the right ad targeted to the right consumer against the right television show.

It's really about efficiency into the automated systems and how our customers are becoming more profitable by using Rentrak. We also in the quarter signed a contract with [Cliff] (ph) a company that helps bring television in the programmatic worlds together. They are using Rentrak census currency fuel to develop products that help clients to decide what networks and what television shows our most efficient and effective in targeting the best customer.

We’re also working closely with analytics company market share to help their clients better optimize their marketing mix and with AdTonik who is a mobile targeting company. Rentrak is in discussions with virtually every major mobile targeting and marketing mix company that’s feeding into this programmatic trend that we’re seeing and we’re confident that we’ll see revenue in this fiscal year. That continues to be significant out of this sector.

Next I'll move to our OnDemand Everywhere business. OnDemand viewing by the consumer continues to arise at what I think is a breakneck speed. Our most recent Rentrak state of video on-demand report shows that free OnDemand television content viewing in the Broadcast Primetime category increased 24% over the last year.

We also approved that over two thirds of the viewing of Broadcast Primetime on the on-demand platform happens after the third day and over 50% after the seventh day. This is a green field opportunity for our networks to generate billions in additional advertising dollars through the VOD platform in using Rentrak to prove that the audience is there.

At the same time, advertising the video on-demand platform has taken longer to materialize than we anticipated resulting in order that the growth didn’t meet our expectations, but is able to describe later. We believe our performance later in this year will accelerate significantly in the OnDemand category.

Rentrak has become and we are now the VOD planning currency for the industry providing the only complete senses of how the consumer is using VOD programming. Our OnDemand Essentials service is used by 170 television networks in all of the [MVPDs] (ph) to optimize their ad planning and using historical performance to gaze future activity. By accounts renewal is just one example of a client that really is getting great value out of our information in the platform.

Over the past two years, Rentrak has licensed more than 60 television networks out of that 170 in all the major broadcast networks to allow transparency in this platform for dynamic ad insertion or what a lot of folks call DAI to become reality with ad agencies. So ad agencies now have complete transparency for those folks.

The transparency initiatives allow us to share information about performance with all the networks with the ad agencies and the advertisers that drive those agencies. We are putting tools in the hands of agencies that allow them to make more informed advertising placement decisions.

Our advanced demographics and our census like measurement provides the industry with tools they need to plan, to buy and to post on multiple platforms against targeted audiences, not just after the third day, not after the seventh day but every day on every program and on every ad over the life of the program. Those of you that follow the television networks heard the CEOs talking about this category and the aspirations for years. The consumer now it's caught up with those aspirations. Rentrak is the only company that can provide complete detailed reporting of television programming beyond day three and most certainly beyond day seven.

We expect to provide a level of reporting that will allow that advertising category we think to grow to $10 billion relatively quickly. We’re also happy to report on this call that Rentrak completed our phase II of it’s Digital Download Essentials industry services by commercially launching the television version of the service for electronic sell through what they call EST in the fourth quarter.

Rentrak is now reporting overall industry data or Internet video on-demand and electronic sell through from movies and TV content digitally downloaded in the United States. We anticipate launching our international digital footprint service in the second quarter of fiscal ‘15 in 20 countries, including Canada, the U.K., Germany, France, Australia, Japan and of course others.

All seven major studios, three of the four broadcast networks and many independent studios and cable networks are currently supporting our digital download industry service. Rentrak is the only company providing full transparency for VOD and digital downloads.

Finally, I’d like to update you on our total television audience products. Rentrak’s Multiscreen Essentials Service is currently in data with some major agencies and we're getting feedback from them. We number our approach to provide total television audience products starts with the MVPD partners and what we have now are 8 million homes where we can report out on all these different platforms.

We simply don't see how a sample can precisely measure this fractionalized audience that’s developing across all these platforms. We’re committed to this marketing and product roadmap well on to the future.

I'll finish my discussion today with our Movies Everywhere business, which you can see on Slide 10. We're growing this business for global expansion and by launching new products to help the studios better monetize their content.

Our PostTrak service, which integrates information about consumer reaction on the first two weekends in the movies released in the box office and marking that information with our box office currency. We’re recently fortunate to sign agreements with 20th Century Fox, CAA, Focus Features, Relativity. Sony, The Weinstein Company, among others.

Our PreAct service that helps determine the health of a marketing campaign up to a year before movie premieres, we recently signed 20th Century Fox, Lions Gate, Sony and Weinstein Company among others.

Additionally, as we mentioned before, our many of our major movie contracts are up for renewal in fiscal 2015. We have successfully negotiated new multi-year contracts and we’ve already signed a large number of them.

I will finish up today with something that I said last quarter because it is a very important takeaway. Only Rentrak can precisely measure movies and TV content wherever and wherever it is being viewed with our census based currency.

By merging our TV and our movie information with information about the products that the viewers buy, the cars they drive, the lifestyles they lead, Rentrak has created product that help our advertisers, their agencies, the movie industries and the multi-channel distributors of this content, TV stations and TV networks to better understand how to reach those viewers and to more effectively and more profitably run their businesses.

Now, I’d like to thank you for your time on my section and turn it over to David to do our financial review. David?

David Chemerow

Thank you, Bill. I’m going to start with the Safe Harbor statement, which the operator forgot to read and then get into my comments. 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.

Rentrak will be discussing certain non-GAAP financial results during this call. The news release issued earlier today contains a reconciliation of these non-GAAP financial results to the 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. Please also note that the company has posted slides to accompany today’s webcast on the website.

Now, I’d like to begin my discussion of the quarter and let me also remind you that our PPT business is now fully reflected as a continued operation. All of my remarks today will relate to our continuing operations.

We posted 40% revenue growth this quarter, which you can see on slide 12. Revenue rose to $21.6 million for the fiscal 2014 fourth quarter, up from $15.4 million last year. On slide 13, you will find a breakdown of revenue by business line.

TV everywhere grew 94% from last year's fourth quarter. Movies Everywhere revenue rose 13%. OnDemand Everywhere increased 9% and other services advanced 21%. Other services include the measurement of physical productm such as DVD rentals and includes our Studio Direct Revenue Sharing or DRS business and our home entertainment essentials business.

Moving now to slide 14, you'll see that gross margin as a percentage of revenue improved to 66% for the fiscal 2014 fourth quarter versus 61% last year. The gross margin expansion resulted from the increase in revenue, particularly in our TV business. As we anticipated, our TV business was profitable for the fiscal 2014 fourth quarter, excluding the valuation charge related to the iTVX earn out, which I will explain in a moment.

Operating expenses were $17.1 million versus $12 million last year. The increase primarily reflected the revaluation of iTVX’s expected earn out, ongoing iTVX operating costs which were not in the prior year period, headcount increases and other costs to support our revenue growth.

On a pro forma basis, excluding the iTVX revaluation and acquisition-related charges, operating expenses would've been $15.5 million for the fiscal 2014 fourth quarter. This brings the fiscal 2014 fourth quarter operating loss, which you will find on slide 15 to $2.8 million, which included $1.4 million in stock-based compensation costs, $1.6 million for the revaluation of iTVX’s expected earn out and $111,000 in reorganizational costs.

Last year, the operating loss totaled $2.6 million, which included $1.3 million in stock-based compensation costs. For comparative purposes, excluding these amounts for both periods, operating income would've grown significantly to $237,000, up from an operating loss of $1.3 million for the fiscal 2013 fourth quarter.

Our loss from continuing operations, net of income taxes was $2.7 million or $0.22 per share, compared with $2.8 million or $0.23 per share for last year's fourth fiscal quarter. Excluding the items I have already detailed for both periods, income from continuing operations, net of income taxes would've risen substantially to $381,000 or $0.03 per diluted share, compared with a loss of $1.5 million or $0.12 per share. This shows the impact of earnings leveraging as we continue our substantial revenue growth.

Adjusted EBITDA grew to $1.9 million for the fiscal 2014 fourth quarter, compared with $13,000 to last year’s fourth quarter. As you can see on slide 16, we generated $6.3 million in cash from operating activities for fiscal 2014 versus using $1.6 million for fiscal 2013, including discontinued operations.

Cash, cash equivalents and marketable securities grew to $22 million at March 31, 2014, up from $20.4 million a year ago. Of the $1.9 million in capital spending for the fourth quarter of fiscal 2014, $1.5 million related to the internally developed software costs in connection with our essential services and remaining $400,000 related to computer equipment and leasehold improvements.

For the full year, we incurred $7.7 million in capital spending, of which $6.7 million is related to internally developed software, with the remaining $1 million related to hardware purchases. For fiscal 2015, we are expecting capital spending of approximately $10.5 million, of which $6.8 million is related to internally developed software costs and the remaining $3.7 million related to computer equipment and leasehold improvements.

Before I discuss our long-term metrics, I’d like to provide a bit more insight about our PPT business, which is reported as part of discontinued operations. We currently expect this business to generate operating coming and cash flow in only the $2 million to $3 million range for fiscal 2015.

Additionally and importantly, our fast-growing information businesses are now generating more cash. As such, the sale of PPT is not expected to have a material impact on our cash flow going forward.

Our long-term business metrics can be viewed on slide 17. As a reminder, actual quarter-to-quarter growth will continue to be a bit bumpy. I'd like to reiterate that as we continue to increase revenue, the leverage we’ve built into our operating model should continue to drive improved profitability.

Our TV Everywhere business is expected to grow 80% for the next several years. The annualized value of our current contracts is 76% higher than during the fourth quarter of the prior year. Our Movies Everywhere business should grow 12% annually for the foreseeable future.

Our OnDemand Everywhere business should grow 20% per year. We know it has been slightly under that level recently. However, we expect advertising use in video-on-demand to accelerate which should bring our growth this year to 20%.

Our other services category is expected to decline 5% annually for the foreseeable future. You will recall that this category includes businesses that measure a physical DVDs which are declining. As a pure-play information business, we are generating high revenue growth with robust EBITDA margins and strong cash flow. These are characteristics seen as many software-as-a-service or SaaS companies. We think it makes a lot of sense to think of Rentrak as a cloud-based software provider to the entertainment and advertising industries.

In summary, as outlined on slide 18, we remain excited about the many growth opportunities that exist for Rentrak. As always, Bill and I thank you for your continued support and we look forward to seeing some of you at our upcoming investor conference appearances and to updating you again next quarter. Operator, we are now ready to take questions from the audience.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Peter Appert with Piper Jaffray.

Peter Appert - Piper Jaffray

Thanks. So you guys enjoyed very strong momentum obviously in the TV business here in the last year. Any specifics you called out for us in terms of what we might look forward to in fiscal ’15 in terms of pace of new station adds or network adds? And then related to that, David, could you talk a little bit more about the leverage in TV profitability that we can look forward in fiscal ‘15?

Bill Livek

In terms of the new adds, the reason that we feel comfortable with our guidance on our television business is it’s driven by the categories of new stations signing up and new network signing up, along with the other usage of Rentrak at the ad agencies. Both agencies with fiscal contract subscriptions they get into our software but also on the programmatic platforms. So other than telling you that we feel comfortable with the guidance, we don’t feel comfortable getting into specific stations or networks. David?

Peter Appert - Piper Jaffray

How about on pricing then Bill in terms of what are you seeing from a pricing perspective as you renew some of the contracts?

Bill Livek

Again, pricing is reflective of utility. One of the beautiful things about the business model that we have there is a component of utility that’s built in. The price of producing our product of course is related to a lot of our data inputs, but it’s - the price that we can charge is how we are used in the marketplace.

So suffice it to say that we are used more actively with the ad agencies and advertisers than ever before, so our pricing should go up. If you boil this down to the other simplicity of it, and the television stations probably the easiest example. The automobile advertising category and the political category can make up almost 50% of the televisions stations’ revenue in some years by us having a focus on dominating those sectors with unique and very special products that only Rentrak has we become ultimately a must buy for everyone. And when people renew, we expect to be paid for the added utility because we’ve made a great deal of investment on those sectors. And there is a lot other sectors, but it helps explain our pricing onto the future. David, do you have anything to add?

David Chemerow

Sure. Let me answer your question, Peter, on the operating leverage within business. Clearly it’s a complicated subject because of the interplay of revenue and expenses, but think of just a couple of elements here based on the guidance we have given you. Our TV business grew last year by $13 million from $18 million and I’m rounding this all off to about $31 million. And based on the guidance of 80% for next year should grow $25 million versus the [$13] [ph] million in fiscal ’14, and then our other businesses will grow although at the somewhat slower rates.

If you then look at that extra revenue, which will start dropping through the financial statements, clearly we have some additional operator expense and we have additional staffing and other operating expenses that we expect to have, but we had a nice pick up in leverage in fiscal ’14. I would expect an even greater pickup in leverage in fiscal ’15. I am not saying all that $25 million is going to drop to the bottom line because they are expenses that some of it has to cover, but we should get an enlargement of leverage as we continue looking forward.

Peter Appert - Piper Jaffray

Okay, that’s helpful. Thank you. And David, is it possible, just sticking on the pricing for a second, to quantify in TV for example, what portion of revenue growth in fiscal ’15 was associated with new customers versus price adjustments?

David Chemerow

That is not something that we’ve broken out and looked at in that way Peter. We feel good about our ability to gain price increases as Bill discussed, but it is not a metric that we have been sharing.

Peter Appert - Piper Jaffray

Any color on early usage by CBS of the Rentrak offering or early examples of how they are getting success in selling advertising?

Bill Livek

Well, there is two pieces that our relationship with CBS with very different groups. One is the local side and one is the network side. The local side is obvious they felt good enough. They were making a good return on their investment that they brought in two of their largest television stations in Los Angeles. On the network side, we make a big difference for a major network like CBS in a lot of the categories. So we have very different answers to questions that you ask about how many people who drive Hyundai, Kias, BMWs, who watch Two and a Half Men, or 2 Broke Girls, 60 Minutes as an example.

It helps CBS change their outlook on pricing while at the same time the ad agencies are using Rentrak to price. So the feedback we get it’s going well. Now remember we built this business by catering to an unmet need in the marketplace and that’s having reliable precise trendable information about every TV show regardless how big or small it is up against the product set we consume day to day. That serves an unmet need out there and as we have been embedded as a planning currency in the majority of the ad agencies, the sellers of advertising start understanding that they can use that to start changing the conversation and how they actually price. So you have to ask CBS, we believe that they are a very happy customer.

David Chemerow

And Peter let me come back to your question on operating leverage because there was a piece of the answer I should have given you that I really didn’t. And that is you can take a look at the information we’ve disclosed and look at fiscal ’14 or fiscal ’13 and the operating income before one-time items grew by about $3.5 million year to year, 3.6 million to be specific. And if we compare that to our increase in revenue over that same time period, we find that about 20% of our revenue fell to -- incremental revenue, fell to the bottom line. So that’s what I say when I say going forward that we expect we should be able to perform even better than that. It was a good start for us in fiscal ’14 that we should perform at a higher level as we move into the further years.

Peter Appert - Piper Jaffray

Understood. Just one more thing and I will let someone else get on. David, the Cox deal that you have announced today, can you give us any color on the economics of that?

David Chemerow

Economics of that are very similar to the economics of our other deals. What we love about these deals are we’re going to pay Cox for the use of their anonymous TV data. They're willing to use from us our ability to target. And so it's not just an economic deal in terms of cash changing hands although it does but also in terms of the utility, they're very tied into the value that they’re able to get from us. So we’re excited about the way that comes in. And like the other deals we’ve signed, we will start paying those amounts when we start using that information later this year.

Peter Appert - Piper Jaffray

And presumably that’s all baked into expectations in terms of you’re able to absorb that incremental cost in the context of leverage you talked about earlier?

David Chemerow

Absolutely correctly, and as I said TV revenues going up $25 million which means that the room for COGs goes up by that kind of amount.

Peter Appert - Piper Jaffray

Got it. Thank you.

Operator

Next we’ll hear from Todd Mitchell with Brean Capital.

Todd Mitchell - Brean Capital

Hi, thank you. Do you have any update on your data sharing agreements with trying to get data sharing agreements from the major network and for on-demand?

Bill Livek

Todd, I’m not sure if I understand the question. We are getting from all of the operators all the data that's out there on their platforms. For transparencies to share it, we’re getting it with as we said 60 television networks and that we believe we will grow everyone at a certain moment, which includes all of the big four. So we've got the bulk of the market covered with respect to ability to share that information broadly.

Todd Mitchell - Brean Capital

Okay. So getting the big four is that recently incremental I guess, I wasn't aware that you had them?

David Chemerow

I think, we announced it on our last earnings call. So it’s happened in the last six months.

Todd Mitchell - Brean Capital

Okay. My bet. And then could -- also on the comments you made on IRI, can you flash out a use case for me and can that be turned into a syndicated product?

Bill Livek

Yes. I will flush how to use case and yes, they will be syndicated products. We announced this at the user conference where they had about a thousand of their largest brand owners there. And we talked about taking these segments that are syndicated that IRI has which we've embedded in the Rentrak product. So advertisers can use the segments of how they talk about their customer and use that in the planning, buying TV, similar to what we did in the Obama campaign by taking a small group of voters.

I’ll take the use case of an appetizer that caters to people who consume a disproportion amount of protein in breakfast and lunch and dinner. They have a definition for that consumer that they use across all the different platforms. We've taken what they call it IRI their ProScore segments. We've integrated that into television essentials. So they can look at the TV shows that have a higher likelihood of people who are eating meat at breakfast and knows that eat a little bit of meat at breakfast and they want them to eat a lot more meat at breakfast.

So, it’s the classic use case of moving the purchase up one notch. As opposed to eating meat twice a week, then move it to three times a week, at lunch from three times a week to four times a week. And they capture the TV show that have a high predilection of the protein consumer. And I would mention the brand to you but you would know their products, it is a very large high profile, very, very high capitalization company that I'm talking about here with the use case.

And the CEO was at the meeting and after our presentation he came up to us. And he was impressed that how the Obama for America campaign potentially squeezed 20% efficiency out of their television buy. He wants to do the same. That’s his target of success is squeezing out efficiencies. And as you guys know, the CPG category because of the pressure from the large retailers like Walmart and the discount stores. They've got only so much pricing flexibility on the upside.

They’ve got to look at their marketing spend and spend differently while at the same time reaching more customers. And that’s how the CPG category is looking at Rentrak, similar to political. How do they get more for the same amount of money that they spend?

Todd Mitchell - Brean Capital

So, how does Rentrak fell? Is this a module that will go on top of regular subscription?

Bill Livek

Yes. Good question. This is a subscription, so the advertiser buys a subscription for television essentials to be able to access the analytics that IRI put together of their segments. So we look at them as being another kind of network client long-term in nature by an access to a data on a monthly basis.

Todd Mitchell - Brean Capital

Okay. One last question. I know that there are notoriously non-disclosing organizations but in terms of DISH, we know you get data from them. We know that you’re instrumental in helping them with their targeted ad platform with DIRECTV. DISH recently did a deal with Disney, that was somewhat unprecedented and that they got over the top rights for several of Disney’s properties, which Disney’s been extremely guarded on.

And Charlie, you’re going to make comments on his conference call that a lot of it had to do with their plans for doing a targeted advertising on a wireless delivery platform. Is there anything you can say as your involvement there or your potential involvement there or give us any insight as to what he might be talking about?

David Chemerow

The answer is no, I would love to. DISH is a great customer. The shareholders are Rentrak. Charlie Ergen in DISH a thank you because we couldn't have accomplished today what we didn't unless guys like Charlie in his management team took a risk on us early on. So one of the great entrepreneurial organizations embodied in a big company.

And like all of our multi-channel providers, we’ve got great relationship with them because they’re great users. So, we’re optimistic about the future with all these folks with what they’re doing to provide great programming on all different types of platforms.

Todd Mitchell - Brean Capital

Great. Thank you very much.

Operator

Next, we’ll hear from Rich Tullo with Albert Fried & Company.

Rich Tullo - Albert Fried & Company

Hey, thank you for taking my question. So terrestrial broadcast stations were up about a 100 year-on-year. Specific network channels, how many were up year-on-year?

David Chemerow

I’ve got to double check that figure. Rich, I don’t have in front of me.

Rich Tullo - Albert Fried & Company

Okay. Gross margin versus operating income, both increased by -- improved by about 500 basis points, which suggests as you said that is flowing directly down to the bottomline. Is the pacing that we’ve seen this quarter, the pacing that we should be able to see? And if that’s the case do you get to breakeven by the middle half of 2015?

David Chemerow

Well, look, I think that the pacing is reasonable. As I said, we’re going to be bumpy some quarter-to-quarter. We expect to see continued improvements. I’m not going to say that I never really talked about our profitability and how profitable, we will be. But clearly if you do some extrapolation, you do get to that kind of situation.

Rich Tullo - Albert Fried & Company

Okay. As we look on the year-on -year performance across the board, strategically the guys stood on, okay. Tactically, on a quarter-to-quarter, year-on-year basis, it was just a little bit different than what you said, not a lot, just a little bit different than what you said. As we look at the guidance, on a go-forward basis, the outlook on a go-forward basis, do you think that we’re going to get a modest acceleration in the first half of 2015?

Bill Livek

Rich, my guidance of 80% growth for TV covers the whole year. I’m not telling you what any given quarter is going to be. My guess is we’ll have some of both. We may have some that are below. I expect they are still going to be centered around that. And I’m not going into which quarter will be the fastest-growing quarter. We don’t know which quarter will be the fastest-growing quarter. We’re out here trying to sell a lot and provide a lot of value to our customers. And we feel really good about our ability to achieve those kinds of growth rates overall.

Rich Tullo - Albert Fried & Company

Okay. I’m just trying to make my model conform with your results, that’s all.

Bill Livek

I understand but I’m not going to there.

Rich Tullo - Albert Fried & Company

You can’t blame a boy for asking the question? And then on the programmatic, what is your senses to the dollar value, the volume right now. Because it seems to me that the market is somewhat locked until CBS comes out with deliverable product. Is that you’re sense of the market right now and keeping in mind, I’m talking about excluding any over the top video on demand as VOD pre-roll videos. So I’m talking about pure-play TV, video on-demand. Is that locked until one of the large broadcasters moves in the direction and develops a product?

Bill Livek

I don’t believe so. Look there has been an insatiable desire in the ad economy to take cost out. And one of the best ways to take cost out while at the same time give their advertisers proven accountability, which way you got to automate. So I believe this -- look this market is developing right now without a lot of the major broadcasters contributing their inventory in it. And it probably will continue to develop because you can buy with a lot less people, more targeted audience and Byron shows that you may deem as too expensive for your client.

So the automation has like a Rubik’s Cube, a lot of different faces to it. The thing that we see and we continue to be pleasantly surprised, we thought it was going to be a trend. It’s developing faster without those sources of inventory. The timing appears to be right with the ad economy.

Bill Livek

And let me just add to that Rich that as I've talked before about our major pieces of business, our three largest pieces of the TV business are stations networks and programmatic and the relatively smaller ones are agency’s advertisers and operators. So programmatic in only a couple of years has become one of our larger revenue sources and we've expect it to continue being in that kind of ballpark.

Rich Tullo - Albert Fried & Company

Okay. And by programmatic, I guess, that's defined as dynamic TV ads is sort of a system like to know?

Bill Livek

No. No, programmatic is the misused term. It’s sort of like VOD. Everyone uses that are loved, everyone uses the phrase and it means many different things. Programmatic, we're using it in the context of its automation and there were a lot of different layers of programmatic. So when one of these machines or software platforms or clients want to automate processes, so they can buy all the inventory, they are using Rentrak. It’s the obvious choice.

Rich Tullo - Albert Fried & Company

What were the fee that they use as their source of figuring it all out?

Unidentified Participant

Okay. I'm sorry. Just one last question, we’ve been doing a lot of research on basically the [T plus 4] (ph) plus time horizon time, okay. And really for original long-form scripted programming, some reality TV programming, anywhere from 92% to 48% of the actual views are now coming following [T plus 4] (ph) timeframe. Are you going to -- like what you do with the movies come out with any data to maybe move that market along a little bit?

Bill Livek

We are doing it, Chris.

Rich Tullo - Albert Fried & Company

Can you tell us about that?

Bill Livek

We are doing it. And our core initiatives around that is to show advertisers and their ad agencies that the audience has become more transient than ever before because we can -- we always got home whenever we got home and we want to watch the best available program.

Now the great thing about our lives, the best available program are all of them at our fingertips and it has very little to do with time. So we are working with all the agency holding companies in terms of showing them how this audience they can capture it in a very efficient way.

So if we look out a world onto the future, time is going to become a variable depending on the account. If you are a car company that selling a new make and model, you are going to be interested in this long timeframe.

If you are a large retailer of a sale that goes over one day, you are going to want to be have your ads restricted those days. The one thing we love our business, we are in the business of catering to both of those models. It’s a great time to be an investor in these businesses.

Rich Tullo - Albert Fried & Company

Excellent. Thank you very much.

Bill Livek

Thank you. Operator, we have a limited amount of time, so if we can get through as many questions we can in the next 5, 10 minutes okay.

Operator

Okay, sounds good. And we will take our next question from Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial

Hi, guys. A question on the political spending, do you think you have the pricing power right now and if you do or if you don’t, do you think with this year’s political spending in election outcome whether voter turnaround will determine how much pricing power you will have in 2016?

Bill Livek

Good question. We have quite good pricing power just because we have a compelling and a unique product, unique in many cases exclusive for these folks and it’s proven to work. Now clearly with the different laws that are getting changed where more and more money is getting spend is anyone’s guess of how big the price is going to be. I think it’s going to be up to safe bet. I just don’t know how big the political pie is going to get, but politics has become ad category, just like cars. You talk to the owners of the media companies, it’s one of the top spend categories. Who would have ever thought, but it certainly is.

Hamed Khorsand - BWS Financial

But do you think that the outcome of the voter turnout and the impact you will have from a campaign you are using will have an impact on how much more pricing power you will have in 2016?

Bill Livek

It’s not about turnout, it’s about outcome. If a lot has been written about the last presidential cycle, one party targeted a very narrow group just to try to get them out on the margin, right. And they were successful doing that by using Rentrak as the GPS so to speak to find the right TV shows to advertise on and that now is embedded in the political DNA regardless of the parties. So voter turnout actually is less variable. It’s getting the right voters to turnout. So, I think it has nothing to do with our pricing power. Our pricing power is directly related to the outcome. And the political consultants and ad agencies that have formed or formed around the certain political campaigns believe that they've got a more favorable outcome.

And the great thing for Rentrak, oftentimes, these are virtual corporations that get set up to elect candidates. And those individuals then go into consumer products to help those people advertise and market more effectively. And some of our best clients now were political ad agencies a few years ago. Now they're utilizing Rentrak across all the different platforms to buy and plan TV.

Hamed Khorsand - BWS Financial

Okay. Thank you.

Operator

Next, we’ll hear from Thomas Le with Kings Point Capital Management.

Thomas Le - Kings Point Capital Management

Thanks for the question. One for Bill, one for David. Bill, now with the M&A environment has cooled off a little bit in the local broadcast segment. Do you see I guess more conversations or more constructive conversations of getting more clients, considering the last bandwidth constraint? And then second one for David, could you remind us what the drivers are behind the lumpiness in the OnDemand segment and why you expect it to accelerate going forward? Thanks.

Bill Livek

The answer to your first one is yes. Now that the regulators really pretty cool, sort of bucket of ice on top of that whole conversation of M&A. The quality of conversations were having been has picked up quite a bit because it is back to running the business as you would expect. David?

David Chemerow

On the OnDemand side, the lumpiness really comes from the efforts at the networks and operators are beginning on how to sell advertising. They have the equipment in place. They are capable of doing digital -- most of them are capable of doing digital ad insertion. And the challenge is coming up with the package that makes sense for the advertiser.

And a number of the very large networks have tried a variety of packages, trying to come up with something that really resonates putting revenue through. And they’re working it, they’re trying it. We’re as constructive and as helpful as we can be, but it’s going to require them to come up with the right kind of package. Now my feeling is and our feeling here is where there is a will, there is a way. They will figure this out and it’s a question simply of when and how long that will take.

Thomas Le - Kings Point Capital Management

Great. Thanks.

Bill Livek

Operator, we have time for one last question.

Operator

Okay. With that being said, we will hear from Jonathan Brolin with Edenbrook Capital.

Jonathan Brolin - Edenbrook Capital

Hi. Good afternoon.

Bill Livek

Hey, John.

Jonathan Brolin - Edenbrook Capital

I was wondering if you could comment on -- you are obviously making progress on local and news about the 50 million homes now as result of Cox is really interesting given Nielsen’s recent comments about potentially adding another 6,000 homes. I was wondering if you could comment on Nielsen’s recent actions in both, with the local people meter and just generally their moves to try to expand their presence in television rating and tracking?

Bill Livek

John, I know you guys hate when I do this but we don't compete with anyone except ourselves. We build -- we saw our market need where we could be number one in a census currency. So our market need that we wanted to use a roadmap that was different than age, sex. We invented the category of advanced demographics. So we’ve carved a niche where we’re number one in two categories and that's all that we focus on.

And every employee that we have at Rentrak, we had our all employee meeting today. We talk about competing with ourselves, so that's what we do. And I know it's not the answer that a lot of folks like to hear because they like street fights. But we’re competing with ourselves, Bill, keep building other products and get more customers to use them and invent more products of these existing databases that can be additionally high-margin products.

Jonathan Brolin - Edenbrook Capital

May I ask it in a slightly different way, do you expect to see any competition from them or any impact on revenue growth or pricing or anything because of their efforts?

Bill Livek

I have no idea. Rentrak is my largest stockholding. My second one is Berkshire Hathaway. So, I only follow the companies that I'm invested in John. I love you but I’m never going to respond to another company that I don't know anything about. Turner? Operator?

Operator

Yes. There are no further questions.

Bill Livek

Thank you. And thank you all and we’ll see you on our next earnings call or at an investor event in the next few months. Thank you all for your time and your trust. Take care.

Operator

And that does conclude today’s teleconference. Thank you all for joining.

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Source: Rentrak's (RENT) CEO Bill Livek on Q4 2014 Results - Earnings Call Transcript

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