Bankrate, Inc. Q3 2008 Earnings Call Transcript

Bankrate, Inc. (RATE)

Q3 2008 Earnings Call

October 30, 2008 4:30 pm ET

Executives

Thomas Evans – President, Chief Executive Officer

Edward DiMaria – Senior Vice President, Chief Financial Officer

Bruce Zanca – Senior Vice President, Chief Marketing Communications Officer

Analysts

Christa Quarles – Thomas Weisel Partners

Tim Boyd – American Technology Research, Inc.

Richard Ingrassia – Roth Capital Partners

Kyle Evans – Stephens, Inc.

Ross Sandler – RBC Capital Markets

Neil Doshi – Citigroup

Presentation

Operator

Good day and welcome to the Bankrate Incorporated third quarter 2008 conference call. Today’s conference is being recorded. And at this time, for opening remarks, I would like to turn the conference over to Senior Vice President, Mr. Bruce Zanca. Please go ahead sir.

Bruce Zanca

Thanks, operator, and good afternoon everyone. Thanks for joining us on this conference call to report Bankrate Inc.’s third quarter 2008 financial results. With me here in our New York Office is the company’s President and CEO, Tom Evans, and our Senior VP and Chief Financial Officer, Ed DiMaria. Let me take a minute to go over the format of the call for today. First, Tom will give us the results and color on the quarter, Ed will give us some detail on the financial results, and then we will have plenty of time to answer any questions that you might have.

Before we begin, I need to take care of the legal prerequisites. Our lawyers have asked me to remind you that some of the statements made in this conference call, including those regarding the company’s future prospects and revenue growth, its ability to continue to reduce costs and successfully implement strategic initiatives, constitute forward-looking statements within the meanings of the Securities Act of 1933 as amended, and the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995.

The company intends that these forward-looking statements may be subject to Safe Harbor created under the Securities law. These forward-looking statements reflect our current views with respect to future events and financial performance but are subject to uncertainties and factors relating to the company’s operation and business environment, which may cause the company’s actual results to be materially different from any future results. We encourage you to read the section entitled risk factors in our Form 10-K and subsequent filings with the SEC.

So, with that being taken care of, let me introduce you to Tom Evans. Tom.

Thomas Evans

Thanks, Bruce. Good afternoon and welcome everyone. We appreciate you taking time to join us today. I trust you’ve seen the press release we put out a few minutes ago outlining our financial performance for the third quarter. I’m going to go and skip for a second and tell you that we think that this was a great quarter. In a volatile economic environment, we’re obviously pleased with the company’s performance. We ended the third quarter with $44 million in revenue, an increase of 77%. We generated $16 million in EBITDA, an increase of 39%. EPS excluding non-cash comp was $0.43 and EBITDA margin for the third quarter was 36%. Traffic for the quarter at slightly more than a $160 million paid dues was 11% above last year’s Q3 levels and 8% greater than Q2 of this year. All in all, pretty good stuff.

In a few minutes, I’ll give you some color on the quarter, on the different revenue components of our business, and how our new businesses and acquisitions are taking shape. We’ll also fill you on the progress of our redesign activities and finally give you a sense of what we expect for the rest of the year.

But as we go through the report I’d like you to keep five points in mind. First, both opportunity and financial anxiety drive consumer interest and therefore traffic to our site. Number two, the broadening of our content and product offering has created a diversified revenue model. We’re clearly not just a mortgage site anymore. Three, the quality of our consumer drives advertiser ROI and we’ve developed more ways with CPC and lead gen to monetize that consumer traffic. Four, we’ve effectively used our cash to acquire sites with traffic that no one can monetize the way we can. And five, our team has done a fabulous job of executing around those business goals. Everything we do revolves around those themes and we remain very optimistic about our ability to continue to execute on that plan. So, first, we’ll have Ed go through the quarter in detail.

Edward DiMaria

Thanks, Tom. The third quarter was all about continued execution especially in such a tough environment out there. I believe the solid financial results we just posted show our progress and that we are locked in on achieving our plan. We have record revenue of $44 million and EBITDA of $16 million representing a 36% EBITDA margin, up from a 32% EBITDA margin in just this past second quarter.

The improved margin over the second quarter is the direct result of execution on improving margins for our new products particularly credit cards and continued growth in CPC and our other performance-based lead generation products. We are further along on credit cards and are now focused on insurance where we expect to make similar progress over the next several quarters. We also benefited from a continued strong performance on our CPC business and as we said during the update call on September, is that no further deterioration in display.

So, first the top line results. As I mentioned a few moments ago, revenues for the quarter came in at $44 million and EBITDA excluding share-based compensation expense was $16 million. The $44 million in the third quarter revenue represented an increase of $19.1 million or 77% over the $24.9 million in Q3 2007. That was the highest revenue quarter in the company’s history. EBITDA, excluding share-based compensation expense, was $16 million, an increase of $4.5 million or 39% over the $11.5 million for Q3 2007. And there was only a small $69,000 difference from our record Q1 2008 EBITDA of $16.1 million.

Non-GAAP net income which excludes share-based compensation expense came in at $8.3 million or $0.43 per diluted share, an increase of 10% from the $7.6 million or $0.39 we posted for Q3 2007. Net income on a GAAP basis was $6 million or $0.32 per diluted share compared to $5.4 million or $0.28 per diluted share in Q3 2007.

Now, before I run through the operational results, I wanted to point out to you a number of sizeable items that have skewed the GAAP net income and EPS results, even though they do not affect EBITDA. Following are some examples of why we in the investment community tend to focus on EBITDA excluding stock comp ‘cause it’s a better measure of operating performance. The items are interest income, stock compensation expense, and amortization of intangible assets.

So,, first interest income, our interest income for the quarter was $310,000 compared to $1.8 million in the third quarter of 2007, and $1.5 million for Q3 on a year-to-date basis compared to $5 million for 2007 on a year-to-date basis. The decrease was driven primarily by a reduction in yield. Obviously no surprise here, as you all know the environment, during Q3 2007 our investment yield averaged approximately 530 basis points compared to only approximately 180 basis points on US Treasury and money market accounts during Q3 2008. We also experienced lower investment income due to lower cash balances after completing the acquisitions. But the vast majority of the loss in investment income has been due to decline in yields. The reduction in interest income resulted in decreasing EPS by $0.05 per diluted share for the quarter and $0.10 per diluted share year-to-date.

For stock compensation expense, we provided a separate P&L that break out stock compensation into a single line item in addition to the standard GAAP financials. The separate P&L breaks this out for your convenience, making it easier to look at the results at a more meaningful manner by excluding it. Stock compensation expense was $3.4 million for Q3 2008 and $10.6 million for Q3 2008 on a year-to-date basis, compared to $3.6 million for Q3 2007 and $7.8 million for Q3 2007 on a year-to-date basis also. The increase is the result of equity awards primarily related to the acquisition of InsureMe and NCS to retain key employees. The increase in stock compensation expense resulted in decreasing EPS by $0.08 per diluted share for 2008 on a year-to-date basis.

Amortization of tangible assets was approximately $2.2 million for Q3 2008 and $5.6 million on a year-to-date basis compared to $425,000 for Q3 2007 and $1.3 million for Q3 2007 year-to-date. The increases are the direct result of acquisitions we completed and the allocation of the purchased price to amortizable intangible assets as opposed to goodwill which is not amortized.

We really don’t have much control here. The accounting regulations make the amortize a sizeable portion of the purchase price which may seem counterintuitive especially if the investment actually increases in value over time but these are the regs. Amortization with tangibles are non-cash charges and resulted in lowering EPS by $0.05 per diluted share for the quarter and $0.13 per diluted share year-to-date over last year levels.

In total, these three items which are unrelated to our business operational results lowered pre-tax income by $2.7 million in Q3 2008 compared to Q3 2007 and $10.6 million on the 2008 year-to-date basis compared to year-to-date 2007. EPS was reduced by $0.09 per diluted share in Q3 2008 compared to Q3 2007 and $0.31 per diluted share in 2008 versus 2007 on a year-to-date basis.

Okay. Sorry for the long explanation. Now, back to operations. Looking at revenue in more detail, online revenues for Q3 2008 were $41.9 million, up $20.3 million or 94% over the $21.6 million reported in Q3 2007. The increase in revenue for the quarter was driven by growth in our lead generation business resulting from the acquisitions of InsureMe and NCS, growth in our hyperlinks business while we had a decrease in our display business. But again, no deterioration in display from Q2 2008, as I mentioned in my opening remarks. We also picked up a partial month from the acquisition of CCG and Bankaholic.

Our total display in lead generation revenues were $27.8 million, up $16.1 million or a 138% over Q3 2007 revenue of $11.7 million. The growth was driven by the new credit card and insurance lead generation products and also by growth in select while we had a decrease in the organic display, as I just mentioned.

The lead generation component of the business, including the credit card products, insurance, and Bankrate Select, all performed well during Q3, above our expectations. Select increased by over 139% and the ramp in our insurance and credit card businesses continued to be on track. As I mentioned in my opening remarks, we really focused on execution here and the results can be seen not only in revenue growth but also margin expansion.

We are driving more organic business across these platforms and improving margins. We expect to go forward EBITDA margins, for example, on our credit card business to be in the mid to upper 30s. This is up from the mid to upper teens where we started. This is the direct result of organic traffic and the strategic acquisition of CCG.

We expect this trend in margin expansion will continue especially as we now turn to our insurance business and focus on achieving similar results there. Also, we continue to believe that high quality organic Bankrate traffic across these platforms will yield better results for our customers and thus command a higher price over time. We’ve already seen this begins to unfold. These conversion rates for the Bankrate consumer are at several time the level we typically see for consumer sourced through affiliate channels.

Further development of these channels and margin expansion remained a top priority but we are pleased with our progress thus far.

The hyperlink business increased by 42% from $9.9 million in Q3 2007 to $14.1 million in Q3 2008. The growth was fueled by 148% increase in deposit CPC revenue. Deposits accounted for 73% of our hyperlink revenue. The increase in revenue this quarter was driven by an increase in volume and higher CPC prices. Also, remember that we increased our CPC rates on CDs and money markets by 20% and 15%, respectively, on July 1. We remained confident that our hyperlinks business will continue to perform well as demand remains high for Bankrate consumers and associated conversion rates.

Our print, publishing, and licensing revenue was $2.1 million for the quarter, representing a decrease of 35% from the third quarter 2007 revenue of $3.2 million. No surprise here. This business continues to decline and we do not expect to see this change. The print business accounted for just 5% of total revenue during the current quarter. The gross margin on the business was 5% and the business continues to be a feeder for online traffic.

Our overall gross margin on sales excluding share-based compensation expense for the quarter was 61.5% compared to 78.3% in the third quarter last year. The online gross margin excluding share-based compensation expense for the third quarter came in at 64.2% in 2008 compared to 88.1% in the third quarter of 2007.

The decrease in the gross margin for the quarter compared to last year was the result of adding the new acquisitions into the mix, whose Legacy affiliate businesses run at lower gross margins compared to core Bankrate, which benefits from free organic traffic.

As we just mentioned, we’ve already increased the credit card EBITDA margins substantially into the mid to upper 30s. We’re also beginning to see increases in the InsureMe gross and EBITDA margins.

Our plan is to continue to improve the margins for the new businesses through further integration into the Bankrate network driving more organic traffic and increasing rates and RPL over the next 12 to 18 months.

Again, EBITDA excluding share-based compensation was $16 million for the quarter, representing a 36% EBITDA margin compared to $11.5 million or 46% margin in the third quarter of 2007. The decrease in the EBITDA margin again reflect the new acquisitions we made in February 2008 and December 2007, and as I just mentioned the margins should continue to improve with more and more organic traffic running across the new platforms. We expect that over time, we can drive our EBITDA margins back to the 40% plus range.

Operating expenses increased for the quarter by $5 million from $11.6 million in the third quarter of 2007 to $16.6 million for the third quarter 2008. The increase was driven primarily by new operating expenses associated with the acquisition of InsureMe and NCS, developmental expenses for investments in our China and fee disclosure businesses.

The new expenses associated with the acquisitions were in all areas including general and administrative expense to run the businesses and that means NCS and InsureMe people and related costs, marketing, product development, and sales expenses.

In addition, as I mentioned in my opening remarks, we recorded $1.8 million in amortization expense for intangible assets for the new acquisitions, which accounted for most of the increase in depreciation and amortization. For your planning purposes, we expect that depreciation and amortization for the year will be approximately $10 million.

Also as I mentioned in my opening remarks, the new amortization this quarter reduced EPS by $0.05 per diluted share, but was still accretive to GAAP EPS.

Our income tax provision of $4.4 million for the quarter represented a 42.2% effective rate on book income. For your planning purposes, we recommend that you model the business using a 42.5% effective rate to remain on the safer side as SFAS 123R can result in the provision bouncing around a little on a quarter-by-quarter basis.

We ended the quarter with 276 employees, up 1 from 275 we had at the end of Q2 2008. And as always, we continue to be very careful and disciplined when it comes to headcount additions.

We ended the quarter with $41.2 million in cash and cash equivalents after spending $46.5 million during Q3 and $97.6 million from Q4 2007 through Q2 2008 on acquisitions. We generated $17.5 million in cash flow from operations during the quarter, used $2 million for capital expenditures primarily on software and the development of the new website. Also, please note that we expect to make a similar level of investment in the new website and other software during Q4 and after that such investments will be substantially reduced.

Also, I want to point out for the benefit of your future estimates, our cash is now invested primarily in treasury securities and to a lesser extent, money markets bearing interest that have blended rate of approximately 75 basis points.

To recap, revenue was up 77% to $44 million and EBITDA excluding stock compensation came in at $16 million and with that, Tom will now present the business report. Tom.

Thomas Evans

Thank you, Ed. Obviously the quarter was a good one by any standard. Revenue, profitability, margin improvement, and traffic all came in at strong levels. In the light of the chaos in the financial sector, we’re able to grind it out and continue to grow. Listen, we're not cocky, but we do believe that the results I had reported are the by-product of the factors we mentioned earlier. First, we spent the past four years diversifying our product offering so that we wouldn't be depending on a single channel like we used to be on mortgage. Second, we spent the time diversifying revenue type so we wouldn't be depending on one source of advertising like we used to be on display. Sure, we saw the significant amount of display advertising but we also have a number vibrant performance-based revenue streams with CPC tables and three different lead gen businesses. And third, the bottom line is it's all about traffic.

We've continued to focus on developing compelling content that helps people find and allows people to benefit from the kind of high quality content that we produce every day. We've made use of our cash to acquire sights that are strong and high quality organic traffic as well. We believe that this quarter is evident that we've executed effectively on that strategy and that we're positioned to continue to benefit from that going forward.

As we've discussed before, the one soft area for the quarter continued to be weakness in the display advertising area. You've heard other companies report the same that the big financial advertisers are simply not spending at the levels they did in the past. It's important to note thought that it didn’t get any worse in the third quarter. It hasn't got any better either.

Obviously, this isn't a problem unique to Bankrate as many companies have reported softness in the display advertising business throughout the year. However, I will remind folks that our business tends to be different. Our traffic tends to be from people looking for a financial product and therefore in the market to transact.

So, we benefited from the fact that many advertisers have shifted their efforts from branding to more performance-based marketing whether through lead gen, CPC or cert, we believe at something that's played to our strengths.

As we mentioned, traffic at the quarter was solid. I can tell you the traffic in the current month in October has continued to be strong as well. Traffic sources for the quarter were right in the line with our historical patterns, 80% from organic traffic, 10% coming from partners, and 10% from paid SCM traffic. We averaged over 7 million unique visitors a month to our sites in quarter, a nice increase over the same period last year.

We've said before that in an environment like this is actually good for our business. Let me give you an example. Banks have obviously have been under pressure recently regarding their own financial health and consumers are looking for information that helps them monitor the safety of their deposits.

On Bankrate, our safe and sound ratings have been on the site and available to the consumer for years. In the past, that area would typically get a modest amount of traffic. In the month of September, that area got 20 times the number of pages that a typical month as consumers wanted some help with understanding the health of the bank so you'll do business well.

So, whether it's for our safer sound ratings, calculators, tools, guides, or checklist, there are a lot of reasons for the consumer to go to Bankrate for the best available information. Again, regardless of the reason, it's great for our traffic.

CPC, however, is an area that we continue to see high consumer interest and continue to see strong advertiser demand. But concerns about the economy, softness in the stock market, news about the vulnerability of some financial institutions, we saw that interest in CDs and money market accounts have never been greater. The number of CPC clicks was up and our CPC revenue grew by 43% versus a year ago. Not surprisingly, mortgage CPC was less than the mix than in previous years.

Given that deposit clicks are now higher priced than mortgage clicks, we've benefited from the favorable mix and increased consumer interest in deposits. Our lien generation business in the mortgage, credit card, and insurance channels all did well in the second quarter. Bankrate's select lead general revenues worth 139% better than the previous year. An illustration of just better execution on that business versus a year ago and with CPC, great proof that we can still monetize mortgage traffic effectively in a tough mortgage environment.

As for our credit card business, NCS continues MCS continues to perform well. The NCS business continues to grow and at the end of the quarter, we acquired both credit card guide and Bankaholic both of which will add to the growth of our credit card business going forward.

All CCT and Bankaholic are very strong, high quality, organic traffic sites and both carry NCS card offers on their sites. The incremental traffic from those two sites in addition to the traffic from the credit card channel of Bankrate, all combine to increase our credit card revenue. And because of three additional sources are predominantly organic traffic as Ed outlined, our margins on that business have improved substantially.

When we acquired the NCS, we acquired a business that was almost exclusively supported by affiliate traffic and a business with EBITDA margins as Ed mentioned in the mid-teens. We've since added the Bankrate and now CTG traffic that business and in September, ran that business from a margin standpoint in the mid-30s. Tonight's improvement of the 10 months we've been in the credit card business and its estimate to the value of organic traffic.

And keep in mind one other characteristic of the credit card business. Many of the card issuers provide tier pricing based on volume. As we add to the volume through our various traffic sources and add SCM to the mix, we benefit by earning bonus payments from reaching the higher volume tiers and obviously that helps margins as well.

Our insurance lead gen business InsureMe continues to grow. In Q3, InsureMe had its best quarter in terms of revenue and EBITDA as it has been able to increase lead volumes in the revenues that it generates from those lead. We're turning our attention now to growing more organic traffic and growing our agent base. It makes sense in a tough environment, consumers are looking for ways to save on everything and shopping for the best rates for home, auto, health and life insurance just makes good sense. And in this climate we see no reason for consumers not to continue to do that. So, suffice it to say that we're pleased with both the NCS and InsureMe teams and that those businesses are doing well. And a redesigned Bankrate.com site will more deeply integrate the insurance and credit card lead gen products more opportunistically into certain areas on the site, so more to come.

So, finally, the redesign of Bankrate is ongoing and a beta scheduled to be launched in November. This has been a long time in the making and has been constantly tested and improved as it's gone through its development. It's run a little behind schedule as we continue test things and mostly because the burden on the team in integrating the two acquisitions we made in September, but we're excited about the business opportunities that exist with the new site in addition to making it a better user experience and easier to navigate for the consumer. And I'll just remind everyone that we did not contemplate any benefit from the redesign in our guidance.

As for guidance, I'll say the same thing we said both during our Q2 earnings call and when we announced the Bankaholic acquisition. At this point, we remain cautiously optimistic about the rest of the year. October has been a good month. Traffic is holding up well and we continue to see strong interest from the consumer audience. Our CPC and lead gen businesses continue to perform well and again, the one weakness continued to be the industry-wide weakness in display advertising, but our guidance does not contemplate any improvement in display advertising for the rest of the year and today we haven't seen a deterioration either.

Our previous guidance expected revenue to be between 164 and 169 million. With a strong Q3 and solid ad cover performance, we expect revenue to be in the mid to top end of that revenue guidance range. As for EBITDA, our guidance for adjusted EBITDA was between 54 and 58 million. Again with Q3's performance, we're now expecting to slightly exceed the top end of the EBITDA range. At this point, we can't project exactly where we'll end up, but we're comfortable at those levels. Remember, the midpoint of the upper end of the revenue range still represent a 74 to 77% increase in revenue and the top end of the EBITDA range represents a 39% increase in EBITDA for the year over 2007. Keep in mind also that 2007 was a pretty good year for us as well where EBITDA grew 48% from the prior year.

Now, you may look at the Q4 guidance as being cautious. Please keep in mind that the fourth quarter is traditionally the softest quarter for us in terms of traffic. The period between Thanksgiving and the yearend is generally slower as people are focused on other things and not shopping for financial products as frequently as they do the rest of the year. So, traffic revenue and EBITDA will tend to skew lower in that period notwithstanding the fact that October traffic and revenue was solid.

Now, I'll just spend a moment talking a little bit about 2009. It's way too early to have any visibility into the next year at this point. We've typically given annual guidance on our Q4 earnings call. We'll probably stick with that timing again for '09. There are so many moving pieces. It's impossible to predict what the economic environment will be and I don't think anyone expects it to be robust. I looked at the consensus this morning in which all of you have projected in the aggregate 2009 revenue of around 195 million and EBITDA of around 70 million. If we were to assume a steady state economy, meaning that it doesn't get any better, but it doesn't get any worse, now we thing the EBITDA consensus in particular is reasonably conservative. At this point, it's too early to be able to forecast it, but we're comfortable with where we are at this point.

However, I will make one prediction. We do believe that we'll be able to run the business at higher EBITDA margins next year than we did this year. We've done it in the past and we believe we can improve upon the margins we run the business at currently. Unless the economy craters, we're reasonably confident that consumers will still be looking for financial products and will be coming to Bankrate to find them. In addition, we've spent several years diversifying our channel concentration, diversifying our revenue model, overhauling our site for maximizing the consumer experience and advertising opportunities and creating an ability to monetize that we believe is second to none. Notwithstanding the environment, we feel like we're in a better position to capitalize on the opportunity than we've ever been before. So, we're pleased with where we are. I wanted to take this opportunity to thank our folks who have worked very hard and who have done a great job. And with that, Ed and I will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session is going to be conducted electronically. (Operator Instructions) And we will first go to Christa Quarles from Thomas Weisel.

Christa Quarles – Thomas Weisel Partners

Hi. First question I guess would be if you could give us some sense of the overall pro forma growth. I know you indicated that display was down organically, but if you could give us some sense there. And then just on the credit card business, I was wondering if you could give us a sense as to what percentage of your credit card business is now driven organically, just trying to see how much headroom you have in terms of transitioning some of that traffic. And then also on the credit card business, just any commentary on some of the legislation that's out there and how you feel that Bankrate is positioned? Thanks.

Thomas Evans

Okay. I'll take this. I'll start with the credit card business, Krista. First of all, we've gone from 100% affiliate to some organic with Bankrate to now more organic traffic, so in a sense we went from zero to about 10 to now in the sort of the 30 plus percent range and keep in mind that we had only a small part of the quarter that we had all of that traffic coming onto Bankrate because of when we made those acquisitions. So, we think there's still some headroom. Certainly as you pro forma that quarter going forward, there's some upside because there was a small percent of that either Credit Card Guide or Bankaholic's traffic and the revenue generated by them in the quarter.

In terms of legislation going forward, again we kind of look like– I mean if there are do not mail lists, like the do not call lists that are put through by the government, that's certainly going to help. I think one of the things that's happened in the credit card business you've seen an atrophy of the response rates of direct mail. Direct mail's gotten more expensive, paper and postage is going up and response rates out of direct mail have continued to decline and issuers are putting more of their promotions and looking to generate new customers more on line. There's also a sort of a self-selected nature. When somebody goes onto the NCS platform and says, I'm looking for the best cash-back card or the best rewards card with the best rate and the best features, it's sort of a self-selective process.

Now, one of the other things that's happening credit card world is that they're raising sort of the qualifiers for consumers. Cards are going to be more expensive and fewer people are going to screen through, but there still are going to be tens of millions of– I think literally hundred million cards are issued a year and there's still a lot of cards and it is the number one financial product that people search for online and it's why we were so enthusiastic and so focused about getting into this business and getting into this market because prior to this year, we did not have much of a card offering. We had credit card traffic for our site, but not much of an offering, so we're very excited about it.

In terms of your first question, the pro forma growth, every area grew except for display. CPC was obviously up dramatically. Lead gen was up, even the pro forma lead gen stuff was up dramatically and display was off and so we're still growing. I mean on a pro forma basis, the core Bankrate was still growing and obviously, there was some incremental lift added by those other insurance and credit card.

And I'll say one thing and the reason that we don't break it out is one of the things that we've developed is, and again this took a couple of years for us to do and those who've been sort of watching the company and watching the performance over time hopefully have noticed that when display is not sold out and we're certainly in that environment now, we run house ads and I'm often asked the question, do you guys work with ad networks?

Well, the reason we don't ever, we haven't ever worked with any ad networks are two reasons. First of all, I believe in controlling your inventory and controlling the customer relationship, but the second thing even more important is, there isn't an ad network, and we get called all the time, who can sell a CPM on Bankrate that is at a higher CPM than what our core products and our house brands eCPM at.

So, we've got sort of a unique ability to fill that inventory with "remnant" advertising, it's house brand advertising that eCPM is at a higher level than any ad network could provide to us.

So, it's kind of a nice opportunity for us that we can plug in and InsureMe ad, SelectAd, an NCS ad, a Credit Card Guide Ad and optimize or monetize that traffic. So, hope that helps.

Christa Quarles – Thomas Weisel Partners

Okay. Thank you.

Thomas Evans

Thank you.

Operator

We will go next to Tim Boyd with American Technology.

Tim Boyd – American Technology Research, Inc.

And actually my questions are two quick questions. First of all, we've gotten some pretty mixed data out there lately on the housing front, Kay Shiller saying housing prices continue to fall, the rate of decline may be starting to slowly stop its drop here, but at the same time, new home sales last month indicating a bit of an uptick, better than expected. Can you give us any sense of whether or not mortgage applications have increased, improved at all in the last few weeks and this question would just be if you give us an update on China?

Thomas Evans

Yes, we see patterns of traffic that increase when– I mean our mortgage traffic has continued to be pretty good. I mean I think what we're hearing from our lenders is there are people that are checking the rates every day. I mean one of the things that hasn't happened yet is mortgage rates really haven't come down.

So, we haven't seen this great influx of people of looking to re-fire people, jepping (opportunistically who are waiting to be able to lock or something. There's still a housing market out there. There's still people shopping. There's still people concerned about and interested in refine. What we're hearing from our lender base is that obviously the bar has been raised, proof of income, money down, and FICO scores, what used to be 680, now is probably 720 and above is sort of just the entry level.

And one of the other things that I think that's impacting the lenders is that when they go out and do an appraisal, and I think in the past we've all read the stories, there were a lot of sort of faux appraisals, I mean there was never an appraisal that came back saying don't make this loan, some of those appraisals aren't meeting the value of the homes. So, fewer people are screening through to be sure, rates haven't come down dramatically, but I'll tell you the traffic is there, the applications are there, we've seen a continuous– certainly not like the boom years, but we continue to see pretty significant mortgage traffic to the site.

Tim Boyd – American Technology Research, Inc.

Thank you. Just if you have an update on China and how that has done?

Thomas Evans

Yes, China is doing pretty well. I mean when we launched China, China continues to add content. We continue to add features and functionalities to that site. We've had a nice ramp in traffic and we started out with some SCM spending in China and we've pulled that back and so the traffic that we're developing now is all organic. We've doubled the traffic in China in the past couple of months, so China is actually going pretty well.

One of the things with China that put a whang, our GM over there is a little frustrated with, is when the advertising market's taken kind of a wait-and-see and it’s been a little tough to get significant commitments from advertisers. We're doing some tests. We’ve got about five advertisers that are testing the site now. Response has been good and we're pleased with that. We've developed some nice partnerships over there through co-brands and some other relationships. We’ve gotten some nice involvement with some of the government agencies over there in terms of, I don't want to– endorsing would be too strong a word, but supporting what we're doing.

So, we're pleased with the performance on China and again it's going to take a while before China's a meaningful contributor, but we like what's going on, we like the ramp in the traffic and we're just committed to building out that site and that part of our business and no bad news today. No seashells and balloons. It's not a game changer yet, but no bad news.

Tim Boyd – American Technology Research, Inc.

Alright. Thanks, Tom.

Thomas Evans

Thanks, Jim.

Operator

We will take our next question from Richard Ingrassia with Roth Capital Partners.

Richard Ingrassia – Roth Capital Partners

Thanks. Good afternoon everybody.

Thomas Evans

Hi, Rich.

Edward DiMaria

Good afternoon.

Richard Ingrassia – Roth Capital Partners

Tom, you've said in the past if there's a risk in this kind of volatile environment is that the consumer goes away and I guess less dramatically, consumers could become more drive-by in nature so to speak, so not able to pull a trigger on a product, so your lender conversion rates might decline. Are you seeing any kind of that decreased tire kicker effect and I mean how do you assess that risk?

Thomas Evans

Yes, as I said Rich my concern was always– and people say, what do you worry about, when will we know that Bankrate's sort of hit a wall of some case, that's when my concern was always that this news and if it gets dramatically worse that the consumer just freaks out and becomes paralyzed. Certainly haven't seen that today. The traffic's been good. I'll tell you, we looked at the 10 largest traffic days in the history of the company have all been this year and they've been around events, January, July, a date in October,

I think when Lehman went out, that was actually great for us in terms of business. We do see mortgage traffic that doesn't convert to click, so yes, there's a lot more shopping, there's a lot more looky-loos in there. I think when people come and they see the rates are still high, they don't click. They don't click and it doesn't cost the advertiser any money.

So, we've seen the sort of visit to click ratio if will decline slightly in the mortgage area. We don't see that in the deposit area. Deposit area is still strong. The traffic as we said earlier is safe and sound. The traffic and the conversion rates what we're hearing on the deposit tables are still pretty strong. And this gets to sort of the conversation that we've had with many of you about our ability to raise prices.

I mean conversion rates bounce around and the value of the Bankrate consumer is so significant and we think that there's enough headroom that in the past we've raised prices, but even if and even when conversion rates decline, we are still a significant value to those advertisers, so it's something that we watch pretty carefully. We're talking to advertisers all the time.

I mean our sales guys are out talking to clients and media folks every day. And we still feel that Bankrate is very well positioned that we drive a consistent amount of traffic and we drive in market consumers, so haven't seen any freak out from the consumer yet, but we're certainly keeping an eye on everything.

Richard Ingrassia – Roth Capital Partners

So, would you say that you've got a better than average chance of being able to increase deposit click rates in January?

Thomas Evans

Well, yes. I mean we still think we're providing a significant value. We haven't made that decision yet, but we think that the value that we provide and the ROI on the Bankrate consumer continues to be significant. There are no lack of banks looking for liquidity and looking for deposit capital. It's gotten to be very aggressive, but we're not going in this direction, but this is probably one of the cores in which we wish we had a bid model. I mean it's (inaudible 00:39:31) way we think about the business, we're not going in that direction, but there was a very strong appetite and continues to be a very strong appetite among the deposit advertisers.

And interestingly there is still a lot of demand on the display side for deposit advertisers. I mean deposit advertising has been strong, stronger this year than last, I mean were up on display this year if you just take a deposit where display's been weak, obviously is mortgage, in particular home equity. Home equity's been very, very dry on the display side and even the CPC side, but deposit is strong on both display and CPC.

Richard Ingrassia – Roth Capital Partners

Okay, thanks, Tom.

Thomas Evans

Thank you.

Richard Ingrassia – Roth Capital Partners

And I don't think I heard it, Ed. I apologize if I did, but did you break out total revenue composition by deposit mortgage and then credit card other?

Edward DiMaria

We broke the hyperlink revenue out, 73% deposits, but we didn't break out the composition amongst the other products. We just gave you the breakout for hyperlinks.

Richard Ingrassia – Roth Capital Partners

Okay. So, you're not doing that at this time for us?

Edward DiMaria

No.

Richard Ingrassia – Roth Capital Partners

Okay.

Edward DiMaria

Yes.

Richard Ingrassia – Roth Capital Partners

All right. Thanks.

Thomas Evans

Yes. Thank you.

Operator

And we will go next to Kyle Evans of Stephens.

Kyle Evans – Stephens, Inc.

Hi. Thanks for taking my question. One quick one, Ed, I think historically you guys have given mortgage contribution in the links.

Edward DiMaria

Yes.

Kyle Evans – Stephens, Inc.

Could you give that for the quarter?

Edward DiMaria

Sure.

Thomas Evans

Yes.

Edward DiMaria

83%.

Kyle Evans – Stephens, Inc.

Okay.

Thomas Evans

Okay.

Kyle Evans – Stephens, Inc.

And then Tom, we have seen the deposit ads on the site. We've seen a lot of house ads and we've even seen some Google AdSense ads on the site. Could you comment on the mix shift in the display ads and how that has affected the revenue per page view when it comes to display revenue?

Thomas Evans

I'll be honest, I don't have that at the top of my head 'cause we don't look at revenue per page view as a metric that we monitor. We did test the Google AdSense just to see what it would do. We've tested some of our own internal product that are sort of rate tables as a display widget and as I mentioned, the house brands continue to do pretty well.

So, when you've got the kind of traffic that we have, it obviously behooves us to run a bunch of tests and try as many things as we possibly can and so you'll see lots of different creative, there'll be lots of different sort of call to action messages. And when you have a quarter like this and display is basically the same as it was last quarter, and yet you've got 11 or 8% more traffic from the last quarter, you're going to see more those.

I mean (inaudible 00:42:36) was pretty flat to Q2 and yet traffic was up 8% over Q2, so you're going to see more of those house ads, so as a percent of ads I guess as a composition, you're going to see more what we call sort of non-customer display ads and they're either our own house ads or one of our lead gen products.

Kyle Evans – Stephens, Inc.

Thanks. And you mentioned that in a steady state economy that that $70 million in EBITDA for consensus for next year was something that you felt like was doable and you also talked about how some pretty impressive margin expansion on the NCS and InsureMe properties. It seems to me like you're in an environment where you have low display demand, yet you have very high supply in terms of eyeballs and that to me seems like the perfect environment to get that margin expansion on those new businesses. How important is traffic next year to you getting to that 40% EBITDA margin that you talked about?

Thomas Evans

Oh, goodness, I mean as I say here other than execution, the three most important things at Bankrate are traffic, traffic and traffic. I mean it's everything. It's the lifeblood. It's our ability to continue to bring in traffic, but it's also the right kind of traffic. I mean one of the things that makes Bankrate Bankrate is it's a high-quality consumer, it’s a consumer whose got the financial wherewithal to be able to make a significant $50,000 deposit, it's the kind of person that qualifies for a loan.

So, the right consumer is critical. We've been very lucky and I think that because of the quality of the editorial content and the things we do and then we don't do anything abnormally to drive traffic, I mean traffic's everything and what it's been to date over the past several years, it's the snowball rolling down the hill. We pick up more and more traffic. We continue to grow and the nice thing is we can either grow organically.

So, it's nothing funny that we're doing and I also think it's the fact that, yes, I mean we've got a million fishing lines in the water, I mean if you were watching television yesterday, Greg McBride I think made four different television appearances yesterday, Leslie McFadden's making television appearances, Laura Bruce has been making television appearances.

All of that, and the print exposure out there, all of that drives people back to the site and so I mean traffic is critical and I mean as I said we're assuming when we look at next year, I think those of you who are familiar with the company know we'll typically budget an 8% increase in traffic over the next year. How do we come up with that number? I don't know. We literally make it up, but we've enjoyed the last couple of years, 16%, 14%, 15% increases in traffic and this year is running obviously ahead of that because of the first quarter, but even the last two quarters have been good in terms of traffic, so we're assuming a modest traffic increase and that's everything, and yes, we do feel comfortable at that number and that's with no improvement in display.

So, we've got lots of levers that we can pull. We've got lots of reasons why people would come to Bankrate and we've got the right consumer that's going to be attractive to the advertiser and as the advertisers have shifted more of their focus on performance based and that's coming right at us. I mean even our display stuff is performance based.

Our stuff is– I think we did an analysis in the second quarter figure that something like 83% of our display campaigns were really ROI-oriented display campaigns. The stuff that's not endemic, some of the automotive stuff we're carrying now where they’re not exactly looking for immediate ROI from that click, but most of our stuff is people shopping for financial products. So, we're kind of in a weird way benefiting from this environment again as long as the consumer doesn't get freaked out and is paralyzed and disappears.

Edward DiMaria

And, Kyle, Tom pointed out, it's not as if we got to look for some large level of page view increase in order to get to those types of margins for next year. You see the progress we made this year. I mean with a good page view increase, 11%, but still in all I mean that was very good progress from the second quarter on relatively the same levels of traffic growth over previous years, so we're comfortable with that type of a range in terms of traffic growth and executing our plan.

Thomas Evans

And the other thing just to follow up on is the new site contemplates, I mean the new site is much more flexible and allows us to for example shrink the funnel if we don't have display demand. Getting more people faster to high value places on the site should improve visit to rate table ratios and should improve– we're doing some things on the rate tables to make them more useable, more accessible, and should improve click through, so we've got a lot of levers that we can pull and again as long as the consumer keeps showing up, we're pretty confident we'll be able to monetize that consumer and as we do, margins will expand as they have in the past.

Ross Sandler – RBC Capital Markets

Great. I'll get back in queue. Thanks a lot, guys.

Thomas Evans

Thank you.

Operator

And we will go next to Ross Sandler with RBC Capital Markets.

Ross Sandler – RBC Capital Markets

Hey, guys. A couple of questions, first, can you tell us what the revenue contribution from Credit Card Guide and Bankaholic was in 3Q and then–

Thomas Evans

Oh, okay, that's an easy one.

Ross Sandler – RBC Capital Markets

Can you talk about the margin expansion at the lead gen businesses? So, there's obviously a step function up once you plug in a high organic traffic leads from some of these acquisitions and from the leads being generated on your site. Is there another step function up when you reach those volume tiers that you talked about before and if we look at the third quarter margins, was that up more a function of the former or is it both happening at NCS and what can we expect to see there from InsureMe in 4Q and I've got one other follow up?

Thomas Evans

Yes.

Edward DiMaria

Do you want to get this? Go ahead.

Thomas Evans

Go ahead.

Edward DiMaria

No, I mean what you saw in the third quarter certainly wasn't the result of any sort of benefit that we would have gotten from CCG on volume or things that we would expect to be able to realize in the coming quarter, so–

Thomas Evans

We didn’t close the deal until September.

Edward DiMaria

Yes.

Thomas Evans

We didn't close the Bankaholic deal until late September so–

Edward DiMaria

Yes, I mean so the contributions from those, I mean we won't give you any specifics, are relatively small so–

Thomas Evans

But you're absolutely right in terms of the premise that more volume– 'cause I mean the way the credit card companies operate is for example and this is just to show the way it operates, let's say for the first 1,000 cards you generate, a 1,000 approved apps you generate, you get $70, for the next 1,000, you get $75, and everything 2,001, you get 80, but once you get to 2001, it's all retro to cross 2001 previous applications that were approved.

So, you get a bonus kind of a true up on that volume 'cause they're trying to get you to drive more volume on their behalf and they're also trying to consolidate around fewer vendors, so the advantage of being one of the big guys, the advantage of driving volume, the advantage of being able to go out and compete more aggressively if you want to do SCM, it's dramatically better than somebody who's of lesser volume, of lesser quality. I mean it's really– I don't want to say it's winner take all, but it definitely skews the advantage and margin expansion and everything else to those guys who can create the volume and if you can create volume with organic traffic, it's a win, win, win.

So, that's really what we focused on. Actually, if you go back and listen to what we said last December when we acquired NCS, it's exactly the sort of plan that we laid out and all we've really done is execute on the game plan and as Ed said earlier we've gone from mid-teens in terms of margins to mid-30s, so it's working the way it's supposed to work and we're pleased with the progress to date, but yes, you should see margin expansion as volume increases.

Ross Sandler – RBC Capital Markets

Okay. And then just one quick follow up on that, just a clarification, so when NCS was bought in December and I know you've plugged in pieces of that for the Bankrate site, can you talk about organically growing from next to zero or zero to actually like 30% over that time, was there a meaningful contribution from the organic stuff in the third quarter that may not have been there in the second quarter because of something you guys changed on the site? Or was it some of the volume to your stuff we're talking about before?

Thomas Evans

I'd say a little bit of all of the above. I mean it's sort of a combination. I mean you got to remember, when we plugged NCS into Bankrate beginning of the second quarter, actually very end of the first quarter, I mean Bankrate has a credit card channel, it's 8 to 10% of our traffic. We had 50, 60 card offers on that site. When we plugged in, we saw 157% increase in click rates, just better product, lower offers, more consumer choice created a better, a higher take-up rate.

Now, you combine that with the fact that we could pay it on approval, so it isn’t enough just to drive more apps, the Bankrate consumer actually is worth 3x in terms of the value that consumer and their qualification rates, so not only did we get more traffic, but we improved the monetization of that channel by 3x just by virtue of doing it. Now, we add more volume through CCG, again, a similar impact and much higher quality for example than NCS traditional network which was largely affiliate. So, we've not only taken that upstream in terms of volume and organic traffic, but we've also taken it upstream in terms of quality.

Ross Sandler – RBC Capital Markets

Okay. And then the last question, can you talk about the visit to rate table ratio with the new site redesign, what kind of metrics are you guys starting to see in the preliminary testing phase in terms of improving click to rates on the hyperlink side once you kind of reduce the number of pages a consumer has to go through to get to a rate table? Is it a 20% lift in CTR, 50? Can you help quantify a little bit?

Thomas Evans

Until we actually do it across a huge audience, obviously we've seen some improvements or we wouldn't be doing it and there's some tweaks that we've made and there's still some MVTs, multivariant testing that we're doing that will assess, I mean we're not only concerned about the best consumer experience and making sure that we don't just blow a lot more click through that we maintain the kind of conversion rates that make Bankrate the value to its advertisers it is, so we think there's going to be an increase.

We're not assuming that in our guidance 'cause you don't know until you actually find out in real time.

We're also sort of holding on pretty tight because there will be some unintended consequence of a redesign that we haven't thought about or contemplated. So, our (inaudible 00:55:25) which is all over it and we're really excited about it, but we're cautiously optimistic. We'll see it when it's launched, so assume that we're doing it because it's going to be a better experience and it's going to be better business for the company.

Ross Sandler – RBC Capital Markets

Great. Thanks, Tom.

Thomas Evans

Yes, thank you.

Operator

And we will go next to William Morrison at Bank Equity. Mr. Morrison, your line is up, can you please check your mute button.

Thomas Evans

Okay, Bill, are you there? Sorry, Bill.

Operator

We will go next to Mark Mahaney with Citi.

Neil Doshi – Citigroup

Hey guys. This is Neil Doshi calling in for Mark. How are you guys?

Thomas Evans

Hey, Neil

Edward DiMaria

How are you doing, Neil?

Neil Doshi – Citigroup

Good. We've had a couple of questions. One, given the advertisers appetite for performance-based marketing, have you guys reconsidered trying out behavioral targeting and see how that might help improve advertiser yield? And then secondly, can you give us an update on how the relationship with Move and Yahoo! and some of your other affiliate sites are going? And then finally, just wanted to get an update in terms of adding additional content to the site and whether you guys plan to build out other vertical like tax and retirement?

Thomas Evans

Yes, so (inaudible 00:56:55). Gosh, this may be the─ I feel the skunk of the garden party. Behavioral targeting does not work. Anybody tells you otherwise is trying to pump sunshine up your pants. We tested behavioral targeting. We tested it with three different vendors last year. It certainly doesn't work and our premise, we at the time had eliminated an amount of inventory, we were oversold, could we take the Bankrate consumer and follow them around the internet on other sites and serve them advertising and, yes, maybe not get a $60 CPM, but could we get a $20 CPM for serving advertisement to that person? Could we get a $15 CPM? Could we get a $5 CPM? The fact is that nothing works– I've been in the media business for, gosh, I'm sorry to say now, 30 years, nothing works like contextual advertising.

When somebody is on a site that's got content and they're in that information processing mindset about that particular topic, they're going to click and they're going to convert dramatically better than if they're on some other site, but it's still that same consumer. It just doesn't work the same way. Anybody that tells you it does is lying. I mean I put everything I got on that, it just doesn't work the same. So, I think to be honest, behavioral targeting is one of those flavor of the month things that everybody got whipped up about and doesn’t work as well.

Now, having said that, can you chase people around social networking sites and really sort of lower value CPM sites and can you get somebody you pay a $0.50 CPM to be worth $0.60? Maybe, maybe. that's probably how it’s best used, but in a high value place that's contextually targeted like Bankrate, doesn't work.

Secondly, co-brands, our co-brands continue to do well. The co-brand revenue has increased primarily because we've got more product on those sites typically. Some of those co-brands have sort of toggled to– I mean a couple of our people who used to have deposit as the default on their site, I'm sorry, used to have mortgage, now have deposits and that's helped, so when we do well, they do well. When we increase rates, they get the benefit of those increase rates. So, that's gone pretty well.

As for content, Neil, I mean we develop content every day. On Bankrate and the home page of Bankrate today, there are three brand new feature stories. There's just a ton of content and we continue to beef up personal or financial planning. We're beefing up retirement. We've beefed up college finance area with saving for college in 529 plans, so we're adding to the breadth and depth of our site literally every single day. We'll continue to make those kinds of commitments and continue to make those kinds of investments 'cause at the end of the day, that's why people come to Bankrate.

It's not only for the rates. We talked so much about rates and people there for rates. 65% of the people who come to bank rate never go to out rate table. They read our stories. They go to our calculators. They do our checklist. They go to our guides. So, it's just the people who are at sort of the end of the funnel that go to the rate tables, but there are a lot of people there that are doing their research, that are learning, and that are using Bankrate as a great resource, alright.

Neil Dershey - Citigroup

Thanks, guys.

Thomas Evans

Last question?

Operator

And due to time constraints, that does conclude our Q&A session at this time. I would like to turn the call back over to Mr. Evans for any additional or closing remarks.

Thomas Evans

Well, thanks everybody. I'm sorry to run long. It's been an interesting environment. I mean I read all your reports all the time and how you're covering other companies. I think we've got a very unique model. I think our business which is largely driven by organic traffic, we've been able to make accretive acquisitions of companies and sites that drive traffic to the site and the diversification of the revenue platform that we have where we've been able to integrate over the last couple of years CPC and lead gen products has obviously panned out.

And again, we're not cocky about it, we're not sitting here gloating, but we're very confident that what we've built has certainly sustained and prospered in this economic environment and we think we can continue to do so. So, we appreciate your time and on behalf of everyone at the company and the great Eduardo and I, we want to thank you for your time and attention today.

Operator

And that does conclude today’s conference. We appreciate your participation and you may now disconnect.

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