Bankrate Inc. Q4 2005 Earnings Conference Call Transcript (RATE)

Bankrate, Inc. (RATE)
Q4 2005 Earnings Conference Call
February 14th 2006, 11:00 AM.

Executives:

Bruce Zanca, Senior Vice President of Communications & Marketing
Tom Evans, President and Chief Executive Officer

Analysts:

Yousef Squali, Jefferies & Co.
Parham Ghorban, Roth Capital Partners
Mark May, Needham & Co.
Colin Gillis, Canaccord Adams
Gary Shinaro, JP Morgan
Traz Turner, Traznite & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2005 Bankrate Incorporated Earnings Conference Call. My name is Cantus and I'll be your coordinator for today. At the time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. If at anytime during the call, you require assistance, please press, '*' followed by '0', and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's conference, Senior Vice President of Communications and Marketing, Mr. Bruce Zanca. Please proceed, sir.

Bruce Zanca, Senior Vice President of Communication and Marketing

Thanks, Operator and good morning, everybody, and thank you for joining us on this conference call to report Bankrate's fourth quarter 2005 and year-end financial results. I'm Bruce Zanca. With me here in our New York office is the Company's President and Chief Executive Officer, Tom Evans. Let me take a minute to go over the format of the call today. First Tom will give us results on color on both the quarter and our full year and then we'll review our financial performance, and then of course afterwards we'll have plenty of time to answer any questions that you might have.

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, its ability to continue to reduce costs and successfully implement strategic initiatives, constitute forward-looking statements within the meanings of the Securities Act of 1933 as amended and the Securities Exchange Act of 1934, as amended. The Company intends that these forward-looking statements may be subject to Safe Harbor created under the securities law.

These forward-looking statements reflected in our - reflect our current views with respect to future events and financial performance, but are subject to uncertainties and factors relating to the Company's operations and business environment which may cause the Company's actual results to be materially different from any future results. We encourage you to read the section entitled "risk factors" in our annual report and on Form 10-K in our subsequent filings with the SEC.

So with that being taken care of, let me introduce you to our President and Chief Executive Officer, Tom Evans. Tom?

Tom Evans, President and Chief Executive Officer

Thanks Bruce. Thanks for joining us, folks, and we have an awful lot to cover today. Since I'm sure most of the focus is going to be on 2006 and how the integration of the two acquisitions we made on December 1st are progressing. First let me comment on why our Chief Financial Officer, Bob DeFranco, is not with us. Bob has had a medical problem in the past week or so. I'm happy to report that he's out of the hospital, he is doing well, and is expected to be back at work full time soon. So we're sorry that he can't be with us here, but we wish him well.

I hope you've seen the press release we put out this morning before the market opened. We also filed the 8-K covering the historical financials for the two acquisitions we made in December at the end of last year. So first, while moving pretty quickly through this, I did want to review 2005, what we said we'd do and what we actually accomplished. You'll remember that last year we laid out our five strategic initiatives and said that we would focus our efforts on execution. We also said at that time that if we do so, we thought we'd see a steady improvement during the year. We also said that we believe that if things went according to plan, 2006 would be the breakout year for Bankrate. While not being cocky, I can tell you that we are more confident in this than ever.

First, we nailed all five objectives. We completed our website redesign, added new vertical co-brands, overhauled our sales organization, increased lead aggregator revenue and converted our rate tables to a cost-per-click model. Each of those items was accomplished in 2005, pretty much on schedule and as planned.

Some of the highlights of the year included: revenue grew every quarter sequentially even in the fourth quarter which is typically our softest quarter traffic-wise. Income grew in the first three quarters and would have in Q4 as well, if not for the added expenses related to the acquisition. We raised guidance twice during the year; operating margins improved during the year, and went from 21% in 2004 to 30% for 2005. And we've created a business that in Q4 and early 2006 we believe it proves the elasticity of the Bankrate model.

We've seen a decline in mortgage volume as interest rates have risen, but a large increase in deposit volume. We believe we've shifted from a mortgage dependent model to a balanced business model. And the implementation of cost-per-click has allowed us to take advantage of this trend. We'll come back to that in a moment. Those of you, who have listened to our calls before, know that we believe that businesses that relay on paid traffic models are a looming disaster. So I'm pleased to tell you that our story keeps getting better.

In the fourth quarter 91% of our traffic came to us free, 79% directly to Bankrate, 12% came through our co-brand partners and only 9% came through paid search, that 91% organic unpaid traffic is our highest level ever. We are very pleased with the year, and feel that we have a lot of momentum going into 2006.

So now filling in for Bob, I'll go through the financials for the quarter and full year 2005. As you know, we closed our acquisition of MMIS/Interest.com and FastFind on December 1, 2005. We think the most helpful way to walk you through our financial results is to present our Q4 and full-year 2005 numbers in two ways: First, we'll give you details on Bankrate on a pro-forma basis without including the two newly acquired companies. Then we'll present the Q4 and full-year financials including the December combined results for Bankrate, FastFind and MMIS/Interest.com.

So on a pro-forma basis Bankrate's results for the quarter ended December 31, 2005, without the other two companies, was slightly above the guidance range as we provided in our last conference call. As you may remember, on our Q3 '05 earnings call we walked through our 2005 guidance at the time we guided to revenue for the year being in the range of $47 to $47.5 million and pretax income to be in the range of $14.5 to $15 million. We expected pretax earnings per share for the full year to be between $0.85 and $0.88 on a fully diluted basis. And I'd like to remind you that the aforementioned October 27th guidance increase did not contemplate revenue or expenses from the two acquisitions. I'm happy to report that our results were slightly above the anticipated guidance.

On a pro-forma basis for Bankrate alone, total revenue reported for the fourth quarter of 12.5 million was 3.1 million, or 33% better than the $9.4 million reported in Q4 2004, and exceeded the third quarter to become the highest total revenue quarter in the Company's history. For the full year 2005, on a pro-forma basis for Bankrate alone total revenue of 47.6 million was up $8.4 million or 21% over the $39.2 million in 2004. Graphic ad revenue of $25 million was up $8.6 million or 53% over the $16.4 million reported for 2004.

We sold more of our available ad impressions in 2005 while increasing CPMs over the course of the year. Our sales group has done an outstanding job of extracting a greater value from our advertisers. Over the course of the full year we saw a 50% increase in the blended CPMs we charge our advertisers. Graphic ad revenue in Q4 '05 was $6.4 million compared to $4.2 million in Q4 2004, and $2.2 million or a 52% increase resulting from higher CPMs in that quarter, and 2% in additional page views versus Q4 '04. Page views in Q4 '05 were $93.3 million versus $91.3 million in the same quarter in '04, and were $14.5 million or 13% lower than the $107.8 million in Q3 of '05.

Remember, the fourth quarter with the Thanksgiving, Christmas and New Year holidays is historically a weaker period in our year. For the full year of 2005, we generated 426 million page views, 33 million or 8% more than in 2004. Again, on a pro-forma basis on Bankrate only, hyperlink revenue in Q4 '05 of $4.3 million was up about $1.1 million or 35% from Q4 last year, slightly above the 30% lift we predicted, we'd see when we announced the conversion to cost-per-click pricing. You might remember when we first announced CPC we suggested a 20% lift in Q4, and then after watching it in early October raised that to 30%. So the 35% was slightly above those expectations.

Our new cost-per-click hyperlink program, which was launched October 1st, has performed particularly well. We added 76 new hyperlink advertisers in Q4 of 2005 compared to only 20% in the prior quarter, and for the full year 2005 hyperlink revenue was $15.6 million, up 8% versus the $14.5 in full year 2004.

Bankrate's print, publishing and licensing revenue on a pro-forma basis was $1.3 million for Q4 '05, up 4% from the same quarter last year. The increase was due to the addition of new newspapers including several from advanced publications, and the Denver Post, and Rocky Mountain News. For the full year 2005, Bankrate's print publishing and licensing revenue of $4.8 million was down 10% compared to 2004. On a pro-forma basis, net income for Bankrate pre-acquisitions for Q4 2005 was $2.7 million or $0.16 per diluted share and above the original consensus guidance of $0.15 per diluted share for the quarter.

In Q4 '04, net income was $2.1 million or $0.13 per diluted share with no income tax provision. Income before taxes of $4.2 million was $2.1 million or 104% better than the $2.1 million reported in Q4 '04, and was $103,000 or just 2% lower than the $4.3 million reported in Q3 '05. The income tax provision for the quarter was 1.5 million, and represents the non-cash utilization of a portion of our net operating loss carry forward. On a go forward basis we will be accruing for taxes at a slightly higher rate than before. In 2006 the new rate will be 39.7% and that change is primarily due to our increased physical presence in states with higher tax rates than Florida, specifically due to the acquisitions in Illinois and California. As previously stated, we expect our NOL to run through the third quarter of 2006.

Full-year net income for the tax provision was $9.8 million or $0.58 per diluted share compared to $9.4 million or $0.59 per diluted share for the same period 2004 without onetime items and gains. And remember, there was no income tax provision in 2004, so it's really not an apples-to-apples. Income before taxes of $15.6 million was $7 million or 82% better than the $8.6 million reported in the same period in 2004. Our gross margin for Q4 '05 was 75% compared to 74% in 2004, and our operating margin was 31% compared to 22% in Q4 of '04.

Excluding barter expense, other expenses for Q4 '05 of $5 million were about $755,000 or 15% higher than the comparable $4.2 million in Q4 of 2004. Sales expenses were up slightly following an increase in revenue, legal fees and accounting fees were up as well as the management incentive plan accruals, but we continue to work to improve our operating efficiencies. Excluding barter operating expenses as a percent of revenue dropped from 54% in 2004 to 45% in 2005. I'll also remind you that as promised we reduced barter every quarter for the past six quarters. Those barter contracts have now expired, and in 2006 we will no longer be running any barter on Bankrate.

We generated over $15.6 million in cash from the operations of Bankrate in 2005, compared to $7 million in 2004. As you know, we made the two acquisitions as cash purchases in December, FastFind and Interest.com were acquired for $10 million and $30 million respectively. We continue to generate cash and have sufficient cash on hand to operate our business for the foreseeable future. Even after the acquisition's legal accounting commissions and stock expenses, we ended the quarter with over $3.8 million in cash and generated on a combined basis $14.9 million in cash for 2005.

So quickly I'd like to present the 2005 financials for the consolidated Bankrate that you've seen in the press release. Those numbers include the acquisitions of FastFind and Interest.com so the numbers reflect one month of operations for both the acquisitions. For the full year total revenue of $49 million was $9.8 million or 25% higher than the $39.2 million reported for 2004. Net income for 2005 was $9.7 million or $0.57 per diluted share compared to $9.4 million or 59% diluted share in 2004 and, again, to beat the same horse, 2004 is without any income tax expense.

FastFind's December revenue was $166,000. Because of contractual obligations to other aggregators, FastFind ads were not running on Bankrate in December. FastFind ads started running on Bankrate.com on January 1st, and I can tell you we're pleased with the initial results. FastFind's operations in December generated a loss of $249,000 which includes $36,000 in expense for the amortization of intangibles.

In January FastFind was profitable, so we believe December will be the only unprofitable month for FastFind under our ownership. MMIS/Interest.com had December revenue of $1.27 million and had $108,000 in operating income after deducting $86,000 for the amortization of intangibles. These results reflect none of the changes or improvements we plan on making to the business. We do believe these businesses can be improved and made more profitable through improved management and scale.

I'm happy to spend more time in answering any questions on the financials or about Q4 2005 in general. What I would like to do is jump into 2006 so we can give everyone a real feel for why we're excited about the year and how the integration of the acquisitions is going. So let me walk through the four different business areas and give an overview of where we are, and what you can expect from each as we go forward.

First, Bankrate.com. The year has started very well for us already. We continue to see strong demand from our graphic advertising customers and we see the continuing pricing power from having a valuable audience of end market consumers. PPMs are on the rise and sell through was ahead of last January's. The biggest impact of course was the move to cost-per-click pricing on our rate tables. January was a great measure of the value of CPC, but because we've come out of the holiday period and we've returned to more normal traffic and click levels.

Yes, with rising rates, the mortgage traffic and click volume is down slightly, but the deposit traffic in clicks have been very strong. In fact hyperlink revenue in January is the highest month ever for the Company by over 40%. And a fascinating thing to us is that 44% of the CPC revenue in January came from the deposit tables. Interestingly, we raised our CPC pricing for deposits on January 1st and saw no pushback from the hyperlink advertisers who are marketing their rates on our CD and money mark tables. In January traffic was solid as we generated over 39 million page views on Bankrate.com, slightly ahead of last year, and in a market that is less attractive from a mortgage standpoint. January has been a good start on the year and proves that our business model is working.

Next let me talk about Interest.com. You may remember on the two acquisitions that we signed, closed and took over the two companies within a week. Actually there were two big reasons that we decided to move that quickly. First, we saw confidence that we knew both companies well and really understood their business. Second, we wanted to get our hands on them as quickly as possible so that we could begin integrating them immediately and impact their business early in 2006. Let me give you an overview of what we intend to do and how it's going so far.

First, Interest.com is much smaller but similar to Bankrate. It will remain a separate website with its own distinct editorial and its own look and feel. But while having said that, for Interest.com 2006 will look like a page from the same playbook that we used for Bankrate in 2005. How will we run it? First, our plan was that the two sites were going to be sold by the same sales force. We actually began that selling effort in early December and it's already had a positive impact on Interest.com's sales in the first quarter. We've improved the sell-through rate and squeezed higher CPMs from the graphic advertisers.

Second, on April 1st Interest.com's rate tables will become part of the Bankrate.com network. So their rate tables will go from a flat monthly fee, which is what they're doing currently, to our cost-per-click tables. And just like with Bankrate, it will allow us to better monetize the rate tables on Interest.com and provide a broader platform and more volume for our hyperlink customers.

Gradually we'll improve the look and feel of the Interest.com website and use some of the learning we acquired when we improved the navigation and improved the user experience when we redesigned Bankrate last year. By the way, one of the things I should mention that we really like about Interest.com is that according to Media Metrix comp score 96% of their audience is unduplicated with Bankrate. That extra reach in unduplicated audience is a powerful attraction to advertisers.

Now let's talk about FastFind. At FastFind we intentionally took a step backwards in December before moving forward. You heard earlier that we generated only $166,000 in revenue in December for FastFind even though they had averaged about $500,000 a month for most of 2005. The reason is that we eliminated many of the unprofitable and low quality lead sources that they had been using. So December was an intentional pullback. However, beginning in January one major thing changed.

As of January 1st we were able to have FastFind ads on Bankrate and on Interest.com and generate high-quality leads basically for free. We've already seen their revenue almost triple in January from December's level as a result. And as I mentioned earlier, was profitable in that month as well. So we'll continue to look for ways to optimize their exposure on Bankrate and interest.com.

Going forward, we've established three main priorities for the FastFind business. First, we want to increase their lender network. When we acquired FastFind on December 1st, they had 40 active lenders buying leads. One month later by January 1, after a month of lenders knowing that they'd have the opportunity to buy Bankrate and Interest.com leads from FastFind, they then increased that base to 100 lenders and that base continues to grow during January as well.

Second, we'll work with them to improve the click through rates of their ads and the conversion rates of their application. Constant trial and error and improvement in the process will enhance both of those metrics and increase revenue. We will carve out a certain portion of both Bankrate and Interest.com ad inventory and increase that as FastFind's business gains traction.

And third, we want to ramp the revenue and the revenue we get from every lead. Our goal is to have FastFind fully optimized by July 1. When it is, we will then push FastFind out to other media channels and aggressively to our co-brand partners. We believe that over time FastFind and Bankrate and Interest.com can be a huge business.

The last area of integration that's taking place is in the print operation of both MMIS and Bankrate. When we acquired them, MMIS had contracts with over 300 newspapers and Bankrate was over 150. We think it makes great sense to have one team selling, servicing and producing the guides and listings that we sell and package for the newspapers. We've already consolidated the two teams into one unit. In this case we felt that MMIS was doing it better than we had been doing it at Bankrate.

The two groups, mortgage market information services for MMIS, and consumer mortgage guides for Bankrate, have now become a single unit called Bankrate Print. We've reduced our staff in Palm Beach by six people and it's now being run out of Chicago by the former MMIS team. We've already begun migrating the CMG papers from our Palm Beach office to Chicago and expect to have that consolidated and completed by mid-March.

Now for those of you who will attempt to model our business going forward let me try to be of some help. We'll continue to break out revenue in two buckets, those being online revenue and print revenue just as we've done in the past. In 2006 we expect online revenue to make up 80 to 82% and print 18 to 20% of our total revenue. Breaking it down further, we expect graphic advertising to comprise around 40% of the total, hyperlink revenue 30%, lead revenue 12% and print the remaining 18% this year.

As we look forward beyond 2006 obviously we expect that the online components of the business, particularly the lead revenue, will grow at faster rates than the print business. We believe that we'll be able to run the business initially at 30% operating margins and that we'll be able to increase the margins as we begin to optimize the acquisitions. Just remember how in the past operating margins went from 21% in 2004 to 27% in Q1 of '05 to 30% for the year while we think that 2006 will have the same kind of trajectory with margins improving over the course of the four quarters but starting higher.

The five initiatives we're focused on for 2006 are pretty straightforward and we believe very attainable. One, we'll continue to optimize CPMs in the rate tables on both Bankrate and Interest.com. Two, we'll integrate FastFind opportunistically on both Bankrate and Interest.com. Three, we'll work to place our CPC rate tables and FastFind's lead generating capabilities on as many of our co-brand partners as we can. Four, we want to continue to expand our co-brand and affiliate footprint and we think we'll have some exciting news along that front very quickly. Five, we will sell deposit tables in addition to the mortgage tables into our 450 plus newspaper partners.

We also think there are some very exciting and interesting opportunities for us as we ramp FastFind on the co-marketing front. People who fill out applications with FastFind have already identified themselves as being in market consumers. So we believe there is a greater opportunity to leverage insurance, home furnishings, security systems and other areas and we intend to take advantage of it. So there's plenty to do but nothing really out of our reach.

Let me make a couple more comments about the 2006 financials. First, the amortization of the intangibles from the acquisitions will be expensed at $122,000 per month or $1.46 million for the year. That's less obviously than the $3.2 million figure that we gave on December 1st when we announced the acquisitions. Obviously we were a little too conservative on that originally. Second, in 2006 we'll use a 39.7% tax rate as we continue to write down our NOL. Remember that we are showing taxes as if but not paying cash taxes. We expect that our current trajected NOL will expire after the third quarter this year. We also hope that with some additional tax planning we may be able to reduce that rate.

Finally, while we'll continue to be conservative in our guidance until we see the full impact of the integration of the acquisitions, we've already been able to move faster than we originally anticipated. As a result we'll increase guidance modestly, have estimated revenue for 2006 of between $79 and $80 million and pretax income of between $24 and $25 million. Now I know everybody models differently, so I'll let you make your own EPS calculation, but you should expect 18 million shares fully diluted for the year.

And just so you know, the $24 to $25 million income number does include the $1.46 million for amortization of the intangibles from the acquisitions, but does not include the non-cash option expense that will begin showing in 2006 as required by the SEC. That non-cash option expense charge will be approximately $8.1 million for the year. I think that covers our remarks. With that, we'll be happy to take your questions.

Questions & Answers

Operator

Ladies and gentlemen lets begin the question and answer portion of today’s conference. If you wish to ask a question, please press “*