Here’s the entire text of the prepared remarks from BankRate.com's (ticker: RATE) Q3 2005 conference call. The Q&A is in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Bruce Zanca, SVP & Chief Marketing Officer, Chief Communications Officer
Tom Evans, President and CEO
Bob DeFranco, CFO
Rich Ingrassia, Roth Capital Partners, Analyst
Yousef Squali, Jefferies and Company, Analyst
Colin Gillis, Adams Harkness, Analyst
Mark Monane, Needham & Company, Analyst
Bill Roy, Jacob Asset Management, Analyst
[Bruce Zanca, SVP & Chief Marketing Officer, Chief Communications Officer]
Good morning, everyone. And thank you for joining us on this conference call to report Bankrate's Third Quarter 2005 Financial Results. With me here in our New York Office is the Company's President and CEO, Tom Evans, and joining us on the phone from Florida is Bob DeFranco, our Senior VP and Chief Financial Officer.
Let me take a minute to go over the format for the call today. First, Tom will give us results and color on the quarter. Bob then will give us some details on the financial results, and then we'll have some time for Q&A at the conclusion.
Standard Disclaimer Omitted. So, with that being taken care of, let me introduce you to Bankrate's President and CEO, Tom Evans. Tom.
[Tom Evans, President and CEO]
Thanks Bruce. Welcome everyone. By now, I hope you've seen the press release we put out this morning covering our third quarter 2005 results. First, we will talk about the quarter and give you a feel for the strength of our business. And then we'll walk you through the state of our cost-per-click launched on October 1.
By all accounts I can tell you that we were very pleased with our performance in the third quarter. We saw an increase in overall revenue, traffic to the site remains strong and we successfully launched the new cost-per-click platform on our rate tables. For those of you who had a concern, that Bankrate is highly mortgaged and re-fi dependent, we have some interesting results from our first month of CPC, that will go a long way in dispelling that notion. We'll get into that in detail later. But just to recap, revenue for the third quarter was up 31%, pre-tax income was up 106%, gross margins were up and operating margins were up in the quarter. Page views were up over the same quarter last year by 17% and we added $5.2 million in cash in the quarter.
So, with that let me turn it over to Bob so he can go through the financials in detail. Bob.
[Bob DeFranco, Chief Financial Officer]
Thanks Tom. Good morning everybody. As Tom just mentioned, we're very pleased with the results for the quarter ended September 30, 2005. Total revenue reported for the third quarter of $12.4 million, was 2.9 million or 31% better than the $9.5 million reported in Q3 last year and slightly exceeded last quarter to become the highest total revenue quarter in the Company's history. Excluding barter revenue, total revenue was 11.9 million, up $3.1 million or 35% over Q304, and was about 300,000 or 20% over last quarter. We continue to intentionally reduce barter revenue, which was down 31% from Q3 '04 and 39% from Q2 '05 as we are much more interested in monetizing our available page views through paid advertising.
For the nine months ended September 30, 2005, total revenue of 35.2 million was 2.9 million or 31% ahead of the same period in 2004. Traffic ad revenue in Q305 or 6.6 million compared to 4 million in Q3 '04, the 2.6 million or 64% increase resulting from 17% more page views in the current quarter and higher CPMs.
Page views in Q3 '05 were 107.8 million versus 92 million in Q3 '04, and were 6 million or 5% lower than the 113.8 million in Q2 '05 reflecting a bit of sluggishness in September, but October date has rebounded back to anticipated levels. For three quarters of 2005 we served 332.6 million page views, 15.8 million or 17% more than the same period in 2004.
Our mortgage lead aggregator program continues to perform as planned. Our two partners, LowerMyBills and iHomeowners used approximately 31% of available ad impressions during Q3 '05, compared to the almost 60% of the seven aggregators used in 2004. Higher CPMs generated almost 700,000 or 41% more revenue in Q3 '04, and in nine months the aggregators used approximately 35% of available ad impressions, and revenue was up 1.9 million or 35% on higher CPMs.
Contributing to the strong graphic ad sales in Q3 '05 was our ability to monetize the additional inventory made available by the aggregator program. Our CPMs increased 36% in Q3 '05 compared to Q3 '04 and over 50% for the nine-month of 2005 compared to 2004.
During Q3 new advertisers and new business with existing advertisers included Bank of America, American Express, Ameritrade, Washington Mutual, Wilmington Trust, and State Farm Insurance. For the nine months ended September 30, '05, graphic ad revenue was 18.6 million compared to 12.1 million in the same period of 2004, a 6.5 million or 53% increase.
Hyperlink revenue in Q3 '05 of 4.1 million was up about 700,000 or 20% from Q3 last year, and was 363,000 or 10% better than last quarter despite a 23% decline and a number of advertisers from a year ago, due to consolidation in the industry. For the first nine months of 2005, Hyperlink revenue was 11.3 million and essentially the same as the same period in 2004.
We have made up the year-over-year shortfalls of the previous quarters in pricing and the Yahoo! CPC rate table launch in April. Our hyperlink business model changed dramatically as of October 1 as we migrated at a cost-per-click model on our rate table. And Tom is going to give you a lot more color on the progress today.
Print, publishing and licensing revenue of 1.2 million for Q3 '05 was down about 12% from Q3 '04 as the decline in the number of consumer mortgage guide advertisers reflects the continued softness in the newspaper advertising.
For the first nine months of 2005, print, publishing and licensing revenue went up 3.5 million was down about 14% compared to the same period in 2004. On a positive note, our license editorial content and rate data business continues to run about 10% better than last year. Net income for Q3 '05 was 2.7 million or $0.16 per diluted share and exceeded the consensus estimate of $0.14 per diluted share.
Our income tax provision for the quarter was 1.6 million and represents the non-cash utilization of deferred tax assets throughout the remaining net operating loss carry forward periods. In Q3 '04 net income was 1.2 million or $0.13 per diluted share with no income tax provision. Income before taxes of 4.3 million was 2.2 million or 109% better than the 2.1 million reported in Q3 '04 and was 241,000 or 6% better than the 1.1 million reported in Q2 of this year. And Q3 '04 included a $390,000 legal settlement charge. For September 30, 2005 net income was 7.1 million or $0.42 per diluted share compared to 6.5 million or $0.41 per diluted share for the same period in 2004, and remember, with no income tax provision in 2004. Income before taxes of 11.4 million was 4.9 million or 75% better than the 6.5 million reported in the same period last year.
Our gross margin for the third quarter was 76% and our operating margin was 32%, both improvements over the 74% and 20% respectively in the third quarter last year. Excluding barter expense, other expenses for Q3 '05 of 4.9 million were about 820,000 or 20% higher than the comparable 4.5 million in Q3 last year. That excludes the $390,000 legal settlement charge in Q3 '04.
Sales expenses were up slightly following the increases in revenue. Legal and accounting fees were higher as well as our management incentive plan accruals, but we continue to improve our operating efficiencies. Excluding barter and the legal and severance charges from last year, other operating expenses as a percentage of revenue has dropped from 48% in 2003 to about 40% so far in 2005.
Our cash flow showed a dramatic increase this quarter increasing 5.2 million. We generated over 12.2 million in cash from operations in the first nine months of this year compared to 6 million last year and end of the quarter with over 40 million in cash, up 13 million from a year ago.
I will now back to Tom, who is going to talk about the other business items of the quarter and what to expect in Q4 and what we envision for 2006.
[Tom Evans, President and Chief Executive Officer]
Thanks, Bob. Let me just make one correction. I think I heard Bob say in Q3 '04 net income was 1.2 million or $0.13 per diluted share. It was 2.1, I think he flipped those numbers. I just wanted to make that correction. So, let me take a few minutes to cover several subjects that are undoubtedly of interest to the audience we have today.
First, let me put some color on the quarter which Bob just covered in detail. Then I will discuss the October 1st cost-per-click launch and give you a sense of how it is going. Third, I will talk about some of the trends. We think we will have a positive impact on our businesses we look forward to next year and finally to give you an update on our planned entry in the aggregator business on January 1 that we talked about previously.
In the third quarter, we continued to see a number of positive things happening in our business. First, we saw a continuation of the moment in our graphic advertising side of the business, as more advertisers continue to make larger commitments to both the Internet and the Bankrate in particular.
Our ad sales staff is now firmly in place and doing a great job, and we continue to see CPM and sell-through rates improving. We believe there is an even greater growth opportunity in graphic advertising. So, we have recently added three more ad sales people to our staff. One each in San Francisco, Chicago, and New York. We now have 16 full-time ad sales people on our staff and we think that for now that's probably the right level.
In the fourth quarter, graphic ad sales bookings was very solid and our momentum for 2006 is very small. Another positive development in the quarter was the distribution of traffic, both in terms of the sources from which it came as well as the channels that picked up traffic. You have heard me talk before about what I think is one of the most important and most often overlooked components of evaluating Internet companies and that's organic traffic.
In the quarter, 88% of the traffic at Bankrate came to us free. Of that, 72% came organically or directly to Bankrate, our highest quarterly percentage ever. 60% came through our co-brand partners and 12% came through paid search. We're really pleased with those numbers as we have seen -- we have all seen the competition for traffic and the cost of buying traffic doing nothing, but increasing over time. So, we are feeling great about that development. We believe organic traffic is one of the core strengths of our Company and of our business model.
On the website, we are pleased to have seen an increase of traffic to the rate table and an increase to our deposit channel. In fact, 30% of our traffic in the quarter went to the deposit channel and has increased beyond that to over 14% in this current month. It really does confirm what we have stated all along, that if interest rates rise, there is a accessory in our model as people come to Bankrate to find the best rates and to make deposits. In fact, we have got some pre-interesting data this year in a minute when we talk about the CPC activity.
I am also happy to be able to tell you that for the first time in a while we had some positive developments on the print of our business. This July, we have signed 17 new newspaper agreements, which will begin late in this quarter, and early next year. While it's great that those new agreements will contribute almost $1 million to the print and licensing revenue line next year, we also like the impact that it has in the visibility and branding of Bankrate, and in a vital way on the organic traffic to our website. And we think that there might be several other growth opportunities on the print side in the next three to six months. We are doing a better job there. We are delighted to finally be seeing some positive moments on the print side. So, all in all, it was a good quarter. Margins increased, expenses were held in check, revenue increased and cash increased dramatically.
As most of you know, on October 1 we launched cost-per-click pricing on all the rate tables on Bankrate.com. I can hardly begin to describe the amount of work that went into building the necessary technology, documentation, marketing, and admin, budgeting and tracking tools for advertisers that were required for us to make the change from a flat fee to the cost-per-click pricing model.
Additionally, we had to notify the advertisers that we were doing it, cancel all the 350 plus rate table contracts, train them on a new billing, budgeting and tracking tools, and get them all signed up and running by October 1. So, I suspect obviously, everybody would like to know what happened.
I am pleased to tell you that initially, 89% of the hyperlink advertisers have signed up and are currently running on our rate tables. We have 49 new advertisers and 34 advertisers who for one reason or another have left Bankrate and has come back to try CPC.
And I can tell you that we had pretty aggressive goals for the transition and it has exceeded our expectations. So the team did a great job and as you can see, we didn't spend a ton of money doing it. Now, please understand that we launched CPC with pricing that was intentionally not terribly aggressive, so that we would make it easy on advertisers and minimize the cycle shot of a pay-for-performance model. We are now 26 days into this new model, but we like what we have seen. We haven't had any markets where we have seen any meaningful decline in the number of lenders on our rate table, so, that's good for the consumer and for the integrity and value of Bankrate. And we have seen the ad budgets allocated by the advertisers to be large enough to meet consumer demand, which is also great news.
However, I think the biggest and the pleasant surprise to us is that deposits are making up almost 40% of the cost-per-click revenue, which we think is a very cool sign. As rising interest rate environment, there is obviously, greater interest in CVs and money market accounts. In the past, we would have no way to take at that age of that shift from a revenue standpoint. It simply would have been a dynamic that we'd have had no chance to monetize.
Now with cost-per-click, we are getting a direct benefit from the fact that consumers come to our site to find the best CV and money market rates, click on those institutions and make deposits. It's one of the many benefits of CPC and creates a more elastic model. It's a little early to make a definitive declaration and the fourth quarter is traditionally the lightest in terms of quick activity, which is one of the reasons that we pick Q4 to launch CPC, but again, we like what we see.
Last year, we generated $3.2 million in revenue from hyperlinks in the fourth quarter. Previously, we have said with the launch of CPC, we expect to beat that number in this fourth quarter by at least 20% with a fair amount of net incremental revenue going to the bottom line. After 26 days of watching the hyperlink business performance, we are confident with that guidance. In fact, with the Yahoo! CPC revenue added to that, we are expecting at least a 30% lift over last year's Q4 from our hyperlink business. And we are eager to watch the business become even more profitable in future quarters as we begin to treat pricing and as we have talked about before by product and by market.
Many of you have heard us talk previously about the fact that we wanted to be able to be in the business of generating and selling our own leads. Similarly, you have heard my Mike Tire analogy where we create the environment to generate the lead. We'll allow someone else to sell them and make the larger margin off of our customers. We have learned through our aggregator RFP of last fall and in watching the performance this year that this is the business we wanted to be able to run internally.
I am not able to be more specific today, but we are still committed to that strategy and our timing remains unchanged. We are headed for a January launch and we should be able to give you more specifics on that very soon. That said, in January 1, we will be devoting some of our ad position to our own aggregator strategy. This year, as Bob mentioned, almost 40% of our ad position went to our two aggregator partners, LowerMyBills and iHomeowners. We will probably reduce the amount of that inventory we allocate to our aggregator somewhere between 10% and 15%. Why? Basically for two reasons.
First, we believe that we have the demand for the 85% to 90% of our graphic ad inventory for next year from non-aggregator advertisers. And second, we believe we can integrate that aggregator capability into other areas of our website that will not cannibalize existing ad positions that we can sell to graphic advertisers. So we feel like, we will be able to have our cake and eat it still or maybe I should say have a piece and eat it still.
The initiative we have been working on going forward relative to this strategy is to integrate the aggregator into as many of our co-brand and affiliate deals as we can. Again, this is another way for us to be able to monetize the traffic at Bankrate content, and the rate tables drive in areas other than our own website. We have envisioned down the road, dozens of Bankrate co-brands and affiliate sites carrying our content with our rate tables generating CPC revenue and our aggregator generating lead revenue at no cost except the revenue share with those partners. It will take time to sell through and covert those relationships, but once done, really creates a win-win for us and for our partners and develops two new revenue strengths. So, I'm sure you want me to quantify this, give some guidance on our CPC conversion, on our aggregator strategy and what it will mean to the finance at the Bankrate in 2006. At the risk of irritating everyone, I like to beg off on that for the time being. So, we will have more to say about the specifics of our strategy and what we believe the financial impact would be in 2006 in a few weeks.
We are very excited about the impact that we think a fully optimized cost-per-click business, and generating revenue from leads will have in our business. Finally, as for industry trends there are several things that have been well documented that we believe will have a positive impact in our business in 2006, purchasing a credible number of ad dollars moving towards the internet. Paid search has forced advertisers to evaluate return on investment in their spending, and when that happens, the internet is a measurable and more efficient medium.
So, advertisers are moving dollars accordingly, and it is a big trend and it's good for us. Second, we also believe that as the mortgage market tightens and slows down, that advertisers will have to work harder and spend more to reach their customers and keep their businesses cranking. As that happens, they will be willing to pay more to reach those customers. We think that will translate to having to pay more for the leads and more clicks and more for ads, all good for Bankrate. So, we believe the near-term and long-term trends are beneficial to us.
One last question, one last comment on this year's guidance. You may have seen in our press release that we increased our revenue and EPS guidance for this year. Again, we are being somewhat conservative by protecting revenue between 47 million and 47.5 million, pre-tax income of 14.5 and 15 million, which will put us at about 70% increase over 2004 and will bring pre-tax EPS between $0.85 and $0.88.
Let me mention something that is both important, may have a short-term impact on expenses, which we factored into that guidance, I just mentioned. We have been impacted by Hurricane Wilma that swept across Florida this past Monday morning. Our building shut down. We are out of power. We have lost our phone service and several of our employees have had damage to their homes and properties, but be assured the Bankrate website has not been affected by the hurricane. So, business is operating and the consumers couldn't even tell.
However, groups of our employees are working at a local motel, which happens to have power. Others are working at emergency trailers that we ordered immediately after the hurricane passed. We will incur some expense from this effort that we factored into the guidance update, I just gave.
However, as in last year, we will surely get this money back in the form of an insurance settlement sometime next year. We had the same situation occur to us in September of 2004. We were impacted by the hurricane not as far of our business, but as far as our expenses and we did receive as you know, from our financial reporting, a settlement of those expenses which covered those in a subsequent quarter in 2005. We expect the same thing to happen to expenses to be slightly up for this quarter as a result. I am sure there are questions. So, I will stop here and we'll take your questions at this point. With one caveat, no one is permitted to beat me up over being conservative about the estimates in the guidance. So, with that, the first question please.