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Executives

Paul Rosenbaum – Chairman, Chief Executive Officer

Kenneth Papagan – President, Chief Strategy Officer

Mark Thoenes – Executive Vice President, Chief Financial Officer

Amir Yazdani – Executive Vice President, Information Technology, Chief Information Officer

Cathy Hetzel – President, AMI Division

Analysts

Ali Mogharabi – B. Riley & Co.

Alan Gould – Natixis Bleichroeder

Jennifer (Dance) – Oppenheimer

Hamed Khorsand – BWS Financial

Brian Gagnon – Gagnon Securities

Bart Blout – Sawtooth Capital

Rentrak Corporation (RENT) F4Q08 (Qtr End 03/31/08) Earnings Call June 10, 2008 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 Rentrak Corporation earnings conference call. My name is Stacey and I’ll be your moderator today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session at the end of the conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Paul Rosenbaum, CEO. Please proceed.

Paul Rosenbaum

Thank you Stacey. Welcome everyone and thank you for joining us today to discuss Rentrak’s fourth quarter and full-year results. I’m going to turn the call over to Mark Thoenes, Rentrak’s Executive Vice President and Chief Financial Officer for a full discussion of this quarter’s financial results and when he is through I’ll come back and give an update on our progress and discussion of some of the more interesting things we are working on.

Since this is our fourth quarter conference call results and obviously our year-end report my remarks will be longer than usual. However, it is in the spirit of keeping our shareholders up to date on everything we can share with you.

Mark?

Mark Thoenes

Thank you Paul. Good afternoon everyone. Before we begin I need to remind you that during today’s call we will be making forward-looking statements subject to certain risks and uncertainties. Please read the Safe Harbor Statement at the bottom of today’s earnings release and also refer to our SEC filings for a complete discussion of the risks and uncertainties that could cause our actual results to differ materially from those we perceive today.

Starting with our fourth quarter results, consolidated fourth quarter revenues were in line with our expectations at $22.3 million. This compares to $23.9 million in our 2008 fiscal third quarter and compares to $28.1 million in last fiscal year’s fourth quarter. Revenues in our AMI division continue to grow at a steady pace throughout fiscal 2008 as we demonstrated our clear value proposition to the industry.

Revenues grew approximately 5% sequentially from the third quarter of fiscal 2008 and increased 29% compared with the same period last fiscal year reflecting incremental revenues from new and existing customers of our essential suite of media measurement services. The AMI division represented approximately 13% of fourth quarter consolidated revenues and contributed nearly 28% of our consolidated gross margin dollars for the period.

Fourth quarter PPT division revenues declined approximately 8% on a sequential basis from our 2008 third fiscal quarter and declined approximately 25% compared with last year’s fourth fiscal quarter as expected primarily because we shipped fewer units and realized fewer rental transactions during the period. You’ll recall that in fiscal 2007 we stopped doing business with what were our fifth and sixth largest product suppliers at the time. The loss of these suppliers’ product and associated revenue contributed to the decline in PPT revenues from last year’s fourth fiscal quarter to the fourth quarter of fiscal 2008.

However, despite that it is important to note that our PPT division continues to generate the necessary cash flow to support further development of our Essentials Media Measurement Suite, the company’s future growth engine.

Fourth quarter consolidated selling, general and administrative expenses were $6.6 million compared to $6.3 million in the third fiscal quarter of 2008 and compared to $6.9 million in last year’s fiscal fourth quarter. The year-over-year reduction in these expenses demonstrates our continued ability to manage our resources effectively while also investing in our future growth.

These factors combined to produce net income of $1.7 million or $0.15 per diluted share in the fourth quarter of fiscal 2008 compared with $547,000 or $0.05 per diluted share in our fiscal 2008 third quarter and compared to $1.6 million or $0.14 per diluted share in our fourth quarter of fiscal 2007.

As noted in our press release earlier today, fiscal 2008 fourth quarter net income included favorable tax adjustments of approximately $560,000 or $0.05 per diluted share primarily as the result of cumulative tax research and experimentation credits available to Rentrak related mostly to the internally developed software for our Essentials Multimedia Measurement Services.

Our operating cash flow for the 2008 fiscal fourth quarter was approximately $300,000. Also, during the fourth quarter of fiscal 2008 we made approximately $800,000 in capital purchases of which approximately $500,000 of these expenditures was for the capitalization of internally developed software for our Essentials Business Solutions. We repurchased 178,228 shares of our common stock during the fourth quarter of fiscal 2008 at an average price of $11.39 per share for a total expenditure of $2 million. We have not repurchased any additional shares of our common stock in fiscal 2009 to date and as of June 9, 2008 523,701 shares of common stock remain available for repurchase under the Board of Director’s annual 2006 authorization to repurchase up to one million shares.

We finished the year with cash and short-term investments of $31.8 million compared with $33.5 million at March 31, 2007. The decrease in our combined cash balance resulted primarily from the repurchase of shares of our common stock.

Before discussing our fiscal 2009 outlook I will briefly recap our full-year fiscal 2008 financial results.

Consolidated revenues in fiscal 2008 were $93.2 million compared with $105.7 million in fiscal 2007, an approximate 12% decrease. Our AMI division revenues for the full year ended March 31, 2008 grew almost 33% to $10.4 million compared to $7.8 million in the prior fiscal year. Revenues in our PPT division were $82.8 million in fiscal 2008 compared with $97.9 million in fiscal 2007 in part as a result of the loss of our previous fifth and sixth largest product suppliers in fiscal 2007. Revenue from these suppliers declined substantially in the first quarter of fiscal 2008 and was no longer significant throughout the remainder of the fiscal year.

Our company-wide gross margin declined minimally in fiscal 2008 with increases in our AMI margins offset by decreases in our PPT division. Fiscal 2008 consolidated selling, general and administrative expenses were $25.7 million compared with $25.2 million in fiscal 2007 demonstrating our efficient use of operational resources while also increasing our investment in the development of our Essentials Multimedia Measurement Services.

As a result, fiscal year 2008 net income was $4.6 million or $0.41 per diluted share compared to $5.9 million or $0.53 per diluted share in fiscal 2007. During fiscal 2008 we invested $2.6 million in capital purchases of which approximately $1.8 million was for capitalized, internally developed software for our Essentials Suite of Media Measurement Services with most of the remaining amount invested in Information Technology hardware.

We generated $3.1 million in cash from operating activities in fiscal 2008.

Now I’ll briefly review our outlook for fiscal 2009.

Revenues in our PPT division will likely remain consistent with fiscal 2008 levels. As noted earlier we lost revenue from our previous fifth and sixth largest product suppliers in our first quarter of fiscal 2008 and thereafter. Although we recently resumed business with our previous fifth largest product supplier, the financial terms of the deal will not yield revenues or margins comparable to our prior agreement terms. We expect to realize revenue and gross margin contributions from this supplier’s product in our current fiscal quarter and expect to realize the greatest revenue gross margin contribution from them in the third quarter of our current fiscal year. This will allow us to maintain a consistent level of overall PPT division revenues in fiscal 2009 when compared to our fiscal 2008.

Revenues in our AMI division are expected to increase substantially from our fiscal 2008 levels due to the continued growth in our Essentials Multimedia Measurement Services. Although company-wide gross margins are expected to remain consistent overall with fiscal 2008 levels with some variability among certain lines of business due to operational considerations. We anticipate that some general and administrative expenses both in absolute dollars and as a percentage of revenues will likely increase substantially in fiscal 2009 primarily due to our heightened efforts and investments in our Essentials Multimedia Measurement Services, especially our development and launch of our TV Essentials Services.

Taking all these assumptions into account we expect consolidated fiscal 2009 revenues and gross margins to increase moderately by approximately 5% and we expect net income and earnings per share to decrease primarily as the result of our ongoing and increased investment in our Essentials Multimedia Measurement Services.

Now I would like to turn the call back over to Paul.

Paul Rosenbaum

Thank you Mark. My comments today will focus on the considerable progress we made during fiscal 2008 as well as the many things we are working on to strengthen our position as a highly trusted, independent, third-party provider of multi stream media measurement. With an increasingly fragmented market that includes more than 425 networks delivering content across multiple platforms, audience measurement has become much more complex. Our extensive knowledge of the entertainment landscape and the considerable investment we have made to date in developing the systems for successfully tackling the media measurement challenges in today’s market puts Rentrak in the enviable position of being able to capture media consumption across all of these platforms and as a quick and powerful way to provide significant benefits to everyone across the advertising value chain.

As you know we have built considerable market share for our current Essentials Businesses including virtually 100% market penetration of OnDemand data measurement. This is critical to the future of our business. Having virtually 100% of OnDemand data not only strengthens our credibility throughout the industry as we move towards commercializing our linear TV products but also puts us in a fantastic position to become an integral part of the mix when the link between VOD ad messages and linear TV ads takes shape and the industry revenue model is determined.

As we discussed with you before, our ability to gain this kind of critical mass by harnessing the power of our technology infrastructure and industry relationships set us apart from other media measurement companies and best positions Rentrak as the future currency of linear TV data measurement.

A few weeks ago we reached an important milestone in our history with the signing of a multi-year video OnDemand measurement deal with Cox Communications, the third largest cable television company in the country and reaching our goal of achieving virtually 100% MSO market share. Recently we also announced a VOD deal with Rogers Cable in Canada, expanding our reach outside the United States for the first time. With the addition of Cox and Rogers who join Cablevision, Charter, Comcast and Time Warner Cable among other important operators we now process daily aggregated census level OnDemand data for 54 million set-top boxes representing 28 MSO’s. More than 100 content providers from the largest and best known studios and networks to the smaller niche players, they all use the data we are collecting to make critical programming and advertising decisions.

We were happy to read this morning that David Verklin has been named CEO of Canoe Ventures, LLC. The announcement confirms the cable industry’s plan to create a nationwide platform for targeted and interactive advertising. We have always believed that the best business model for Canoe would be for the operators to sell use of the platform to the networks and for the networks to include these enhanced advertising capabilities in their offering to advertisers, creating the potential for increased CPMs. This model provides increased revenue opportunity for both operators and networks, removing one potential hurdle that could have slowed down the progress for Canoe.

Rentrak has been selected by all six of the operators in the Canoe Ventures partnership for audience measurement for their video OnDemand content. Over 100 of the networks and studios who will be using the Canoe platform are already subscribing to our OnDemand Essentials service. This puts us in an excellent position to also provide third-party measurement for all aspects of Canoe including the link between linear TV and OnDemand. Our tremendous success in the VOD market laid the foundation for Rentrak also becoming a major player in linear television measurement.

To our knowledge no other media measurement company in existence today can provide the quantity and quality of granular second-by-second viewing data that we provide. We are years ahead of our peers at providing the solutions that will broaden the scope of audience measurement.

In preparation for a commercial launch of TV Essentials, we started enhancing our processing engines at the early stages of trial for our OnDemand product. Measuring OnDemand data requires that we be able to process transaction volumes dozens of times greater than the theatrical gross receipts volumes we were processing at the time. To achieve this capability our engineers spent a couple of years creating a system that would not only manage OnDemand data for more than 50 million set-top boxes but would be powerful enough to handle linear TV data at 100 times the volume of OnDemand per set top box. As a result of this significant investment our current engine now performs thousands of times faster than existing relational databases.

At Rentrak customer reports do not take hours or days to complete, they take only seconds. The speed of our engines is critical to our ability to successfully measure the immense amount of data required for linear TV. As important, our speed allows our customers to make actionable decisions in a much more timely fashion. We expect that the technology we built will save Rentrak more than $50 million in database licensing fees. We would save this $50 million because we don’t have to pay licensing fees on 300+ quad service which is equivalent to 1,200 CPUs at $45,000 per CPU. In addition, we will save more than $10 million on annual maintenance fees which gives us a tremendous competitive advantage and creates significant entrance barriers.

Today, Rentrak’s TV Essentials engine can already manage linear data from tens of millions of set top boxes with minimal hardware and much lower maintenance costs. TV Essentials provides in-depth metrics far surpassing what other measurement companies can provide. The Internet industry, for example, has been trying to develop a solution to measure and track user behavior with exact precision but have been unable to successfully tackle that challenge. Through TV Essentials Rentrak already possesses the ability to track audience behavior at the most granular level and this capability is highly replicable in the broadband and mobile video arenas.

For that reason, in addition to quickly becoming the industry leader at measuring linear TV we intend to leverage our considerable experience to apply the same metrics for the measurement of video on the Internet and mobile devices. I’ll talk more about that in a moment.

We have been talking about linear TV measurement for some time. So why is it so important? The industry is now insisting on better, faster and more granular data that goes well beyond the ratings they currently receive for the top networks and top programs. In fact, one major agency recently announced that it would no longer buy spots on unrated networks without set-top box data. At the National Cable Show in New Orleans a few weeks ago we demonstrated TV Essentials to operator and network clients and prospects.

This is the first year we have demonstrated our TV Essentials products at the National show and traffic to our booth was significant as we were busy demonstrating our capabilities for two straight days. We are confident based on the discussions we have had in New Orleans that we will continue to add data partners for TV Essentials and achieve our first quarter calendar 2009 commercial launch goal.

It has become crystal clear that the $70 billion TV advertising market is searching for a better, faster and more accountable way to target their messages to consumers and increase the return on investment of their marketing expense. With interactive television and advance advertising moving into the mainstream, this need will become even more important. In addition to the significant progress we made in OnDemand and linear TV as I mentioned earlier, we are now working to apply the same metrics and standards for measurement of video both on the Internet and through mobile devices.

In fact, we are currently in a mobile trial with a major network to provide audience measurement of video enhanced services, content and advertising on mobile phones. We have seen a lot of money in video content expanding to broadband but page views and click throughs are not effective in measuring video consumption on the web. This future of broadband advertising will be in video. Internet companies are not effectively measuring what happens after somebody clicks through to the video. What the broadband industry is demanding in terms of measurement capability is what we are already doing with TV Essentials which is immediately transferable to broadband media.

In addition to streaming video, digital downloads are also a significant part of video on the web. We are currently developing a new Essentials Service called Digital Download Essentials to collect, process, audit and report on movie and television content rented or purchased by consumers and downloaded via the Internet. We are currently in trials with multiple studios to test and refine this service.

We have been working to further our leadership position by demonstrating our ability to measure and report intelligence across these multiple channels. In the fourth quarter of fiscal 2008 we published several research reports and press releases such as the State of Video OnDemand including a recent release on Video OnDemand Play Time. The top 20 cross platform movies. The Top 12 Box Office Title Weekend Estimates which are available weekly on Sundays and Mondays. Retail Essentials Top Ten DVD Sellers, which is available on a weekly basis and Home Video Essentials Top Ten Rentals available weekly as well. This data is now being features in various media outlets including Variety, USA Today, Entertainment Weekly, The New York Times Video Business and other important media with more to come.

This increases recognition for Rentrak name and our capabilities. Not only through our industry but in the financial community as well. We are moving forward deliberately, methodically and strategically and are working hard to make sure all of the pieces are in place that will allow us to capitalize on the many positive trends in the entertainment media space.

The media measurement company that can successfully meet the unique and evolving needs of networks, operators, advertisers and their agencies will become a critical and integral part of the landscape for years to come and Rentrak is that company. With technology that is robust and scalable and industry relationships that have been strengthened by our media measurement successes to date we are confident we can penetrate the linear TV landscape while also solidifying our position in the home video, theatrical and VOD markets.

By way of example, as Mark mentioned earlier in the home video arena, we recently re-established a relationship with a major studio that is once again utilizing our revenue sharing model. While we are very happy to have this program supplier back it is important to understand this deal is different from our previous agreement and the revenue and gross margins associated with it will not reach past levels.

On another positive note, we have recently begun distributing Blue Ray Disc content for several additional studios. Lastly, I think it is important to point out that while this business is certainly not immune to the current economic situation it is somewhat resilient as home entertainment tends to perform well in a challenging economic environment. Although we are really not an EPS growth story in the short-term, we are making considerable progress towards becoming the media measurement company of choice based on our ability to provide data and insight currently unparalleled in the industry.

I look forward to keeping you up to date on our accomplishments. On every conference call for the last 18 months I have continuously given credit for our accomplishments to the entire Rentrak team. We are indeed a team. I want shareholders to become familiar with all of the executive officers of the company and as CEO of Rentrak it is important to me that our shareholders get to hear directly from other company officers on these conference calls. The team is here with me today and we stand ready to answer any and all of your questions.

Operator can you please begin the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Ali Mogharabi – B. Riley & Co.

Ali Mogharabi – B. Riley & Co.

I have a couple of questions so bear with me. Actually a couple of quick ones first for Mark. Depreciation and amortization for the quarter Mark?

Mark Thoenes

We don’t normally have that in our 10Q but we have it on an annual basis. Why don’t you go on to your next question and I’ll get it for you while you are asking.

Ali Mogharabi – B. Riley & Co.

Paul, on the legacy business, PPT, can you give us an idea of where you are seeing most of the pressure? I’m assuming the number of transactions certainly are impacted not only by the industry maturing but also the macroeconomic environment but are you seeing any pressure on pricing and your take from those transactions?

Paul Rosenbaum

Not at all, Ali. The decline has been basically the fact as we said that we lost two of our clients and customers. We have steadily started to make that up but we see no pressure on pricing and more important than that with $4 gasoline prices if anything the price of a DVD in terms of a sale of a DVD is obviously the numbers are less and less attractive and the rental business obviously I think is not only holding its own but may see a resurgence in the coming months because the price of gasoline and the price of all consumer foods are bringing people back into the rental stores again.

Ali Mogharabi – B. Riley & Co.

Just to follow-up on that quickly, what do you think about the additional options that are being made available? Do they impact the smaller rental store businesses that you guys mostly do business with? The substitutes or the additional options I’m talking about, for example, in the news today which was Netflix’s set-top box.

Paul Rosenbaum

We haven’t seen any. We truly have not seen any appreciable difference in terms of our business as the result of all of the tangential options that people have out in the marketplace. Our numbers are holding. Our turns are holding. I can talk for the PPT division without hesitation saying the number of turns are holding and our business is holding.

Mark Thoenes

Ali, excuse me you asked a question about our fourth quarter depreciation and amortization. For the fourth quarter it was $390,000.

Ali Mogharabi – B. Riley & Co.

Mark, you mentioned AMI revenues. You guys actually expect that in fiscal 2009 to grow “substantially.” Can you give me an idea what you mean by substantially? From around $10 million, $10 million and change…

Mark Thoenes

Ali what I said in the call was that we expected our consolidated revenues for fiscal 2009 as well as our gross margins to grow by approximately 5%. We also expected our PPT revenues in 2009 to remain consistent or level with the 2008 level. That should give you some type of idea of what to expect with our AMI growth levels.

Ali Mogharabi – B. Riley & Co.

What are you thinking about 50%, $15 million or something like that? Then for linear programming, are you talking about Q1 of calendar 2009 or fiscal 2009?

Paul Rosenbaum

We’re talking about Q1 of calendar 2009. That would be our fourth quarter of 2009 for us.

Operator

The next question comes from the line of Alan Gould – Natixis Bleichroeder.

Alan Gould – Natixis Bleichroeder

I have two questions, one technical and one marketing. On the technical side when I look at the counts, the measurements that the Internet companies are doing those are in the billions of measurements and how is it different in the way you process the data versus them processing the data? On the marketing side, I’m not sure who this would be for, you Paul, Ken, Cathy or whoever is there, what are the gating factors to take you from now measuring 2 million linear set top boxes to being commercially deployed in the March 2009 quarter? What milestone should we look at and what sort of number of boxes…what do you mean by commercially deployed? Does that mean the number of boxes or simply getting paid for what you are doing today?

Amir Yazdani

The measuring difference between Rentrak what we do with the data and what the Internet tracking companies do is the Internet is basically a counting of the page hits. They roll it up at the end of the month that are downloaded so basically it is a counter. With Rentrak we keep the transaction information live. So if you want to know the people who are watching certain content, what are the content they are watching, you will be able to go back and dynamically provide them that kind of information. There is a huge difference between drawing up numbers and having an active database and being able to do research.

Kenneth Papagan

In terms of the TV Essentials linear product the gating factors are mostly the operator’s agreement to let us go ahead and release monetizing data that we have been collecting from them and measuring for some time now. We anticipate that number could be between $2-5 million by the time we launch in the first quarter of 2009 calendar year. But there really is no gating factor in terms of the amount of set-top boxes with the nearly 2 million we have today. We are seeing quite a broad view of the linear television landscape.

Paul Rosenbaum

Alan let me add on to that just so that I make this clear, the difference in the database between the theatrical gross receipts and the OnDemand was at least tenfold. Literally years ago we understood where we had to go and we started making those changes I would say close to 3.5 to 4 years ago. The difference between linear TV and OnDemand is one hundred times difference and what we have done is when we are at the point right now is we are ready to go on this. As Ken said once we have the clearance and once we have the agreements in place there are no inhibiting factors for us to go to the next level. None that at least I know of and I have been on top of this thing for some time so we are ready to go.

Cathy Hetzel

The only thing I would add to that is this is very similar to the same progression we made with our other businesses where we got trial information, we worked with it internally, we worked with our operator partners to refine the system and then we launched. It took us about 11 months from the time we got our first data feed in VOD before we launched commercially to the industry. This is on a similar track.

Paul Rosenbaum

This track right now I think from the first time that we looked at this in terms of putting a plan together for it until the time we commercialized it is roughly about 23 months.

Alan Gould – Natixis Bleichroeder

On the September call you were measuring a half a million linear TV products. On the December call a million and now on this call now 2 million boxes. So you have been doing this for awhile. My question is the cable industry sometimes moves slowly and if they are just starting to finalize Canoe LLC right now will they be ready for an advertising business and need for measurement in nine months?

Paul Rosenbaum

I don’t know whether or not they will be ready for it but I’m not sure that is exactly what I was referring to as I made my comments here. I think one of the things I hope you are not misunderstanding this is the Canoe Project is a VOD project. It is video OnDemand. We are talking about linear television. There are two different issues here. Cathy might want to go into a little further on it but there is a distinction between where I was heading with the comments I was making and the Canoe Project.

Alan Gould – Natixis Bleichroeder

I thought Canoe was interactive TV over cable.

Paul Rosenbaum

It is. It is.

Alan Gould – Natixis Bleichroeder

Whether it is VOD or linear TV.

Paul Rosenbaum

It is and I’m sorry. There is a link between the two of them and I made it very clear there is. I can’t talk for them as whether they will be ready or not in that period of time. I just don’t know that but what I was referring to in commercializing linear TV was a different issue than what we were just talking about or what you were mentioning. That is about as close as I can come without getting into trouble on it.

Alan Gould – Natixis Bleichroeder

But you have to get the data from the cable operators, right?

Cathy Hetzel

Today we have 100% of the data on the VOD side and we are working hard as you know to get the linear side. I think that positions us very well to be able to provide that link that is going to be necessary between the two in order to offer effective measurement on the types of initiatives and advanced advertising and interactive advertising that will come out of Canoe.

Operator

The next question comes from the line of Jennifer (Dance) – Oppenheimer.

Jennifer (Dance) – Oppenheimer

On the AMI business which percentage of the growth came from the OnDemand component and can we expect this to accelerate further for the next few quarters given the Cox and Time Warner deals?

Mark Thoenes

Relative to the growth comments I made in the financial remarks, it is fair to conclude that over fiscal year 2008 as well as the fourth quarter of the fiscal year the two business lines within the AMI division that contributed the most to the growth were both our OnDemand Essentials line of business as well as our Box Office Essentials line of business.

Jennifer (Dance) – Oppenheimer

Is OnDemand becoming an increasingly greater component?

Mark Thoenes

Yes. Its growth rate is becoming increasingly greater.

Jennifer (Dance) – Oppenheimer

On the International side, do you guys want to try to get more MSO’s from Canada?

Paul Rosenbaum

The answer to that is yes. We certainly would like to be in a position but we first have to take care of the national basis and if we feel there is an opportunity for us we will certainly go for it. The Rogers was obviously the first one that we announced outside of the United States but I think the possibility of doing things overseas is certainly there.

Operator

The next question comes from the line of Hamed Khorsand – BWS Financial.

Hamed Khorsand – BWS Financial

Could you provide a break down of AMI and who provided more of the revenues? The content providers or MSO’s?

Paul Rosenbaum

The answer simply is no. We do not do that. We do not break it out at this point. We haven’t. The answer is no. We’re not going to do it today.

Mark Thoenes

All I can reiterate to you in an attempt to respond is that as I indicated previously when you look at our AMI division taken as a whole the business lines that contribute the greatest amount of that revenue you see are the OnDemand Essentials line of business and the Box Office Essentials line of business.

Hamed Khorsand – BWS Financial

Will the move to linear TV be similar in fashion to the ramp of the VOD tracking revenues?

Paul Rosenbaum

Well it should be higher. We certainly hope it should be substantially higher than the VOD movement. That time will tell but it is a much, much bigger market place and the potential I hate to say the word enormous but it is. If in fact we are successful we certainly think there is a very, very strong opportunity for growth for Rentrak.

Hamed Khorsand – BWS Financial

Lastly, would the expense you are expecting in 2009 be considered as a burden on the gross margin level or operating margin? Can you provide more details on those 2009 development plans?

Mark Thoenes

My comments with respect to my outlook for 2009, our outlook for 2009, I indicated that we expected our consolidated revenues to increase and consolidated gross margins to increase approximately 5% while our PPT revenues remain consistent with 2008 levels and substantial increases in our AMI division revenues. I also went on further to indicate that we expected substantial increases in our selling, general and administrative expenses or otherwise known as our operating expenses and most of those substantial increases are related to our very heightened continued investment in our Essentials Multimedia Services, especially our development plan and launch plan for TV Essentials Services in fiscal 2009.

Operator

The next question comes from the line of Brian Gagnon – Gagnon Securities.

Brian Gagnon – Gagnon Securities

I have a couple of questions for you. Paul, I’m not going to hold you to any of this, and I know everybody else won’t hold you to this either but give us an idea of how big an opportunity is linear TV. Is it a $50 million a year opportunity? Is it a half billion a year opportunity? Kind of give us what your thinking is to how big this opportunity might be.

Paul Rosenbaum

I think that is a fair question and you can’t hold me to it but I would again I’m just thinking out loud and there is a lot of difficulty in thinking out loud but I’m looking at down the road a piece of at least $300 million a year business if not more. It is substantial. We have to understand that it is a very competitive marketplace. We believe very strongly that we have an excellent product and if in fact we are successful I believe those figures are reasonable.

Brian Gagnon – Gagnon Securities

Who is going to be paying you in the first year that you are doing business?

Paul Rosenbaum

Well the easiest way to answer that is that the networks and local stations will be paying us in our first year of business. I would like to leave it just like that. I really don’t want to go any further. Did that answer your question?

Brian Gagnon – Gagnon Securities

Yes, I know what you mean by that. Everybody else can go figure it out. As far as the development is concerned for getting this product launched, Amir maybe you could talk about this a bit. Is there anything else that really is heavy lifting that has to be done as far as development or is this really just kind of dealing with each individual MSO and what they are going to want to do to make sure they don’t give away any proprietary information?

Amir Yazdani

What we have done is in the past two years we have done most of the heavy lifting. A little bit of the data cleanup that each MSO provider’s data that it takes to get the data.

Brian Gagnon – Gagnon Securities

So really at this point it is just about getting the rest of the people you want to be in there for the launch, making them comfortable with whatever data work you are doing and then getting really prepared to launch this thing into however many set-top boxes you can have at that point?

Amir Yazdani

That is correct.

Brian Gagnon – Gagnon Securities

Paul, what number do you think is the right number of boxes to give you an accurate, effective measurement of linear TV viewing habits?

Paul Rosenbaum

I am uncomfortable in trying to answer that question. What I am comfortable in saying is that under the present circumstances today the numbers we have are substantial in terms of what the present system is and how it is working. So if you know how the present system works and if you understand what we have then I think we are in a very enviable position as I said during my comments. Cathy do you want to say anything to that?

Cathy Hetzel

The one thing I would add to that is that as a reminder the set-top boxes that we have data from in our system represent multiple operators and multiple markets. The products we intend to launch early on are not dependent on having a complete national footprint so if we decide to move forward and bring half of the appropriate contracts in place and we are ready to move forward one of the reasons we are focused on networks and mobile stations in the early phase is that we have available a very useful product for those two opportunities even without the complete national footprint.

Paul Rosenbaum

That is why I was really hesitant to talk in terms of the numbers that are necessary. It becomes almost misleading to a certain extent and that’s why I didn’t want to do it.

Operator

The final question comes from the line of Bart Blout – Sawtooth Capital.

Bart Blout – Sawtooth Capital

I was wondering if there is a target which you have in mind that would allow us to have some perception over what the return of sales to operating cash flow would be on new businesses collectively. Then, how long will it take to obtain that?

Paul Rosenbaum

I’m not sure I understand the target part of it.

Bart Blout – Sawtooth Capital

Let’s pretend and say the legacy business was gone tomorrow and you didn’t have any future money coming besides what is left from that legacy business. How long would it take you to generate money to replace the legacy business cash flow?

Paul Rosenbaum

First of all, if you mean are you referring to the legacy business or PPT business or are you including the AMI part?

Bart Blout – Sawtooth Capital

No, all of the new businesses versus the old PPT business. In other words, we can’t get an idea as to sales and we can’t get an idea as to a million things and we have heard this story a long time and it would just be nice if we had something in our minds.

Paul Rosenbaum

Okay. If we’re going to replace all of the $85 million in revenue, is that what you are asking me?

Bart Blout – Sawtooth Capital

I’m not speaking about revenue. I was speaking about operating cash flow because the revenue might not be apples and apples.

Paul Rosenbaum

I would say somewhere between 2.5 to 3 years or somewhere around there, being on the conservative side.

Bart Blout – Sawtooth Capital

At the end of three years would you be operating at what would be peak operating cash flow as a percentage of sales?

Paul Rosenbaum

No. Absolutely not.

Mark Thoenes

No, at around the end of three years we would be operating at a replacement level compared to your question of replacing the operating cash flow from the legacy business but certainly not at our anticipated peak level given what we believe is the level of opportunity and the resulting cash flow that we could ultimately generate from the business opportunity.

Bart Blout – Sawtooth Capital

But the reason why I ask and one which we all should be able to have some kind of picture, I’m sure you have some kind of target but maybe you choose not to discuss it. The question was brought up earlier by B. Riley and that was how long is this thing going to last because there is a real revolution going on in Hollywood and Blockbuster and Netflix and everything and those kiosks that are in grocery stores.

Paul Rosenbaum

I tried to answer that as best I could. There is very little effect on our…

Bart Blout – Sawtooth Capital

I know but now there is not much effect but there is bound to be effect coming forward.

Paul Rosenbaum

On the same token just keep in mind that the more diversity comes the more we have an opportunity to measure everything. We are in a very enviable position from the very beginning and as that business declines our new businesses increase and we are in the middle of both waves. If you look at just the old legacy business if we didn’t have anything to replace it with would anybody even be on this teleconference now listening to us? The answer is no. We are in a very enviable position of having a replacement factor for all of the legacy business as it dissipates.

Bart Blout – Sawtooth Capital

I agree but seeing as we can’t compare sales of the legacy to the new business because the sales of the new business will be small but the margins will be much higher.

Paul Rosenbaum

It won’t be small.

Bart Blout – Sawtooth Capital

It’s not going to be like big.

Paul Rosenbaum

Well I don’t know.

Bart Blout – Sawtooth Capital

It seems to me.

Paul Rosenbaum

I’m trying as best I can to answer your question but there are so many things that are changing in this. I gave you the best guess I guess I could at this point and it really is a guess. It could happen significant faster or it could happen slower. But that is the best honest guess I can give you.

Operator

Now I’d like to turn the presentation back over to Mr. Paul Rosenbaum for closing remarks.

Paul Rosenbaum

Thank you very much. As always we are open to any questions. If you have any follow-up’s please feel free to give us a call. We’ll be here and we’ll answer all your questions. Have a good day.

Operator

Thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect. Have a good day.

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Source: Rentrak Corporation F4Q08 (Qtr End 4/30/08) Earnings Call Transcript
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