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Bankrate, Inc. (RATE)

Q3 2006 Earnings Call

October 26, 2006 11:00 am ET

Executives

Tom Evans - President, Chief Executive Officer, Director

Edward Dimaria - Chief Financial Officer, Senior Vice President

Bruce Zanca - Senior Vice President, Chief Marketing/Communications Officer

Analysts

Colin Gillis – Canaccord

Youssef Squali - Jefferies & Co.

Andrew Jeffrey – Robinson Humphrey

Stewart Barry – ThinkEquity

Jordan Rohan – RBC

Mark Mahaney - Citigroup

Mark May - Needham & Company

Heath Terry - Credit Suisse

Presentation

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2006 Bankrate, Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to, Mr. Bruce Zanca, SVP at Bankrate. Please proceed, sir.

Bruce Zanca

Good morning, everyone. We would like to welcome you to our Q3 2006 conference call. With me here in our New York offices is the our President and CEO Tom Evans; and Senior VP and Chief Financial Officer, Ed Dimaria.

Let me just take a minute to go over the format of the call today. First Tom will give us some results and color on the quarter. Ed will then give us some detail on the financial results, and then we'll have time for questions and answers.

Before we do that, I need to take care of some 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. 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 operations and business environment, which may cause the company's actual results to be materially different from future results. We encourage you to read the section entitled Risk Factors in our annual report and Form 10-K and our subsequent filings with the Securities and Exchange Commission.

So with that being taken care of, let me introduce to you Bankrate's President and CEO, Tom Evans.

Tom Evans

Thanks, Chris. Good morning everyone and thanks for joining us. I am sure most of you have seen the release we have put out this morning. We’ll go through the financials in detail in a moment, but let me give you an overview on the quarter from our perspective.

It was obviously a busy quarter for us. First, revenue for the quarter was up 58% and EBITDA 48% over the same period last year. EBITDA was impacted significantly by the legal expenses we generated in the settlement of the lawsuit that we announced on October 10. Excluding the stock comp and the $3 million legal settlement, earnings per share were $0.21 and EBITDA margins were 35% as compared to 34% in the same quarter a year ago. Ed will go through the financials in greater detail, but suffice it to say that results for the quarter were somewhat mixed.

Profit for the quarter was solid and a return to more normal patterns after the second quarter. Our graphic advertising business remained strong, and we continued to see high levels of demand. Our hyperlink rate table business continues to perform well for both our advertisers and for Bankrate.

In our print business, we have been able to develop some new opportunities that we think will allow us to grow that business. and the Interest.com and mortgage calculator websites are doing well. However, the one disappointment we have seen is the continued deterioration of the fast find lead aggregation business. I can assure you that we are not just sitting around waiting for that to improve on its own. We have been working on a strategy to reposition and re launch that business. We are confident that there is still significant opportunity for Bankrate in the lead generation space, and that we can fix it while keeping the other parts of the company growing and thriving. Again, more on that later.

On October 10, as you have probably seen, we announced that we settled the American Interbank lawsuit that had been previously disclosed in our Q’s and K’s for $3 million. We are prohibited by a confidentiality agreement to discuss the suit and there is still litigation pending between American Interbank and a number of other mortgage companies.

We simply thought it was prudent to make a business decision to settle the suit and focus our time and effort on running our business and not being involved in a costly and lengthy trial.

So now let’s have Ed go through the financials for the third quarter.

Edward Dimaria

Thank you, Tom and good morning, everyone. We have a lot to talk about so let me get started. But first, I want to remind you of how I typically run through the results. First the headlines including revenue, EBITDA and EPS; then I will provide some color on revenue in more detail. Next we will walk through operating costs; and last I will recap the results and then turn the call back over to Tom, and he will deliver the business report.

One other note, our financial statements are prepared on a GAAP basis, however we also provide certain financial metrics on a non-GAAP basis excluding such items as stock compensation expense and the legal settlement cost for this quarter. We do this with clear explanations in a straightforward manner to compare our operating results on an apples-to-apples basis, since such items are new for this year.

As Tom mentioned, the results for the quarter were mixed. There were a number of positive developments. For one, we continued to see strong results in the core Internet business, and this despite a more challenging mortgage environment. Our continued strong results further demonstrate the performance of our core business and the enviable position Bankrate holds as the premier site where consumers research financial products.

Another positive development was the settlement of the American Interbank lawsuit, allowing us to avoid an expensive trial that would have diverted some of our attention away from the business.

Now on the other hand, there is FastFind, where we saw relatively poor results. As you know, FastFind is our developmental lead aggregation unit purchased in December 2005 which is included in our online business segment within display advertising. More on FastFind in a minute.

Total revenues for the quarter came in at $19.5 million, an increase of $7.1 million or 58% over the $12.4 million we reported in the third quarter of 2005, and basically flat with the second quarter of 2006. Our EBITDA, on a GAAP basis, came in at $1.5 million compared with $4.2 million in the prior year, although current results include the American Interbank settlement of $3 million and stock compensation expense of $1.7 million. So excluding these amounts, our adjusted EBITDA came in at $6.2 million, which is a 48% increase over last year.

Net income came in at $1.2 million, or $0.07 per diluted share, which included $0.09 per share charge for American Interbank settlement and $0.05 per share in stock compensation expense. Net income, as adjusted for these charges, is $4 million which is $0.21 per diluted share. That is a 31% increase over the $0.16 we posted last year.

In addition, we incurred relatively high legal costs of $675,000 or $0.02 per diluted share, to complete settlement of the lawsuit. This amount has been included in EBITDA this quarter, which has negatively skewed EPS and EBITDA results. So for total revenue, EBITDA and EPS, we had positive results driven exclusively by the core business, while FastFind and to a much lesser extent, print, under-performed during the quarter.

So first FastFind. This unit only generated $900,000 in revenues for the third quarter of 2006, as compared to $1.5 million in the second quarter of 2006. Off 39%. We include this revenue in our online segment within display advertising. Even worse, we had expected the results to continue to ramp up in the third quarter, which obviously was not the case. So this is a clear set-back for us, but nonetheless an opportunity for us to enhance the FastFind model in light of recent trends in the lead aggregation space. Tom will cover more on FastFind in the business report.

Now print. This business produced positive results over last year but dipped from last quarter. Total print revenue for the quarter came in at $3.7 million compared to $1.2 million in Q3 2005, and $4.2 million in Q2 2006. The increase over the prior year is the result of the acquisition of MMIS in December, 2005. The decrease compared to the second quarter of 2006 is a result of us cutting off some weak, MMIS legacy print advertisers during the quarter, which resulted in lower revenues and a charge to bad debt expense.

This is better for the business over the long haul, but customers we cut off tended to be weaker or less sophisticated players with poor payment history, so we felt it was prudent to clean this up now and get it behind us. Also, this experience does not cross over into our online segment, which attracts a higher quality, more sophisticated advertiser base. We’ve added some new higher quality Bankrate advertisers to print, and the early part of the fourth quarter has picked up.

Now the revenues for the core business, graphic and hyperlink advertising revenue. Online revenue for the third quarter was $15.8 million, which increased by 41% over the $11.2 million we reported in the third quarter of 2005. Key drivers over last year include hyperlink revenue up 58% over last year, and display advertising, up 39%. Total online revenue was up $300,000 compared to the second quarter of 2006 online revenues of $15.5 million.

Excluding FastFind, total online revenues in Q3 came in at $14.9 million compared to $14 million for Q2 2006, representing an increase of nearly $1 million. Graphic advertising revenue was $9.2 million during the third quarter, up 39% over the $6.6 million in the third quarter of 2005. Hyperlink revenue increased to $6.6 million for the quarter, up 58 % over the third quarter 2005 revenue of $4.2 million. Hyperlink deposit and mortgage rate table revenue continued to remain strong, and accounted for 44% and 46% of third quarter hyperlink revenue, respectively. Also, we increased CPC pricing on average by 20% across the board on October 1, 2006, so we are expecting a solid increase in hyperlinked revenue during the fourth quarter of 2006.

Page views in Q3 2006 were 127 million, versus 116 million in Q2 2006. We continued to see strong traffic in the deposit channel for CDs, money market and savings accounts. Also, our organic traffic to the Bankrate site remained strong at 90%. Again, this traffic to the site comes to us at zero cost and provides the fuel for the powerful monetization engine we have.

Total operating costs in Q3 2006 was $13 million compared to $5.4 million in Q3 2005. The increase over 2005 is driven primarily by the $3 million in legal settlement of the American Interbank case, $675,000 in associated legal expenses, and $1.7 million in stock compensation expense due to the adoption of FAS 123 R. In addition, there are incremental operating expenses associated with the acquisition completed in December 2005.

Compared to the second quarter of 2006, if you exclude stock compensation expenses and costs associated with the legal settlement, the adjusted operating expenses were $7.6 million in the third quarter of 2006, as compared to $6.9 million in Q2 2006. $700,000 increase was driven primarily by an increase in sales and marketing expenses, as we began to increase paid search; and an increase in bad debt expense related to legacy print MMIS customers, as I previously mentioned.

We ended the quarter with 162 employees, down one from the end of Q2 2006. Our income tax provision for the quarter of approximately $650,000 was charged primarily against our deferred tax assets and therefore did not result in cash payments for tax. We opened the year with a tax NOL carryforward of approximately $14 million, which is recognized on our books as deferred tax assets. We believe our NOL will be substantially used by the end of the fiscal year.

We ended the quarter with $103 million in cash, which is invested primarily in U.S. Treasury securities. The balance sheet remains debt-free, and our ratio of current assets to current liabilities is over 13:1. We are well-positioned for growth with an excellent cash position, and zero debt. Once again, net income for Q3 2006 was $1.2 million, or $0.07 per diluted share, compared to $2.5 million or $0.14 per diluted share for Q2 2006. Earnings per diluted share were $0.21 after adding back $0.14 in legal settlement and stock compensation expense.

Tom will now take you through his business report.

Tom Evans

Thanks, Ed. Let me add a little context to the numbers Ed just reported. When we look at our business model, we really think about there being five components to drive our business: Traffic, graphic advertising, hyperlink advertising, print and of course, lead generation through FastFind. Let me briefly touch upon each, and then give you some color on how they are doing, and then some other things that we are doing to continue to grow our business.

First, traffic. Traffic for the quarter was about what we thought it would be. Bankrate traffic at 126 million page views was up 16% over a year ago, up 9% from Q2 and very much in line with our expectations. We have plans to try to increase traffic going forward then I will talk about in a minute, but traffic for the quarter was solid.

Organic and partner traffic, or free traffic, was at 90% and paid traffic was at 10% as we began building out the paid search efforts we talked about in our last call. For the third quarter we averaged 5 million unique visitors a month and had slightly over 14 million aggregate unique visitors in the quarter compared to 11.7 million in the quarter a year ago. So our audience is growing.

Graphic advertising continues to be strong. We have been seeing strong demand and are continuing to increase both the number of advertisers and the size of the buys they are making. Those of you who watch our website closely have seen several well known and premier financial services brand added to our roster of advertisers in addition to the new insurance, automotive, credit card and home furnishings advertisers.

The secular trend we have talked about before continues; that more advertisers are spending a greater portion of their ad budgets on the Internet. We are getting our fair share of that money and happily continue to be able to charge some of the highest CPMs in the business.

I probably don’t need to tell you that the hyperlink business has been a home run for us and continues to go very well; up 58% in this quarter versus a year ago. Last October 1, a year ago, we launched cost per click pricing from the old flat model I could spend a lot of time on this but I think its success could be summed up in three statistics:

Number 1, we have more lenders today on our rate tables then we did a year ago when we launched cost per click. Number 2, 44% of the revenue from our CPC tables in Q3 came from the deposits channel, and that compares to 21% a year ago and just 12% two years ago in the same quarter. Number 3, on October 1st we pushed through a 20% rate increase across the board to all of our CPC advertisers on all channels and saw no decline in the number of advertisers wanting to participate.

One last interesting statistic on CPC; while mortgage revenue declined as a percent of revenue on our rate tables in Q3 from 66% in 2005 to 46% in this year, actual dollars from mortgage clicks were up 20% versus last year. So CPC is humming and working extremely well for us.

The print business serves a dual purpose for us; it is both a revenue stream and it creates a tremendous amount of visibility and brand recognition. In the quarter, we were able to sign up a handful of new newspapers which we will announce when they go live. We had added deposit tables in eight of our existing papers and we introduced a new product to our print offering.

On September 29, we dropped into over a million copies of USA Today our first editorial freestanding insert. It is a 12-page magazine-sized FSI. The insert contains seven pages of Bankrate editorial on savings accounts, sponsored by five pages of advertising from eLoan. eLoan used it, by the way, to introduce the new eLoan savings, which was followed by their appearance on our CD and money market hyperlink rate tables. We have plans in 2007 to produce and sell eight of these topic-specific newspaper FSIs which will carry advertising sponsors and be tied into our online guides as well.

The one obvious area of our business that has been problematic has been our lead aggregator, FastFind. FastFind got off to a very good start early in the year as we ran ahead of projections. Unfortunately, it began declining in mid-year and continues to do so. FastFind revenue, as Ed mentioned, was down almost 40% from the second quarter to the third.

I would say that part of the problem has been a change in the market which affected FastFind, and part of the problem has been poor execution on our part. Without making any excuses, let me explain the dynamics that have impacted FastFind’s business.

First, around May 1, LendingTree/LowerMyBills began selling their leads five times versus what they were previously selling four. So the two guys that share probably 70% of the aggregator market had pushed another 20% of volume onto the customers that we were trying to sell and trying to build a business with.

As the business got more challenging, other aggregators began slinging leads to lenders, and then to other aggregators. So instead of a lead being sold to four lenders, these are now being sent to six, seven, eight lenders. To no one’s surprise, lenders began to complain about conversion rates of the leads. So we were in a position of trying to build that business, build the lender base and build lead demand in the face of glut of lead volume on the market.

Suffice to say as well that we weren’t doing a great job of executing our business at the time. I won’t make excuses, but the net-net is the business performed well below our expectations. We decided that we are not going to do anything to sacrifice long-term value for trying to drive a short-term performance target. To that end, driving traffic to FastFind to try to generate revenue with a product that is not ready for prime time is the wrong thing to do for Bankrate jealously guarded reputation.

As you know, we are generating revenue in that segment of our online business ahead of some of our expectations early in the year, which led us to be cautiously optimistic about our progress. Frankly, as time progressed during the third quarter, we became worried about the user experience and the experience of our customer base. There is little that is more important to us than the Bankrate name and community.

To that end, we have dialed back driving traffic to FastFind to relatively modest number while we retool this portion of our business. We remain encouraged that Bankrate has a unique and defensible position to build a large and important business here, which is another reason why we are so focused on getting it right and make sure what comes out from Bankrate is a superior experience for everybody. This is going to take a little patience but the management team and our board are collectively convinced that we want this product to be reflective of Bankrate and our very high standards of quality and performance.

I think the amazing thing is that the rest of the online business is doing so well that it just about made up for us having FastFind, a drag from a financial performance standpoint. We are further encouraged that the premise of the deposit channel and other items in our revenue stream will grow rapidly in times like these; it is being proven out everyday.

What our customer base is demanding and paying for in deposits is of high value, just like the mortgage channel. We have been working on a plan to fix the FastFind business by changing the model to focus on having a deeper and more lucrative relationship with fewer lenders, and extracting more value from our high quality leads which will get us away from the lead slinging business that is proving to have less and less value to those lender customers.

We are putting the pieces in place and expecting to be able to discuss this in greater detail in the coming weeks. We plan on having it in place by early 2007 so that it will have a positive impact on our business in 2007. I will not minimize the disappointment in how this business has performed to date. What I can tell you is that we are still very committed to Bankrate having a successful lead generation business that we believe will create strong growth and be a real contributor to our business over time.

There is more we will be able to discuss with you relatively soon. We are in the process of making changes in the business. We have made and are making changes in the management at FastFind and I can tell you that I, the management team, along with the board are all actively involved the planning and structure of the next generation of our lead generation business. We’ll be happy to take your questions about the FastFind business, but before I do, let me tell you about some of the other positive things that we are doing to grow to the business.

First let me talk about paid search. We talked before about our interest in growing our paid search audience, as we now have the graphic ad demand and through CPC, a way to monetize incremental traffic to our rate tables. At the end of September, we launched our paid search efforts using Efficient Frontier. As we are now been are now better able to measure the value of our keyword spend, we are more able to accurately measure our results and confirm the return that we are generating on the modest amount of paid search that we have been doing.

As we said before, our plan is to grow our paid search budget in a methodical and thoughtful way so that the money is spent in concert with ad sales demand so as to generate high rates of return. We expect to grow that spending quarter by quarter until we reach the point where we see returns diminishing below a targeted level.

The benefits of doing so are pretty obvious. It drives additional traffic to the site that we are working concurrently to monetize. As we grow this capability, it should increase both our traffic and our revenue. We have hired a very talented VP, a guy by the name of Mike Ricciardelli from Classified Ventures, where he ran sales and marketing for apartments.com. Mike is running that part of our business, and we are very delighted to have him on the team and excited about what we think the impact of growing paid search will be.

The other effort we are making to boost ad impressions and our ad sales is by launching behavioral targeting effort. We have just signed contracts with two vendors who will allow us to track consumers who have visited the Bankrate website and then serve ads to them when they go to other places, other sites on the Internet. These two firms will be set up to anonymously cookie the visitors to our site and allow us to serve targeted ads to them as they visit other sites that are on the vendor’s ad networks.

It will allow us to extend the reach of our advertisers’ campaigns and generate more revenue. We are putting those pieces together now to be able to begin selling behaviorally targeted ads early next year. We know we have the demand from our advertisers who are interested in reaching the Bankrate consumer. Both our keyword buying and behavioral targeting initiatives will allow us to better fill that increased demand.

Lastly, we continue to look for acquisition opportunities. When we raised the money in our secondary in May, we had several targeted companies in mind. As we got further into the due diligence on two companies that we had targeted, we became much less enthusiastic about their business and decided it was prudent to walk away.

We continue to look at a lot of potential targets. We are still focused primarily on insurance, real estate, retirement and financial planning assets. We want to put the money to good use, but we don’t want to do anything stupid. Our core business is very strong, and we want to make sure that we continue that momentum and get FastFind on the right track.

We believe there are plenty of opportunities out there. We have a great foundation, and believe that we have significant amount of growth to be developed in the near future, so we will keep you updated on any acquisition opportunities, and continue to focus on growing the business.

One last issue we want to address is our 2006 guidance. As you will remember at the end of the first quarter we raised our original guidance from the between $78 million and $80 million in revenue for the year to between $80 million and $82 million; and raised EBITDA from between $26.5 million to $27.5 million to between $28 million and $29 million. We raised the guidance primarily based on the fact that we saw real strength in the core components of our business, and based on FastFind’s initial early success.

With FastFind having had some trouble over the past two quarters, it is no longer in a position to provide any upside, so today we are revising our guidance to between $79 million and $80 million in revenue, and $27 million and $28 million in EBITDA, excluding stock comp and the legal settlement costs, back to the top of the range where we were at the beginning of the year. We are disappointed to be in a position where we are lowering our guidance, particularly given the strength of the core business, but I think it is, again, prudent to do so at this time.

We won’t be making any comments about 2007 guidance until later in the year, but we continue to feel optimistic about our business. So with that, Ed and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Colin Gillis – Canaccord.

Colin Gillis – Canaccord

I might as well start the ball rolling. In terms of the guidance for 2006 you have got the paid search component, you’ve got prices up 20%. What we are trying to parse our hands around is, is there anything going on in the other segments of the business besides FastFind that give you any concern? Shouldn’t there be enough strength in those other segments to compensate for the weakness in FastFind? Can you quantify a little bit about what the revenue expectations are for Q4 for the lead aggregation business?

Tom Evans

There very well may be. We are certainly feeling very bullish about the graphic ad part of the business. We are feeling super about the hyperlink part of the business. I mean, you can’t push through a 20% increase unless you’ve got the kind of demand or the kind of lender base that we have on CPC. So those things are going very well. We’ve had a very good October.

You know, the toughest part of the year is always that Thanksgiving to New Year’s portion and we tend to run fewer page views. As a result, we just have less of an opportunity and fewer consumers coming through. There absolutely are not any weakness in the other parts of the business.

Graphic advertising we think will be very strong; hyperlink advertising will be very strong; traffic, as I said, October has been good. We don’t know about November/December but there is no reason to think it will run anything other than at traditional levels.

It is just cautiousness on our part. Our expectations on FastFind, as Ed mentioned, we ran about $900,000 in revenue on FastFind in this quarter. It will be less than that, we expect, going forward. Ballpark, two-thirds of that.

Colin Gillis – Canaccord

But you are clearly saying that the reduction in guidance is tied to FastFind. You are dialing it down, retooling, and you are going to update us on a new, go to market strategy going forward?

Tom Evans

100%.

Colin Gillis – Canaccord

Okay and just let m ask you this question: from an operational angle, if you were to take a thousand leads garnered from Bankrate, how would you view them stacking up against a thousand leads gathered from the other sites?

Tom Evans

The only proxy we have, and this is our quandary on FastFind being in the lead slinging business with everybody else; I can tell you that -- and we hear this time and time and time again and we said this publicly many times -- we are told by our customers that there is no better source, there is no better conversion rate, there is no better quality consumer then comes from Bankrate. We just haven’t being able to, to date, convert that on the FastFind side.

We are going to drive that business so that its much more like a direct lead business than it is sort of a lead slinging business. We think there is great value, we know the consumers converts at a very high level, we know that Bankrate at the end of the day, drives an in market consumer who is poised to purchase, who are closer to the purchase decision then in any other marketing channel. Again, the proxy for this is the success of the hyperlink business.

So clearly what we've being doing isn’t working but we think that a properly positioned lead generating business with a reorganized approach can make a significant contribution to our revenue going forward.

Colin Gillis – Canaccord

Okay, excellent. Can you give us a sense as to the paid search campaign? I mean, that is obviously an exciting piece. I know you want to clearly track the returns before you pump up the volume on that. But it has been running for four or five weeks now. Any anecdotal evidence or commentary you can give us.

Tom Evans

We are pleased with the results to date, We are driving the kind of ROI that we anticipated. We are ratcheting up spending slightly in this quarter. We are seeing the demand met by the additional inventory being met by demand on the graphic side of the business. So we want to do this smart and we want to do this methodically, we want to get this right; but so far we are very pleased.

Colin Gillis – Canaccord

Just finally, could you address the notion, are you seeing acquisition candidates in the pipe that are more accretive than buying back shares? Or what your thought in terms of a share repurchase program.

Tom Evans

We raised the money with the intent of making acquisitions and we are still committed to that. I am still convinced that this is going to be an environment of consolidation, that there are a number of companies that would be good fits for Bankrate. You are likely to see, before we report again, that rather than an acquisition we will do a business development deal with one of the companies that we were interested in. Sometimes public company reality and private company prices don’t synch up.

So there are things out there that we like and we certainly intend to put the money to use in that way. If we are not able to, that is a recalculation, but right now we think the opportunities exist out there to do that.

Colin Gillis – Canaccord

Great. The online publishing piece, that is certainly not a small number. Thank you very much.

Operator

Your next question comes from the line of Youssef Squali - Jefferies & Co.

Youssef Squali - Jefferies & Co.

Thank you very much, Good morning all. So just a couple of questions on the hyperlink revenues, how should we be thinking about the sequential growth into revenues using the 20% pricing increase for Q4?

Tom Evans

I would normally say just flat line 20%, but volume is going to be down, because if you look at historical traffic, we have run historically in the last three fourth quarters we have run 92, 92, 93 million page views. That would compare to an average of 110 million. So down slightly in terms of clicks, but obviously up in the value of the cost per click.

Youssef Squali - Jefferies & Co.

Even though you are increasingly going to be spending money on search, that should not overcome the seasonality of the business.

Tom Evans

Well it won’t fully overcome the seasonality, at this point we don't know, we sort of won’t know until we get there. But it is difficult to tell, this is a different mortgage environment, it is a different deposit environment than it was a year ago, so it is difficult for us to look at last year or the year prior, or quarter, and use those as proxies for what is going on now.

We said the most bullish thing about CPC is that, when we launched CPC a year ago, the month prior to us launching CPC -- so September '05 -- we had 371 advertisers. When we launch CPC we had 341; by January we had over 400; by June we had over 500 and today we have over 600 advertisers in our portal. Now to be sure not all of them are getting clicks. Thankfully, the best rate in 30-year fixed isn’t getting too many clicks. But the fact is we have got the demand, we have got the base, and it is working. It is working for us, and it is obviously working for the lenders.

We have been more onerous about the quality of those rates. I mean, it puts us in a position where we QC’d out 17 advertisers in the third quarter, including one of our top three advertisers from a CPC standpoint. They posted a rate, they were mystery shopped, they failed, they were off the site for two weeks. So it gives us an enormous amount of power and an enormous amount of leverage, and it is obviously working well for the consumer and it is working well for the lender.

Youssef Squali - Jefferies & Co.

Then can you speak a little bit about the pricing in the core business? Just running some raw numbers on your effective CPM, I am showing actually a sequential decline. Can you talk to that?

Tom Evans

You mean if you take page views?

Youssef Squali - Jefferies & Co.

Exactly, into graphic ad revenues.

Tom Evans

I would say that is actually inaccurate. We basically were flat from quarter to quarter. Some of what we deal with is when we look at effective CPMs, an advertiser who is paying an average $70 CPM across our channels, that says we really need to lower the effective CPM, we will throw in some other positions. It really depends upon the channel, but we will throw in some other positions to sort of effectively lower the CPM for them and charge them lower rates for that. But we are seeing very strong pricing power in our graphic advertising. Not as aggressive mid-year; it is tough to lift graphic ad prices mid-year, so we are holding those very, very well and pushing through the increases on the CPC side.

Youssef Squali - Jefferies & Co.

And typically there is positive seasonality in the effective CPM from Q3 to Q4?

Tom Evans

Yes, there is.

Youssef Squali - Jefferies & Co.

Lastly, can you explain what happened in the print business exactly? I think you said you cleaned up some accounts there? How should we be thinking about that business? Is this a good base to work off of in terms of revenues?

Tom Evans

In the acquisition of MMIS, there were some receivables that we worked through, there were some customers that quite frankly we continued to carry through the first half of the year, that we made a decision, the board made a decision and the audit committee made a decision that we would start cutting off those customers. Between Q2 and Q3 we just started cutting back those customers, and weren’t carrying them.

So we took both a charge for payables and cut those customers back. So we want to be there with the guys that are paying, we want to be there with the guys that are advertising and supporting the products rather than some of the ones that were on there that we probably kept them on too long.

Youssef Squali - Jefferies & Co.

How much was the charge?

Edward Dimaria

Our bad debt expense was up during the third quarter an additional $250,000.

Youssef Squali - Jefferies & Co.

Okay. Great, thank you very much.

Operator

Your next question comes from Andrew Jeffrey – Robinson Humphrey.

Andrew Jeffrey – Robinson Humphrey

Good morning. I wanted to elaborate a little bit on Youssef’s question regarding the nominal calculation of revenue per page view, and try and tie it back into your paid search initiatives. It does look, regardless of CPMs going up, the revenue per page view is down sequentially. Again, I realize it is a nominal measure, but maybe a good directional one.

I am wondering if any of that has to do with challenges monetizing search-driven traffic as opposed to organic traffic? Maybe Tom, if you could address that dynamic directly as well, that would be great.

Tom Evans

When we sell those, those are not segregated. If you are buying mortgage channel traffic, if you are buying a leader board in the mortgage channel – you being the advertiser – it doesn’t discriminate to whether that is traffic driven by somebody typing in the Bankrate URL coming from one of our co-brands, coming through organic search or coming through paid search.

One of the things that was impacted, and I better understand the question now. Some of the page views that were generated were from Interest.com which doesn’t monetize at the rate that Bankrate does. Some of the pages, generated page views were from the new mortgage calc, which the page views were in there, but not much revenue because we really hadn’t started networking mortgage calc and selling that. So you are working off of a larger base, but we weren’t really selling that so that would probably have some impact on skewing the numbers a little bit.

The sell-through remained pretty constant. Ex of those two assets, so the new tool will help us drive value to those pages better and to those two new sites better. We will be selling across a network in ’07 so we will be selling Mortgage Calc and Interest.com along with Bankrate as a network buy. So that will all help to lift the effective CPM of adding those pages.

Andrew Jeffrey – Robinson Humphrey

Okay, so given those comments, what were the organic page views or the Bankrate page views? How do they compare to what we saw in the second quarter? The 116 million?

Tom Evans

We are going to stop from breaking those out going forward, but suffice it to say they were up. They were up to more traditional Bankrate levels.

Andrew Jeffrey – Robinson Humphrey

Do you think some of that is a function of the apparent uptick in refis that seemed to spring from the precipitous fall in mortgage rates that occurred during the quarter? Do you think that is just natural growth of the business?

Tom Evans

I actually think it is natural growth of the business, because we are seeing it across all channels. So I don’t think it was just the refi opportunity. We saw a nice uptick in deposits, obviously, and it was pretty much broad-based. I just think we are doing a better job of having Bankrate being more ubiquitous and reaching more customers out there. I wouldn’t think that the uniques were necessarily driven by that refi opportunity.

Andrew Jeffrey – Robinson Humphrey

And if I may sneak in just a last quick one. Any cannibalization at all from FastFind in the quarter?

Tom Evans

Sure, yes. There absolutely was. When we give FastFind an ad, and they monetize that and they are monetizing that at $0.50 on a dollar or less, sure it had an impact. We probably hung in there too long and struggled with it too long before we started cutting it back, but there was a real impact on FastFind.

Again, we still are very convinced that there is a lead generation business for us. FastFind just wasn’t achieving the kind of results that we had hoped and it was a drag on the financials this quarter, to be sure.

Andrew Jeffrey – Robinson Humphrey

Thanks a lot.

Tom Evans

Thank you.

Operator

Your next question comes from Stewart Barry – ThinkEquity.

Stewart Barry – ThinkEquity

Good morning. Tom, do you feel the price increases over the last several months will make it difficult to raise prices for ’07, as you might typically at the beginning of the year?

Tom Evans

No. Primarily, if you look historically, we launched last year and we haven’t been out beating our chests about this, but we launched last year on October 1. We raised CD and money market prices on January 1 of last year. We raised mid-year, we re-oriented the tiers, which was an effective rate increase for mortgage advertisers. We came back in October with another increase. So we still think we have a lot of running room.

The fact that we have a 20% increase and we don’t see any decline in the number of lenders on the rate tables, suggests to me that we have still got – a wise guy could say, you are not raising them fast enough, unless you are inflicting some pain, unless you have some people dropping out, but we want to be methodical about this. We want to be thoughtful. We want to continue to provide value to the consumer.

One of the things that we monitor very closely is at the end of the day, we watch the rate tables like hawks to make sure that the number of lenders that are on those rate tables represent a fulfilling and objective and comprehensive list to the consumer. That is why we have editorial listings, it is why we really watch the number of lenders. So that continues to be very strong, as I said. More lenders on today than were on July 1. More lenders on July 1 than were on January 1 of last year, and more today than were on a year ago when we were on a flat fee.

I think the most encouraging thing to us is when we talk about the elasticity of the business. We have seen a nice transition where we are balancing a decline in number of mortgage clicks with just this incredible increase in deposit clicks, and even the decline in mortgage clicks has meant more mortgage revenue to us because of the pricing leverage. So we are feeling very good about that.

Stewart Barry – ThinkEquity

To what extent is Citigroup’s pull back in ad spending affecting your second half this year? Do you feel that Citigroup and its peers will be spending up in ’07?

Tom Evans

We don’t talk about specific advertisers because that is confidential and we don’t want to signal to other folks. If you look, and it was widely publicized, that they did pull back, you will see lots of Citi advertising on our site currently. I can just tell you that we have lots of demand from lots of other advertisers, as well as Citi. You will see a big presence from the BofA, Wells Fargo, Countrywide, Citi. And a number of new advertisers that you see on the site like Fidelity and Schwab and folks like that. So we are very encouraged by what we see.

At the end of the day it is all about conversion rate. Advertisers are getting much smarter about conversions, about ROIs. I will go back to, there is nothing like the Bankrate consumer. There is nothing like that person who is in market, who comes to our site, poised to transact and who can find the kind of information, whether it be editorial, whether it be the kind of help we provide editorially, whether it is our calculators and tools or whether it is our rate information.

It is a full offer that the consumer apparently finds very fulfilling. I will through out a little – our sales folks have done an excellent job, have really done a terrific job of bringing in a broader base of new advertisers while increasing the spend from some of our biggest advertisers.

Stewart Barry – ThinkEquity

Thank you.

Tom Evans

Thank you, Stewart.

Operator

Your next question comes from Jordan Rohan – RBC.

Jordan Rohan – RBC

I had a couple of questions. The first is, there is an emerging trend in the mortgage lead gen business to have a business model that has a dynamic auction for leads, where lenders can be very specific about the sources of inventory from which they draw leads, and the value for that inventory. Is this something you have considered in remodeling FastFind?

Second question, your paid search efforts always seem to refer to lenders, and I would assume mortgage related stuff, but it would seem to also work for deposit-related inventory and institutions. Are you doing it on both sides of your business there?

Finally, the conversion rates via paid search is probably going to be different than the conversion rate through the organic channels and driving traffic to the Bankrate site. When will you know if the quality of leads that you are selling, that have been originated via paid search, is actually lower, higher or in line with that of the Bankrate average? Thank you.

Tom Evans

Great questions, all. Your first question is spot-on about the different dynamic, the different models that are available in the lead-gen business. It certainly is something -- we want to go, without giving too much information yet, we want to get to the point where we know we have a high quality consumer. Rather than flinging that around like a number of other aggregators are doing, you are absolutely right. We want to get to a much more dynamic position where we are matching a consumer with a lender and we are getting a lot more for that.

That is certainly the direction that we intend to head in.

In terms of paid search, we are driving both deposit and mortgage, as well as a couple of other channels where we have a lot of demand, like credit card and auto. Auto tends to be very competitive, but yes, it is not just focused on mortgage. It is across the board, and what we have seen to date, to answer your last question, what we have seen to date in terms of ROI and rate table click-through rates, once we start somebody down the funnel from paid search, is working pretty well.

It is working just about at the same level as somebody who comes in and starts down one of our channels that comes from either organic or form typing in the Bankrate URL, so I think the most pleasant surprise to us is that it is converting at relatively the same level as our other sources of traffic, which I must tell you, has been a bit of a surprise, but a pleasant surprise.

Operator

Your next question comes from the line of Mark Mahaney of Citigroup. Please proceed.

Mark Mahaney - Citigroup

Thank you very much. Just three questions. First, on whether you are seeing signs of any softness in the financial services vertical broadly, and I think you have been talking about this a little bit on and off during the call, but let me set up the question this way, which is clearly Yahoo! talked about weakness in financial services. I guess listening to you, it does not seem like you have seen that, but I just wanted to get that definitive statement from you.

Tom Evans

Other than when City did publicly announce and it was picked up in the Times, in the Journal, and in an adage that they pulled, absolutely not. We have not seen a decline fall back in financial services advertising.

Mark Mahaney - Citigroup

Then, I know you will put it out in your Q, and you talked already about the contribution that FastFind made during the quarter. Could you give that overall number of how much interest.com and FastFind would have contributed to your online publishing revenue this quarter? It is really helpful at figuring out what is happening to the core growth, excluding the acquisitions. Just the acquisitions contribution, just to the online publishing in the quarter.

Tom Evans

Let me handle it this way. The growth of the business was between 75% and 80% core business, without sort of breaking it out individually. The Bankrate core business, graphic advertising and CPC represented about 75% to 80% of the growth.

Mark Mahaney - Citigroup

Then, a gross margin question. It looked like the online publishing gross margin reached a nice high level. Is that sustainable? Should we be thinking about online publishing running at 85% plus gross margins as it scales more?

Edward Dimaria

Yes, and in addition to that, as we continue to have additional pricing leverage, we will expect that to certainly hold and probably increase.

Tom Evans

Offset a little bit going forward by paid search, but as a percentage, the price increases will have a greater impact than that paid search, so yes.

Mark Mahaney - Citigroup

Sorry, one last question. In terms of, you talked about pricing increases for the hyperlink across the board, thoughts on pricing increases for your graphic display advertising business? I cannot remember what the history is. When is the last time you actually raised some of your rates there and your confidence to be able to raise rates there going forward?

Tom Evans

Graphic advertising tends to be done on a calendar year basis. You know, you put out your rate card and what happens generally is you get somebody, a large financial institution, like some of the ones we mentioned, and while they commit quarter by quarter, the understanding is that we are locking in these rates for the year. Now, the nice thing about -- I spent 20 years in the magazine publishing business. I can tell you that your revenue per page in the publishing business always declined as a result of volume discounts. That is not the case in the Internet world.

We are able to maintain those CPMs throughout the year, and we will look at an annual increase at the beginning of next year. But we are also starting to layer in packages. We have a number of advertisers that are not only running graphic advertising, but they are running CPC, they are running in our newspapers. We are talking to them about buying and sponsoring our print FSIs that we are going to be dropping into newspapers next year, like the one that we launched in USAToday.

We are just looking for more dollars and more opportunity from some of those bigger guys. What we are trying to do and what we did last year with a couple of the big guys is get them to lock in to a large number at the beginning of the year. They want to do it because they want to tie up the valuable inventory, and obviously we want to do it because it gives us a lot of visibility and it gives us the ability to really project and direct our business properly.

So look for that first of the year.

Mark Mahaney - Citigroup

Great, and I am sorry, should we be modeling 35% tax rates going forward?

Edward Dimaria

No, if you look on the year-to-date basis, the effective rate is 40%.

Mark Mahaney - Citigroup

Model 40% going forward?

Edward Dimaria

It has kind of bounced around a little, due to FAS-123R and the impact of some of the items, specific tax items that come in with that. I would model higher than that though, Mark. I would model in the 42% range.

Mark Mahaney - Citigroup

Okay. Thank you very much.

Edward Dimaria

That is effective tax rate on bookings.

Operator

Ladies and gentlemen, we have time for two more questions. The first one is from the line of Mark May of Needham and Company.

Mark May - Needham & Company

Thanks for taking my questions. I wanted to take another stab at Mark’s last question on the contribution from acquisitions. We know that you had the mortgage count of three websites in the quarter. I think you mentioned last earnings call that was going to contribute about $300,000 in EBITDA a quarter. I am assuming that is probably about $1 million in revenue this quarter. I wonder if you would just confirm that.

Then, on a year-over-year basis, if you could just give us the organic growth, since you have done a lot of acquisitions over the last year, just what the organic growth is, including all the acquisitions on a year-over-year basis, which I think is what Mark’s question was as well.

Maybe, with regard to Mortgage-calc, how much did they contribute to page views in the quarter?

That is the first question.

The behavioral ad network sounds interesting. I am wondering if you have any sense, as you negotiated those deals, how much your ad inventory could increase as a result of becoming part of the behavioral ad network. I had one other follow-up question.

Tom Evans

A couple of things there. Mortgage-calc’s contribution in this quarter was diminimus, and when you said $1 million a quarter, I think you meant $1 million for the year.

Mark May - Needham & Company

Tom, didn’t you say it was going to contribute about $300,000 in EBITDA a quarter?

Tom Evans

Yes, once we get it up on the Bankrate network, about $100,000 a month was our --

Mark May - Needham & Company

Was that the run-rate this quarter?

Tom Evans

I’m sorry?

Mark May - Needham & Company

Was that the run-rate in the third quarter?

Tom Evans

We did not acquire the company until August 1. We just started serving ads on the site sort of mid-September, so the revenue was fairly diminimus.

The page views from those -- from Mortgage-calc was sort of in the 2.5 million, 3 million a month range. That is really before we had done anything to it.

Mark May - Needham & Company

What about the organic growth for the company, year over year?

Tom Evans

I think the organic -- based upon the core business, as I said earlier, if you look at the graphic advertising and the hyperlink advertising, about 80% of the growth that we had in online publishing came from the Bankrate core business.

Mark May - Needham & Company

What about -- okay, I will just wait for the Q to come out. The behavioral network and the impact that might have on your ad inventory?

Tom Evans

Yes, you know, I do not know. The really exciting thing to us is if you think about behavioral where you tag those visitors and then you are able to shoot them targeted ads as they go to other sites. The fact that Bankrate has not a recurring audience but a new audience every month is very exciting. When you talk about 5 million uniques a month, that is nice, but 14 million a quarter is really nice. We think there is an opportunity out there. This is something new for us. This is something where literally we sign those agreements this week. We are starting to be able to integrate that technology. We expect it to be able to sell those targeted ads effective January 1. While they will not go for the full CPMs of Bankrate, it is a great way for us to again do a couple of different things.

Sometimes we are asked to offset our high CPMs with some other inventories so that the effective CPM is lower. That is a great opportunity. There are a lot of people that just want to take more bites at the apple. We have talked about before, in certain areas to certain consumers, we have a lot more demand than we have inventories.

I do not know exactly. If I told you the estimates that the behavioral targeting guys have given us, we would all be seashells and balloons, but we are trying to be much more conservative about the CPMs.

The way we model it, we model it much lower numbers than they projected, and lower CPMs than they have projected. We are still very excited about where we think the effect of incremental distribution and those sort of lower ECPMs can do.

Mark May - Needham & Company

In addition to the bad debt charge, you contributed the decline in the operating margin to higher -- the paid search initiative that just got started during the quarter. I am wondering, I guess one might assume that your paid search efforts would actually have an incremental positive impact on margins. Was it just the case that you were sort of getting the program up and ramped and you were not seeing really the full benefits of that in the quarter?

Tom Evans

We talked about that I think at the last call, that it really was being effectively launched and able to be monetized where we were working on that right at the end of September. That is something that -- you are talking about almost $700,000 in legal, a couple hundred thousand dollars in incremental paid search, a couple hundred thousand dollars incremental in bad debt expense, so we kind of wanted to get it all out at the same time and move forward in a very clean way.

Mark May - Needham & Company

My last question on FastFind, I think I remember FastFind did like $5.4 million in revenue in ’05. This year, it looks like it could be down 15%, 16%, 17% year over year. You have contributed it primarily to industry macro factors. Is there anything as you really started to dig into FastFind that was structurally wrong with the technology, or the actual business itself? Or do you contribute really 100% of the softness there to industry factors?

Tom Evans

I think there are a number of factors. Clearly a large factor in FastFind’s lack of success has been a lack of traction, has been our execution. There were some things that we did wrong. I do not think the platform was hitting on all cylinders, but there were some things that we did wrong.

There was some macro environments to be sure, or macro influences that affected FastFind. I also think it has been tough for, as guys who buy leads have been consolidating from the lead sellers, we are trying to build a new business almost from scratch, with a different value proposition, with a different -- you know, selling the value of the Bankrate consumer and building it off of a lower base and trying to do it slowly, and we sort of ran into the position of not being important enough to anybody. They wanted a guarantee of volume and they had a lot of guys -- a lot of guys, as the consolidation of the industry was going on -- and I mean consolidation by the lenders buying, not consolidation of aggregators -- who were forcing that to happen. They wanted fewer suppliers, and we were not big enough to anybody at that point to matter.

It is a little bit of the falling tide was lowering all boats, but to be sure, some of it was our execution, some of our approach, and that we did not really have anything unique, other than the fact that it was coming from Bankrate.

Operator

Your final question comes from the line of Heath Terry with Credit Suisse.

Heath Terry - Credit Suisse

Thank you. I was wondering if you could talk about the non-mortgage categories, which one specifically that you are seeing the strongest performance out of, and which ones you intend to put the most investment time and dollars in the year or so ahead?

Tom Evans

Deposit has been obviously a huge winner for us, and what has been great about that is -- enthusiastically, so we are excited about that.

The others that are doing well, home equity, there is tremendous demand for home equity; credit card, where again, we have a lot of demand for credit card and insurance, so those are three areas.

The one area where we hear constantly from advertisers, and also at the same time from our consumers, that they would like more information, more help, is in the area of retirement, sort of retirement/financial planning.

You know, as the baby boomers age, and we are hopefully going to live longer and need more money in retirement, that whole generation is concerned about that, and I think Bankrate can really provide some help and some benefit in that area.

Deposit number one to be sure, and then, you know, home equity, credit cards, and insurance.

Heath Terry - Credit Suisse

Thank you.

Tom Evans

Thanks very much. Again, we want to thank you for your time and attention today. We are excited about our business going forward. We appreciate the support of our investors, and on behalf of the board and the management of the company, I want to say a special thanks to the employees who have done a great job and continue to do so.

Good day, everyone, and thanks for joining us.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Bankrate Q3 2006 Earnings Call Transcript
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