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Executives

Stacy Ybarra - Director of Corporate Communications

William J. Ruckelshaus - Chief Executive Officer, President and Director

Eric M. Emans - Chief Financial Officer and Treasurer

Analysts

Clayton F. Moran - The Benchmark Company, LLC, Research Division

Kartik Mehta - Northcoast Research

Michael Millman - Millman Research Associates

Ryan Bergan - Craig-Hallum Capital Group LLC, Research Division

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Richard Tullo - Albert Fried & Company, LLC, Research Division

InfoSpace (INSP) Q4 2011 Earnings Call February 15, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 InfoSpace Earnings Conference Call. My name is Amisia, and I will be your operator for today. [Operator Instructions] I will now like to turn the call over to Ms. Stacy Ybarra. Please proceed.

Stacy Ybarra

Good afternoon, and welcome to InfoSpace's Fourth Quarter and Full Year 2011 Earnings Conference Call. On the call today are Bill Ruckelshaus, President and Chief Executive Officer; and Eric Emans, Chief Financial Officer.

Before we begin, I'd like to remind you that during the course of this call, InfoSpace representatives will make forward-looking statements including, but not limited to, statements regarding InfoSpace's expectations, about its products and services, outlook for the future of our business and growth initiatives, acquisition strategy and anticipated financial performance for the first quarter 2012. Other statements that refer to our beliefs, plans, expectations or intentions, which may be made in response to questions, are also forward-looking statements for purposes of Safe Harbor provided by the Private Securities Litigation Reform Act. Because these statements pertain to future events, they are subject to various risks and uncertainties, and actual results could differ materially from our current expectations and beliefs.

Factors that could cause or contribute to such differences include, but are not limited to, the risks and other factors discussed in InfoSpace's most recent quarterly form on Form 10-Q on file with the Securities and Exchange Commission. InfoSpace assumes no obligation to update any forward-looking statements, which speak only as of the date the statement is made. In addition, during this call, our management will discuss GAAP and non-GAAP financial measures. In the press release, which has been posted on our website and filed with the SEC on Form 8-K, we present GAAP and non-GAAP results along with reconciliation tables and the reasons for our presentation of non-GAAP information.

Now, I'll turn the call over to Bill Ruckelshaus. Following his comments, Eric Emans will review the fourth quarter results and first quarter outlook, then we'll open up the call to your questions.

William J. Ruckelshaus

Thank you, Stacy, and good afternoon. We are pleased to provide an update on our performance for the fourth quarter and full year 2011. InfoSpace has progressed considerably in the period since January of last year on a variety of fronts. Today, we will briefly discuss our performance last year and provide some thoughts about why we are excited for the future. Revenue in the fourth quarter of 2011 was $66.6 million, up 34% from the prior year. Adjusted EBITDA was strong at $10.2 million, up 23% year-on-year. Our fourth quarter capped a good year of top line growth and profitability for InfoSpace.

The distribution side of our search business continues to be a big driver for us. Last period marked the third consecutive quarter of accelerating revenue growth with our distribution partners. In the fourth quarter, distribution revenue increased 69% year-on-year, aided significantly by revenue from partners signed in 2011. We see the market opportunity for distributed search expanding, and we believe InfoSpace is well positioned to continue to tap this growth.

I want to spend some time describing this marketplace a bit further. Users are continuing to evolve in how they consume digital content, through applications and utility-based tools on the desktop, on social platforms and increasingly through mobile devices and tablets. This evolution is driving significant downstream innovation in the publisher community. Barriers to entry are coming down dramatically for providers of content and applications. No longer is it a question of funding or scale, ideas and imagination win the day. Search is playing an important role in this trend, allowing the growing provider community to monetize effectively and adding functionality to their consumer offerings.

InfoSpace is serving this market through its distributed search offering. We partner with publishers to help them monetize, and share in the gains when they do. We differentiate through our years of in-market experience, service levels and flexibility. Distributed search is a sustained growth story for us. In the period from 2008 to 2011, revenue from our distribution business has grown at a compound annual rate of 22%. The market is accelerating and we are participating fully in the momentum.

Supporting our search business, we have longstanding relationships with Google and Yahoo!. In the first quarter of 2011, we renewed our agreements with both parties to continue to distribute their result sets through our network and partner websites through 2013. These partnerships represent a cornerstone of our search business, and we are pleased to extend our relationships with both parties on favorable terms.

Moving now to 2012 and beyond, we are optimistic going forward about our prospects in search and are now thrilled to welcome TaxACT to the company's story. Last month, we announced and ultimately closed our acquisition of TaxACT. This was a significant milestone for our company and the result of an announced strategy and dedicated process to allocate our capital to acquire a new business outside of search. In TaxACT, we have found an outstanding business run by a terrific team with an excellent track record of execution and financial performance.

TaxACT has a strong consumer brand and loyal professional preparer following. There is an identified digital shift underway in the market for income tax preparation, and TaxACT is well positioned against this secular trend. In a moment, Eric will provide a few more specifics as to how we think TaxACT figures into our Q1 forward guidance. As for how they are doing overall, well it's early, and given the short duration of the filing season, there always going to be challenges in comparing mid-season results from 1 year to the next.

In particular, tax law changes last year and the resulting delay in the IRS processing certain itemized forms is further challenging year-on-year comparisons this season. Nevertheless, these overlaps are expected to normalize as we progress further into the season. And taking all of this into account, we feel good about how TaxACT is performing to date and we believe we are well positioned to maintain share in the digital do-it-yourself market this season.

A quick word on TaxACT marketing. The TaxACT team developed a comprehensive marketing plan this year spanning offline, web, e-mail, social media and public relations channels designed to both drive response and increase brand awareness and engagement. This plan included a 30-second spot during the 2012 Super Bowl earlier this month. The goal with the Super Bowl spot was to build brand awareness and differentiate TaxACT's message to a Neilsen-estimated audience of over 165 million viewers. The ad was well received overall, and we were pleased with the opportunity to gain favorable broad exposure at this important time in the tax season.

In summary, we are excited about the future for InfoSpace. Our company operates in strong markets. We have great teams in place. We are executing on strategies to continue to grow, and together, our combined businesses can generate significant profitability and free cash flow going forward.

With that, I'll turn it over to Eric for more details on the financials.

Eric M. Emans

Thanks, Bill. I'll start today with a review of our financial results from the fourth quarter and full year 2011. I will then discuss guidance for the first quarter 2012, which will include expected results from TaxACT for February and March.

Revenue for the fourth quarter 2011 was $66.6 million, up $16.9 million or 34% versus the fourth quarter 2010, and up $10.4 million or 18% from the third quarter 2011. The year-over-year and sequential revenue growth was fueled by our distribution business, which grew by $22.9 million or 69% from the fourth quarter 2010 and $10.7 million or 24% from the third quarter 2011. The growth in our distribution business versus the same quarter last year was driven primarily by our longstanding distribution partners, while approximately 40% of the sequential growth from the third quarter was generated from distribution partners we launched this year. Specifically, these new partners have generated $7.2 million in the fourth quarter and a total of $11.8 million during 2011, representing an increase of $8.6 million or 270% compared to the revenues generated from the distribution partners we launched in 2010.

Distribution revenue in the fourth quarter was 84% of our total revenue, up from 81% from the third quarter, as our revenue mix continued to shift toward distribution. The shift is expected to continue, primarily driven by continued growth in the distribution business. As a result, we expect continued margin percentage compression, but remain focused on year-over-year adjusted EBITDA growth and not margin percentages. Our owned and operated properties represented 16% of our revenue in the fourth quarter, down $5.9 million or 36% from the fourth quarter 2010, approximately $400,000 or 3% from the third quarter 2011.

The year-over-year decrease is driven by a drop of $3.1 million from our direct marketing initiatives. The expected decline of $2.2 million from Make the Web Better and a decrease of approximately $600,000 from our organic search sites. Compared to the third quarter 2011, the decrease is driven by a drop of $600,000, primarily related to the drop in our direct marketing initiatives.

For the full year, total revenues were $228.8 million, which represented an increase of 7% versus 2010. Revenue growth was driven by increases in the distribution business and partially offset by declines in our owned and operated properties. These declines, primarily driven by the contributed -- continued attrition of the Make the Web Better user base, a drop in our direct marketing initiatives and the decline from our non-search product initiatives related to the shutdown of our auction website, Haggle.

Adjusted EBITDA for the quarter was $10.2 million, up $1.9 million or 23% versus the same quarter last year and up $1.7 million or 20% compared to the third quarter 2011. The increase from the fourth quarter 2010 was driven in part by increased contributions from the distribution business and a decrease in severance charges recorded in the fourth quarter 2010 related to a departing executive. These gains were partially offset by decreases in contributions from Make the Web Better, our direct marketing initiatives and our organic search properties. The sequential $1.7 million increase from the third quarter 2011 was driven by increased contributions from our distribution business and partially offset by decreased contributions from our direct marketing initiatives.

For the full year 2011, we posted $36.6 million in adjusted EBITDA, up $4.2 million or 13% versus the prior year. Income from continuing operations in the fourth quarter 2011 was $23.6 million or $0.59 per diluted share, up $12.9 million or $0.30 per diluted share versus the same period last year. Compared to the prior quarter, income from continuing operations was $21.5 million or $0.54 per diluted share. The year-over-year increase is driven by decreases in depreciation and amortization expense and stock compensation charges. Additionally, both fourth quarter 2011 and 2010 included significant one-time benefits. First, in the fourth quarter 2011, we recorded a tax benefit of $19.6 million or $0.49 per diluted share related to the release of valuation allowance on deferred tax assets. And second, in the fourth quarter 2010, we recognized a gain on a litigation settlement of $19 million or $0.51 per diluted share.

The fourth quarter sequential increase is primarily driven by the aforementioned tax benefit, as well as a decrease in stock compensation expense related to a warrant issued in the third quarter. For the full year 2011, income from continuing operations was $32.3 million or $0.84 per diluted share compared to income from continuing operations of $9.3 million or $0.25 per diluted share in 2010, which included a gain on litigation settlement of $19 million or $0.51 per diluted share.

Non-GAAP net income for the fourth quarter 2011 included a noncash income tax benefit of $18.3 million, primarily related to the release of our valuation allowance, net of our expected utilization of our NOL carryforward. Excluding this noncash income tax benefit, our non-GAAP net income for the fourth quarter was $5.3 million or $0.13 per diluted share, down $14 million or $0.39 per diluted share versus the same period last year.

As noted, the fourth quarter 2010 included a one-time gain on litigation settlement of $19 million. Compared to the prior quarter, our non-GAAP net income increased $2 million or $0.05 per diluted share. The sequential increase is driven by the decrease in stock compensation expense. For the full year 2011, non-GAAP net income was $18.5 million or $0.48 per diluted share compared to non-GAAP net income for 2010 of $17.8 million or $0.48 per diluted share, which also included certain other non-operating or one-time items, most notably the gain on litigation settlement.

On a GAAP basis, net income for the fourth quarter 2011 was $23.6 million or $0.59 per diluted share, up from the third quarter net income of $2.1 million or $0.05 per diluted share. The increase is driven primarily by the tax benefit recorded in the fourth quarter 2011. Net income for the full year 2011 was $22.3 million or $0.58 per diluted share compared to $4.7 million or $0.13 per diluted share in 2010. Net income in 2011 included losses totaling $9.9 million or $0.26 per diluted share related to the sale and discontinued operations of our Mercantila e-commerce business in 2011. Net income in 2010 also included losses from discontinued operations of $4.6 million or $0.12 per diluted share.

Turning to the balance sheet, we ended the year with $293.6 million in cash and short-term investments equal to $7.43 per share. We used a significant portion of this cash and short-term investments in the first quarter 2012 upon the closing of the TaxACT acquisition. Upon completion of this transaction, we had an excess of $100 million in cash and short-term investments and $100 million in debt.

Now for the outlook. First quarter guidance includes our search business for the full quarter and the TaxACT business for February and March. We expect revenue to be between $109 million and $114 million, adjusted EBITDA between $26 million and $29 million and net income of $9.5 million to $11.5 million or $0.24 to $0.29 per diluted share. Guidance for adjusted EBITDA includes transaction expenses related to the acquisition of TaxACT of approximately $1 million, which excludes amortized debt issuance costs. Additionally, net income includes the impact of transaction expenses including those amortized debt issuance costs, estimated amortization expense of $3.3 million from intangible assets acquired in the TaxACT acquisition and one-time stock-based compensation charges of approximately $3.3 million.

Specifically, we expect the search business revenue for the first quarter to be between $73 million and $76 million and adjusted EBITDA between $8.5 million and $9.5 million including the aforementioned $1 million in transaction expenses. We expect the TaxACT revenues to be between $36 million and $38 million and adjusted EBITDA from TaxACT to be between $17.5 million and $19.5 million for the 2 months ended March 31.

It is important to note that this breakdown may not be indicative of how we segment the business on a go-forward basis.

With that, I will turn the call back over to Bill for closing remarks.

William J. Ruckelshaus

Thanks, Eric. We have some time for questions at this point, and before we hand it over, I did want to mention a word on TaxACT. So people may understand, we've recently closed this transaction and thus, are in the early stages of integrating our businesses. And on top of that, the company is in the middle of its tax season. So I just want to manage folk's expectations as to how much detail we're prepared to go in on this call. Our next expected communication will be in late April or early May in connection with our Q1 earnings announcement, at which point we'll certainly be prepared to speak more about our overall business as well as TaxACT.

So please bear with us. We understand there's regular intra-season communication in this industry coming from other providers, and we fully expect to evolve into a regular communication pattern over time, and in so doing, provide more transparency.

So with that, I will hand it over to the operator to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Clay Moran with Benchmark.

Clayton F. Moran - The Benchmark Company, LLC, Research Division

A couple of questions. Just wondering about TaxACT and what your guidance is implying for first quarter growth year-over-year for revenue and EBITDA. And also, typically, what you see for revenue and EBITDA in the first quarter as a percent of the full year?

William J. Ruckelshaus

So Clay, this is Bill. I'll hand the details over to Eric, but just on the revenue growth. We -- one of the things that Eric spoke to that's probably worth calling out, first and foremost, is that in our guidance is 2 months out of the quarter, so we have essentially a stub period in Q1 given the transaction didn't close till the end of January. So there's that. That's really, probably, addressed first and foremost. And then as it relates to the year-on-year guidance and the seasonality, there is -- this business, as you are rightly anticipating, is significantly seasonal within 4 months out of the year. The first quarter is 70%, is that right, Eric, roughly?

Eric M. Emans

70%, 75%.

William J. Ruckelshaus

70%, 75%. And so that's kind of gives you a sense for us the seasonality overall. And then, of course, our guidance is going to be partial given the stub period.

Clayton F. Moran - The Benchmark Company, LLC, Research Division

Okay. And...

Eric M. Emans

As far as the trend year-over-year, I would say we look at it more on a quarterly basis rather than the stub period, as Bill called out in his closing remarks, as well as in his script. There is some movement in the comparability. And so looking at it year-over-year, we are not going to speak to specific numbers or metrics, but we are encouraged by the results and have seen growth in revenue and EBITDA.

Clayton F. Moran - The Benchmark Company, LLC, Research Division

Okay. When you announced the deal, you talked about around 10% revenue growth. I assume we're still in that area, right?

William J. Ruckelshaus

Yes. Clay, we're not -- at this point, we're not going to go into a ton of specifics as to growth rates and unit volume growth rates and all that. There is a fairly decent consensus out there as to how fast the digital do-it-yourself market is growing. And as I had mentioned, we feel pretty comfortable that we're at least maintaining share against that market. And then I would also, of course, provide the usual caveat that the year-on-year comparisons, particularly when looking at growth rates against a noncomparable prior year, is a little bit difficult. So bear with us. We'll provide more information down the road, but the headline message on this call is that we are encouraged by the results. It's conforming to the plans we had in place around the time of the acquisition, and feel like the company is making great progress thus far into the season.

Clayton F. Moran - The Benchmark Company, LLC, Research Division

Okay. And then just a couple other ones on expenses for the first quarter, just want to make sure the transaction expense, you referenced $1 million. Is that in the TaxACT EBITDA number or range that you gave? And then secondly, you mentioned the sales and marketing strategy at TaxACT. So are you saying that's in place for this full year and you really won't touch that? Or are you thinking of rejiggering that in any way and sort of pushing harder?

William J. Ruckelshaus

Well, I -- so I would -- let me just tackle the marketing question first, and I think to jump to the -- the answer on the transaction expense is, as we've reported it out of the InfoSpace, the guidance.

Eric M. Emans

That's correct. The $1 million was taken to account in the EBITDA guidance for the search business.

William J. Ruckelshaus

So on the marketing, let's make sure that we're -- that it's the right proper noun. So the Cedar Rapids team has, as I mentioned about their track record, they have a fully functioning marketing team and were entirely responsible for the marketing plan that exists this tax season, and it's a good marketing plan. There's nothing hardwired about it, there's a lot of course correcting that goes on through the course of the season. It's a fast and furious first 4 months of the calendar year. And so there is a lot of sort of, on the ground decision making and audibles that are being called as the year -- the season progresses. So I'm not sure exactly what you're getting at by your question, but what I did want to...

Clayton F. Moran - The Benchmark Company, LLC, Research Division

I was just curious if you thought you brought more resources to the table and you might spend more on sales and marketing or if you would just sort of let it go on course as it is?

William J. Ruckelshaus

Yes, yes. Well, I think you're touching on a great point, which is that there is an opportunity as we reset, potentially revisit priorities that the company has in place, to revisit the balance that's been struck over the history of the company's operations and recent history between share growth and profitability. Certainly, they've been striking that balance very effectively and not viewing it as a trade-off necessarily, but able to accomplish both. And so as we work with the team and develop strategies, not only for the remainder of this tax season but beyond, those things are going to be very much on the table and it's a nice position, advantageous position to be from, which is there's a lot of levers that the company can pull to drive not only top line growth, but also profitability given where it sits in the marketplace.

Operator

And the next question comes from the line of Kartik Mehta with Northcoast Research.

Kartik Mehta - Northcoast Research

Bill, I just wanted to go back to a comment I think you made about the seasonality of the TaxACT business, saying that the first quarter is about 70% to 75% of the revenue, and I know you're only giving guidance for February and March this time around, which I think the midpoint was $37 million. But if you do the math, wouldn't that imply that TaxACT year-over-year will be down a little bit in revenue if you just assume that January was about $9 million in revenue just by doing some math? Or is that -- am I mixing up too many numbers here?

William J. Ruckelshaus

Yes, I think that's probably the case. This is Bill. I'm going to, again, let Eric speak to the specifics. But I think that is the case. That's certainly -- if you're coming away from any of the information we provided with a declining year-on-year revenue growth trend, that's not an accurate translation.

Eric M. Emans

That's correct. And yes, we have noticed that January year-over-year was a little stronger this year than last, and I think we can attribute some of that to the comparability and that people may be filing a little earlier this year. But in general, year-over-year, we saw January to be very strong and that's why that math is not quite working there for you. And we're hoping it carries through to the -- for the remainder of the tax season.

Kartik Mehta - Northcoast Research

Just from your perspective, what do you think from overall tax returns, is the season -- from the number of tax returns filed with the IRS, do you think the season is up this year so far, flat compared to last year or down?

William J. Ruckelshaus

Well, I think that there is -- again, I'll keep coming back to the comparability issue. And I think it depends on whether you're looking overall at all filers or e-files or from what channel you're looking at. And I know there's been some speculation thus far in the season as to which channels are performing well and how the overall category is doing. I think there's definitely growth that we're seeing. Some of that growth, we believe, is attributable to the lack of comparability, so the growth is going to be more pronounced earlier in the season given the fact that significant amount of filers weren't actually able to file last year until mid-February. And so a little bit trustful of the year-to-date growth numbers that we're seeing in the category as being at all representative of what's going to happen full year. So in terms of a sort of how linearly things progress during the tax season this year, it will probably be a little bit more front-end loaded than it was last year just because of the IRS acceptance issues last year.

Kartik Mehta - Northcoast Research

So Bill, would that imply that the digital category so far is probably growing faster than kind of the last couple of years as you've referenced in the past?

William J. Ruckelshaus

Well, again, I think on a normalized basis, that remains to be seen. Early in the year, probably yes, but some of that having to do with the tax year 2010 overlap issues.

Kartik Mehta - Northcoast Research

And then just a last question. This year it seems as though your marketing was a little bit later in the season especially with the Super Bowl ad. Was that just as a result of you thinking maybe some of the season is going to be later in the year and you're trying to capture some other customers or was that just to take advantage of an event like the Super Bowl to get the TaxACT brand name more familiar with consumers?

William J. Ruckelshaus

Well, I don't know that that's necessarily an accurate statement. It may be that it was something that was observed on your part that there was sort of back-end waiting this year with respect to the marketing spend, but certainly that ad came later in the first part of the season given the Super Bowl timing. But I think it is roughly consistent with last year as it relates to the timing of the spend on behalf of the company.

Operator

And the next question comes from the line of Michael Millman with Millman Research Associates.

Michael Millman - Millman Research Associates

I guess sort of following up on the TaxACT questions. When you say it's stronger -- very strong, were you talking about TaxACT or were you talking about the digital or were you talking about all of tax filing returns?

William J. Ruckelshaus

Yes, our comments about the strong -- the results year to date and the comparisons versus prior year have a lot to do with what we're seeing in the category and our own experience with the TaxACT team. That's really going to be the vantage point where we're most informed, and so we are seeing strong growth year to date. And I think some of it has to do with comparison issues with last year.

Michael Millman - Millman Research Associates

Do you believe that in the online business, you've taken some market share through mid-February?

William J. Ruckelshaus

I think that remains to be seen.

Michael Millman - Millman Research Associates

Could you, to try to get away from the dysfunctions last year, compare your numbers with 2 years ago, with 2010?

William J. Ruckelshaus

Yes. We, of course, we do that on a regular operating basis. That's not a level of detail that we want to go into on this call.

Michael Millman - Millman Research Associates

Can you just give us an idea of whether that would make a big difference in some of the comments you've made?

William J. Ruckelshaus

As you might imagine, we pinpointed one comparability issue, which I think is fairly well understood for people who've been following this industry in terms of the tax law changes last year and their impacts on timing of filings. But as you might imagine, with any company, there are -- and particularly when going back to 2 years, any number of company-specific comparability issues, whether it's level of marketing spend and so the precision in doing something like that is at a level where sharing it on this call is probably not the most constructive exchange, but, yes, those are the types of things that the company does daily and weekly to try and assess trends. And as you get back further into rearview mirror, the precision of doing that is perhaps less, but nevertheless, it's important to do.

Michael Millman - Millman Research Associates

There's a general feeling amongst at least some analysts that this year started somewhat slowly for retail. And can you comment as to why you would -- believe that there's been even more relative strength in online than there has been in past years?

William J. Ruckelshaus

Well, certainly, we've read some of that commentary as well and understand, we think, some of the reasonings behind why that may be true. I think what we -- and so we're not -- we're certainly, with the TaxACT team, aware of some of the dynamics that might be different than past years as it relates to some of the retail folks, but I think it's, given the fact that it's mid-season and the information flow here is a little bit intermittent as it relates to looking at channel comparisons, et cetera, it's probably not a good thing to speculate at this point. But certainly, time will tell.

Operator

And the next question comes from the line of Ryan Bergan with Craig-Hallum.

Ryan Bergan - Craig-Hallum Capital Group LLC, Research Division

Addressing investment in TaxACT in 2012 and beyond, do you see a scenario where you might -- would you invest -- could you invest incrementally or would it be a scenario where, in order to help maintain margins, you may decide to invest in TaxACT, but take a little bit from investment in the core search business?

William J. Ruckelshaus

So I think that we certainly -- that is a very reasonable question to ask and certainly something that we can as we move ahead in our planning for the future with the TaxACT team, be more specific about. But I guess I would start off with the observation that there really isn't anything wrong with the way that they've been operating. In fact, quite the contrary. Their track record is pretty impressive. I would characterize it as profitable growth, which is they really have been striking a balance between top line growth, taking advantage of the secular market trend, keeping pace with the market, but at the same time, maintaining a lot of disciplines around bottom line flowthrough and profitability. And certainly, that is something that we would hope to and would expect to continue with the company and also use the new ownership as an opportunity to revisit priorities and how we set them and what it is we're solving for.

Ryan Bergan - Craig-Hallum Capital Group LLC, Research Division

Okay. And then moving to distribution revenue and -- do you feel like you're having to spend more to acquire partners each quarter as, you've had a nice rampup, the sequential acceleration, the revenue growth there. Are you seeing that the -- your COGS there having to come down appropriately as well?

William J. Ruckelshaus

Well, the COGs number is probably not the specific yardstick for that because there's more in there than just our rev share -- our rev share payments to partners. So there's a variety of other sources within cost of goods. I would say generally, it is -- there are positives and negatives with respect to the contribution margin trend in the distribution business. On the one hand, many of the partners that we're working with, the new partners, tend to be smaller partners than some of the players that we've been working with over the last 5 or 6 years. And as a result, they're starting out from a younger revenue base and earlier revenue base which, as we think about rate card and how we work with our partners, as you might imagine, it's true with many businesses. The larger a partner gets, the more they end up benefiting in the economics that we create together. And so there's that on the plus side and then the sort of double-edged sword of having longstanding partners that tend to be bigger that have been performing quite well for us is that, that tends to grow into -- be more expensive revenue for us given the, sort of the rate card and the rev share tiers that we have in place. So that's a general answer to your question. I think it's a bit of a mixed bag, actually.

Eric M. Emans

If I would add to that, the other thing I would point out is just some of the rapid decline we've seen in owned and operated really driven by the Make the Web Better transaction. So depending on how you're modeling that business, the margin compression in search has been accelerated and we expect it to slow a bit. We still expect it to compress just because of the rate our distribution business is growing as compared to our owned and operated business, but that has accelerated over the past 8 quarters.

Ryan Bergan - Craig-Hallum Capital Group LLC, Research Division

Okay. That's helpful.

William J. Ruckelshaus

I'm sorry to interrupt. That actually is the overriding dynamic going on with respect to our gross margins, is this shift out of owned and operated, which is comprised of both our historical destination search properties as well as Make the Web Better. And so that is the overwhelming dynamic going on there as opposed to margin compression with any of our distribution partners.

Ryan Bergan - Craig-Hallum Capital Group LLC, Research Division

Okay. That's helpful. And then finally, I just wanted to get kind of an assumption on the debt, on the interest rate on the debt. Are we talking about a 5%?

Eric M. Emans

Yes, 5% is probably the right way to model it. There's some debt issuance costs that will amortize off into interest expense. We could probably take that offline a little more detail.

Operator

And the next question comes from the line of Scott Schneeberger with Oppenheimer.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Guys, nice looking margins on your TaxACT guidance. I'm curious, I would think the Super Bowl would significantly affect the spend that you're having on marketing. So it sounds like you are showing nice progression on revenue to offset and maintain the margin level. It's kind of a twofold question. One, is there a big one-time blip or does it fit in the category? And two, kind of stepping back, I assume that, that was in the plans before the acquisition was closed. I'm just curious how much of -- how much influence or touch you had on TaxACT since it's marketing -- assuming in place strategy came to you upon the close?

William J. Ruckelshaus

Scott, this is Bill. So yes -- so the marketing plan was pretty well advanced, if not set in stone by the time we were introduced to the TaxACT team and it was a process that we really embarked on and got to the finish line, mostly in Q4 and obviously early into January of this year. But nevertheless, we were fully aware of everything that was -- they were intending to do, fully bought in, understood what they were trying to accomplish. And this, perhaps needless to say, but the Super Bowl commercial, they had never done a Super Bowl commercial before. This represented a bit of a new direction as it relates to something that was less in the direct response, direct marketing category and more in the awareness and brand building category. And so the metrics are different and the metrics are much less in month or even in season and maybe over multiple seasons. And so we understand that, we're aware of that. But nevertheless, it was something that the financial model overall was able to sustain and absorb and still come up with what we felt was a very realistic plan. So I would say, in answer to your second question, that the answer to that is yes, which is we're fully engaged with the TaxACT team and intend to be fully engaged going forward. We have a lot of confidence in what they've done as evidenced by their track record. And so -- but at the same time, that doesn't mean we're not going to be with them every step of the way and understanding what they're doing and seeing how we can help. So that's kind of the operating philosophy that we're laying down with the team there.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Just one more, a twofold question, and then I'll step aside. The Super Bowl this year, as a big jump in national awareness, is that something that you anticipate doing again? Was that a one-time strategy or something that you might think persists, or is that a play by ear? And then the second more meaningful question is, the way expenses are accrued at TaxACT, was a lot of the expense endured in December and prior or even when the deal closed end of January and prior, so we're not seeing that as part of the expense hitting this year? I just kind of -- the split of the seasonality of the marketing spend and what's accrued and when that -- what's the timing of the hit is?

Eric M. Emans

So Bill, if you want touch on the Super Bowl ad...

William J. Ruckelshaus

Yes, so think it's an annual decision, and that the point at which they would, with us, make a determination as to the marketing budget for the coming season and to what extent there was a football game included in that marketing budget, I think, is still -- those are conversations that still play out.

Eric M. Emans

And as far as the marketing expense, it's recognized as -- essentially the ads are shown, and so no, there's not a lot of expenses that were taken out a period. And as we touched on earlier on the call, expenses and the spending of those expenses are largely at the same rate as they were last year. So very comparable as far as how we're addressing the season and spending our marketing dollars.

Operator

And our next question comes from the line of Rich Tullo with Albert Fried & Company.

Richard Tullo - Albert Fried & Company, LLC, Research Division

First on seasonality. You said there's going to be a stub period in relation to the TaxACT acquisition. You also said that the seasonality first quarter is something like 70% to 75%. Does that contemplate the stub period or does it exclude the stub period.?

William J. Ruckelshaus

The 75% was for the entire quarter period.

Richard Tullo - Albert Fried & Company, LLC, Research Division

Okay. Second question is on accounts payable. It looks like a lot of the cash flow in the quarter was generated by the $26.2 million step-up in accounts payable over a $3.5 million cash flow in the prior year. Can you provide some color in and around that?

William J. Ruckelshaus

You're just talking balance sheet year-over-year?

Richard Tullo - Albert Fried & Company, LLC, Research Division

I'm talking about the cash flow statement. It shows that there was a cash inflow of $26.2 million in this year versus a cash outflow of $3.5 million last year in the accounts payable.

Eric M. Emans

So I think I would ask you to put the accrued expense line and the accounts payable line together to normalize that out. So you...

Richard Tullo - Albert Fried & Company, LLC, Research Division

What was that accrued expense attributed to because it doesn't seem like on the income statement there's any kind of escalation in any of the expenses?

Eric M. Emans

No, it's not. I guess what you're just seeing there is a shift between accounts payable and accrued expenses on the balance sheet. It's just the nature in which something goes from being an accrued expense versus an accounts payable and so it's more -- how I would always point somebody to look -- is to add those 2 lines together and then look at the change. So...

Richard Tullo - Albert Fried & Company, LLC, Research Division

Okay, that's great. Can you provide some color on what it's related to?

William J. Ruckelshaus

It's just our normal operating. Any time that you accrue something at the end of the month prior to having an invoice and then when the invoice goes in. It's largely how we -- where our distribution expense payments were classified in the prior year versus whether being classified this year. Last year, they were sitting in accrued expenses, this year, they were sitting in payables.

Richard Tullo - Albert Fried & Company, LLC, Research Division

Okay. And on TaxACT, what's the benefit of spending $3.5 million on the Super Bowl ad when that money could be spent on a bought, owned, earned digital campaign or on a high-frequency radio and cable TV ad campaign? I mean, what's the benefit of brand awareness in your product?

William J. Ruckelshaus

Well, I guess, I would say that you judge the company by the overall results and to speak to any given marketing outlay as being mutually exclusive to another may also be a false premise because in a market like this where it's an intense 3.5, 4 month opportunity to reach consumers who you know are going to undertake an activity, it's really incumbent upon a provider who is looking to make the most of that opportunity to get in front of those consumers. And when you have an opportunity, as was the case with the Super Bowl, to get in front of 165 million viewers, that's something to be taken seriously. And I think the measurements of success in a channel like that are, by definition, going to be different. But to speak of them -- to speak of an outlay like that as being mutually exclusive to another, I'm not sure is necessarily how the company was thinking about it.

Richard Tullo - Albert Fried & Company, LLC, Research Division

No, it's not how I think about it either. But when BMW spends $3.5 million on an ad and they get 26 million people looking at YouTube on the day before, that's the kind of bought, owned, earned strategy, I would expect on that kind of outlay. And I'm just trying to kind of figure out in my head, was this a mistake or whether there's something more going on as far as ads that are not in my market that I can't channel check on, that it is being supported by what you did.

William J. Ruckelshaus

I appreciate that. As I said in my opening comments, we're pleased with the results of the Super Bowl spot. We think it was well received and it was a good opportunity to get exposure to an audience at the right time.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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