Executives
Michael R. Stanfield – Chairman and Chief Executive Officer
Madalyn Behneman - Principal Financial Officer
Analysts
Kevane Wong – JMP Securities
Unknown Analyst – JFP
Brad Evans – Heartland
Intersections Inc. (INTX) Q4 2007 Earnings Call March 13, 2008 5:00 PM ET
Operator
Good afternoon ladies and gentlemen and welcome to the Intersections Inc. Fourth Quarter 2007 Earnings Conference Call. (Operator Instructions)
During this call Intersections has made projections and other forward-looking statements. Actual results could differ materially from the results projected in these forward-looking statements. For some of the factors that could cause actual results to differ materially, you can review the SEC’s filing at the corporate website at www.intersections.com. We do not intend to and do not undertake any obligations to update any forward-looking statements or projections that we have made. The financial highlight and certain non-GAAP measures of performance discussed during the call are also available in the press release Intersections distributed this afternoon which is available currently on the website. I would now like to introduce Michael Stanfield, Chairman and Chief Executive Officer of Intersections Inc. Mr. Stanfield, you may begin the call.
Michael R. Stanfield
Thank you. Good afternoon. I’m sorry for the delay. We sent out our release at the same time we normally do it. It just for some unknown reason took an hour to get distributed. Our apologies.
I’m pleased to report strong fourth quarter results. We ended 2007 with quarterly records for gross subscriber sales and revenue. Diluted earnings per share were 19 cents for the fourth quarter. A strong fourth quarter financial results demonstrate that we are crossing the threshold from marketing investment to earnings and cash flow creation consistent with our plans previously described. Enrollments in the fourth quarter were over 1.1 million, another quarterly record. We ended 2007 with approximately 5.3 million subscribers. New enrollments so far in the first quarter 2008 have continued the strong subscription sales trend. Revenue was 77 million for the fourth quarter of 2007, a third consecutive quarter of record revenue for our company. The revenue for the fourth quarter of 2007 was 40% above revenue for the same quarter of last year, and our revenue of 2007 was 272 million which was more than a 10 million increase over the 2007 announced guidance target.
I’d like to use this time this afternoon to discuss three topics, the economic environment and its effect on our business, non-financial business trends in our consumer and our non-consumer businesses, and the actual financial trends for 2007 compared to 2006 and some targets for 2008 compared to 2007. First, on the economic environment: While our clients are experiencing significant earnings pressure primarily from the housing and mortgage industries, today this pressure has not impacted our business negatively. Our enrollment rates and costs have remained stable. Our cancel rates have shown no significant increase except in relation to a previously reported purge of on-holds by one of our customers, and importantly our decline rates on credit card charges have remained stable. Our clients are looking for earning sources and our business is one of those sources. Additionally, identity theft is becoming a more sophisticated crime and our research tells us consumers are becoming more educated about the complexities of the crime and the need for more comprehensive solutions. This holds well for our initiatives in product innovation and distribution expansion which we’ll talk about a little bit later.
Finally, in an environment such as we face while we’ve not seen a negative impact on our consumer business, we are vigilantly watching our results for any negative signs that require change in course. Clearly, the screening business is experiencing a modest slowdown domestically as a result of the economy. Our international screening business does not appear to be suffering a similar macro-economic driven slowdown.
Let’s go to some non-financial trends and events in our business. First, on the consumer business: We added a number of clients and partners in 2007 in both the United States and Canada, and while none of these new partners are giants in their ability to generate enrollments, we believe bringing a significant number of smaller enrollment generating partners is good for growth and good for diversification. We also have active initiatives to create other marketing channels in industries impacted and related to identity theft, and we hope to tell you more about those initiatives later in the year. An important part of the growth of our subscription business is the direct consumer program we started 2 years ago. We’re pleased to report that subscribers acquired from our multi-channel direct consumer campaigns grew by 30% in 2007 and our direct consumer program started contributing to profit in the fourth quarter of 2007. We spent much of 2007 building systems and products for this market place, and we continue to see promising signs for our direct consumer business. We’ll be launching major efforts in this area in the second quarter and look forward to reporting on those efforts on our next call.
In 2007, Intersections launched several new state-of-the-art identity theft protection and computer security products, Identity Guard Safeconnect launched in August of 2007 was the first product in the market to combine credit bureau file monitoring and anti-malware software. In December of 2007, we began offering an internet security suite to combat spyware and malware as part of the Identity Guard total protection service. Next month we will roll out other significant enhancements for total protection, and we’re confident that total protection will be by far the most comprehensive identity theft protection service in the market. With these new product offerings, Intersections will continue our tradition of offering the most advanced and practical suite of identity theft services available to consumers and we will provide consumers multiple capabilities to prevent identity theft. This enhanced product will be backed by a new branding program and a significant marketing budget staring very soon.
In February 2008, we acquired substantially all of Citibank’s membership agreements for the Citi Credit Monitoring Services Program. The memberships purchased were already receiving Intersections credit monitoring service in an indirect partnership with Citi. Essentially, we purchased the revenue stream previously owned by Citi for those purchased members. The Citi name will continue to be used with the purchased members. These Citi members were already part of our reported subscriber count. They will now switch from indirect to direct. Incremental direct revenue stream Intersections will now receive will be included in the consumer products and service segment starting the first quarter of 2008, and we expect these memberships purchased will be accredited immediately. Currently, the audited assessment is that 100% of the purchase price of 33 million will be treated as intangibles in our financial statements and amortized on an accelerated basis following an estimated remaining life for those members – tenure amortization.
Our direct subscriber revenue base has continued to grow as planned. In 2006, our direct marketing spin was $30 million. In 2007, our direct marketing spin was $46 million. We expect our direct marketing spin in 2008 to be about $55 million. In connection with that spin, we target having approximately 50% of our subscribers as direct by the end of 2008 and to have 73% of our subscription revenue from direct subscribers in 2008. This compares to 31% of our subscribers and 59% of our revenue in 2006 as coming from direct. To us inside the company, the marketing investment growth is a promising leading indicator of cash flow creation despite the fact that it causes us to experience decreases in near-term earnings. The economies of our business can be seen in the reducing general and administrative costs per subscriber, a 22% reduction in the fourth quarter of 2007 over the same quarter of 2006.
By the way, if you take out the severance cost in 2006, that reduction was still significant at 13%. As you will recall, we had a major cost containment, a reengineering project underway in 2007, and we consider that a major success. In 2007, we also successfully attacked operational costs. We drove down our call center costs per minute despite a growth in customer touches. These higher touches create additional opportunities for cross-sale and up-sale and retention which we expect to more fully exploit in 2008. Further, we reduced our paper and postage costs through product redesigns, the full impact of which will be recognized in the current year. And our overhead cost per subscriber continued to decline as discussed earlier, and we will be introducing additional cost containment initiatives this year as we strive for a process of continuous cost improvement.
Before turning to the non-consumer business, I want to address the 8-K we filed regarding Discover. We’ve had a good relationship with Discover since we launched services with them in 1998 – a profitable partnership for both of us. Last month, Discover notified us that effective September of 2008, they were terminating that indirect agreement with Intersections. Based on that termination, we would continue to service indirect customers from Discover through August and starting September 1st we would no longer receive payment or service those indirect subscribers. The separate direct relationship between Intersections and Discover is not affected, but we’ve not added new subscribers there for several years. As you will see in our 2007 10-K, revenue from the indirect relationship with Discover accounted for approximately 10% of revenue in 2007 – a declining percentage from 2006 due to the diversification of our business and the growth of our high-value direct subscription business.
On February 29, 2008, we filed a complaint in the District Court of Fairfax County, Virginia, regarding the credit report authorizations obtained by Intersections under that service agreement. We believe there is competitive and economic reason for obtaining a court-directed clarification on the point and given the court proceedings we will be very limited in what else we say about this today.
While we’re certainly disappointed with Discover’s decision, we remain focused on opportunities and initiatives in 2008 that we expect, and we expect to continue our growth. Clients and prospective clients will continue to request proposals and price quotations for various services and products, and we will endeavor to be responsive to those requests. However, as we move out of our indirect low-value model and towards our total protection and direct models, our appetite to be aggressive in acquiring low-margin indirect credit services business are maintaining for additionally good margin business at lower margins when we bid will be limited to unique situations. Accordingly, we do not expect to win all business nor keep all clients forever.
Let’s now discuss the non-consumer business. In August 2007, we acquired a startup company called Captura Analytical which endeavors to change the workflow and data management processes in the bail bond industry. As we stated at the time of the acquisition, we believe our skills and resources will help Captura mature faster and more successfully, and we think it will create a unique and valuable niche business. Captura spent the latter part of 2007 introducing its services to the industry, and it is now actively selling in the market place. Our plans call for Captura to contribute to EBITDA in late 2008, and their results are reported in our 10-K under the “Other” segment.
In December 2007, we acquired Net Enforcers, Inc. Net Enforcers provides corporate identity theft protection services including online brand monitoring, online option monitoring and enforcement, intellectual property monitoring, and other services to large corporations. Through a combination of proprietary technology and specialized business processes, Net Enforcers helps corporate brand owners prevent illegal trademark and copyright abuse, counterfeit product and service sales, gray market sales, channel policy violations, and other business risks in the online world. Combined with our existing data breach response and background screening businesses, Net Enforcers adds to a portfolio of services related to corporate security. Net Enforcers was cash flow positive when we acquired it and began contributing to our EBITDA immediately. Their results are also reported under the “Other” segment in our 10-K.
Last year was the first full year of our international background screening joint venture, Screening International. As discussed previously, we had operational issues with UK which weakened earnings in 2007. Starting late last year, we began to see progress and margin improvement initiatives for the UK business. We look for Screening International to contribute to EBITDA in late 2008 and to profits in 2009. Although we are disappointed with the results in our background screening business last year, we remain confident and committed to the fact that they will be a worldwide business with strong potential.
Our breach mitigation and fraud resolution businesses remain modest in size but profitable contributors to this group.
In total, we expect our business services group to be EBITDA positive for the year, but not to contribute to earnings. We expect earnings contribution in 2009.
Finally, let’s review actual financial trends for 2007 compared to 2006, and some targets for 2008 compared to 2007. First, let’s look at the consumer business, and then we’ll look at the total corporation.
We are pleased with our subscriber and revenue ramp, but it is more important to understand the underlying related cash flow creation. As shown in the “Other” data in the press release for the consumer products and the services segment, revenue per subscriber has grown 28% from $10.36 in the fourth quarter of 2006 to $13.21 in the fourth quarter of 2007. Gross margin per subscriber and EBITDA before stock compensation expense per subscriber are growing at even faster rates. Gross margin per subscriber grew by 35% in fourth quarter ’07 to fourth quarter ’06, from $6.65 in ’06 to $9.00 in ’07. EBITDA before stock compensation per subscriber grew by 101% fourth quarter to fourth quarter, growing to $1.75 from $0.87 in the fourth quarter of ’06.
Let’s review several metrics over the past two years and look at our approximate targets for ’08 which will show the impact of these things on our overall business. This forward look assumes Discover Indirect is gone as of September 1, 2008. All forward-looking amounts set forth are approximate targets for ’08 and may change dramatically if our business plan is substantially altered by economic conditions, additions or deletions of planned marketing campaigns, additions or deletions to our client roster, or by acquisition.
First, if you turn to the “Other” data part of the press release, if you’ve been able to find it, there’s a page which shows the per-subscriber cost elements by year – our revenue per subscriber for 2006 was about $38. Our revenue per subscriber for 2007 was about $46. Our expectation for 2008 is that our revenue per subscriber will be above $60 for the year. This is driven by higher price points and more direct business. Our cost of revenue per subscriber grew from $13.50 in 2006 for the year to $16 in 2007 and we expect it to grow to around $19 in 2008. This is driven by more robust expensive products and by higher fulfillment costs related to increased enrollments. In 2007, we were successful in driving our G&A costs before stock expense per subscriber down from about $8.60 in 2006 to $7.90 in 2007. At the end of 2008, we expect a blip in that assuming that the Discover subscribers are not on the books to about $8.80. The average over the course of the year will be lower than that, but that would be the year-end calculation based on our current outlook. We intend to work hard in 2008 and 2009 on the G&A to improve these numbers, but the number I just gave you of $8.80 is the current target.
If we look at marketing and commissions, they will be continuing to grow with the growth in direct business. We expect marketing to grow to $10 per subscriber in 2008, up from $5.4 in 2006. We expect commissions to grow from $5.6 in 2006 up to be around $9.00 per subscriber for the year 2008, and if you look at the “Other” data in the press release, you will find a chart that gives these amounts by quarter, and you will see that over the course of 2007, the EBITDA per subscriber has been increasing $0.15 to $0.30 roughly per quarter, and we expect that to continue to increase to an amount north of $2.00 per quarter. This increase in the EBITDA is result of the realignment of our business towards more profitable direct business and more robust products.
So what does all this mean at the corporate level when we add in the business services? First let’s look at revenue. Our 2006 revenue was $201 million, 2007 revenue was $272 million. In 2008, we are currently targeting that revenue will exceed $350 million. With the improvements in margins due to the direct business, we expect that corporate EBITDA before stock expense to also improve substantially. EBITDA before stock expense for 2006 was $26 million, for 2007, it was $24.3 million, and for 2008, we expect it to be above $45 million. That is our current target.
Our earnings are impacted by stock expense and intangibles amortization, and that is a growing number primarily as a result of the Citibank transaction, so we think it is important to delay a little detail out on that. Stock expense and intangibles amortization together in 2006 were $2.5 million, which on an after-tax basis had an 8-cent impact on earnings. In 2007, stock expense and intangibles were approximately $6 million and had approximately a 21-cent impact on earnings. In 2008, we expect stock expense and intangibles amortization to be approximately $16 million and to have a 55-cent impact on our earnings per share.
If we achieve the targets for 2008 that we’ve laid out, we will have achieved compounded growth and EBITDA before stock expense of over 20% from year-end 2003 to year-end 2008, and that is the first 5 years of being a public company. We expect improvements in our business services unit, reductions in our intangibles amortization and depreciation to positively impact earnings in 2008. Finally, our preliminary view of 2009 is continued growth over 2008 levels, both revenue and EBITDA before stock expense.
Two final notes: In the third quarter of 2007, as part of our publically announced share repurchase program, we repurchased approximately 50,000 shares at a cost of approximately $445,000, and secondly, in the first quarter, concurrent with the Citibank transaction, we created a new debt facility consisting of a 4-year term loan of $28 million and a 4-year revolving credit facility in the amount of $25 million. We were able to secure what we consider favorable entry percent. Our cash at the of February 2008 was about $20 million, and with that we are ready to take questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Kevane Wong – JMP Securities.
Kevane Wong – JMP Securities
Good afternoon, guys. How are you doing?
Michael R. Stanfield
Hi Kevane
Kevane Wong – JMP Securities
Nice numbers. A few things. First, I’ll give you a broader picture. Obviously overall market has been some issues. Have you guys seen any impact as far as subscribers… people coming off? It looks like the numbers are good, but I was curious on your general feel as far as the macroeconomy. Is it having any impact or really it seems to be negligible at this point?
Michael R. Stanfield
The only impact we’ve seen that was out of the ordinary was last year when we had a number of subscribers fall off at one client after they’d had the systems change and they put a number of those people on hold until later in the year and then decided to release them. If we back that group of people out of our numbers, our attrition rates seem to be holding quite well.
Kevane Wong – JMP Securities
Nice, okay great! Also, obviously, somebody is going to want to know a little bit more about Discover. I was curious if you could tell us as far as why are they leaving, are they going to a different provider, are they taking it in house? I’m just trying to understand why they left at this point.
Michael R. Stanfield
Well, we really don’t want to say very much right now. First of all, they are a client, and we expect them to be a client for a long time in one form or the other and hope to have them reupped as a client at some point in the future, but I think the only thing I can tell you is we had no ongoing dispute or any flare-up of any sort, so they made a business decision that they felt was in their interest, and we are concerned about the venture that we make a profit when we do things in our business and other than that, I don’t really want to speculate at this time.
Kevane Wong – JMP Securities
Even with them coming off, you are still increasing the top line in your guidance. You have another $10 million to be over $350 million. Is there a particular thing that is driving it? Is it the number of subscribers that is still coming on? Is it improvements in the other parts of the business – Screening International, etc., or just the acquisitions that are driving that?
Michael R. Stanfield
It’s being driven primarily by higher direct business and better retention, and a little bit CCM – the Citibank services that we bought, the incremental revenue from that.
Kevane Wong – JMP Securities
I will make this the last one here, and then I’ll step back. Did you give expected EPS for ’08?
Michael R. Stanfield
Wait a minute. It’s not there? It was in the last draft. I don’t know what happened to it. Greater than 60 cents.
Kevane Wong – JMP Securities
And that’s still with 55 cents of negative impact from the stock expense and intangible… that’s all noncash, right?
Michael R. Stanfield
That’s correct.
Kevane Wong – JMP Securities
So it’s really on a cash basis. It’s going up pretty remarkably, from 60 cents this year or 55 cents plus 60 cents, what is it, $1.15? So that sounds like [__________] pleased with the numbers. I will let someone else pick the queue. Thanks guys.
Michael R. Stanfield
Thank you.
Operator
Your next question comes from [__________] from JFP. Please proceed.
Unknown Analyst - JFP
Hey Michael, congratulations on a nice fourth quarter and doubling the bills. Let’s see, can you help us a little bit with CapEx, interest in taxes, just so we sort of see – I guess you’ve already really helped us with interest, but I assume you’ll be something on the order of $30 million as the net balance on average for the year for these?
Michael R. Stanfield
Yeah, I think we can give you….
Unknown Analyst - JFP
Something more precise?
Michael R. Stanfield
Yeah, assuming no major changes in borrowing levels, the interest should be a little bit under $3 million for the year.
Unknown Analyst - JFP
Okay.
Michael R. Stanfield
The CapEx should be around 13 million.
Unknown Analyst - JFP
Does that particularly divide up between consumer and….
Michael R. Stanfield
I should say majority of it is in the consumer business.
Unknown Analyst - JFP
Alright
Michael R. Stanfield
And the tax rate for the year is going to be around 40%
Unknown Analyst - JFP
Cool. The tax rate…..
Michael R. Stanfield
41% maybe.
Unknown Analyst - JFP
I’m sorry
Michael R. Stanfield
Somebody is nodding 41 to me.
Unknown Analyst - JFP
Alright. We’ll give the government that extra point I guess. And can you talk a little bit about your – the pipeline for acquisitions and appetite, if you still have one, and whether or not the Citi thing has one off or whether you think that there are opportunities to buy back other bucks.
Michael R. Stanfield
Well, first of all on acquisitions, we are continuing to look at a few things, but between the stock price and the credit markets, they will have to be extremely cheap for them to make sense for us to pursue or small and strategically well suited to bring something new. So, we will keep looking recognizing that there may be some buying opportunities, but from a corporate acquisition point of view, we are not – I would say – not in any frothy mode. With respect to potentially buying other blocks of revenue, we are certainly going to be looking at that as any of our clients indicate an interest in doing so, but we do not at this time have any specific transactions teed up.
Unknown Analyst - JFP
Got it. And let’s see if there was one other thing I was going to ask you. So, do you think you’ll be continuing with the stock buy-back, obviously at a level this year, or are you more focused on debt pay-down or you can manage both.
Michael R. Stanfield
Well, I think that’s going to depend on whether or not we have opportunities to invest capital in incremental marketing arrangements, number 1; number 2, whether we have opportunities to buy revenue streams back; and number 3, the stock price.
Unknown Analyst - JFP
Sure, but given all those things, is there any direction that goes along with that answer. I totally appreciate the fact that those are the considerations, but as you see it today, the stock buy-backs – I hope I’m not giving you the impression I have a preference because your marketing spend has been very effective.
Michael R. Stanfield
The board has authorized a program and we have been – over the last 3 months – out of the market for disclosure reasons primarily, and we will have to assess our opportunities to spend the dollars – if we have the opportunity to spend them on marketing campaigns and get the returns we expect, that will get precedence over stock buy-back. I think I could safely say that.
Unknown Analyst - JFP
That’s what I wanted to know. Okay thanks.
Operator
Your next question comes from Brad Evans from Heartland. Please proceed.
Brad Evans - Heartland
Good afternoon Michael.
Michael R. Stanfield
Hi Brad, how are you?
Brad Evans - Heartland
Doing well, thanks. How about yourself?
Michael R. Stanfield
Good, good.
Brad Evans - Heartland
Can you just talk about in your 2008 guidance what subscriber growth you’ve gotten better than that guidance?
Michael R. Stanfield
Yes, I’d be happy to. Our assumption at this time is that the subscriber number at the end of 2008 will be approximately where it is at the end of 2007. We are anticipating that a group of Discover customers – on the order of 700,000 subscribers – will go away and as a result that would offset much of our growth this year.
Brad Evans - Heartland
Okay, that’s helpful. I may have missed the number as you gave it, could you just repeat the depreciation and amortization number for your expectations in 2008.
Michael R. Stanfield
Yeah. I’m not sure I gave it, but I can give it since we’re trying to give this – I just have to pull it up here. The amortization number – I think I did give was about 12 million. The depreciation number that we expect for 2008 is in the neighborhood of – I’m just going to wait and let somebody find it for me – 11 million.
Brad Evans - Heartland
Okay.
Michael R. Stanfield
That’s based on our current capital plan obviously.
Brad Evans - Heartland
I guess the growth rate that’s embedded in – I guess I can do a pretty quick back of the envelope, but it looks like you’re expecting within the non-consumer side of your business to grow low double digits, is that correct?
Michael R. Stanfield
Correct.
Brad Evans - Heartland
Okay. Thanks. I’ll get back in queue.
Operator
And you have a followup question from Kevane Wong for JMP Securities. Please proceed.
Kevane Wong – JMP Securities
Hi. A few things – one – I probably missed this, but other income had a big pickup this quarter – what was driving that?
Michael R. Stanfield
Yeah, I’m going to let Madalyn answer it, but it was Canadian.
Madalyn Behneman
Hi, we had a rather large payment towards a foreign currency transaction game.
Kevane Wong – JMP Securities
Okay.
Madalyn Behneman
It was the majority of that number.
Kevane Wong – JMP Securities
Gotcha. And it sounds like it’s one-timish.
Madalyn Behneman
Yes.
Kevane Wong – JMP Securities
Gotcha, okay. Also sort of related, but I guess a broad question – could you talk a little about sort of the direct consumer program, how that is going, what are you sort of experiencing as you are going through that in terms of quality of customers, pricing, etc., and then I’ll give the followup after that.
Michael R. Stanfield
Okay. Yeah. I’d be happy to talk about that. We spent much of our time last year both developing processes to build the consumer direct business doing marketing, testing, and starting to build a product that we felt would be unique, better, and have the highest value proposition in the market place. We have found that we have been able primarily with web marketing to achieve a cost per order that meets our hurdle rates. We have found that consumers are showing a desire to buy our total protection product rather than credit products often which we are very pleased by. We are finding that our total protection product sustains higher retention than our credit-based products despite the fact that it has a higher price point, and we have built the ability to communicate with those customers on an ongoing basis in a manner that we think is well accepted. We are currently putting the finishing touches on a number of upgrades to that product; though we thought it was still the best product in the market, we weren’t happy with it. We are adding incremental softwares, some incremental communication abilities for the customer, some increment monitoring services so that when someone buys this product they will be protecting themselves through the ability to detect identity theft to prevent identity theft through early warning monitoring to monitor both credit and non-credit financial accounts to safely go on the Internet without risk of key-loggers or other softwares that can be put on their computer, and we think it’s going to be a hell of a product that if one were to buy the individual components, you would spend $500 or $600, and if you buy this product you’re going to get all of that for about a quarter or 30% on that price, and we intend to market those products aggressively through multiple media avenues starting in the near future, and we’re excited about it, and we don’t want to talk about the specifics of the product until we do a product launch beyond what I’ve said, but we think it is absolutely the total protection that we’re going to call it.
Kevane Wong – JMP Securities
Gotcha. And I don’t know if you want to give it or not, but can you give us a sense as far as your direct consumer businesses are – what percentage of consumers are actually going for that high-end product versus any of the others?
Michael R. Stanfield
Well right now people that just come to our website, roughly 40% of them are choosing that without being solicited for it.
Kevane Wong – JMP Securities
Wow! Fantastic! On the spending as far as marketing here, I also want to know if you could give us a little sense on your connected sort of cash marketing spend in 2008. If I remember it’s been something along the lines of 12 million per quarter at least for the first few quarters of 2007. Has it reached a plateau level – is it going to pick up – what do you show expecting?
Michael R. Stanfield
Yeah. Actually, in my comments I think I said we spent 46 million in 2007 and our current expectation is to spend 55 million in 2008.
Kevane Wong – JMP Securities
Gotcha, okay. And then, two last things, one is quick. In 2007, what was your exposure to those large bank customers as a percentage – I know – like 2006 it was – I think it was 5 accounts basically which was 63% of revenues, that’s been coming down, what was that at 2007?
Michael R. Stanfield
I’m not sure – you know that?
Madalyn Behneman
Yeah, I do – 23.0.
Michael R. Stanfield
Well, that’s a 10-K number.
Madalyn Behneman
Yeah.
Michael R. Stanfield
We haven’t filed that yet.
Madalyn Behneman
Correct.
Michael R. Stanfield
So, I don’t think – no.
Kevane Wong – JMP Securities
Okay, you are looking at the 10-K.
Michael R. Stanfield
They will be filed in a couple of days.
Kevane Wong – JMP Securities
I’m assuming – is that continuing to come down?
Michael R. Stanfield
On a total revenue basis, not necessarily.
Kevane Wong – JMP Securities
Okay, but as a percentage?
Michael R. Stanfield
Yeah, but certainly as a percentage of indirect customers versus direct customers, it is.
Kevane Wong – JMP Securities
Gotcha, so that does give you more stability here versus risk of another Discover kind of…
Michael R. Stanfield
We would hope so.
Kevane Wong – JMP Securities
Gotcha. And then, one last one and I’ll hop off here. As far as market environment, just a little curious what you’re saying – I mean some of the large bureaus that seem to be really looking more for this big data breach contracts, some of the other competitors out there have some other issues that is going to be affecting them negatively. What do you think as far as the market environment – are things getting more [__________] competitive – are people sort of moving away into other areas or are you seeing more people actually directly competing with you more?
Michael R. Stanfield
I think there is a lot of market noise right now with a lot of people boasting that they do things for consumers that they don’t do, and I think the market will be better served by people having serious products that provides serious solutions that are marketed to consumers in a serious way.
Kevane Wong – JMP Securities
Gotcha. Hope we don’t see you walking around with a big billboard with your social security number out there. Alright thanks guys.
Operator
And we have a followup question from Brad Evans from Heartland. Please proceed.
Brad Evans - Heartland
Michael, I was just – I wasn’t fast on draw there based on your comment on the sub-growth – but if I were to plug in just organically, roughly 10% subscriber growth less the exiting of the 700,000 Discover stuff – it looks like your goal to be flat on the year – looks to be conservative assuming that the cancellation rates run at historically normal levels that you’ve seen over the past few years. Is that a fair statement?
Michael R. Stanfield
Well, if we ended at 55.2 and if we grew at 15% which I think would be a good year growth, that would be 750,000 and you back out 700,000 or 725,000 whatever the number will be at the appropriate time with Discover, they basically net out and so we think if we end the year flat year over year, that’s not a bad year, and if we can beat that, we certainly will try.
Brad Evans - Heartland
Okay, I guess maybe I have a – are you seeing in the short term any other data that has changed measurably – your cancellation rates – related to the softer economy?
Michael R. Stanfield
No, not yet.
Brad Evans - Heartland
How should we think about the interplay of your growing receivable charge-offs and to liquidate accounts with the credit card companies and how that will affect your cancellation rate over the next 6 to 12 months
Michael R. Stanfield
Well, the cancellation rates of cards, delinquencies, I mean, the last number I saw was that if credit card delinquencies increased by 50%, that was a move from something on the order of 2% to 3% of total accounts. Does that sound right to you?
Brad Evans - Heartland
Sounds about right.
Michael R. Stanfield
So that would be a very insignificant change to us also – it wouldn’t be a 50% increase in our cancel rate – it would be – if 150 of the cards cancel and that is resulting in 150 from our cancels, then it increases by 100% to 125, that would still be a very small change in the overall cancel rate. I think the cancelled cards are factored into our cancel rates – I worry more about declines where people that get in trouble and stay on the edge than actual cancelled cards, but so far, we’re just not seeing a significant change.
Brad Evans - Heartland
Okay. I guess just with Discover – do you think that they will represent less than 10% of your EBITDA in 2008?
Michael R. Stanfield
I don’t really want to get into that number. That’s one of the reasons that I am trying to provide an overall EBITDA look at 2008 with Discover out, and I’ve told you that I expect EBITDA to be higher in 2009 with no Discover, and I’m not going to get into specific margins on specific customers.
Brad Evans - Heartland
Okay. And I guess the promise of one of the things that we’d been hoping to see here was as the – and you kind of eluded to this before with respect to your customers under some earnings pressure looking for a fee income type of revenue sources that are high margin would open up more opportunity for you, and there’s been a lot of discussion about your consumer direct initiative on the call here, but would you say that you are seeing your balance opportunity set with respect to – I know you’re focused on the direct side, but are there indirect opportunities available to you – are those increasing notwithstanding the Discover news here?
Michael R. Stanfield
I would say the indirect opportunities are not increasing because there are less financial institutions interested in investing front-end dollars.
Brad Evans - Heartland
I am sorry, I must have misspoken. I think what I meant – my comment was more directed towards marketing alongside your bank customers, the credit card companies are opposed to your consumer direct initiative – excuse me.
Michael R. Stanfield
I’m sorry. Are there are increasing opportunities for us to be marketing with banks?
Brad Evans - Heartland
Yes sir.
Michael R. Stanfield
Okay, I would say the answer to that is yes, and I only think that’s positive.
Brad Evans - Heartland
Is there any way you could just kind of qualitatively prescribe the magnitude of difference you’re seeing today versus 12 or 18 months ago.
Michael R. Stanfield
Well, we can put it in perspective like this – two years ago we spent $20 something – $26 million, I believe – in direct marketing, almost all of which was related to banking. This year, our current forecast is 55 million. It is possible if certain opportunities come forward along the lines of Joe’s question a few minutes ago that we will increase that 55 by doing incremental marketing with financial institutions. That’s not committed, so it’s not in our plan, but we are having some discussions with some financial institutions that would increase our marketing spent, and that may put some pressure on meeting our EBITDA target for this year but it may put more outside in the future.
Brad Evans - Heartland
I don’t know whether you talk about clients on a public forum like this, but with respect to the other high-profile customer we lost, is there anything your can share there with respect to – I mean is there still an opportunity for you, are they happy with their current service provider, how would you gauge that opportunity if at all?
Michael R. Stanfield
I would say if we were to try to go in to them and just replace them with the existing product, we’ll be wasting our time both in terms of being successful and making any money, but if we have other things to sell to them, then there is certainly a possibility.
Brad Evans - Heartland
Okay. Thank you very much
Operator
And we have a followup question from [__________] from JFP. Please proceed.
Unknown Analyst – JFP
Actually, my question was already answered, so thanks.
Michael R. Stanfield
Okay. Alright. I believe that’s it. No one else is popping up. We again apologize for the delay. We’ll see if we can change procedure next time so it doesn’t happen, but we did everything as routine as possible, and we appreciate you holding on and joining us, and we will talk to you later. Thank you very much.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a wonderful day.
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