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Bankrate, Inc. (RATE)

Q2 2007 Earnings Call

August 2, 2007 11:00 am ET

Executives

Bruce Zanca - SVP & Chief Marketing and Communications Officer

Tom Evans - President & CEO

Edward DiMaria - SVP & CFO

Analysts

Rich Ingrassia - Roth Capital Partners

Mark May - Needham & Company

Richard Fetyko - MCF & Company

Victor Anthony - Bear Stearns

Youssef Squali - Jefferies & Company

Heath Terry - Credit Suisse

Colin Gillis - Canaccord Adams

Mark Mahaney - Citigroup

Stewart Barry - ThinkEquity Partners

Presentation

Operator

Good day everyone, and welcome to the Bankrate, Inc. Second Quarter 2007 Earnings Conference Call. Today's call is being recorded. At this time, I'll turn the call over to Mr. Bruce Zanca. Please go ahead, sir.

Bruce Zanca

Thanks operator. Good morning everyone. Thanks for joining us on this conference call for Bankrate to report its second quarter 2007 financial results. With me here in our New York office is the Company's President and Chief Executive Officer, Tom Evans, and our Senior VP and Chief Financial Officer, Ed DiMaria.

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

Before we begin I need to take care of the legal prerequisites. Our lawyers have asked me to remind you that some of the statements made in this conference call, including those regarding the company's future prospects and revenue growth, it's ability to continue to reduce costs and successfully implement strategic initiatives, constitutes forward-looking statements within the meanings of the Securities Acts of 1933, as amended in the Security Exchange Act of 1934, as amended.

The company intends that these forward-looking statements may be subject to Safe Harbor created under the securities law. These forward-looking statements reflect our current views with respect to future events and financial performance, but are subject to uncertainties and factors relating to the Company's operation and business environment, which may cause the Company's actual results to be materially different from any future results. We encourage you to read the section entitled "Risk Factors" in our Form 10-K and subsequent filings with the Securities and Exchange Commission.

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

Tom Evans

Thanks Bruce. Good morning everyone, and thanks for joining us. I hope most of you have had a chance to see the press release we put out this morning announcing our second quarter earnings. As in the past, we'll go to our second quarter results, give you some of the detail and color on the quarter, talk a little bit about what we're working on and how we think the year shapes up, and then we'll be happy to take your questions.

As you can see, revenue for the quarter was a record $23.3 million; adjusted EBITDA for the quarter was $10.3 million; and non-GAAP net income, excluding the non-cash stock comp expense, was $6.8 million, or $0.34 per fully diluted share, an increase of 48%.

With one exception, and that exception being print revenue, the second quarter was another strong quarter in terms of financial performance for the company. Consumer traffic through the quarter was solid and advertising demand for both our display advertising and rate cable hyperlink advertising remains strong as well.

Gross margins, as Ed will explain, grew to 75% and our EBITDA margin for the quarter was a solid 44%. In the first half, we ran a little ahead of where we thought we'd be due to the strength in traffic in an online advertising revenue, so we're raising our annual EBITDA guidance as well, but more on that later.

Ed will walk you through the financial details, so why don't I turn the call over to him now? Ed?

Edward DiMaria

Thanks, Tom. Well as Tom just mentioned, we posted another solid quarter, adding to our strong start in Q1. This quarter was all about growth in volume as the demand from our advertisers for Internet impressions and clicks was very strong. So the core businesses of graphic advertising and costs per click, or CPC, remain the primary driver for our growth.

Total revenue for the second quarter this year was $23.3 million, up $3.6 million, or 18%, over Q2 2006. Adjusted EBITDA, excluding stock compensation expense, came in at $10.3 million for the quarter, up 44% over the $7.1 million reported in the prior year period.

Net income on a GAAP basis increased by 107% to $5.2 million, or $0.28 per fully diluted share in Q2 2007; compared to $2.5 million, or $0.14 per fully diluted share in Q2 2006. On an adjusted basis, excluding stock compensation expense, earnings per fully diluted share, or EPS, came in at $0.34, an increase of 48% over the $0.23 reported in the second quarter last year.

Please note that I do cover certain results, including stock compensation expense, which assist the investment community in valuating our results on a comparative historical basis.

Now let's move right to revenue so I can provide some more detail that I'm sure you're interested in. As I just mentioned, revenue came in at $23.3 million, an increase of 18% over the second quarter 2006 revenue of $19.7 million.

Revenue from the online publishing portion of our business, however, increased by 31% in Q2 2007 to $20.2 million, compared to $15.5 million in Q2 '06, representing an organic increase of nearly $5 million. Looking deeper at the core business, excluding FastFind and Bankrate Select, which I will cover in a minute, the increase in online revenue was actually $5.9 million, or 42% increase in core internet revenues.

Graphic advertising revenue for the second quarter 2007 came in at $12 million, an increase of 31% over the $9.2 million reported in the second quarter 2006. Now excluding FastFind and Bankrate Select, the graphic advertising business actually grew by 51%, so you can clearly see the healthy demand for our graphic advertising as I mentioned it in my opening remarks.

This growth was fueled primarily on higher volume. We were able to capitalize on higher inventory availability, given a 17% increase in page views, and also we had greater inventory availability through the network sales approach for our system. In addition, we continue to benefit from the increase in our display advertising rates that was made effective January 1.

Page views for the current quarter were 136.1 million, up 20.1 million, or 17% over the 116 million in Q2 2007, with the majority of this growth realized through gains in organic traffic. CPC revenue came in at $8.2 million in Q2 2007, compared to $6.2 million in Q2 2006, representing an increase of 31%. The increase was achieved through higher CPC volume, as well as higher rates.

About two months ago we announced our second CPC pricing action this year, with a 15% rate increase to mortgage, home equity, and other debt related products. We are pleased to report today that CPC rates on CDs will increase by 25% and money market accounts by 20% effective August 15. The level of demand for these products continues to be high. We now have over 800 CPC advertisers on the tables with demand continuing to grow every day.

Now let me update you on Bankrate Select. As many of you are aware, we began the Bankrate Select product offering at the end of Q1 2007 with testing and evaluation. During June we continued to test and evaluate the program with a second partner who provided a deeper window into the quality and behavior of the Bankrate Select consumer.

Contribution during the second quarter remained relatively small, running on a limited basis with mostly remnant impressions to evaluate performance, quality, and conversion results. The research and testing to date has informed us that consumers choosing to use the program are of the highest quality and tend to convert at a very desirable rate.

Next, we will schedule additional impressions for the program the during the second half, but keep in mind that this program will compete directly on CPM, and given the strength of our graphic ad demand and as I just mentioned, we were up 51% this quarter, the program may not receive the level of impressions we originally anticipated. But this would be in exchange for higher organic growth and display advertising, so stay tuned.

Our print revenue was $3 million for the quarter, representing a decrease of 28% from the second quarter of 2006 revenue of $4.2 million. The print business only accounted for 13% of total revenue during the current quarter. The decline in this business actually accelerated during the second quarter on lower than anticipated advertiser demand for our print products. We expect that this business will continue to show a decrease during the third and fourth quarter 2007 versus 2006, although not as large a decline as we saw this quarter.

You can see our print business results are in sharp contrast to our Internet business results, which increased by 31% during the quarter. We continue to earn a small margin on print and the business remains a driver of traffic to Bankrate.com. Also, we had a number of advertisers cancel during the quarter in favor of advertising on our CPC table, so we lost the print slotting speed, but we gained yet more demand on the CPC table.

The bottom line is we are seeing what every other print publisher is faced with, declining ad demand. We continue to slug it out and drive the print business forward because we believe in the value that the print footprint brings to our online business. But by the same token, we will continue to welcome any trade in print revenue at an 11% margin to online revenue at an 85% margin.

Our gross margin on sales for the quarter was 75%, compared to 67% in the same quarter of last year. The increase in margin was driven by mix as well as higher rates. 87% of our business came from online sources, up from 79% in the second quarter of 2006. We expect this trend to continue, and obviously we are pleased to report that our online segment at an 85% gross margin is a key driver to our revenue growth.

Our EBITDA margin, excluding stock compensation expense, increased to 44% for the quarter, up from 36% in the second quarter of 2006, resulting in EBITDA of $10.3 million, compared to $7.1 million in the same quarter last year. We achieved the 44% EBITDA margin by realizing an 86% EBITDA margin on the $3.6 million increase in sales this quarter over the second quarter 2006.

We accomplished this through a combination of a more favorable business mix, consisting of 87% of revenues derived from online sources, and a natural operating leverage inherent to our high margin business. We expect that we will realize similar operating leverage from our business in the coming quarters. We will, however, continue to increase our search engine marketing, or SEM, expenditures, and invest in product development.

Operating expenses increased for the quarter by $742,000 from $9.7 million in the second quarter of 2006 to $10.4 million for the second quarter 2007. The increase was driven by higher sales, marketing, and product development cost, offset by lower general and administrative expenses.

Sales and product development expenses were up due to higher human resource and development costs associated with new products we are working on for 2008, and higher share-based compensation expense.

Marketing expenses increased as we continue to ramp our SEM spend during the quarter. G&A expense decreased as a result of lower share-based compensation expense; lower legal and infrastructure cost, as well as lower bad debts expense.

One point I want to note is that share-based compensation expense is expected to increase in the coming quarters on grants associated with our new share-based compensation plan approved at the Annual Shareholder Meeting.

We ended the quarter with 165 employees, up five from the end of Q1 2007. We will continue to modestly increase staffing during the remainder of the fiscal year, with the primary focus being product development and revenue growth. We continue to be very disciplined in terms of headcount, focusing on improving the bottom line and driving additional cash flow.

Our income tax provision of $3.5 million for the quarter represented a 40.3% effective rate on book income, compared to $1.5 million, or a 37% effective rate, in Q2 2006. The fluctuation in our 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 fully utilized as of the end of 2006; making us a cash taxpayer in 2007. We started making estimated payments during the quarter with additional estimated payments scheduled in the coming quarters.

We ended the quarter with $134.7 million in cash and cash equivalents, up $14 million in 91 days that elapsed from March 31, 2007 where we reported $120.7 million in cash and short-term investments. Our investments earned $1.7 million before income taxes during the quarter. Also, our cash flow generated from operations during the quarter was $10.5 million, with the remainder of the net cash flow due to investing, financing, and capital activity.

In summary, the second quarter was solid with the core Internet media business showing strong growth. Again, revenue was $23.3 million, adjusted EBITDA was $10.3 million, and adjusted EPS was $0.34 per fully diluted share.

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

Tom Evans

Thanks Ed. Now let me put a little color on the business. As Ed mentioned, the performance of the business in the second quarter was very strong. In response to questions in our last earnings call, we said we had not seen a slowdown in traffic or an advertising demand attributable to the problems in the subprime mortgage market. Obviously it's a continued concern that we and others are watching very closely.

However, while we don't want to be either arrogant or naive, the fact is we really haven't seen any exodus of advertisers. In fact, it's been just the opposite. We continue to grow our rate table-advertising base and have more lenders on the table than we did last quarter, and more than we had last year. We have seen some shifting in traffic patterns, where deposit traffic has gotten stronger, and mortgage traffic as a percent of our total traffic has declined, but there's still a strong mortgage and refinance activity on our site.

As Ed mentioned, traffic in the second quarter was strong, up 17% over the same quarter 2006. Organic traffic grew by 13%, while partner traffic was down slightly, and we were more than able to offset that with an increase in our SEM spending, increasing our page search activity to satisfy the ad demand that we generated in the quarter.

For the first half, 78% of our traffic came to us organically, 10% came through co-grant partners, and 12% came through paid search. Unique visitors to Bankrate.com grew to almost 18 million in Q2, an increase of 15% over the second quarter of 2006. We believe it's an indication that consumers value the depth and breadth of the content, the calculators, tools, rate tables, and advertising on our site. I can't stress that enough.

While we talk with investors about the advertising and the rate tables, a big reason consumers come to Bankrate is for the kind of credible, helpful, trusted editorial; tools, checklists, calculators, and advice that our expert staff provides. It's really the most important traffic driver and a very valuable component.

Again, as Ed mentioned, graphic ad demand continued to be a great strength for the company in the second quarter. We experienced high levels of demand from existing advertisers and have been able to attract new advertisers to our network. As a result, we had more advertisers, sold more ad impressions, and sold them at higher CPM than we did the year prior.

Those of you who spend time looking at our site have seen a much greater diversity in the list of advertisers that we had even just a year ago. While we still have many of the traditional lenders that continue to be prevalent on our site, we have diversified that base to include banks, credit card companies, college lenders, companies offering annuities, brokerage firms, insurance companies, and automotive manufacturers. We remain very optimistic about our graphic ad business and think we've done a very good job of branching out and expanding beyond our endemic client base.

We've also seen why Bankrate has become not only a core buy for many of our advertisers, but a site now being utilized for brand building as well. To be sure, most of our advertisers are still focused on click rates and conversion, but more and more are using our pages to promote their brands and their companies for our consumers.

As for our rate tables, the hyperlink business continue to perform very well in the second quarter and really demonstrated the elasticity in our model and the diversification of our revenue stream. It should be no surprise to anyone that due to the current housing slowdown, that our mortgage clicks were down slightly in the quarter from last year.

However, due to our pricing leverage, mortgage revenue was actually up by double digits. Furthermore, and this is interesting, total clicks were up in the quarter over the prior year due to the strength of the deposit business, particularly due to the strong consumer money market account activity.

The second quarter was also notable in another way. The second quarter 2007 was the first time ever that our deposit tables generated more revenue than our mortgage tables. Just think about that. Three years ago, mortgage represented 73% of the rate table revenue, and deposits only 12%. In the second quarter 2007, deposits represented 46%, and mortgage only 40%. And remember, mortgage revenue is still growing by double digits.

Hyperlink revenue for the quarter, as Ed said, was up 31%, while the number of advertisers on our rate tables continue to grow for the seventh straight quarter as more and more advertisers are finding the Bankrate tables the go-to place for reaching end market consumers who click and convert.

As of yesterday, August 1, we had 811 advertisers on our rate tables. Given that strength, given that demand, you are aware that we previously announced a 15% price increase for mortgage and home equity hyperlink clicks effective July 1. As Ed said, there's more news on the pricing front. This last week we announced to deposit advertisers a price increase effective August 15 of 25% per CD click, and 20% per money market click.

Again, the increases are driven by advertiser demand and our belief that Bankrate provides a unique environment that advertisers find very valuable. And you should know that neither increase has resulted in a decline in the number of advertisers.

Unfortunately, one source of angst is the continued softness I our print business. Revenue for our newspaper mortgage and deposit tables declined 28% in the quarter versus a year ago. It shouldn't be a surprise to anyone watching the deterioration of the newspaper industry that we've experienced similar problems selling print advertising to what the newspaper company themselves have seen.

We could go through a list of the newspaper companies that have reported earnings recently, while saying that the second quarter was the worst quarter for newspaper advertising in any non-recessionary period. Unfortunately for the industry, I'm not sure that there's any better news on the horizon, although I guess the good news for us is that print represents only 13% of our revenue and a much smaller percent of our profit.

However, it is a business that, for us, remains profitable and puts us in front of millions of consumers who may not have otherwise been aware of Bankrate.com. We still think it's great exposure and a great marketing vehicle for us, and currently we're only in 500 of the 1400 plus dailies in the country, so we certainly haven't tapped that entire potential market.

Another area I'd like to touch on is Bankrate Select, our lead gen platform that grew out of the FastFind business. First, anyone following the recent earnings announcements of several of the lead gen companies, have seen that these are difficult businesses right now. Selling leads has been tougher and tougher in this current environment.

In the first half of the year, we've run Bankrate Select, testing a couple of programs; one, using a partner as our lender network, and another with a single lender that's testing real time pricing quotes for consumers. While both have worked well, we've run both using mainly remnant inventory, because as we've said, the demand for display advertising has been so strong that we haven't wanted to cannibalize our graphic ad sales.

We will continue to work with these partners until the lead gen business improves or we find the kind of situation that generates a return that we think is competitive with the other components of our business. We still believe that there's an opportunity for us to provide real time quote from multiple lenders, and that it will be an opportunity that is a better products of the consumer and great for the lender, in that it connects to hungry end market consumer to the lender with a customized offer in real time. We'll continue to work on it to provide updates as we progress.

On the business development front, we've signed three new co-brand deals with CNBC and Homescape, and another that we will announce soon, that we think will add value to our business, and add a category of business we've spoken about in the past. So there's good news there. And we expect to finally be able to announce some enhancements with an existing partner that we believe will have a positive impact as well.

We're also pleased to announce that we'll be adding a new channel to the Bankrate site in the fourth quarter of this year, our new retirement channel. We're very excited about it. With the Baby Boom generation reaching retirement age, we know there's a big audience for the kind of information we provide.

We think it will enhance the value that we produce for a large group of consumers looking for help and advice. We've already been out presenting the new channel to advertisers I have gotten a great response, and believe we've generated a great deal of advertising interest.

Additionally, for several months we've been working on a complete redesign of the Bankrate.com site due to launch on 2008. The new redesign will allow us to have many of the features that will improve the consumer experience, like a faster site, taking advantage of wide page technology with video, registration, and an easier-to-navigate environment. It will also include enhanced rate table listing, help consumers ladder CDs, and contain a feature we'll call dynamic page generation.

Dynamic page generation, for example, will allow us to solve a problem that we have currently. Today, we show the inventory we have available instead of, what the redesign will allow us to do, and that is formatting the page configuration and creating the inventory on a customized basis, that the advertiser wants on the fly.

If the advertiser wants posters and all we have available is skyscrapers, the page will automatically reformat to accommodate the desired ad unit. We can't do that today with our current site, which means we sometimes leave money on the table.

Dynamic page generation should generate higher inventory yields and higher CPFs. That's just one example that will make the new site more effective and more consumer and advertiser friendly. We've done a lot of work on the design already, but there's surely a lot more to do before it's ready to launch. But we're very excited about how it will improve Bankrate for both the consumer and the advertiser.

Last, our thoughts on guidance. You'll remember that when we guided at the beginning of the year we projected revenue of between $95 and $100 million, and EBITDA between $36 and $40 million. Given the decline in print, we're not going to change the revenue guidance for the year.

However, given the growth in the online part of our business, we're confident that we'll continue to do well, in raising our EBITDA guidance to between $39 and $43 million, from the $36 to $40 million previously projected. Just to summarize, we expect revenue for the year to be between $95 and $100 million, and EBITDA for 2007 to be between $39 and $43 million.

Two other quick mentions that we're sure to get asked about. One, we're still actively engaged in M&A activity, but have nothing to announce at this time. And two, we're still experimenting with behavioral targeting. I'd say today our results on behavioral targeting tests have been somewhat lackluster.

In part that's due to the approach we took where we wanted to do a limited amount of testing and didn't want our customer data to be shared with any outside vendors or advertisers. We're now rethinking that approach. We'll keep working on it to see if we can find ways of using behavioral targeting to drive more ad opportunities, mostly with inventory off the Bankrate sites.

Finally, as we're now a month into Q3, you should know that July traffic has held up pretty well, up approximately 13% above July 2006 traffic numbers, and advertising demand continues to be strong.

We have one housekeeping item that we wanted to mention for the sake of full disclosure. Two weeks ago an antitrust complaint was filed in the New Jersey District Court against Bankrate by a company names BanxCorp.

The complaint claims that Bankrate is a monopoly, and has used that position to foreclose competition, thereby harming competitors. At the time the suit was filed, I don't recall that I'd ever even heard the name of this company. I'm told that BanxCorp is a five-person company based in White Plains, NY.

Obviously, we disagree with the claims made in the complaint, and intend to defend our position vigorously. We're not sure this is material, but in the interest of full disclosure we'll be disclosing it in the 10-Q so we wanted to mention it today.

And with that, I'd now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go to Rich Ingrassia of Roth Capital Partners.

Rich Ingrassia - Roth Capital Partners

Thanks. Good morning, everyone.

Tom Evans

Good morning, Rich.

Rich Ingrassia - Roth Capital Partners

Good morning. Tom, there's lately been a lot of talk in the industry about moving away from page views as a pricing mechanism, and instead the time spent on average day, or whatever you want to call it. How do you think Bankrate would stand up in that kind of an environment?

Tom Evans

I think it's a crazy argument, particularly in sites like ours. We are measured -- I think we hold up pretty well. But we're measured by advertisers, based upon the performance of our consumer. Our consumers come, they click, they transact. We've got a super-high conversion ratio, which is why we can charge the kind of CPMs we do, and if somebody sits a long time on a rate table before clicking on one lender, I'm not sure that makes it any more valuable, as they sort of toggle back and forth and look at the rates and look at the APR and go up and down the list. I don't think it hurts us in any way. I just don't think it's a relevant measure, particularly for us.

And again, we're much more measured on clicks, conversions, yield, and the value of that traffic.

Rich Ingrassia - Roth Capital Partners

Okay. And then just two quick comments or questions on expenses. Earlier in the year, it sounded like search marketing was really thought of as a way to dial up traffic periodically when demand exceeded supply. But should we now assume that FTM is going to be part of a regular quarterly expense?

Tom Evans

Sure. What we've always hoped is that we could increase FTM in a methodical way, because we're in a situation where, as we've said in the past, every dollar spent on SEM that we coordinate with the sales guys has a positive rate of return.

We spend a dollar, we monetize that in $2 plus dollars in advertising. Now, we can't just go and spend $1million a month because we got to make sure that we coordinate the incremental traffic with ad demand, with selling that.

But we're hoping to increase that continually, drive more traffic, monetize it very effectively on that arc, and then grow it over time. So, it will continue to be a component of our expense, and we think a driver of revenue. How high does it go over the long term?

The honest answer is I don't know, but we want to continue to drive it because, as I said, we're receiving such a good return of that; as long as we're coordinating with it, we're selling it at the same time we're driving it. It doesn't make any sense to drive the traffic and not sell us, so we're making sure that we coordinate that activity.

Rich Ingrassia - Roth Capital Partners

Okay. And finally, and I know G&A was down year-over-year, but it was up about 15% sequentially if you back out stock comp. Was there any unusual expense in there?

Tom Evans

No. The only thing that we had a little more of during the quarter was some more legal expenses. We filed our proxy and had some more SEC activity, but it was only up a couple hundred thousand from the first quarter backing out stock comp expense.

Rich Ingrassia - Roth Capital Partners

Okay. Thank you.

Operator

We'll go next to Mark May of Needham & Company.

Mark May - Needham & Company

Thanks for taking my question. I know page views were down in the second quarter. Sequentially, last year they were also down, but there was a more pronounced, I believe, downturn in the mortgage markets a year ago. So just wondering if could talk a little bit about, how much of this is you think is seasonality versus sort of macroeconomic in nature?

And last year, we saw a rebound from the second quarter into the third quarter. Would do you expect a similar thing this quarter? It sounds like with the 13% year-over-year growth, I haven't really looked at the math, but that would suggest maybe you wouldn't see the same type of rebound, at least in page views in Q3 this year like you did a year ago?

Tom Evans

Mark, great question, and it has sort of seasonally dipped in the second quarter; and I went back and looked at sites like MSN Money and Yahoo! Finance and Forbes and CNN, Motley Fool, SmartMoney, Kiplinger's; they all dipped in the second quarter as well. So I think it is seasonality. We certainly don't think it's anything to do with Bankrate. As I said, there'd be a core traffic that came in organically was up 13%.

Do we think it's going to bounce back? You know, on a sequential basis in the third quarter, it kind of feels like that to date, but again, the one thing we absolutely don't control and only have a feel for is traffic. So we're not seeing any problems; we're not concerned about traffic at this time, but we monitor it pretty closely.

But I do think that the second quarter has seasonally declined. The only year it didn't, I'm looking at a several year traffic for us was '05, and it went up for $111million to $113 million in that year. Last year was down 7% quarter to quarter; this year was only down 4%. So you can draw your conclusions from that.

Mark May - Needham & Company

Okay. Thanks. And maybe two quick follow-ups. Marketing cost as a percentage of revenue, I think, just above 8% this quarter, where are you kind of comfortable seeing those go to over time, and then, secondly, I think there was a mention about the share comp expense going up maybe if you could give us a sense of what to expect in the second half?

Tom Evans

Yeah, I'll take the first part of that, and that Ed address the second. In terms of SEM spend, again, we'd like to drive it higher, because it means we're monetizing it on the back end. So, I think that's sort of one of those TBD.

What the target is? Don't know; we certainly hope to be able to increase that. Again, if we continue to see the same kind of ROI where we're spending $1 and driving more than $2 in revenue from that, we'll continue to do that. But we want to coordinate that so we don't sort of get out over our skis, and start spending money that we haven't, we're not in a position to monetize, or vice versa, where we're sort of overselling and can't deliver that.

So it's just something that we're trying to coordinate, and it's why we're trying to grow it in a very systematic, very methodical way. We're doing it a lot better than we did a year ago, where we did a little bit up and just sort of tested it. We're gotten much more analytical, and I think much better in terms of spending money and monetizing it sort of concurrently.

Edward DiMaria

Yeah, on the stock compensation expense, it was $2.5 million during the current quarter, and I think, as we mentioned, we expect it to go between for the year, to be between $10.5 million and $11.5 million. So that's anywhere between $3 million and $3.6 million.

Now, there's a couple of factors there. We have some performance awards, and depending upon how the stock does and what the expectation is in terms of those stock options vesting, the expense is a little bit variable under the accounting rules. But that's the range that we've set out; between $3 million and $3.5 million for each of the next two quarters.

Mark May - Needham & Company

Okay. Thanks.

Tom Evans

Thank you.

Operator

We'll go next to Richard Fetyko of MCF & Company.

Richard Fetyko - MCF & Company

Hey, guys; couple of questions on the redesign of the website coming up in '08. Could you give us a little bit of timing, first quarter, second quarter? And also, do you expect, what kind of percentage improvement in yields and traffic would you think that the site could deliver, or would you at least, maybe you could mention where would you see more improvement? Is it on the monetization yield or on the traffic, meaning page views per visitor?

Tom Evans

I believe, Richard, sort of all of the above. We think it’s going to help the yield. At this point, we'd rather not, I mean, we've modeled some of those things, but, we’re just going to help the traffic. We think we're going to be able to drive more traffic; we're going to be able to attract more people to the site. And video alone, we think will enhance the site, the consumer utilization.

And Richard, really your question about time spent, we have today, we launched our auto guide today, for example; and we have our first sort of test on video on our auto guide. The auto guide is sponsored by Toyota. It's done very well in the past in terms of traffic, and we have our first bit of video. We're hoping to enhance that and make that much better.

How that will do in terms of incremental page views, how that will do in terms of greater yield, we're not yet prepared to say. It intended to launch as early in '08 as possible. I could give you the date, but Steve Horowitz, who is sort of running that program, would probably give you a different date. But first quarter of '08, to be sure.

Richard Fetyko - MCF & Company

Okay. And then, if I may, one more. In terms of the traffic to the site in the back half of this year and next year, do you think you'll see some benefit from the ARM loan interest rate resets, that there's a wave of ARM loans that were made in '04 and '05 was so the peak for ARM loans, particularly three-year ARM loans? Do you see that as benefiting your traffic trend in the back half of this year and '08?

Tom Evans

Yeah. We think so. I'm a little bit surprised that we haven't seen the impact of it to date. Maybe that's just a reflection of the fact that the Fed hasn't moved the base rate, and that consumers are still sort of taking a wait and-see; but that nothing's really moving right now. But certainly an increase in the Fed rate, or even a decrease in the Fed rate could push a lot of people to do that. We haven't seen the reaction yet, and we thought we would have by now.

We're certainly prepared for that. Lenders are certainly prepared for that. We're hoping that occurs, because obviously that will great for us, and that'll be a nice windfall. We've got our big catcher's mitt open and we're waiting for it; but we haven't seen it yet.

Richard Fetyko - MCF & Company

Okay, thanks.

Tom Evans

Thank you.

Operator

We'll go next to Victor Anthony of Bear Stearns.

Victor Anthony - Bear Stearns

Great. Thanks for taking my call; just had a few quick questions. The first one is on, it appears that you guys aggressively targeted the deposit channel with paid search initiatives. At the same time, you neglected your mortgage channel. I wanted to know whether or not you could just explain that a little bit further; and is the rationale between which between targeting deposits or the mortgage channel? And second, if you could tell me how much of the revenue growth on deposits in the quarter was driven by paid search initiatives.

And the second question I have is any sort of revenue expectations from above your target and for the back half of the year. I know you talked about it was lackluster results so far. But are you expecting some revenue contributions? I wondered if you could talk about it a little bit more. And I have a follow-up.

Tom Evans

First, Victor, I take objection to the fact that we're neglecting the mortgage business. I said that mortgage is still a big business for us. The mortgage channel's doing very well. We try to drive more traffic into the mortgage channel, the home equity channel, the deposit channel, the credit card channel, into a number of different channels. We can’t force consumers where they don't want to go. There just happens to be great interest, currently, in the deposit.

So rather than try to force one or the other, what we really try to do is we just try to take advantage. It's kind of the great thing about our model. We've got all this resident demand built up on the rate tables. If tomorrow, we got 70% more mortgage traffic, we'd be able to monetize that.

If we got 70% more deposit traffic, we'd be able to monetize that. If we got three times the amount of credit card traffic, we'd be able to monetize that. The way the CPC model works and the number of advertisers who are there, ready to pay for those clicks, it just works very well.

So, it's not a matter of us neglecting it, it's a matter of us sort of going with the flow and figuring out where the consumer wants to be right now and taking advantage of that. So, that's really sort of how we manage that business. We try to push a bunch of different levers and whichever ones work, we monetize.

And again, paid search is still a very small component of our growth. Remember, it's 12% of our traffic. So, if on our rate tables, I mean you assume that, well you couldn't assume that all of that is being driven because it's not but if on the rate tables, 46% is deposits, and in total, 12% of our traffic is driven by paid search, you can assume it's still a fairly modest number that's being driven by paid search.

We'd like it to be more. We're going to try to drive more, as we talked about earlier, responding to Rich's question. It's just a matter of making it happen. As for behavioral, there are three things you can do with behavioral. Number one, we can sell ads to our advertisers targeting people who are on the Bankrate site who then leave Bankrate that our behavioral partner has tagged, and that's what we're doing.

The second thing to do, we can have the behavioral targeting company selling ads on their network and give us a share of that revenue. We've opted not to do that. The third thing, we can get paid for anyone selling an ad to a target whose data was generated by Bankrate. We've opted not to do that.

We really want to learn behavioral targeting. We wanted to figure it out; we wanted to test it; we wanted to see what kind of ROI it drove, its sort of in isolation, before we took the chance of allowing a behavioral network to use our data to sell, and in a sense, compete with us; although, now that we've looked at it, we don't think it's going to be competitive, because Bankrate is core to those advertisers, so we really do believe it would be an incremental opportunity for us.

And then, we really didn't want our data used in making ad sales from anyone else targeting those people more valuable, even though it cost us money not to implement that. As I said in the remarks, we're rethinking that. We're thinking maybe this isn't as scary as it might have been.

We think this could be more beneficial, more advantageous, and so we're rethinking our behavioral targeting efforts.

Victor Anthony - Bear Stearns

Okay, thanks. Last question is just more of a macro question. It seems that most of the online advertising companies have reported weaker than expected top line results this quarter, from CNET to ValueClick Yahoo!, Google's results were so-so, and not as strong as people expected.

I am wondering if you're actually seeing on a macro level if there's a slowdown and a shift of ad dollars to the Internet, or if it's more so any sort of pricing pressures you're actually seeing on a macro level, or whether or not it's just more advertisers are using the ad networks or ad dollars are being spread across multiple different sites. That is, all and I’ll be, I appreciate it. Thanks.

Tom Evans

I think, again, if you look at the top line results of our results were pretty strong, ex-print; and it's pretty obvious why the print business isn't strong. Sell-through rates were high; number of ads we sold were up. I think as, I do agree with you in terms of, if you look across sort of the totality of the Internet, I just think there's more inventory out there.

I mean, I think that the ad networks have sucked up and the social networking sites currently, because that's kind of the flavor of the month, have sucked up a lot of advertising dollars that would have gone, for example in the past, to the portals.

I don't think, I mean this is a personal opinion, that I think ad networks and social networking sites have taken money away from sort of the AOLs and Yahoo!s and MSNs because I think advertisers are buying two ways now.

They're buying core, contextual, high-value, targeted advertising, like Bankrate, like a WebMD, like some of the other vertical content areas; and then they're using the rest to buy their mass, their sort of impression buys, which used to go to the portals, and are now going to ad networks, social networking sites.

So I think there's just more buying opportunities for non-targeted and non-contextual ad environment. But I tell you, the contextual places are doing great. Bankrate's business is good. Our CPM leverage is strong; because we perform.

The consumer comes to Bankrate looking for, I've said this before. I'd love to tell you that people spend Saturday afternoon grooving around our site because it's so much fun. They don't. They come to us when they're in market. And so they use our editorials; they use our tools; they use our calculators; they click on the rate tables; and they convert. That's why we get the kind of CPC prices we get. It's why we get the kind of CPM prices we get.

So I think there is a bit of a shift in dynamic. I don't think it a the negative impact on our business in any way; in fact, I think it's got a positive impact on our business, and I think all this shakes out over time.

I just happen to think that advertising on social networking sites and some of the areas, as sort of, as I said, flavor of the month; and I don't think that's going to be sustainable. That's my personal opinion.

Victor Anthony - Bear Stearns

Thanks. Appreciate it.

Tom Evans

Thank you.

Operator

We'll go next to Youssef Squali of Jefferies & Company.

Youssef Squali - Jefferies & Company

Thank you very much. Tom, I was wondering, can you go over the traffic growth in mortgage versus deposit for the quarter that you just talked about? And maybe, can you quantify, I'm not sure you can, but I would love to see maybe, if you could talk a crack at it, quantify the benefit you're seeing from the SCM spend. I would imagine that your traffic from the search optimization may have actually seen a better pickup, but maybe it's mass by just lower mortgage traffic. So, that's why I'm asking for the breakdown.

Tom Evans

Yes. Mortgage traffic was still in the sort of a mid to low 30s. Deposit traffic was in the mid to low 40s. So deposit traffic is bigger at this point than mortgage traffic. They're both still growing, but deposit's growing faster.

The only negative, and I don't know if there's negatives, because I look at, hey, if you're monetizing it as effectively as we do, it's still very positive; but we get more on a CPM basis and a CPC basis from mortgage than we do deposit. So if those were both 40% numbers or those were both even, that actually would have a positive impact on our revenue and on our bottom line.

So, and SCM, SCM's worked; knock on wood, SCM's worked really well. I think part of that is we've got better metrics to measure SCM now than we did before. We used to sort of guesstimate at what we thought and it was an educated guess, but it was a guess at what we thought we'd get in terms of monetizing.

Now we have actual, we have actual data. We have the statistics. We use the information that we get sort of on a per click and on a bucket basis from Efficient Frontier. We run that across the page view information, the traffic information that we get from Armature, and we merry those two to come up with literally an ROI per click.

I mean we've got a pretty good idea of by source, by channel, dollar spent on Google or a dollar spent on Yahoo!, what that means in terms of the ROI, what the click through rate is, how we monetize in terms of graphic advertising. So, it's doing well. Right now, the return is as I said, it's better than $1 spent and $2 in revenue.

So, it's been interesting to watch, and it's why we said we hope to continue to increase that spend. If we can continue to grow organically, if we can continue to increase our SEM spend, we think that's a win-win; and at the same time, monetizing both ends of that.

The interesting part of it is we don't really see much difference in quality between the organic and the SEM. So, that's actually kind of a good thing; they monetize and they click and they convert in similar ways.

Youssef Squali - Jefferies & Company

Okay. My last question is on the hyperlink revenues. If I look at them, they're nicely up. Year-on-year, they're down sequentially, despite the 15% increase in CD and money market, in that category, April 1. I was wondering what kind of revenue growth, I guess, is baked into your guidance for the second half, considering the price hike you just announced? Ed?

Edward DiMaria

I'm sorry. I didn't catch the second half of the question.

Tom Evans

The revenue growth; what's baked into the guidance, revenue growth for the second half?

Youssef Squali - Jefferies & Company

For the hyperlink business, just considering that you've announced these price hikes?

Edward DiMaria

We continue to -- during the first and second quarter. We were up 133% in the first quarter, up 131% in the second quarter, and we expect those types of trends will continue.

Youssef Squali - Jefferies & Company

You're talking about hyperlink revenues?

Edward DiMaria

Hyperlink growth.

Youssef Squali - Jefferies & Company

Okay. So in Q2, you were up 31%, right; in Q1, you were up 33%?

Edward DiMaria

Right.

Youssef Squali - Jefferies & Company

Okay. And you're expecting those kind of growth rates to sustain themselves through year-end?

Edward DiMaria

Correct.

Youssef Squali - Jefferies & Company

Okay, great. Thank you.

Edward DiMaria

Okay. Thank you Youssef.

Operator

We'll go to Heath Terry of Credit Suisse.

Heath Terry - Credit Suisse

You've talked in the past about the difference you see in pricing, or the gap between pricing for your hyperlink revenue versus what the larger search engines are getting in their bid/ask marketplaces. Can you talk about where you see the trends in that now, and then how significant that gap is, following some of your recent price increases?

Tom Evans

Heath, we're still well below their price. And again, I think it's a little bit of an apples-to-oranges. One reason is because we're pricing it across 800 advertisers, and everybody is paying the same thing. Whereas when you look at Google or Yahoo! and you look at the prices that people are offering, those are what the top guys are willing to pay. So I think there's a little bit of a difference. We look at some areas where we're not even half, in terms of our $7 click, or whatever it happens to be, we're not even half of what the top prices are that people are willing to pay on Google and Yahoo!

Not sure that's the best measure only in that it's a matter of what our three most eager people would be willing to pay, but it's really what 800 people are willing to pay throughout our rate tables. So I think we've got some headroom. I also think that when somebody clicks on Bankrate, and I've said this before; if you just think about -- pardon, the little analogy.

If somebody goes into Google and type in "mortgage," and they get a click and that's worth $12, versus somebody who's on Bankrate and they've gone to the Bankrate mortgage channel, and they've gone to New York, Poughkeepsie, 30-year-fixed, zero points, they're looking for 37 lenders on that site, they look at the rates, they look at the APRs, they look at the lock period and everything else, then they click. That person -- it's just a different person. I think they're certainly further down the funnel than the person who just typed in "mortgage" and then clicks.

I'm not saying that it's not valuable on Google and Yahoo!; I just think it's a very different dynamic. Don't know whether that person on Google and Yahoo! is looking to use a calculator, is looking just to get an idea of what mortgage rates are, is looking for a glossary of mortgage terms -- it's very different from somebody who's gone through the process, gotten through all the steps, clicked on an actual lender on the table that they're specifically looking for.

Do I think we've got more headroom? Yes, but it's not just based on what people get from Google and Yahoo!; it's more the dynamic of why people are at Bankrate, the fact that they're poised to transact.

Heath Terry - Credit Suisse

And what that would imply is that at some point, Bankrate's pricing should be at a premium to what you see or what we're seeing right now in the sponsored search arena.

Tom Evans

Again, we're talking about -- you can't always account for what some knucklehead may tag. I'm talking about someone who's willing to go ahead and bid $30 a click on Google to be at the top of the tables. We're talking about what 800 people are willing to pay to be on the Bankrate site.

So again, I don't want to just -- I don't want to compare their orange with my apple because I don't think it's exactly relevant when we're getting a mass of people to pay the same rates, and they're getting 1, 2, or 3 people to pay a higher rate. Not sure I understand going forward that the relationship with that dynamic.

I think -- as you know, we look more at what the value of that conversion is, and what they're willing to pay for that conversion elsewhere. So if Bankrate turns out to be a $200 conversion, in essence. I get 100 clicks and I pay $600 and three of those guys convert; so in a sense, it's a $200 conversion. What will they pay for that conversion elsewhere?

Well, the going rate in the mortgage industry is between $750 and $1000. So that's where we look at a proxy and a comparison; not necessarily what the top three guys are paying at Google or Yahoo!

Heath Terry - Credit Suisse

Okay. Great.

Tom Evans

Thank you.

Operator

We'll go next to Colin Gillis of Canaccord.

Colin Gillis - Canaccord Adams

Hey, guys. Hey, just how many partners do you see working with Bankrate's front? And do you have a partner of choice?

Tom Evans

We think it will look sort of the 3 to 5, and we're kind of ambivalent about the partners. It's a partner that can offer a full suite of products, licensed in at least 40-plus states, so that when a consumer comes, whether the consumer's from New York, or the consumer's from Idaho, we want to be able to have sort of a comprehensive offering to the consumer of 3 to 5 real-time rates, and that will take at least 3, no more than 5.

But again, partners that are large enough to have sort of a comprehensive offering of products, so they've got a full line of mortgage and home equity products and are doing that in enough locations so that we don't have holes in our offering.

Colin Gillis - Canaccord Adams

Okay, great. And then just on the BT side, are you looking for a new partner to help you on that initiative?

Tom Evans

We're talking with a number of people.

Colin Gillis - Canaccord Adams

Okay, great. And finally, with all the acquisition activity, Tom, have you been approached or have you reviewed a takeout bid?

Tom Evans

Obviously, we don't make comments about things like that. We've got our head down, we're building our assets, and we think we've got an enormously valuable company that will thrive and prosper as a standalone, or could fit very well as a component of a large organization. But we certainly are not going to comment on that.

Colin Gillis - Canaccord Adams

Okay. Thank you.

Tom Evans

Nice try.

Operator

We'll go to Mark Mahaney of Citigroup.

Mark Mahaney - Citigroup

Great. Thank you. Two questions. First, gross margin trends seem to be consistently positive. Where do you think those continue to ramp to, particularly for the online publishing segment.

And then second, I know you already talked a little bit about the product revamp. Can you just go through -- what are the key factors that will determine the timing of when you'll have the website relaunched, revamped, the way you want it to be? Are there particular features or functionality that are key to that launch that you want to make sure those are up to speed before you launch? What are the gating factors there?

Tom Evans

I'll take the first one on the product revamp, and then have Ed, comment on the gross margin.

It really is incumbent upon us -- we did this three years ago, shortly after I came into the company, and actually brought Steve Horowitz on board, that we stepped back and said, knowing what we know now, and looking at the tools that are available to the consumer, how would we lay out a Bankrate site?

First and foremost, driven by content, what is it that we want to do from a content standpoint to really add and enhance the value of what we have on our site? And the second is sort of the infrastructure questions.

How do we -- and what we decided to do three years ago in launching the new site was not to just tweak and fix and alter the then-current Bankrate site, but completely redesign it; to step back and say, "If we were starting from scratch, what would this look like?" Keeping some of the features that we know were beneficial, but also eliminating some of the things that we did just out of habit and that were detrimental.

So we're really looking at a complete revamp overhaul. We want to spend enough time testing it, too. If we're driving x number of page views per visit, you don't just all of a sudden open up a new site that can drag half of that. So we'll do a lot of testing. We'll make sure that it's working well; dynamic page generation, laddering of CDs, registration.

We want to make sure that at first we do no harm, and the second thing is that it really enhances business, and that we've got the component pieces of the redesign, like video, like calculators and tools, like editorial and content, things like that, in the right places and on those pages before we launch it in earnest to the consumer.

Takes a long time; want to make sure we get it right. There's nothing broken now, so this isn't "Dutch, we've got to get this up quickly because we've got a problem." This is "We've got some opportunities going forward.

Lots of interest in video; real-time page generation -- we can't tell you what kind of an impact that's going to have, because right now, we have ad units that are in high demand that we just don't have enough of and we have ad units that are in low demand that we've got too many of; and it's just the way our wire-frames and our site had been set up.

And so, the ability to change that on the fly to satisfy advertiser demand will be a huge impact, we think.

Edward DiMaria

On the gross margin, Mark, the big thing with our gross margin, really two things. One, obviously, we've driven the gross margin up on the change in the business mix, as print is becoming a much smaller component of the business. So the margin for June 30th last year was 66.5% and this year it's 75.2%; so definitely seeing the benefit of the print business.

But the other thing, as you pointed out is on the online side. We're up to an 85% gross margin online. That's up 350 basis point in 12 months. So it's a pretty good expansion there on online.

The benefit there we're getting is because it's an organic traffic play. We don't rely heavily, despite our extensive -- the partnerships that we have and the traffic that we get -- most of our traffic is, of course, organic. So as we continue to push through better economics, get better yields, it does show up on the gross margin.

In terms of where that can go, we think that there's going to be continued expansion there. Am I going to lay out a specific number right here, no; but I think that over time, we'll continue to see that continue to pick up probably every single quarter.

Mark Mahaney - Citigroup

Thank you, Tom. Thank you, Ed.

Tom Evans

Thank you.

Edward DiMaria

Thanks, Mark.

Operator

And due to time constraints we'll take our final question from Stewart Barry of ThinkEquity.

Stewart Barry - ThinkEquity Partners

Thanks and good morning. While page view growth and clicks have been strong, how systematically are you measuring your conversion rates for advertising -- advertisers; and how are they tracking versus prior periods given the increased SEM and change in mortgage environment?

Tom Evans

We actually track it pretty closely, and again, we track the click rates very closely and that's sort of definitive. The other stuff is anecdotal. I think the thing we find is people -- advertisers do it at better and worse rates. There are some that are incredibly efficient, incredibly effective, great customer service, great sales; they've got very competitive rates, and they're still doing very well and they're converting.

I think for some guys, it's a tougher environment. For some people, they're not as competitive, and I think -- one of the things that Bank rate does and one of the things that a market and an environment like this does, it makes the consumer a lot smarter.

The consumer is not going to go with somebody who is not a good service or is not a competitive rate or somewhere where they can do better. There are times that -- we're hearing that people aren't doing as well, and yet, they're not as competitive and they're not as good on the back end as other people.

Guys are still doing well. They're still closing a lot of loans. We've also been pretty immune to date to the subprime market. We looked and saw that -- I mean, less that 1% of our clicks on our rate tables are subprime; and that being the case, and that representing 35% of the revenue of the company, so less than 0.3% of the revenue has anything to do with subprime. We've really not seen the impact. And again, I don't mean to be naïve, but it just isn't something that we've seen much impact on.

Stewart Barry - ThinkEquity Partners

And just one final question; how does the News Corp/Dow Jones deal change your universe of opportunities, given Mr. Murdoch's focus on financial media, the Internet, improving its ad sales effort, all areas which you're strong?

Tom Evans

You know, it could make -- we've got co-brands with the Zeal.com, (ph) and with MarketWatch, and it could make them even more effective and better partners. I think a focus on the financial category is good for us.

If it's concerned about competition, we think we can compete very effectively. We compete with a lot of sites, currently, whether it's for ad dollars. Some of the guys that are our partners, they're also competitors. They're trying to sell the same advertisers, display advertising that we do.

Our success has been driven by the fact that we really provide a value to advertisers and a concentration of consumers that they don't find elsewhere. Lots of places consumers could go; lots of places that advertisers could go. We benefit because we've got a great environment that drives a great ROI for advertising. We think that will continue.

Stewart Barry - ThinkEquity Partners

Great, thanks.

Tom Evans

Appreciate it. Everyone, thanks a lot for joining us today. Sorry that we've run a little bit over. We've got a lot of momentum going into the second half of the year. I know that we think we're being conservative in projecting our opportunity to go forward in raising our EBITDA guidance, but we're pleased with where we are today.

We're pleased with the trajectory and momentum of the company. I want to just publicly thank all the employees of the company who have done a terrific job, and we're very optimistic. We look forward to reporting our next quarter in 90 days or so. So, thanks for joining us today, and have a good day.

Operator

That concludes today's conference call. We thank you for your participation. You may disconnect at this time.

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Source: Bankrate Q2 2007 Earnings Call Transcript
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