Bankrate Q4 2006 Earnings Call Transcript

Transcripts

Bankrate, Inc. (RATE) Q4 2006 Earnings Call February 6, 2007 11:00 AM ET

TRANSCRIPT SPONSOR

Executives

Tom Evans - President and CEO
Ed DiMaria - SVP and CFO
Bruce Zanca - SVP of Communications and Marketing

Analysts

Andrew Jeffrey - SunTrust Robinson Humphrey
Youssef Squali - Jefferies & Company
Mark May - Needham & Company
Heath Terry - Credit Suisse
Colin Gillis - Canaccord
Mark Mahaney - Citigroup
Richard Fetyko - Merriman Curhan Ford
Stewart Barry - ThinkEquity
Jordan Rohan - RBC Capital Markets
Victor Anthony - Bear Sterns

Operator

Good day, ladies and gentlemen, and welcome to the Bankrate, Inc. Fourth Quarter 2006 Earnings Call. My name is Tanya and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Mr. Bruce Zanca, Senior Vice President of Communications and Marketing. Please proceed, sir.

Bruce Zanca

Thank you. Good morning everyone. Thanks for joining us on this conference call to report Bankrate's fourth quarter and full year 2006 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 today. First, Tom will give us some results and color on the quarter. Ed will give us some detail on the financial results. And then we'll have plenty of time to answer any questions that you might have.

Before we begin, I need to take care of some 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 in 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 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 Annual Report and on Form 10-K and the subsequent filings with the SEC.

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

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Tom Evans

Thanks, Bruce. Good morning everyone and thanks for joining us. We've a lot to cover today, and I am sure most of the focus is going to be on 2007, and how our business is progressing. So I'll move in pretty quickly through this. We'll first review the fourth quarter fiscal year 2006 and then we'll get into where we intend to go in 2007.

First, we are going to be reducing some of the details that we've given in previous calls. Initially, when I arrived at the company in 2004, we began to change the business model. We thought it was important that we lay out where we were going, how we were going to get there and give you enough details to be able to monitor our progress along the way.

Now that we have a number of advertisers, partners and quasi-competitors that are now listening to the call, we believe it's not in our interest, nor do we think it's really a need to give the kind of detail we've given in the past. The people that follow the company understand our business; will still find it easy to track our progress without us having to give away information and the trajectory of our business.

Having said that, as you could see from the results, the fourth quarter was a very solid quarter for the company. Revenue was up 49% over Q4 2005 and up 6% sequentially in a quarter that was seasonally our slowest in terms of traffic.

EBITDA was up 99% over the same quarter in 2005 and up 31% sequentially. And EBITDA margins increased from 29% a year ago to 39%. We generated 120 million pages in the quarter as compared to the 97.6 million in the same quarter of 2005. For the year, revenue was up 62% and EBITDA was up 85% over 2005.

Now, I will let Ed go through the fourth quarter and the 2006 financials and then I'll put some color on the business following that. Ed?

Ed DiMaria

Thanks, Tom. I'll get started by saying that the fourth quarter was really solid, particularly the core business. We posted the highest quarter in the company's history in terms of revenue, profit, EBITDA, EBITDA margins and EPS, and we did this despite the fourth quarter being traditionally weakest in terms of traffic. So we are pleased to finish 2006 on such a positive note.

Now, before I take you through the results, first a quick reminder that our financial statements are prepared on a GAAP basis, although we do provide certain non-GAAP financial metrics such as results excluding non-cash stock compensation expense, which was new in 2007, and the legal settlement recorded in the third quarter. We provide such supplemental non-GAAP financial metrics to aid in the review of our operating results.

But first, the highlights. Total revenue came in at $20.7 million for the quarter, an increase of $6.8 million or 49% over the $13.9 million for the fourth quarter of 2005. EBITDA excluding stock compensation expense nearly doubled to $8.1 million, which represents a 39% EBITDA margin for the fourth quarter of 2006. This compares to $4.1 million or a 29% EBITDA margin in the fourth quarter of 2005.

Net income including stock compensation expense came in at $3.9 million for the quarter compared to $2.6 million in 2005. Earnings per diluted share were $0.21 compared to $0.15 one year ago.

Now, looking at EPS on an apples-to-apples comparison, earnings per diluted share excluding stock compensation expense were $0.27 compared to the $0.15 last year, which is a bottom line improvement of 80% for the quarter. For the full fiscal year, revenue came in at $79.6 million compared to $49 million for fiscal 2005, representing an overall top line increase of 62%. EBITDA for the full fiscal year excluding stock compensation expense came in at $28.1 million, which represents a 35% EBITDA margin for the year compared to $15.2 million in fiscal 2005. So, this is an 85% increase in EBITDA dollars for 2006 over 2005 and we improved our EBITDA margin for the year from 31% to 35%.

Now taking a closer look at revenue, the $20.7 million for the quarter is comprised of online revenue of $17.1 million and print revenue of $3.6 million. This compares to total revenue of $13.9 million in the fourth quarter of 2005 broken down to $11.6 million in online revenue and $2.3 million in print revenue. The online revenue of $17.1 million increased by 47% over the $11.6 million reported in the fourth quarter of 2005. The increase in online revenue was driven by increases in both graphic advertising revenue and hyperlink revenue.

Graphic advertising revenue increased by 38% from $7 million to $9.7 million, driven by greater volume and higher CPMs. We continue to commend higher CPMs along with strong demand by advertisers for access to Bankrate consumers. Hyperlink revenue increased from $4.6 million to $7.4 million or 62%. The increase was driven again by volume as well as price. Our rate tables business continues to be an exciting model for us with growing demand and an increase in the number of active advertisers every quarter. In addition, we continue to have pricing leverage as a result of the quality leads we generate and the conversion rates enjoyed by our advertisers. All of this adds up to our belief that our rate table model will be a growth driver for us in the future, providing opportunities for expanded offerings with better economics.

Now, let me touch briefly on FastFind. This business continued to under perform in the fourth quarter as we've predicted on our last call. This prompted us to pull back on impressions for FastFind in favor of higher effective CPMs from our core advertising customers. Again, we've planned this pullback. Our primary focus for FastFind is relaunching the business in 2007, which Tom will be covering in the business section of the call.

Our new model will be focused on extracting better economics by taking advantage of our strength, the Bankrate consumer. We know, we produce high quality leads with high conversion rates and our new model will give us the ability to immediately monetize our leads through a broad network at improved rates without the filters and inconsistent lender demand we had in 2006.

Print revenues came in at $3.6 million compared to $2.3 million in the fourth quarter of 2005. But keep in mind that 2005 compared to 2006 is not an apples-to-apples comparison, as we closed the MMIS acquisition on December 1, 2005. So, in the fourth quarter 2005, we have only one month of MMIS revenue. We were able to reduce the deterioration of the print business in the current quarter by continuing to work through our customer base and improve the status of our receivables.

We slowed the rate of new customer suspensions for non-payment and we recorded less bad debt expense for this segment in the fourth quarter compared to the third quarter of 2006. So, we did make some progress to build on.

Our gross margin for the fourth quarter of 2006, excluding stock compensation expense came in at 73% compared to 71% in the fourth quarter of 2005. The gross margin for online revenue was 86% in the fourth quarter of 2006 compared to 83% in 2005. The improvement is the result of higher pricing and sell-through levels in the fourth quarter. The print business margin was 13% for the quarter compared to 10% in 2005, reflecting some of the improvements we've made to this business this year.

The overall gross margin for the full year was 70% in 2006 compared to 74% in 2005. But remember, in 2005 we derived only 12% of our total revenue from print compared to 20% in 2006, which negatively skewed the overall gross margin in 2006. We expect online revenues to grow faster than print revenues thus making print a smaller component of our business going forward.

Indirect operating cost came in at $9.7 million for the quarter, including $2 million in stock compensation expense compared to $6 million in the fourth quarter of 2005. The increase for the quarter over 2005 resulted from incremental G&A expense related to the acquisitions completed in December 2005 and of course the $2 million in stock compensation expense in 2006.

We continued our modest ramp in keyword marketing spend this quarter to drive more traffic to our sites. Our fourth quarter investment in keyword marketing was made at solid ROIs to help fulfill our strong advertisers' demand against lighter traffic due to the holidays. Traffic is traditionally lighter in the fourth quarter since less consumers are in market and most are preoccupied with the holidays and put off financial decisions till the New Year.

Another item that I wanted to point out is that our non-direct operating expenses actually decreased by over $600,000 in the fourth quarter 2006 compared to the third quarter 2006, after taking out the $3 million legal settlement in the third quarter and stock compensation expense in each of the quarters. The decrease was driven by lower legal cost and less bad debt expense.

We ended the quarter with 164 employees, up two from the end of Q3 2006. While we expect to add some additional staff in 2007, the primary focus of these additions will be to further enhance the business and increase our top and bottom line performance. And as you know from listening to us each quarter, we are very disciplined in determining headcount or other cost additions to the business, as our focus is improving the bottom line and driving additional cash flow.

Our income tax provision of $2.8 million for the quarter and $6.9 for the year represented a 42% effective rate on book income for the quarter and 41% for the fiscal year. Our NOL will effectively be used up on our 2006 annual tax return, and therefore will no longer be available in 2007 to offset current taxes due.

The accounting rules associated with FAS 123R drive up the effective tax rate on book income, due to the required unfavorable treatment of ISO compensation expense in determining our provision. Now nothing has changed for tax with these options, but FAS 123R does not allow you to treat the newly reported compensation expense under the standard, as the timing difference and take the deduction on book income, even though experience may show that you will get the deduction for tax.

We ended the year with $110 million dollars in cash, up $7 million over the third quarter 2006. The growth of $7 million dollars in cash over the past three months was realized despite of paying out the $3 million to settle the lawsuit as well as paying out the associated legal fees. So, we added nicely to our cash war chest in the fourth quarter, and of course our balance sheet remains very solid with zero debt.

Now recapping the quarter revenues were up 49% to $20.7 million. EBITDA, excluding stock compensation expense, was up 99% at $8.1 million and EPS, excluding stock compensation, were $0.27 per diluted share for the quarter.

And with that I'll turn it back over to Tom to provide the business report. Tom?

Tom Evans

As Ed pointed out there are a lot of nice things should happened in the fourth quarter, it gave us nice momentum going into 2007. Let me point out a few things, that I think made 2006 a great setup for continued growth in this current year.

Row one, our audience continues to grow. Traffic in both page views and unique visitors continues to grow as more consumers are using the internet to research and shop and are finding Bankrate a compelling place to do so. Traffic to our core site Bankrate.com grew by 10% over Q4 '05 to a 102 million page views from 93 million in the same quarter last year. We averaged around 4.6 million unique visitors for the month and uniques for the year grew by 14%. Including Interest.com and Mortgage-calc, page views were 120 million for the quarter. More people are using Bankrate sites to research and shop for financial products.

Number two, demand for graphic advertising strengthened throughout the year and we were able to press for higher rates while attracting more graphic advertisers. Graphic advertising in Q4 grew 38% over the same quarter last year and grew 36% for the fiscal year and you will see a wide variety of big name brands on our website, multinational banks, automotive companies, brokerages, credit card companies, investment companies et cetera. Advertisers are making larger commitments to us because Bankrate is working for them.

Number three, we continue to be pleased with the consumer and advertiser interest in our rate tables and continue to see the strength from both the mortgage and deposit business with the number of advertisers on our tables continuing to grow. Cost-per-click revenue was up 62% for the quarter and 68% for the year. Interestingly, in the fourth quarter, both mortgage and deposit click volume increased from the prior year and that growth combined with our rate increase had an obvious positive impact on CPC revenue. During the year our Hyperlink business showed amazing strength in both volume levels and in pricing power throughout the year exhibited by rate increases in January, July and October.

Number four, it's not a secret that the newspaper businesses is not all rosy. Newspapers are having a tough time, and we have seen the headwind that the industry is facing have an impact on our print business as well. 2006 was a transition year for us integrating the 300 former MMIS newspapers and advertisers into our 150 Bankrate Consumer Mortgage Print Guides. While not easy, we think it went pretty well. This is still a business that’s profitable and also provides a great marketing tool for us to be in millions of newspapers a week, where people come across the Bankrate data and Bankrate brand in a high quality editorial environment.

We've signed some new papers recently that will announce as they go live later this quarter, and have a lot of advertiser interest in our free-standing insert program that we launched last year with E-Loan as the first sponsor.

I was looking through our transcript from last year's call, and with the exception of FastFind, we are able to accomplish just about everything we setup in our 2006 agenda. Obviously, if FastFind had done well, it could have been an even better year.

So, what's in store for '07? Well first, we remain bullish about the advertising market and in our ability to compute or ramp both our Graphic and CPC revenues. We think the demand will remain strong and that we'll have some degree of pricing power in both areas.

We also have been expanding our available inventory base by networking the Interest.com, Mortgage-calc, and Bankrate.com sites. By selling the three sites as a network with the same ad serving capabilities, it will make it easier for our advertisers to plan and execute their campaigns, allowing us to optimize those assets and create a more efficient and effective sales operation. Advertisers will now only have to make one buy at the network instead of buying Bankrate, Interest.com, and Mortgage-calc and scheduling those campaigns separately as they did in 2006.

We've spoken before about search engine marketing and keyword buying. In 2007, when we see advertising demand increase we plan to spend more on keywords to drive targeted impressions to our network. By doing so we think we can increase our traffic at the times when advertising demand is high or as we saw occasionally in 2006, when demand actually outstripped our available inventory. We just started this in Q4, but our early tests indicate, as Ed mentioned, that we will be available to do this at certain volume levels at very attractive ROIs. We don’t know how big this can become, but we intend to find that over time by methodically increasing our spending and closely monitoring the return on that investment.

We have also launched behavioral targeting with two partners to manage two distinctive advertising networks. What behavioral targeting allows us to do is, to identify consumers who come to our websites, track them on an anonymous basis and then serve them targeted ads when they are on websites on one of the two partner's networks. We launched it this month, so it's really early to tell whether we have any sense of either the success of those efforts or on the size and impact of those initiatives. But, we will watch them closely report on the progress and scope of our behavioral initiatives in subsequent calls.

Now for FastFind. We promised to report we had a new solution in place for FastFind and I am happy to tell you that we believe we have accomplished that. If you will remember our problem with FastFind wasn’t in getting people to click on the ads and wasn’t getting people to click on the forms, we did that pretty well. Our problem was we weren’t able to establish the network of lead buying lenders that allow us to monetize the leads we generated.

I am happy to announce that we believe we have solved that problem by partnering with LendingTree to tap into the LendingTree lender network. We believe that by doing so we will have access to an important and well established lender network that we will be able to fully monetize the leads we generate.

Additionally, in our desire to have this business get off to a fresh start, we are changing the name from our platform, from FastFind to Bankrate Select. We think that a better user experience warrants a new name. We believe that consumers will value and trust the Bankrate brand and we expect that click and conversion rates will be higher as a result of that trust.

It had always been our intention to use the Bankrate brand and to surf off that credibility when we originally bought FastFind. We believe with a re-launch of this effort later this month that now is a good time to do so.

The terms of our contract, I can't discuss the specifics of the agreement with LendingTree. However, we are excited about the opportunity to make Bankrate Select our lead generating business, a meaningful contributor to our business going forward. We are excited to be working with LendingTree and are confident that this is going to be successful for both our companies.

We have plans for a Phase II to be implemented in the future, where we get further down the goal -- further towards the goal of enabling our consumer to apply and be approved for a loan online with a single session. But more on that at a later date.

I’ll anticipate a question and talk about the $110 million plus sitting on our balance sheet that Ed mentioned. We have been a little frustrated that we haven’t been able to better put that money to work on the acquisition front.

As you know, we have targeted the areas of real estate, insurance, retirement and financial planning. We have looked at several companies, who just haven’t found the right fit. In some cases where the business is too fit, we have found the valuation expectations of some private companies to be vastly different from what we consider to be reasonable.

We don’t want to do anything stupid with some of the best decisions we made last year, where things we decided to walk away from and not do. However, we are still very active and constantly looking at opportunities and are confident that we will be able to put the capital to use wisely and to continue to grow our business.

As for guidance, in 2007, we expect online revenue to make up approximately 83% and print approximately 17% of our total revenue. And as was the case in 2006, we expect that the online components of the business will grow at a faster pace than the print business, continuing to improve the margins.

As to guidance for the year, we are forecasting revenue of between 95 and $100 million; and EBITDA, excluding stock comp, of between 36 and $39 million for the year. We also believe that the company's growth trajectory will be a little different from 2006, and that revenue for 2007 will show more sequential quarter-to-quarter progress than it has in past years. As things like SEM and Behavioral Targeting ramp, we expect that revenue will grow during the course of the year.

We certainly won't be at full speed on either of those initiatives in Q1, nor will be with Bankrate Select. So the revenue we want to build throughout the year, which as I said, will be a little different from the years past.

We have been able to successfully improve the margins year-over-year and believe that that will continue to have the same kind of operating leverage going forward. So there is plenty to do, but nothing really looks to be out of our reach.

I think that covers our remarks. And with that, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Andrew Jeffrey of Robinson Humphrey. Please proceed.

Andrew Jeffrey - SunTrust Robinson Humphrey

Good morning.

Tom Evans

Hi, Andrew.

Andrew Jeffrey - SunTrust Robinson Humphrey

A couple of questions for you, just when I look at the page view growth you put up in this quarter, a couple of things there. One is; could you give us a sense of what the organic page view growth looked like? And then, two, it looked like maybe there was a little bit of tradeoff in the quarter relative to recent performance between volume and pricing, just as measured by revenues per page view. Could you touch a little bit on that dynamic and maybe what you anticipate in 2007?

Tom Evans

Sure. The organic growth was about 10%. I mean, we were still running in the ballpark of sort of 75 to 1015 in terms of the organic traffic, partner traffic, and SEM traffic. So from a page view standpoint, revenue per page view was up for the quarter, as we ran – it certainly was up from Q3, as we ran fewer pages and generated more revenue. And, it’s a byproduct of pricing increase and sell-through, and we saw both of those, sort of work very favorably in the fourth quarter. Now, there will be times during the course of the year, where we’re really having to push to generate -- we believe to generate more traffic to satisfy the advertising demand, and that’s what we think the Search Engine Marketing will do of course, as well as the Behavioral Targeting, where we have that incremental demand.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. But no explicit tradeoff in your mind between volume and prices is taking place or is contemplated?

Tom Evans

Absolutely not. No.

Andrew Jeffrey - SunTrust Robinson Humphrey

Okay. And then a question on Bankrate Select, there is been some press given to a new model, a new competitor. This route exchange has more of an open marketplace for mortgage leads? And I am just wondering if you view that as a competitive threat and maybe if that drove Bankrate and LendingTree together or little bit and then just as a corollary whether or not Bankrate Select revenues are included in the '07 guidance?

Tom Evans

Yes, the route, I can tell you, is not even on the radar screen in terms of its impact on the business or a consideration. I think, still, the two most powerful entities out there in terms of leads, are LendingTree, LowerMyBills, then you've probably got NexTag and InterActive and I am not even sure who is in the top 10, don’t know but that would be my guess, it certainly didn’t have an impact. I think the important thing is to focus on the value of the Bankrate consumer and one of the things that we know is this, the rate tables drive an in-market consumer, the clicks on graphic ads, as we told, convert very well. We have a three-year history of really understanding how well our consumer converts and we just hadn’t made that happen on the former FastFind now Bankrate Select side, primarily because the lender network that we had put together wasn’t as effective. We think we solved that problem with partnering with LendingTree and it's still -- we are still being pretty conservative about what we think the impact of that business is going to be in 2007. It’s less than 10% of the business, as we forecasted.

Andrew Jeffrey - SunTrust Robinson Humphrey

Thanks a lot.

Tom Evans

Thanks, Andrew.

Operator

Your next question comes from the line of Youssef Squali of Jefferies & Company. Please proceed.

Youssef Squali - Jefferies & Company

Thank you very much, Youssef Squali. Congratulations on a very good quarter. I have two questions; first, I guess just a quick housekeeping item. Can you just quantify for us FastFind's contribution this quarter and CapEx? And secondly, I think you said earlier something to the effect that you feel that you still have some pricing power that you can draw from in '07. Can you help us just quantify what kind of price increases baked into your '07 revenue guidance for the online business?

Tom Evans

Sure. The FastFind's contribution in the fourth quarter was right around $350,000. As Ed mentioned there was a trade-off. We ended up selling more graphic advertising revenue and putting FastFind advertisements. The CapEx for the quarter was about $450,000 and then in terms of rate increases what we got, we got sort of -- as we said before, low double-digit rate increases are what were targeted, something in sort of the 10% to 15% range. And again, remember that that's now going to be sold across the network. So, if we are selling Interest.com and Mortgage-calc at that CPM along with Bankrate, it -- that the network effective at makes the impact better than 10% or 12%.

Youssef Squali - Jefferies & Company

Okay. And lastly, just one quick question, maybe for Ed. Was there any change to the way you compute your share count? Historically, you had actually given two EPS numbers. I've noticed that you have only given one and your share count went down, is that just price-related?

Ed DiMaria

The way we do -- we do the share count in two different ways. We do it based on a GAAP basis where we -- you just take weighted average shares divided into GAAP earnings, and then for purposes of FAS 123R, we exclude the tax affected stock compensation expense and divide it into the weighted average shares. And the only point there is that, we do the weighted average share calculation a little bit different. In that you add back the effect of weighted average shares related to FAS 123R. So, it's pretty much the same as we've always done it.

Youssef Squali - Jefferies & Company

Okay. Thanks.

Tom Evans

Thanks, Youssef.

Operator

Your next question comes from the line of Mark May of Needham & Company. Please proceed.