Bankrate Q1 2007 Earnings Call Transcript

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Bankrate, Inc. (RATE)
Q1 2007 Earnings Call
May 2, 2007 11:00 am ET

Executives

Bruce J. Zanca - Senior Vice President
Thomas R. Evans - President, Chief Executive Officer
Edward J. Dimaria - Chief Financial Officer, Senior Vice President

Analysts

Colin W. Gillis - Canaccord Adams
Youssef H. Squali - Jefferies & Co.
Stewart Barry - ThinkEquity Partners
Andrew W. Jeffrey - SunTrust Robinson Humphrey
Heath P. Terry - Credit Suisse
Ross Sandler - RBC Capital Markets
Mark May - Needham & Company
Richard Fetyko - Merriman Curhan Ford

Presentation

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2007 Bankrate earnings conference call. My name is Clarissa and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Mr. Bruce Zanca, Senior Vice President. Please proceed, sir.

Bruce J. Zanca

Thank you. Good morning, everyone. With me here in our New York office is the company’s President and CEO, Tom Evans, and our Senior VP and CFO, 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 details on the financial results and then we will have some time to answer your questions.

Before we begin, I need to take care of the legal prerequisites. Our attorneys 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 aspect 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 2006 Form 10-K and our subsequent filings with the Securities and Exchange Commission.

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

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Thomas R. Evans

Thank you, Bruce. Welcome, everyone, and thanks for joining us on our first quarter 2007 earnings call. I trust that most of you have seen the press release that we put out this morning. As in past calls, we’ll of course walk you through our quarterly results and then we will take your questions.

As we mentioned in our last call, we will be providing somewhat less detail than we have given in the past. Our feeling is that by now, people understand our business model and they have been able to see the changes that we have made to the business, so the detail that we have gone into in the past is probably not necessary now, and from a competitive standpoint, not now in the best interest of the company.

So first, the quarter. I am delighted to report that the first quarter 2007 ran slightly ahead of our revenue budget and well ahead of our EBITDA expectations. Revenue for the quarter was $22.2 million, adjusted EBITDA for the quarter was slightly over $10 million, and net income excluding the non-cash stock comp expense, the way most of the investors and analysts measure the company, was $5.4 million, or $0.33 per share fully diluted, a little bit ahead of where we thought we would be at this point.

Gross margins rose to 73% and EBITDA margins grew to 45%. And in the first quarter, traffic remained strong and advertiser demand remained strong. More on that later, so now, Ed will go through the financials for the quarter in detail. I will then give you a business update and then we will be happy to take your questions at the end. Ed.

Edward J. Dimaria

Thanks, Tom. Well, the first quarter is now on record and you can see that we kicked off the year with a great start, particularly in the core business. We are pleased to report that we accomplished what we set out to accomplish in Q1 and the results show.

Our margins increased faster than we anticipated, driven by an assortment of factors, including really strong traffic, pricing, advertiser demand and cost controls. We set records on all fronts in terms of financial performance, so here are the top line results: total revenues were $22.2 million, up 12% over Q1 2006; adjusted EBITDA, excluding stock compensation, was $10 million for the quarter, up 51% over the $6.6 million reported in Q1 2006; and net income on a GAAP basis increased by 120% to $5.4 million over the $2.3 million we reported in Q1 2006.

EPS on a GAAP basis came in at $0.28 per fully diluted share, an increase of 100% over the $0.14 per fully diluted share we reported in the first quarter of 2006. On an adjusted basis, excluding stock compensation expense, EPS per fully diluted share came in at $0.33, an increase of 57% over the $0.21 we reported in Q1 2006.

A quick reminder, when I cover the results, I do present GAAP as well as certain non-GAAP financial metrics. The non-GAAP metrics exclude non-cash stock compensation expense, which helps assist the audience in evaluating our results on an historical basis.

Now let’s jump right into revenue so I can provide some more color that I know everybody is anticipating. As I just mentioned, revenue came in at $22.2 million, an increase of 12% over the first quarter 2006 revenue of $19.8 million. Revenue from the online portion of our business came in at $19.1 million, compared to $15.6 million, an increase of $3.5 million or 22%.

Looking deeper at the core business, excluding FastFind, which I will cover in a minute, the increase in comparable core online revenue was actually $4.6 million, which is a very solid 32% increase.

Our graphic advertising business got off to a slow start in January, but quickly caught up in early February and never looked back. As I am sure you are aware, in January many advertisers were still buttoning down annual spending levels and business objectives. This is the case every year. One good thing, however, was more advertisers were signing up for annual programs with us and that took a little longer to nail down.

Graphic advertising revenue for the first quarter of 2007 came in at $10.5 million, an increase of 14% over the $9.2 million reported in the first quarter of 2006. Now, looking at graphic advertising excluding FastFind, the graphic advertising business grew by 31%. Growth drivers to this business included both higher rates as well as more impression sold. Also, as we mentioned last call, we launched the network sales approach to our graphic advertising in January 2007. This approach provided an increase in advertising inventory levels as interest in mortgage calc are not included within the network. Demand levels continue to remain strong and CPM rates increased.

Our traffic numbers were strong all quarter long, from the beginning of January right through the end of March, which provided more inventory than expected. Page views for the quarter were $143.2 million, up 15% over the $124.2 million in Q1 2006, and up 19% over the $120.6 million reported last quarter, the fourth quarter 2006.

Now, looking at cost per click hyperlink revenue, or CPC, revenues came in at $8.6 million in Q1 2007, compared to $6.5 million in Q1 2006, representing an increase of 33%. The increase was driven, as was the case with graphic ads, by both higher rates and greater click volume to the tables.

We are continuing to see growing consumer migration to the rate tables when visiting the site and demand from our advertisers for the CPC program has increased, as we now have over 700 advertisers on the rate tables.

Given the noise in the marketplace, the results of our core business may seem counterintuitive to some who do not understand the Internet trends and in particular, the Bankrate business model and our positioning in the industry. But remember, our success spans from the quality of the Bankrate consumer and the secular trends driving more research and advertising online.

Also, a tighter mortgage market continues to bode well for us and net advertisers are becoming more focused and efficient. Our business model is tailor made to capitalize on these trends, as the results show.

Now let me update FastFind and Bankrate Select. As many of you are aware, we began the Bankrate Select offering at the end of Q1 2007. This program is developmental in nature and we believe it will begin to contribute during the third and fourth quarter this year. The contribution during the first quarter was very small in that we were running it on a limited basis with mostly remnant ads to evaluate performance, quality and conversion results.

Our print revenue was $3.2 million for the quarter, representing a decrease of 24% from the first quarter of 2006. As was the case in 2006, we continue to cut off some MMIS advertisers for non-payment. This results in less advertisers on the newspaper tables and lower revenues.

We did add several new newspapers this quarter and we do expect this business to gradually improve during the year, although it will most likely be down for the full year 2007 compared to 2006.

We continue to earn a small margin on our print segment and view the business as great branding and another distribution point for our online advertisers, and as a free advertising platform for us to attract additional web traffic with the Bankrate URL on every print table.

Our gross margin on sales for the quarter was 73% compared to 67% in the prior year. The increase in margin was driven by our revenue mix as well as higher rates. 86% of our business came from online sources, up from 79% in the first quarter of 2006. We expect that this will continue and obviously we are pleased to report that our online segment, at an 85% gross margin, is fueling our growth.

Our EBITDA margin excluding stock compensation expense increased to 45% for the quarter, up from 33% in the first quarter 2006, resulting in EBITDA of just over $10 million compared to $6.6 million in the same quarter last year. The increase of $3.4 million in EBITDA dollars during the quarter was driven on $2.4 million in incremental revenue, which represents a 141% incremental EBITDA margin on incremental sales.

Now of course, we had lower expenses during the quarter in order to accomplish this, but nonetheless a noteworthy achievement.

Please note that although we continue to expect higher EBITDA margins for the remainder of 2007 over comparable 2006 levels, we do anticipate ramping our SEM marketing program and other business development programs that will add some additional costs during the year. Tom will cover more on that in the business section of the call.

Operating expenses decreased for the quarter by $500,000 from $9.1 million in the first quarter of 2006, down to $8.6 million for the first quarter 2007. The decrease was driven by lower general and administrative expense, partially offset by higher sales and marketing expense. We did ramp our search engine marketing program during the quarter, although at a slower pace than we anticipated, given the strength of our organic traffic.

G&A expense decreased as a result of lower legal fees, and there were some costs associated with integrating the acquisitions during the first quarter last year.

We ended the quarter with 160 employees. We expect to add some additional staff in 2007, with the primary focus being product development and revenue growth. As you can see, we continue to be disciplined in terms of headcount, with a focus on improving the bottom line and driving additional cash flow.

Our income tax provision of $3.8 million for the quarter represented a 41.3% effective rate on book income, compared to $2 million, or a 45.6% effective rate in the prior year quarter. The fluctuation in the income tax effective rate is attributable to FAS-123R, whereby the effective rate on book income can fluctuate quarter to quarter as a result of ISO activity and the unfavorable tax provision treatment under FAS-123R.

Also, a reminder that our NOL was used up during 2006, making us a full taxpayer starting in 2007.

We ended the quarter with $120.7 million in cash and short-term investments, up $10.8 million over the $109.9 million reported at the end of last year. You may have noticed that we reclassified a portion of our cash and now show our investments as short-term investments on the balance sheet. We reviewed our portfolio of securities held with Credit Suisse and determined that although extremely liquid and short-term, they are more appropriately classified as short-term investments as opposed to cash equivalents.

Our investments earned $1.5 million before income taxes during the quarter. The growth in cash and investments was driven exclusively by $10 million in cash we generated from operations.

Wrapping up, the story for Q1 2007 is quite clear. The core Internet media business is strong, healthy, and expanding at a fast pace, and our initiatives are on track to make the contribution later on in the year.

Once again, revenues were $22.2 million; adjusted EBITDA was $10 million; and adjusted EPS was $0.33 per fully diluted share.

With that, I will turn it back to Tom to provide the business report. Tom.

Thomas R. Evans

As Ed mentioned, we believe the financial performance for the company in the quarter was very solid, so let me go through the component growth drivers for our business and give you some greater detail, but first I would like to make a comment about the overall economic environment.

During the quarter, at every one of the conferences we attended, we were asked what the effect problems with the sub-prime lenders were experiencing and the slowdown in the housing industry was having on our business. What we said at every one of those conferences we will reiterate today -- is that we haven’t seen any impact from the so-called meltdown in sub-prime.

We have more advertisers running at Bankrate today than we did at the beginning of the year, more than we had a year ago and more than we had two years ago. While we are well aware of the reported statistics that have indicated a decline in housing sales and mortgage applications, we have more consumers coming to our site, more people using our calculators, and even more people clicking on our rate tables both in the mortgage and deposit channels.

So let me run through some of the growth drivers. Of course, the first we want to mention is traffic. Notwithstanding all the noise during the quarter regarding the aforementioned housing economy, our traffic remained strong throughout the quarter. We believe that our website, given the value of our editorial content and the help it provides to a consumer, is even a more valuable source of information when mortgage rates are rising, and even more important when there is confusion in the market.

In the quarter, as Ed mentioned, our traffic grew to our highest level ever, 143 million page views. We also saw, according to our own Omniture measuring tools, that March was the first month that we ever exceeded 6 million unique visitors on Bankrate.com, which compares to 5.3 million in our best month a year ago.

In the quarter, unique visitors to Bankrate.com alone grew by 9.8%. In the first quarter, about 80% of the traffic to Bankrate came directly through our site, either through non-paid search or through people typing in the Bankrate URL. On top of that, around 10% of the traffic came through our co-brand and the remaining 10% of the traffic came from paid search.

So again, fully 90% of our traffic came to us free. We have said it before and it bears repeating, that there is a disproportionate value to free traffic and it had an obvious positive impact on margins.

As Ed mentioned, our paid search spending was actually down in Q1 from the prior two quarters, as the pace of organic traffic surprised us a bit and was above our estimated budgeted levels, so we needed to spend less on paid search.

In the area of graphic advertising, Q1 was typical of first quarters, and I mean that both in good and bad terms. January got off to a very slow start, as Ed mentioned earlier. We had a lot of proposals in the pipeline and a lot of promises that orders were coming in, but it just was not happening for the first 20 days or so in January.

In many cases, advertisers were just late getting their 2007 budgets approved in order. In the 25 years I have been in the media business, I can tell you this is unfortunately pretty typical. However, what made it all the more frustrating is that traffic was so strong in January and we did not optimize it at all.

However, as the quarter progressed, those orders that we were waiting for materialized, so that February and March were terrific. You will be happy to know that April was also a very good month in terms of traffic and graphic advertising.

So the late start in January was just sort of a year-end hangover. Again, we continue to see more new advertisers and more advertisers committing larger percentages of their total advertising spending to the Internet and Bankrate has become a core buy for many of them.

Those of you who watch our site closely, and I know now that some of you do because I get calls when new advertisers appear, have noticed new insurance, new credit card, brokerage companies, new automotive and other advertisers marketing on our site.

Graphic advertising demand is high. CPMs have increased and we believe will be a key driver for the company’s growth throughout the year.

Another obvious area of consistent strength for us as been the hyperlink rate table business. Ed mentioned that CPC revenue for the first quarter grew 33% over the year ago, and 14% over the fourth quarter of 2006.

Clicks in both the mortgage and deposit channels were up. It seems as though we are simply reaching more end market consumers than ever before. Similarly to our last few quarters, approximately 47% of that revenue came from mortgage and home equity clicks, 40% came from deposit and the remaining 13% from other channels.

Interestingly, the number of hyperlink advertisers continues to climb as well, again in spite of the more difficult housing environment. In fact, we have had a net increase in the number of advertisers every single month since we launched CPC, including each of the first four months of this year.

Understandably, the one part of our business that has been struggling is in the print area. We are seeing the same kind of softness in our print newspaper business that the newspapers themselves are experiencing. It seems that hardly a week goes by that there isn’t some story about a struggling newspaper company trying to figure out how to stem the bleeding that they are seeing in their advertising base. Advertisers are shifting money out of print and onto the Internet.

It is one of the reasons we are conservative in our guidance from a revenue standpoint. In Q1, as Ed mentioned, we were down $1 million in print revenue from the same quarter in 2006, and there were two reasons for that. One was the softness I just mentioned. The second was the fact that we have gotten more aggressive cutting off advertisers who are falling behind on paying their bills. You might recall that we mentioned that we began getting tougher on those folks in the middle of last year and we continue to do so.

Let me be clear though -- even with its challenges, we like the print business and our people have been doing a good job. We added five new papers this quarter and expect to add more during the rest of the year. We love the exposure that it gives the company and we still have hundreds of advertisers that are participating in our print products.

Also during the quarter, we sold another ad sponsored, freestanding insert. Wilmington Trust sponsored a 12-page FSI that ran in over 600,000 copies of USA Today on the east coast. Again, it’s a great way to offer our advertisers additional channels of exposure and a great way for us to provide multiple high quality touch points for consumers.

Toward the end of the quarter, we launched the lead-gen ads for Bankrate Select with, as we reported during the quarter, the Lending Tree lender network. However, by the time we got Select up and launched, a lot of the best ad inventory on the site had been sold, and as a result, Bankrate Select has had a modest start, so it is a little early to tell how well it is working. Also, our agreement with Lending Tree prohibits disclosure of any specific ROI or other metrics.

However, going forward, Select will compete internally on an ROI basis with some of the other advertisers on the site, so that we are in a position in having Select be a competitive revenue alternative for us when it runs. Currently, it is running mainly as a remnant ad, and we hope to ramp that up over time. Again, it is a little early to have any definitive projections about Select, but we are still believers that it will represent a significant business opportunity for us going forward and another strong offering for our consumers.

I will try to pre-empt any question by telling you that we do not have the announcements to make today with respect to any acquisitions. We continue to be very active looking for companies to add to our business. We have kicked a lot of tires and made a few offers, but obviously I haven’t gotten anything done.

As we see it, there is still a wide discrepancy between what we see as the value of certain assets and the expectations of private company owners or investors. Obviously a wrong investment would be problematic, so we will continue to work hard to uncover businesses that we think add value to Bankrate at a reasonable price.

We are working on a number of exciting new co-brand and other opportunities in the targeted areas we have discussed previously, like real estate, insurance, retirement and financial planning, and we will have something to tell you in the weeks to come.

Now, two other quick mentions, just to give you an update on some things we have talked about in the past that Ed touched on, SEM and behavioral targeting. SEM, the keyword buying or paid search, worked very effectively in Q1. While our needs were less than we anticipated due to strong organic traffic, we were able to opportunistically target traffic in some key areas, and we are actually able to improve the ROI that we had generated previously.

We remain very optimistic about SEM and plan to continue the use of paid search when it makes sense to do so.

Our behavioral targeting efforts in the quarter were more modest. We had in essence a soft launch, testing a handful of campaigns with a few advertisers. I can tell you the results were mixed.

Some performed fairly well and some were disappointing. The good news about the modest effort here is it allows us to test and analyze and move forward with what is working. We are still working with our behavioral partners to offer the best vehicle for our advertisers and we will attempt to ramp this component of our revenue up over the course of the year.

Lastly, an update on guidance. I must tell you, it is tough giving guidance and of course, you will all grind us about sandbagging. The fact is you will remember that in January, we issued our revenue guidance to be in the range from between $95 million and $100 million, and expected EBITDA, which excludes the non-cash compensation expense, to be between $36 million and $40 million for the year. When we last issued guidance, we also said we were not going to play the game of adjusting it quarter by quarter. It just makes it harder for us to manage a growing business and do the right things for the company over the long-term.

When we guided, we said that we expected the revenue mix to be approximately 83% online revenue and 17% to be print. As Ed mentioned, in Q1 it ran 86% online and 14% print.

In addition, we anticipated to be spending more for traffic and assumed higher levels of shared revenue in a few places with partners. Obviously with that revenue mix and higher-than-expected organic traffic levels, margins popped a little faster than we expected.

We are obviously feeling pretty good about our business. We have some investments to make to get to the next level. For example, we launched the current Bankrate.com site two years ago yesterday. Two years is a long time. There are things we want to do for our consumers and for our advertisers that the current site does not allow us to do.

First, the web is evolving and we want our site and our company to evolve with it, so we have recently begun a process to redesign our site that we hope will incorporate a lot of features that will improve both the user experience and enhance our business model.

It is not a huge dollar investment but it will require some expense.

We will also add a few people along the way -- not a lot, but a couple of additional people in finance, editorial, development and sales. We still plan to run the company very profitably at high margins, but we want to focus on our long-term growth. I hope that explains our stance on guidance.

Before we move on to your questions, I want to mention a couple of nice points of recognition that we received recently.

In early February, we launched a financial literacy editorial series that is running monthly on our site. It happens to be sponsored by our good friends at Discover Card. On March 27th, Congressman David Scott, a Democrat for Georgia and a member of the Financial Services Committee, mentioned the piece, mentioned our poll, and our senior analyst Greg McBride several times during congressional hearings. The story was also picked up by several television and newspaper organizations.

In a recently release report by the government accounting office, Bankrate's closing cost survey, which we ran on the site, was cited by the GAO three separate times.

Lastly, the Society of American Business Writers and Editors honored Bankrate's Laura Bruce with one of three enterprise reporting awards for her piece detailing banks filing suspicious activity reports on consumers with the federal government. The award was in the real-time news category from the most prestigious business journalism association in America, so we are not just about rates. It really reinforces the value of our content and the reason consumers come to Bankrate. So congrats to Laura and the Bankrate editorial team.

With that, we will move to your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Colin Gillis of Canaccord.

Colin W. Gillis - Canaccord Adams

Good morning. Congrats on a great quarter. Could you drill down a little bit for us on Bankrate Select and just what you see there in terms of the ability to drive more traffic, and also the deposit angle? Do you have any feedback in terms of how the leads are converting from Lending Tree?

Thomas R. Evans

We have pretty good information on how we are doing in terms of converting clicks to applications. We don’t have any visibility -- it takes a while if you’ve got a 60 day close. You don’t know what the closing ratios are. It is early to tell that information. We do know that the quality of the consumer is very high, that the loan amounts are higher than normal but the credit quality is higher than average. We like what we see to date. As we’ve said, we use it mostly on a remnant basis but so far so good.

We still think that there is a -- keep in mind, it is one of three offers for the consumer. The way we look at Bankrate and the lead gen, lead aggregation business is it still offers the consumer the opportunity of choice. The consumer can come in to Bankrate and they see the branded ads, the big names that we all know and they can click on those. They can go to the rate table and do their own work and decide for themselves, or they can go fill out an application and have lenders pursue them.

We want to continue to offer the consumers the opportunity of choice and we think there is a significant arm in the lead-gen business. We think that organic traffic and the quality of the consumer is an important component of that. The lead-gen business has had a pretty tough 12 month period, given the state of the mortgage industry and what I think some lead-gen companies are doing in order to maintain their business, but we are big believers in it over time.

Colin W. Gillis - Canaccord Adams

So from all the data that you have though, your traffic is coming in, converting as good if not the best compared to other sources?

Thomas R. Evans

That would be our claim.

Colin W. Gillis - Canaccord Adams

And then, any update as to when we might see a phase two, in terms of more of a real-time application process?

Thomas R. Evans

We think it is something that is -- it is early in the game now. That probably is not ready now. As you know, we think over time that the Internet is going to provide an opportunity for consumers to provide data and get a quote in real-time and be able to get a commitment on that, so it is something that we think long-term, we want to be providing to the consumer. Nothing to announce now but it is certainly something that we are interested in pursuing longer term and something we will contemplate when we redesign Bankrate.

As for your question about deposits, deposits continue to remain very strong. Our deposit clicks were up. Our deposit revenue was up. Number of active advertisers was up, so the deposit business has been a boom for us and so far, so good.

Colin W. Gillis - Canaccord Adams

And just one last one from Gary. He wants to know, is EBITDA still going to be ramping throughout the year? That would put us at the low-end of the guidance range and be closer to that $40 million number now.

Thomas R. Evans

The answer is we have some investments we want to make. We are a little bit -- as we said, we were a little bit surprised with the EBITDA results. Listen, no criticism or whining intended but the analyst community has had a habit of running out in front of the company, and if you added this quarter to the analyst expectations for the rest of the year, the adjusted EBITDA comes in right at the top-end of our guidance.

We would really like to get through another quarter, watch the traffic and advertising patterns for this quarter, and then discuss where we think we will end up for the year. That’s all. Given that, I am sure the numbers that our friends put out will be more aggressive anyway. We just want to be prudent about managing our business and do not want to set ourselves up.

It is sometimes frustrating for us to report a quarter like this, and I am not complaining, exceeding our revenue budget, exceeding where we said we would be on EBITDA, and to have some reporting it as a miss. So what we would like to do now is level set so we can get some of the out layers in line with where we think the growth trajectory of the company is.

Colin W. Gillis - Canaccord Adams

Fair enough. Thank you.

Operator

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

Youssef H. Squali - Jefferies & Co.

Thank you very much. A couple of questions; if I look at the business sequentially, I look at the page view growth of 19%, I look at the hyperlink revenue growth in the mid-teens, say 15%, that implies that most of the growth has really come in from the graphic or the editorial side of the business. Is there less transacting going on on the site?

Thomas R. Evans

Actually, Youssef, hyperlinks were up 33% and 14% for the quarter on quarter --

Youssef H. Squali - Jefferies & Co.

Right, sequentially, yes.

Thomas R. Evans

Yes. You know what, it is not -- not necessarily. Clicks, mortgage clicks were up, deposit clicks were up. We did not have a rate increase from the fourth quarter to the first quarter. But graphic advertising was growing. I do not want to get specific about our click per visit or click per page view, but it was a solid quarter in those areas.

Youssef H. Squali - Jefferies & Co.

On April 1, I think you raised your CPCs and Money Market by some 15%. Any early indication of how sticky that has been?

Thomas R. Evans

We have had more advertisers on the site in April than we did in March. We have yet to have a month where we have had a sequential decline in the number of advertisers on the site. We are up at the end of March to over 750 advertisers. Again, not that that’s a metric. We have a couple of hundred advertisers who did not get a click, did not pay us a dime in the quarter, but what it really points to is that this is an environment where the consumer is coming to find financial products. Not surprising, the guys who have the least favorable rates or the less aggressive rates are not getting many clicks, but advertising demand is high, both the graphic side and hyperlinks. The number of advertisers is up, so we are feeling pretty good about the business.

As I said, we have read a lot and heard a lot and been asked a lot about the sub-prime market, the mortgage market. Our mortgage clicks were up, our deposit clicks were up and revenue in both of those areas was up as well.

Youssef H. Squali - Jefferies & Co.

Okay, and then Ed, just a housekeeping item. Your G&A keeps fluctuating a great deal. It is down $1 million year on year. Can you explain why that is the case and how we should be thinking about it? The STM cost is not in that line, I am assuming?

Edward J. Dimaria

No. As I said on the call, we did have some integration costs last year that drove the first quarter G&A up a little bit. With those out, G&A came down for the first quarter ’07 over ’06. Also, there was the legal fee last year, so this is kind of the first quarter that we have run kind of clean, without the legal fees since the suit’s been behind us.

Youssef H. Squali - Jefferies & Co.

So this is good level to work off of?

Edward J. Dimaria

From here on out, to grow off of, so --

Youssef H. Squali - Jefferies & Co.

That’s great. Thank you very much.

Operator

Your next question comes from the line of Stewart Barry of ThinkEquity.

Stewart Barry - ThinkEquity Partners

Good morning. Tom, is the ROI on paid search higher in the CD or mortgage channel? The second question is what are the challenges in behavioral targeting? Has it been the advertiser adoption or has it been weaker click-through rates on network run graphic ads versus owned and operated, or has it bee just execution?

Thomas R. Evans

I will take your questions in reverse order. It has been in some of the channels, on some of the places we ran for some of the advertisers the click rates have not been as good as we had anticipated, they’d anticipated and we’d been led to believe, so I think what we are doing is we are trying a lot of things. We are testing -- you don’t get to determine with behavioral targeting your environment, but we are just seeing whether there is a difference between -- it is one of the reasons why we are using two vendors. We were able to determine and really look at which one had the better or the most productive network, which ads are working well, which ads aren’t working well for what advertisers.

It has been mostly just on the performance that we are monitoring really closely. Again, it is early enough into it -- and the reason why we -- and we said this last year, that we were going to put this out slowly, as is our style. Let’s not just go out there and blast away. Let’s do this very methodically, very thoughtfully, look to analyze all the data and let’s build it from that. We thought if we went out and sold this program to a lot of advertisers without really understanding the value and what the expectations should have been, that we could have had a mismatch. So we have done it very cautiously and that’s why when we talked about guidance and we talked about revenue ramp and everything, we said that we had thought we would see more sequential growth this year than we have in years past from a revenue standpoint because of some of these initiatives.

As for the ROI, I don’t want to get too specific, but we do charge more for -- if you look at our rate card, mortgage clicks are more expensive than deposit clicks. So you’ve got that but you also have got the fact that deposit traffic tends to click on a higher per visit ratio, per page ratio than mortgage.

I think mortgage, there is a lot more research, a lot more calculators and tools being used, a lot more back and forth before they make that decision. Deposit guys, there is very little research that needs to be done on the institutions besides just the star ratings, but most of it is go and find the best rate and make that deposit.

We actually look mostly at, what we talk about is blended ROI. The thing that was the most surprising and most pleasant to us, and we will thank our friends at Efficient Frontier for some help in this, but we are actually running paid search at a higher ROI in the first quarter this year than we did last year.

Stewart Barry - ThinkEquity Partners

Great, thanks a lot.

Operator

Your next question comes from the line of Andrew Jeffrey of Robinson Humphrey. Please proceed.

Andrew W. Jeffrey - SunTrust Robinson Humphrey

Good morning. Tom, it sounds like you have some considerable conviction in the lead-generation business. I am a little surprised that given the traffic levels and given the observable refi volumes that you are not a little more aggressive on your outlook there. Is there something -- is there a competitive dynamic here, do you think? Or is this just business that maybe is a refi boom kind of driven business as opposed to one that can excel in a more normalized kind of mortgage environment?

Thomas R. Evans

Great question. The honest answer is we don’t know. We do have great conviction about this business. We think this is going to be a big business for us over time. It is hard when you launch a brand new -- I mean, we have FastFind and Select running. They are running remnant right now. As I said earlier, most of the best positions on our sites are sold out.

It will be interesting to find out whether it is a -- some of it is clearly the market environment for the lead-gen business right now. It is just a tougher environment for that business right now and I think we are seeing some sort of weeding out of the players in that category.

The only thing that is sort of encouraging to us is the potential spike in the rate resets. At a recent Grants interest rate observer conference, a fellow name Bill [Akmin] from Persian Square gave details showing that the spike in rate resets really begins in June of this year and will last for several subsequent quarters. That really is when it ticks up dramatically. It sort of perks along for the first few months in this year and then June is when it really hits.

So we have our big catcher’s mitt out and we are ready for it. That will be the best test of the lead-gen business and to whether your premise is correct.

Andrew W. Jeffrey - SunTrust Robinson Humphrey

Okay. Just a capital allocation question, I know you want to make acquisitions. You are generating a lot of cash. You have a lot of cash on the balance sheet. The stock, irrespective of whether you want to bring the guidance up to we’re probably going to eventually here on EBITDA, the stock looks very inexpensive relative to other content providers. Why not just buy some back?

Edward J. Dimaria

We have had, as you’d expect a prudent board to discuss this, about whether we ought to be buying our own stock and have not made a decision to do so at this time. We have discussed it.

When we raised money, we did so with the intent of making acquisitions. That is still our intent. We have made several offers. As I mentioned, we have kicked a lot of tires. We just have not been able to reconcile some of the prices that are being asked for some private companies. We continue that effort. We have been outbid in a couple of places.

We are not in any way ruling out a stock buy-back plan, but we are just not announcing anything at this time. But we have had -- again, you’d expect a prudent board to do, we have had those discussions.

Andrew W. Jeffrey - SunTrust Robinson Humphrey

Thank you very much.

Operator

Your next question comes from the line of Heath Terry of Credit Suisse. Please proceed.

Heath P. Terry - Credit Suisse

You have talked in the past about the gap that exists, or that you believe exists, in the pricing for clicks in your hyperlink business versus what you typically see in sponsored search pricing. I was wondering if you could give us an idea of where you feel that gap is now and what kind of trends you are seeing and the financial keywords that you are buying as you try and grow the sponsored search traffic that you are seeing versus the trends that you are seeing in pricing on your own hyperlink?

Thomas R. Evans

I will give you, and we get this question a lot, and I will give you an answer, and mostly it is anecdotal information that we get. We have a number of people that will tell us for every 100 clicks they get, they convert that into let’s call that somewhere between 12 and 15 applications. They then are able to close 20% or 25% of those applications, so they end up closing three or four loans.

If they spent $6 a click, let’s just say on average, that is $600 across three or four loans, so it is somewhere between $150 and $200. That is just sort of my back-of-the-envelope math based upon just aggregating a lot of information.

Lenders will pay $770, $750 a converted loan, so we think there is still headroom. We have had a series of rate increases over the course of a couple of years because we thought when we launched CPC, converting from our [platform], they said that we were woefully under-priced.

We also believe that in a tighter mortgage market, that our leads, our consumers, because of their credit quality and because their the end market consumer, that we were more valuable.

As I can tell you, I’m not really sure what the number is at the end of the day but if there is a spike to quality and all of these lenders are looking for the guy who can quality for a loan now rather than when money was easy, Bankrate is a great place to find that.

The fact that we have had -- we have never had a month where we have not had a net increase in the number of lenders on the table, notwithstanding the fact that we have had a series of price increases. So we think there is more room. The only way you find out in the advertising business whether your too high a price is people start leaving.

There is absolutely, positively no evidence that we have reached that level.

Heath P. Terry - Credit Suisse

Great. Thank you.

Operator

Your next question comes from the line of Jordan Rohan of RBC Capital Markets. Please proceed.

Ross Sandler - RBC Capital Markets

It’s Ross Sandler sitting in for Jordan. Just a couple of clarification questions. You mentioned that traffic to he core Bankrate site I believe is up 9% year over year. Is that correct? Secondly, how have the traffic trends for all of your sites tracked or progressed in April after finishing the first quarter?

Thomas R. Evans

April was a good month. April traffic was strong. April traffic continued the trend that we have seen right through January, February, March, so April looks very similar to the last couple of months we had.

Ross Sandler - RBC Capital Markets

You talked about a bit of a slowdown in the first 20 days related to advertisers shifting budgets to more annual programs, et cetera. How much money do you think you left on the table with that, and would it be safe for us to assume that that is not going to happen in the next several quarters until we get to potentially 1Q08?

Thomas R. Evans

I don’t know that we calibrate the amount. It is probably $1 million in January. How do we guarantee we are not going to have the same problem -- some of it is just timing. It really is. As I said -- I will give you a little anecdote. I used to be in the news magazine business. I looked at Time, Newsweek and U.S. news coming out of the first of the year, the first two issues of Newsweek, which normally run 40 to 45 ad pages, had six pages and eight pages of advertising. So it was not just Bankrate.

That does not happen in April. It does not happen in May and June and July and it certainly does not happen in October when you hit your final quarter. Can I guarantee it is not going to happen? Gosh, I don’t know. It is execution on our part. April was fine. May is looking good. It is a little early to have total visibility on June, and the biggest item is always traffic and we are always trying to measure that and supplement that with paid search.

It really is -- it is not -- in the advertising business, you have two anomalies. January is always a little slow, not for the consumer but for the advertiser, and December is always strong for the advertiser, not necessarily the consumer. So if you look at our December of last year, we had a great December. We had a better December than we had a January, notwithstanding the fact that we had dramatically more traffic in January. It is just the way the business runs.

So don’t think it is going to happen again during the course of the year, and we are talking about what we are going to do next January to mitigate some of it.

Ross Sandler - RBC Capital Markets

Great, and just one last clarification; you guys stated that mortgage on the hyperlink side, mortgage represented about 47% and deposit about 40% for the first quarter. What were those two figures in 4Q?

Thomas R. Evans

In the fourth quarter, it was 42% deposit and 46% mortgage, so a little higher mortgage activity in Q1 than there was, on a comparable basis, in Q4.

Ross Sandler - RBC Capital Markets

Great. Thanks a lot.

Operator

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

Mark May - Needham & Company

Thanks for taking my questions. I have a few of them. The first one is seasonality; last year on a sequential basis, it looks like both your graphic and hyperlink revenues and your page views were down sequentially in Q2. Would you expect a similar seasonal trend this year?

Thomas R. Evans

I don’t think so, Mark. If you recall last year, we had a weird, as did all the other finance sites, sort of a weird anomaly where for about three weeks in late May, early June, there was a real slowdown in traffic. We experienced it and if you look at, and I hate to ever lead anybody to any ComScore or numbers like that, but other finance sites experienced the same thing.

We have not seen it, and all I can tell you is we have not seen it in April. We are just one day into May so it is too early to tell, but it did not happen in ’05. Other than that three-week period in ’06, everything else was sort of normal and it does not look like it.

Mark May - Needham & Company

The other question has to do with margins. Your online gross margins, very high, 85%, but they have been flat for the last three quarters. That said, you have been able to put up huge improvement in gross and operating margins in the last three quarters. It looks like primarily because of the lower mix of print revenue, which is a very low margin business, and I would imagine it is a drag on operating income. I would imagine you must be losing money on an operating basis in that business.

The question is why wouldn’t you just wind that business down? Related to that, would you expect to see continued sequential declines in print revenue throughout the year, or do you think it flattens out from here.

Thomas R. Evans

Let me take it in the three parts. First of all, it is slightly profitable. It is slightly profitable. We are not losing money on print. It is not a huge contributor to the bottom line but it is not a money loser.

Having said that, how do you measure the value of being in 40 million circulation every single week in high-quality newspapers, whether it is the Philadelphia Inquirer or the Denver Post or the San Francisco Chronicle or the Atlanta Constitution or the Chicago Tribute, the L.A. Times, and the value of the awareness because every time we are in there, it say Bankrate.com? The amount of organic traffic that drives to the site -- 80% of our traffic comes in organically. Half of that is people typing in the Bankrate URL. I don’t know where they see it. Perhaps they see it with some of our editorial listings in the Journal and the Times day to day and the other hundred newspapers that will list us editorially. Some of it has to be those mortgage and CD and money market guides that appear in the newspapers.

I like the business. It is absolutely something that we would not wind down because to me, it is like a $14 million, $15 million marketing campaign that we get paid for, and we get paid -- it is contextually relevant. It appears in real estate sections, in business sections. It is people who are looking for those kinds of financial products.

Listen, the newspaper business is challenging right now. Our guys are doing a really good job. It is not something we think is going to grow other than through adding new papers and through our FSIs, but it is definitely is not something that we would just --

Mark May - Needham & Company

Could you sell the business? Is it too integrated with your core offering that you could not sell it? I understand the argument not winding it down, but if you could sell it, given the -- playing devil’s advocate -- given the readership trends in print and the ROI that you are seeing from marketing and other channels, primarily online, if you are able to sell the business and reinvest it in other growing marketing channels. But I agree winding it down probably doesn’t make sense, but maybe I should have said could you sell the business.

Thomas R. Evans

We certainly have no plans to do that. One of the things that is a tremendous gating item for us we believe is in terms of competition and barriers for competition is how does anybody else break into this if we have tied up all the best newspaper relations, the best co-brand relationships and we’ve got a dynamic organic traffic website. How does anybody else get into this business and compete with Bankrate? I look at it as both an offensive marketing opportunity as well as a defensive opportunity. Again, I don’t know how we value or figure out how much of our traffic comes from that. I’d hate to find out by selling the business that it was significant.

Mark May - Needham & Company

Just moving on, one other question. You talked about investments in website redesign and some added personnel. I know you don’t give guidance on a quarterly basis, but you had about a $1 million upside to the consensus EBITDA number in the quarter. These sound like new investments since the last time you gave full-year guidance, so the question is are they new, would they be greater than $1 million, which was the upside to the street number, and what is your timing in terms of when the investments start to hit, or what quarter do they hit?

Thomas R. Evans

The first answer is no, they aren’t new. Second answer is no, they aren’t over $1 million. We have already started layering some of these expenses in. Some of it is headcount -- again, we are not talking about a tremendous number of people, but it is just something that we think -- you know, it is why we -- the management team is looking at how do we have the best year we could possibly have but also how do we set up our blocks for 2008?

When we redesigned the last time, it took us nine months. When we launched May 1 of ’05, it took us nine months to launch that site. It is going to take a while for us to set up all the things that we want and to develop that site.

I think we have done a pretty good job of not adding a tremendous number of people and not adding a tremendous amount of headcount or costs when we do things. We’ll look to do the same thing.

Mark May - Needham & Company

One very quick last housekeeping, Tom, I think you mentioned you had no rate increases during the quarter, although I think you took your normal rate care increase for graphical at the beginning of the year, if I remember. Did you say no rate increase because you were only talking about hyperlink or because you didn’t see really the benefit of the rate card increases during the quarter?

Thomas R. Evans

I was speaking specifically about CPC. There were no rate increases. We did have a rate increase on graphic advertising and we had no problem pushing that across.

Mark May - Needham & Company

What would you say your average CPM increase, either sequentially or year over year?

Thomas R. Evans

We are going to decline on answering that. We just -- we have a lot of advertisers who listen to our -- we hear a lot of advertisers listen to our call now and I don’t think it’s in our interest to --

Mark May - Needham & Company

Okay, well, thanks for answering at least most of my questions.

Operator

Our last question comes from the line of Richard Fetyko of Merriman Curhan Ford. Please proceed.

Richard Fetyko - Merriman Curhan Ford

Thanks. My question relates to the comment you made that you are getting longer term or annual commitments from your graphical advertisers. If you could expand on that; is that a change from prior years in terms of the commitment? How much of the guidance on the graphical advertising side of the business is in the bag considering some of these annual commitments that you received in the first quarter?

Thomas R. Evans

I think it is a change in the amount of money that is being pushed towards the Internet by advertisers is creating a little bit of a position for publishers where they’ve got valuable inventory and people are paying a premium for it and people are wanting to lock it down. So they are just making larger commitments earlier so that they can lock in the inventory so they don’t get it bought out from under them.

It has given us a little more visibility. It has given us a situation where some of our larger advertisers have made much larger, much larger longer term commitments to us than they had before.

I’m not sure that’s -- we love it. We think it puts us in good shape. I’m not sure we’re that unusual in that regard. This is kind of what we are hearing about a number of advertisers in a number of high-quality content sites, so it does give us a base to work off of, and then we scramble to make sure that we optimize every opportunity and every page view on the site during the rest of the year.

It is a good base to work off of. It is a bigger base than it was a year ago. It is a bigger base than it was two years ago. I think it is just symptomatic of what is going on in the industry right now and we are benefiting from that because we are a core buy to a lot of those advertisers, and they are concerned about not having access to that high quality inventory in subsequent quarters.

Richard Fetyko - Merriman Curhan Ford

Do you think that the anticipated spike in loan interest rate resets that you mentioned coming in June and the following quarters perhaps is driving that early demand for locking up the inventory?

Thomas R. Evans

I don’t think so. I honestly think it is more of a secular trend in the advertising business. I think as big guys are moving money on to the Internet from other media, they are looking to spend more money. I think they have probably run into some situations in the past where they have seen some of the things they wanted to buy were sold out. I think they are trying to make sure that that does not happen.

At least my sense, because it is not just mortgage advertisers. It’s people who are advertising credit card, deposit, banking products, checking products -- it’s a lot of things. It’s not just mortgage, so it is not just a focus on the mortgage reset business. It is really kind of across the board.

Richard Fetyko - Merriman Curhan Ford

Thank you.

Operator

Ladies and gentlemen, management will be happy to answer any questions offline. Please contact Bruce Zanca. At this time, I would like to turn the call back over to Tom Evans for closing remarks.

Thomas R. Evans

Again, thanks for your time and attention today. We believe, as we have said, that we see strong momentum on our business. There are still several areas where we are focused on growing and improving our business and we will continue to do so and report back to you on that progress. Thanks again for joining us and good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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