Bankrate Q2 2008 Earnings Call Transcript

Bankrate, Inc. (RATE)

Q2 2008 Earnings Call

August 4, 2008 4:30 pm ET

Executives

Bruce J. Zanca - Senior Vice President, Chief Communications/Marketing Officer

Thomas R. Evans - President, Chief Executive Officer, Director

Edward J. DiMaria - Chief Financial Officer, Senior Vice President

Analysts

Mark S. Mahaney - Citigroup

Colin W. Gillis - Canaccord Adams

Analyst for Youssef H. Squali - Jefferies & Co.

Richard Ingrassia - Roth Capital Partners

Sameet Sinha - JMP Securities

Sandeep Aggarwal - Collins Stewart

Kyle Evans - Stephens Inc.

Ross Sandler - RBC Capital Markets

Presentation

Operator

Good day and welcome to the Bankrate incorporate second quarter 2008 conference call. Today’s conference is being recorded. At this time for opening remarks I would like to turn the conference over to Mr. Bruce Zanca. Please go ahead, sir.

Bruce J. Zanca

Thanks, Operator. Good afternoon, everyone. Thanks for joining us on this conference call to report Bankrate's second quarter 2008 financial results. With me here in our New York Offices is the company’s President and CEO, 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 the results and color on the quarter, Ed will drill into the financial results, and then we will have plenty of time to answer questions that you might have.

Before I begin, I need to take care of those 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 by the Private Securities Litigation Reform Act of 1995. The company intends that these forward-looking statements may be subject to Safe Harbor created under these Securities laws. 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 SEC.

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

Thomas R. Evans

Great, Bruce. Thank you. Good afternoon, everyone, and welcome. We appreciate you taking time to join us this afternoon for our second quarter 2008 earnings call. As you are aware, on July 7th we made a pre-announcement of the results of the quarter. I trust that you have seen the press release we put out a few minutes ago outlining our financial performance for the second quarter of 2008. In what was an extraordinarily volatile economic environment, we’re generally pleased with the company’s performance. We ended the quarter with $40.2 million in revenue, an increase of 73% versus the second quarter of 2007. In the quarter, we generated $12.8 million of EBITDA, an increase of 25% over the same quarter last year. EBITDA margin for the first quarter -- I’m sorry, for the second quarter was 32%. However, the softness in the high margin display advertising business had the impact of lowering revenue, EBITDA, and of course margins for the quarter.

In a few minutes, I’ll take you through and give you some color on the display, CPC, and lead gen businesses, give a status report on the integration of our acquisitions, give an update on our redesign activities, and finally an overview of what we expect for the rest of the year, but first we’ll have Ed go through the financial detail for the quarter. Ed.

Edward J. DiMaria

Thanks, Tom. As you all know, we pre-released our second quarter results on July 7, 2008. The actual results came in slightly better than the preliminary results we released, with revenue coming in right at $40.2 million and EBITDA excluding stock compensation expense coming in at $12.8 million, just above the preliminary range we provided of $12.3 million to $12.7 million.

The $40.2 million in second quarter revenue represented an increase of $16.9 million, or 73%, over the $23.3 million in Q2 2007. EBITDA excluding stock compensation expense was $12.8 million and as I just mentioned, an increase of $2.5 million or 25% over the $10.3 million for Q2 2007.

Non-GAAP net income, which excludes stock compensation expense, came in at $6.5 million, or $0.33 per diluted share, a decrease of 3% from the $6.8 million, or $0.34 we posted for Q2 2007.

Net income on a GAAP basis was $4.1 million, or $0.21 per diluted share, compared to $5.2 million, or $0.28 per diluted share for Q2 2007.

And please note the amortization of intangibles related to the four new acquisitions during the quarter -- remember, this is a non-cash charge -- was $1.5 million, resulting in lower EPS of approximately $0.05 per diluted share. In addition, lower interest rates on our comparable cash balances this quarter reduced EPS by $0.02 per diluted share compared to Q2 2007.

So taking these factors into account, on a more apples-to-apples operating basis, EPS excluding stock compensation and adjusted for the new amortization and interest rates, would be $0.39 per diluted share for Q2 2008, compared to $0.34 per diluted share for Q2 2007. More about amortization later, but I want to point out even though this charge skewed EPS results, the acquisitions were, and we believe will continue to be, accretive to GAAP EPS.

Looking at revenue in more detail, online revenues for Q2 2008 were $37.8 million, up $17.6 million, or 87% over the $20.2 million reported in Q2 2007. The increase in revenue for the quarter was driven by a mixed set of results, where we saw the core organic Bankrate display business off while on the other hand, we benefited from the core hyperlinks business being up 30%. Also, our lead generation business for select posted solid gains over last year and our new lead generation products for insurance and credit cards also provided strong growth for the quarter.

Our total display and lead generation revenues were $27.1 million, up $15.1 million, or 125% over Q2 2007 revenue of $12 million. The growth was driven by the new credit card and insurance lead generation products, and also by growth in select, and yet this overall increase would have been even larger had it not been for the impact of the lower display revenue during the quarter.

The drop in display advertising was obviously a problem for us as this business generates a 90% margin, so the impact to EBITDA was felt nearly dollar for dollar. What happened here is we got impacted by banks pulling back significantly on advertising in a very difficult environment. Although no single advertiser accounts for more than 5% of revenues, when 10 or more top banks pull back dramatically on marketing spend it obviously has an impact. The pull-back was primarily in brand advertising across all channels, especially home equity and retail mortgage.

In our revised guidance that Tom will cover, we do not plan for any recovery of this business, so we believe that the numbers are achievable based on the performance of the other components of our business. But if display starts to recover this year, it would obviously place us in a better position.

Tom will provide more color on display in a few minutes, and keep in mind that we have multiple weapons at our disposal to deal with this issue and we believe we can less or displace much of any display weakness over time, so stay tuned.

The lead generation component of the business, including the credit card products, insurance, and Bankrate Select, all performed well during Q2, above our expectations. Select increased by over 80% and the ramp in our insurance and credit card businesses continued to be on track. Also, we are beginning to drive more organic traffic across these platforms and improving margins.

After only two quarters, we have increased the growth and EBITDA margin on our credit card business by over 300 basis points. We expect that this trend in margin expansion will continue through higher insurance lead sell-through rates as we ramp up demand from larger agency and insurance carriers, more Bankrate organic traffic monetizing across these platforms at 85% to 90% margins, and higher yields and price points through optimization and high quality leads. We have already seen that Bankrate consumers convert at a much higher level than consumers sourced across InsureMe and CS' affiliate channels.

Further development of these channels and margin expansion remains a top priority but we are pleased with our progress thus far.

The hyperlink business increased by 30% from $8.2 million in Q2 2007 to $10.7 million in Q2 2008. Also, please note that our hyperlink business, like display, also runs at very high margins of near 90%. The growth was fueled by an 80% increase in deposit CPC revenue and a 21% increase in mortgage CPC revenue. Deposits accounted for 60% of our hyperlink revenue and mortgage accounted for 34%. Again, mortgage had a revenue increase of 21% despite dropping as a percentage of the total, with other accounting for 6%.

The increase in revenue this quarter was driven by an increase in volume and higher CPC prices. Also, please note that we further increased our money market CPC rates by 15% and our CD CPC rates by 20% effective July 1st. Tom will provide more color on our hyperlinks business in the business report.

Our print, publishing, and licensing revenue was $2.4 million for the quarter, representing a decrease of 22% from the second quarter 2007 revenue of $3 million. No surprise here -- this business continues to decline and we do not expect to see this change. The print business accounted for just 6% of total revenue during the current quarter. The gross margin on the business was 7% and the business continues to be a feeder for online traffic.

Before I get to margins and expenses, I want to take a minute and highlight our management of accounts receivable. If you’ll recall during 2006 and early 2007, we were fighting some issues from inherited advertisers from our acquisition of MMIS. We certainly brought those issues under control during 2007 and have kept a very tight handle on both print and online accounts receivable. So in the midst of what has been an awful situation for banks and financials, we have managed to actually improve our DSO this quarter, as well as reduce bad debt expense.

Our internal credit controls are working. For example, with IndyMac, one of only a handful of meaningful advertisers in our history to go into bankruptcy, we have zero AR exposure as we manage this situation carefully. Now, they were not a large advertiser but we pay very close attention to the details for both larger and smaller customers. Our overall gross margin on sales excluding stock compensation for the second quarter was 58.3% compared to 77.5% in the second quarter last year. The online gross margin excluding stock compensation expense for the second quarter came in at 61.5% in 2008 compared to 87.3% in the second quarter of 2007.

The decrease in the gross margin for the quarter compared to last year was the result of adding the new acquisitions into the mix, whose legacy affiliate businesses run at lower gross margins compared to core Bankrate, which benefits from free organic traffic.

The InsureMe affiliate business runs at gross margins in the low 40s and the NCS affiliate business runs at gross margins in the mid-20s. And as I just mentioned, we have already increased NCS’ gross and EBITDA margins by over 300 basis points and are beginning to see increases in the InsureMe gross and EBITDA margins as well.

Our plan is to continue to improve the margins for the new businesses through further integration into Bankrate's network, driving more organic traffic and increasing rates and RPL. This process is well underway and with each coming quarter, we should continue to see benefits from this strategy.

Again, EBITDA excluding stock compensation was $12.8 million for the quarter, representing a 32% EBITDA margin compared to $10.3 million, or 44% margin in the second quarter of 2007. The decrease in the EBITDA margin again reflects the new acquisitions we made in February 2008 and December 2007, and as I just mentioned the margins should improve upon further integration and running more organic traffic through the platforms.

Also, the weakness in the display business contributed to the decline in the EBITDA margin. As I mentioned earlier, the display business runs at a 90% margin, so a loss of business here had an impact on EBITDA margins.

We expect that over time, we can drive our EBITDA margins back to the 40% plus range. This will come through continued expansion of credit card -- of our credit card and insurance margins and further expansion of Bankrate's performance products, such as CPC.

Operating expenses increased for the quarter by $5.6 million, from $10.4 million in the second quarter of 2007 to $16 million for the second quarter 2008. The increase was driven primarily by new operating expenses associated with the acquisition of InsureMe and NCS, developmental expenses for investments in our China and fee disclosure businesses, and an increase of $1.2 million in share-based compensation expense, primarily for awards for new employees associated with the acquisitions. Also, core Bankrate expenses were slightly lower for the quarter.

The new expenses associated with the acquisitions were in all areas, including general and administrative expense to run the businesses, meaning NCS and InsureMe people and related costs, marketing, product development, and sales expenses.

In addition, we recorded $1.5 million in amortization expense for intangible assets for the new acquisitions, which accounted for most of the increase in depreciation and amortization.

As I explained in the Q1 call, we ended up with a higher identified intangible asset allocation of the purchase price than anticipated, and also more of a front loaded faster amortization timetable.

Identifiable intangibles must be amortized as opposed to goodwill, also an intangible asset, which is not amortized. I’ll remind you that these are non-cash expenses and bear little weight when evaluating an acquisition, where we tend to focus on EBITDA and operating cash flow. For your planning purposes, we expect that depreciation and amortization for the year will range between $9 million and $9.8 million.

As I mentioned in my opening remarks, the new amortization this quarter reduced EPS by $0.05 per diluted share, but was still accretive to GAAP EPS.

Our income tax provision of $3.1 million for the quarter represented a 43% effective rate on book income. You may have noticed that this is an up-tick from Q1 where we had an effective rate of 41.6%. The increase in the effective rate is the result of stock compensation expense for [ISOS], which are not deductible for tax unless exercised as a disqualifying disposition. The non-deductible ISO stock compensation expense had more of an impact on the effective rate this quarter compared to Q1 2008, given our lower operating results. Even though we expect the operating results to be higher in Q3 and Q4, for your planning purposes we recommend that you model the business using the higher 43% effective rate to remain on the safer side, even though the rate may be a little lower in Q3 and Q4.

We ended the quarter with 275 employees, which include 184 Bankrate employees, and that includes our small team in China, and 91 new employees from the acquisitions.

We ended the quarter with $75.2 million in cash and cash equivalents after spending $97.5 million in the fourth quarter of 2007 and the first quarter of 2008 on acquisitions. We generated $8.4 million in cash flow from operations, and that’s after paying $10.5 million in estimated tax. And we used an additional $600,000 for capital expenditures, primarily on software and the development of the new website.

Also, I want to point out that for the benefit of future estimates, our cash is now invested primarily in treasury securities bearing interest at the rate of 1.5%.

I am sure you noticed a recent press release where we announced that we are acting on our stock repurchase plan. We have been active in the market and continue to believe that the acquisition of Bankrate stock represents a solid investment for the company and is accretive to shareholder value. We will disclose our repurchase activities in the third quarter 10-Q when it is filed.

Also, we continue to see accretive strategic acquisitions as a preferred investment for our cash on hand, as it will not only also increase shareholder value but will do so through additional growth of our footprint as a premiere personal finance Internet vertical.

Okay, I know I covered a lot, so I will stop here so that Tom can cover the business report and guidance and still save some time for questions. Tom.

Thomas R. Evans

So obviously the big news for the quarter was that display advertising has softened to a level that it’s finally impacted our business. For a period of time, it seemed as though we would get through the current environment relatively unscathed but with Q2, that wasn’t the case. We don’t want to ignore the disappointment of the display business but we also want to point out how strong every other component of the business was in a pretty tough economy for the financial sector.

Many of our advertisers are doing through difficult times in their business and are challenged like never before and it’s having an impact on that business. As you know from several other companies that have reported, this is not a problem unique to Bankrate. However, other than the problem with display advertising, every other component of our business was solid through the second quarter. Traffic to the site was solid, with an increase of 9% above the Q2 2000; of course, down from the record levels of our previous quarter, Q1. We had solid traffic in April and May, did see a little softness a bit in June. However, I am happy to tell you that July has been a very good month for traffic, July up more than 20% versus last year and the site patterns are pretty much to all the areas of the site.

In July, the activity level on the site was pretty robust. As you can imagine, consumer interest in CD and money market rates has been very strong and click through rates for CPC and display, and things like visit to click ratios on CPC cables has been consistent throughout the past several months. Traffic to our editorial features, like our safe and sound ratings, details on FDIC insurance, and to pieces like what the new housing bill means to consumers has all been strong.

Traffic sources for the second quarter were right in line with our historical patterns -- 80% organic traffic, 10% from partners, and 10% paid SEM traffic. We averaged over 6.5 million unique visitors a month to bankrate.com in the quarter and over 7 million a month when including interest.com and mortgage calc. Again, down from what it was in Q1 slightly but a nice increase over the same period last year.

The audience continues to grow because of the breadth and depth of our content offering and the increased interest that consumers have in their financial well-being.

As I mentioned, the display advertising business in Q1 was weak and was finally impacted by all the trouble that financial advertisers have experienced the last several quarters. I know we are not the only company to recently report that trend so we don’t feel like the softness in this display area is from having lost business to anybody else. We know it’s not a pricing issue. We don’t think there’s any less interest in the Bankrate audience. We’ve simply seen several advertisers cut back what they are spending and stop supporting some products, like home equity, that they were supporting and advertising previously.

CPC, however, is an area that we continue to see high consumer interest, continue to see strong advertiser demand and where we have continued to experience pricing power. With concern about the economy, softness in the stock market, and the news about the vulnerability of some financial institutions, we saw that interest in CDs and money market accounts has never been greater. Our CPC revenue grew by 30% with deposits making up an amazing 60% of that mix.

Mortgage CPC revenue was also up 21% for the quarter versus Q2 2007, although at 34% of the total was less of the mix than in any quarter previously. By the way, let me say that again so that everyone is clear on what we said -- our mortgage CPC revenue for the quarter was up 21% versus the same quarter last year. Not surprisingly, the one area where we saw weakness in CPC was in home equity. There are just fewer people able to or interested in tapping into the equity in their homes in this current environment.

As I mentioned, July’s traffic was strong. We’ve seen even greater interest in deposits. You’ll remember that as Ed mentioned, we increased CPC prices for CDs by 20% and MMAs by 15% effective July 1st, so that’s had a positive impact. In fact, as a result CPC revenue for July was up over 60% above July of 2007, so it’s a great start to the second half and obviously hope that July traffic and revenue is an indicator of that trend.

Our lead generation business in the mortgage, credit card, and insurance channels all did well in the quarter. Bankrate Select’s lead gen revenues, as Ed said, were more than 50% better than the previous year, an illustration of just better execution on that business versus a year ago, and with CPC great proof that we can still monetize mortgage traffic effectively in a tough environment.

NCS, our credit card lead gen business has been doing well and is right on target with our expectations to date. We’ve been pleased to see that even as some of the card issuers have reported increased delinquencies in their customer portfolios, there’s been no reduction in their interest in attracting new card members.

You’ll remember that in Q1, we said we began by integrating the NCS engine onto the Bankrate credit card channel. That came with hundreds of additional products that NCS had that we previously didn’t have, and we’ve seen click rates improve simply by having made that channel a better customer experience by offering greater choice. Since then, we’ve made improvements to our credit card channel by increasing the content offering, which has resulted in Bankrate being more prominently featured in algorithmic search, which of course will generate more organic traffic.

If you check, for example, the Google rankings, you’ll see that in several popular credit card terms, like credit cards or best credit cards or cash back cards, we’ve gone from a second or third page listing to now being in the top 10 and in some cases, top five. That’s obviously great for driving volume because its organic traffic should improve margins as well over time.

We are pleased with the credit card business and believe it will be another growth driver for our business going forward and as issuers continue to shift more of the responsibility for generating new customers from direct mail to the Internet, we think we are in a great position to benefit from that dynamic.

As for InsureMe, InsureMe had a great second quarter as well, and the trends in the insurance industry are definitely ones that we believe play to the strengths of our positioning. Since 2001, policy life expectancy, or persistency, as it’s known in the industry, has been declining, meaning that more people are switching carriers more often. The Internet is definitely increasing the propensity of getting more people to shop and switch.

As a lead gen platform working with thousands of agents, that decreasing persistency is great for our business. The ease of obtaining multiple quotes is making smart consumers shop their policies and switch carriers more often, exactly what you would want if you are an insurance lead gen company.

We have integrated the InsureMe engine into our insurance channel on Bankrate and will begin to employ the same methods that we have with credit cards to improve our organic rankings and direct traffic. We are having discussions with several of our co-brand partners about getting both NCS and InsureMe on to those partner sites, and we’ve developed some new CPC-based insurance products that we are excited about and eager to see how they develop over time.

So suffice to say that we are pleased with both the NCS and InsureMe teams and that those businesses are doing well, and our redesigned Bankrate.com site will more deeply integrate the insurance and credit card lead gen products more opportunistically when we launch that in October.

As for print, there’s no great news, as Ed mentioned, as newspaper advertising continues to be very difficult. Our print revenue was down 22% versus the same period last year and down about 3% sequentially. Our print team is doing the best that they can in a difficult environment but there is no magic bullet that will improve our business or the industry overall.

As for saving for college and fee disclosure, the build-out of those products is ongoing. It will be a while before they are meaningful contributors to our financial performance but they are great assets to own and will do well over time.

As I mentioned on our last call, we launched our new Bankrate China site on April 1st. We continue to add features and functionality to the site and are generating a little over 0.5 million page views in the last month, which isn’t bad. Again, it will be a while before China is a meaningful contributor to our business from a financial standpoint but it’s a great foothold and we are pleased with our team’s progress there.

Finally, the redesign of the Bankrate.com site is going well and scheduled to be launched as planned on October 1st. This has been a long time in the making and involved almost every department in the company. We are excited about the business opportunities that will exist with the new site, in addition to making it a better user experience and easier to navigate for the consumer.

Now, guidance -- as for our guidance, at this point we are cautiously optimistic about the rest of the year. Traffic is holding up well. We continue to see strong interest from our consumer audience. Our CPC and lead gen businesses continue to perform well. The one weakness, as we’ve discussed, is in display and our guidance does not contemplate any improvement in display advertising for the rest of the year. If we get an improvement from display, great but we feel that it’s prudent not to expect or build it into the guidance at this time.

We are reaffirming the July 7th guidance that we expect revenue to be between $164 million and $169 million, and adjusted EBITDA to be between $54 million and $58 million.

So let me explain how we got to those revised numbers -- first, 100% of the fall-out is from display advertising, so we took our revenue expectations for display down by about $12 million, almost all of which comes at a very high margin, so it’s nearly the same $12 million taken out of EBITDA.

Because other areas are performing better than anticipated, we added back another $9 million in revenue and because of a different margin expectation, add back about $2 million of that to EBITDA, so that should help some of you who have asked why we reduced revenue by only 2% but EBITDA by 15%. The shift in mix is the reason.

The midpoint of those ranges still represents a 75% increase in revenue and a 35% increase in EBITDA over 2007, where 2007 EBITDA grew in that year by 48% over the year prior.

Lastly, be assured that we’ll continue to hunt for acquisitions that add to the depth and breadth of our content offering that we can purchase at a reasonable value and make accretive to our financials within the first year. As we’ve said before, this economic environment has made many potential targets much more reasonable and we think this is a great time to be out buying things and continuing to build the business.

So with that, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Mark Mahaney with Citigroup.

Mark S. Mahaney - Citigroup

Thank you. Is there a way, Ed or Tom, you could help us think through what the organic display advertising growth was like on the properties you’ve owned the entire period, or all properties held throughout both periods?

And then just a broad question on the overall pull-back -- to what extent do you think it’s been an overall pull-back just in display advertising or almost a forced shift over to other channels? What makes you think that you just won’t see those dollars come back from large banks, like Citibank? What makes you think they will come back in display versus just permanently or much more on an accelerated basis shifting over to performance-based advertising? Thank you.

Thomas R. Evans

Well, I think, Mark, the first thing I’d say is that the display is -- sort of same-store sales year over year was down slightly, which is the first time we’ve seen a decline. It’s tough to break out apples-to-apples because of the way we are sort of optimizing the inventory and moving things around and things that are now falling into the lead-gen bucket. But if you just look straight display, apples-to-apples, it was down slightly.

A lot of -- and I know that the analysts and the industry tend to break out display advertising and CPC as two very different pieces; one is performance based and one isn’t, and while some of that is actually accurate, you know, some of it is not. A lot of our display advertisers really are performance oriented. They just happen to track it more closely or be better about tracking it when it’s performance-based CPC or CPA.

And the other thing is -- listen, I just don’t think that these banks are going to be out of the market, are going to stop trying to solicit and grow their consumer base for a long period of time. I mean, they are all going through some real internal problems and we are just seeing that they are not supporting products right now or they are not running the amount of advertising that they were running. As I said, we did an analysis of the five customers where we’ve lost the most business and in two out of the five, we’ve actually picked up share. They are just not running anywhere near the business that they were previously, so we just think that -- you know, a number of things.

First of all, we’ve got a great consumer. It’s a consumer that can qualify for a lot of their products and over time, they will be coming back. You know, having been in the media business for 25 years, I’ve lived through five or six media recessions before. It just is the way it is. I happen to think because of the velocity of business today, we’re going to come out of that business or out of that recession or out of that slowdown in spending faster because I think the advertiser will recognize it faster that their business is actually improving, and I also think that -- gosh, when I was in the magazine business, it used to be three months before they could actually run something in a magazine by the time they committed the money with closing dates and print dates and mailing dates and everything else. Now they could call us on a Tuesday and be up on Friday, so I just think we are going to -- when we do come out of it, we are going to come out of it faster.

We know that there’s not any less interest in Bankrate -- there’s just less money being spent in the financial sector by our type of advertiser and it will just take us a while to work through it.

Mark S. Mahaney - Citigroup

Thank you, Tom.

Operator

Your next question comes from Colin Gillis with Canaccord.

Colin W. Gillis - Canaccord Adams

Good afternoon. Did you see the pull-back accelerate at all during the quarter? I mean, could you give us some color about the different months?

Thomas R. Evans

You know, one of the things that’s really interesting about our business is the fact that it does bounce around a lot. I mean, January was great, February was just okay, March was pretty good, April was very good, first half of May was okay, second half of May wasn’t very good, June was probably the softest month.

I can tell you, and I hesitate to say this but July has been a great month. Now, don’t get crazy and go run out in front of us but July traffic was 20% higher than it was last July and revenue for July was our best month ever. Whoops -- did he just say that, our best month ever? July was our best month ever in terms of revenue.

Now, I don’t know whether that’s a trend. I certainly hope it is. Don’t know whether it’s going to continue. We’re being sort of cautiously optimistic but it’s just the -- it’s sort of the volatility of our business. I know that doesn’t [comfort] investors, I know that doesn’t make it easy for analysts but that’s the way our business moves.

June was a disappointment to us. July was very good. We literally, as those of you know who deal with us a lot know, we watch the business day to day and week to week and I can just tell you one thing -- the people that we have in place can do a pretty good job of optimizing whatever we have available and we’ve got great assets and we think our ability to manage those assets effectively is pretty good.

So as I said, it’s bounced around and we happen to be in a pretty good wave right now. Again, I’m not suggesting it’s a trend but we like this better than we like June.

Colin W. Gillis - Canaccord Adams

Did you see any impact from Yahoo! in the quarter, fighting more aggressively for deals?

Thomas R. Evans

Not that I can see -- you know what, I think we are looked at very differently than -- I mean, I don’t -- I talk to our sales guys all the time. We talk to our managers. We go out and see customers. Nobody said to us guys, we’re not using you because we got a great deal from somebody, or we’re not using you guys, we’re not running what we can because you guys are priced too high.

So we really don’t feel like we are losing to other sites. We really don’t feel like we are getting pressure on price. It’s just a matter of are they running the kind of volume or not.

And one of the difficulties we have is because our CPMs are so high, it’s tough to go out -- I mean, we can go out and fill some of our inventory with non-endemic but it’s not even close to what we get for core Bankrate. I mean, I heard some other folks talking about how well they are doing with endemic and what they get on a per thousand page view revenue and what we get isn’t even in the same ballpark, so it’s a little tougher to back-fill and that’s why we developed some of these other products and that’s why we’re so pleased at NCS and InsureMe and Select are doing as well as they have.

Colin W. Gillis - Canaccord Adams

Just to be clear, that’s why it’s difficult in any three-month quarter -- I mean, if the months had been flipped around and you had a little bit more time, the results for the quarter might have been different?

Thomas R. Evans

Well, I got to tell you -- I mean, it just -- if we flip June and July, we’d be talking about how fabulous a second quarter we had and that we are a little afraid of Q3. No, you’re absolutely -- I mean remember, we had a spectacular first quarter and we said listen, we’re a little bit afraid of this because it’s a business and it’s a current environment that feels like it kind of comes and goes in waves. And we watched it. We watched it through month by month, it just sort of ebbs and flows and as I said, June was a real disappointment and that’s why we came out July 7th and pre-announced. But July has been great, so it’s always tough for us to -- and again, we were fine through the first of June. We had no way of knowing -- somebody said why did you wait so long to pre-announced; because we didn’t know and we literally wait and watch month to month and week to week.

Colin W. Gillis - Canaccord Adams

Okay, that makes sense. Thank you.

Operator

Your next question comes from Youssef Squali with Jefferies & Company.

Analyst for Youssef H. Squali - Jefferies & Co.

Good afternoon, everyone. This is Sandeep for Youssef. Thanks for taking my questions. Just a quick follow-up with you, Tom -- so what do you think drove the July traffic? Was the activity on the lead gen side or the CPC side? What was sort of the driver for that?

Thomas R. Evans

You know, it really was across the board. I can tell you that the deposit CPC was phenomenal. I mean, it was very good. You know, events like IndyMac are actually good for our business. We saw unprecedented traffic to our FDIC area where people go in and want to find out -- you’ve got to remember, I mean, one of the things about Bankrate that makes Bankrate I think so unique is the breadth and depth of our content really sets us apart and when there is an event and people are concerned or think either there is an opportunity or they have an anxiety about something like IndyMac and wow, what are the provisions on FDIC insurance. They go to Bankrate to read that content, so we did great traffic in the CD area and the conversions in that business on CPC were terrific. It just happened to follow a price increase that we had July 1st, so it kind of had a double benefit.

But credit cards did well, insurance did very well. Mortgage did fair but selected pretty well, so -- I mean, volatility is good for our business. If rates go up or rates go down or there is concern or an opportunity or anxiety, that happens to drive traffic to Bankrate. And again, it isn’t just people in there buying stuff. It’s people who engage with our content, with our calculators, with our tools, with our checklists and all of the tremendous content that we have that we’ve spent years and years developing.

Analyst for Youssef H. Squali - Jefferies & Co.

That’s great. And you were just mentioning about the traffic around credit card CPC business, so just give us some color in terms of what kind of leverage do you have in terms of pricing? When do you start raising prices on the credit card CPC side of the business?

Thomas R. Evans

And we’ve had some earlier success doing that. You know, Ed mentioned we’ve had -- we’ve already moved the NCS business 300 basis points since we’ve taken over the business in six months, and it’s a combination of a couple of things. First of all, they pay for higher quality and they pay up for higher quality and also the card issuers pay more for volume, so when you are able to drive more volume and all of a sudden we’ve taken the Bankrate organic traffic and we’re getting a higher click rate and a higher conversion rate and it happens to be a high quality consumer and it adds to NCS’ volume, it has sort of the double benefit.

Now we’re engaged in conversations with those card issues about their prominence and placement on the site, how they want to integrate their display advertising with their lead gen opportunities, and so we are having integrated conversations about Bankrate and the NCS platform, so we are seeing some traction in that regard and there is no doubt in our mind, and you know, the one thing that we always fall back on and we hear it time and time again, whether it’s a mortgage advertiser, whether it’s a CD, bank institution or whether it’s a credit card company, the Bankrate consumers convert the best and they are the highest quality. And that’s a huge calling card and a huge area for leverage when you are negotiating a future deal and rates going forward.

So we are having those conversations now. We’ve had some success and we think we will be able to continue to add that. We are very bullish that business and our ability to continue to ramp up and improve that business.

Analyst for Youssef H. Squali - Jefferies & Co.

Terrific, thanks and one final question from our end -- you spoke about the acquisitions as a key [to your strategy] and the cash balance. How much stock have you repurchased so far and how do you plan to balance the buy-backs with any potential M&A activity, considering that the company’s cash position is not as strong as it used to be?

Thomas R. Evans

That was very delicately put, I appreciate that. You know, we’ll announce and release the information in the third quarter Q in terms of the stock buy-back. The number of -- but I’ll say this, and we have bought some stock; the number one use of our cash that we’d like to see, that our board would like to see, and I think that the investors would like to see is accretive acquisitions. So that’s our first focus. We’ve got $75 million. We would love to buy -- you know, I don’t think we need another platform but we love traffic and we love good quality organic traffic. If you watched what we did in the mortgage business a couple of years ago where we acquired interest.com and we acquired mortgage calc -- I could tell you that those have been great acquisitions when you look at the numbers and see the revenue that they are generating relative to what we paid for them on an ongoing basis. It just broadens our base and allows us to deliver more customers to those advertisers who make us more prominent with those folks, and we’d like to do the same thing in credit card, we’d like to do the same thing in insurance, and we’re out there hunting around.

So we’re probably as active now as we’ve ever been. I think we are cheap, we’re prudent, and we kiss a lot of frogs and end up not acquiring things but we’re active.

Edward J. DiMaria

And just also keep in mind that the operating cash flow, as I mentioned in my prepared remarks, we generated $8.5 million in cash flow from operations and that’s after paying $10.5 million in estimated tax. Our estimated tax in the third and fourth quarter will definitely be lower, which should open up some additional operating cash flow. So that in combination with the cash that we have on the books we feel puts us in a pretty good position to be able to first pursue acquisitions but also continue to execute on our repurchase plan.

Operator

Your next question comes from Richard Ingrassia with Roth Capital Partners.

Richard Ingrassia - Roth Capital Partners

Thanks. Good afternoon, everybody. Tom, you said guidance reflects no improvement in the second half but does it actually allow for things to get a little worse, or do you maybe have enough visibility or some advanced commitments that makes you think it won’t get worse?

Thomas R. Evans

Well, at this point we -- I think we’ve been pretty clear about the fact that we have relatively little visibility beyond the 30, 45 day period that we are working in, or sort of to the end of the quarter right now. So no, it’s not any great crystal ball that we have and it’s not any great visibility that we have but -- I mean, we’re having ongoing conversations. I’ll have four or five meetings tomorrow and over the next couple of days with advertisers on the West Coast and you know, you get a pretty good sense of where we are and what they intend to spend and when they are going to spend it, so -- and our guy who runs, our SVP of Sales, Don Ross, is a pretty good finger on the pulses to our managers and so we kind of feel like we are at a level that we can support.

My biggest fear, I think we’ve given ourselves enough room. My biggest fear is always traffic. If we get the traffic, we’ll be okay. We’ll -- and I’m not talking about any great -- you know, we certainly didn’t expect or wouldn’t anticipate 20% like we had in July but if we get reasonable traffic that we’ve maintained on a pretty consistent basis, we’ll -- we feel pretty comfortable that we’ll be able to support those numbers.

Richard Ingrassia - Roth Capital Partners

Okay, thanks. And you pretty clearly described how the product mix affects margins on the revised guidance but is there also some allowance in the lower gross margin for potentially greater use of SEM or greater reliance on partners in the second half?

Thomas R. Evans

Not necessarily partners. You know, we’re not seeing great -- any increases in partner activity. That’s pretty much a steady state and the SEM is stuff that we drive pretty much to an ROI. We focus on an ROI. We’ve got a pretty good sense of what we generate sort of by product type and by channel, and we’re to assuming deterioration in that area. And in fact, in the month of -- in the second quarter and the month of July, it hasn’t deteriorated, so we’re not making an assumption that it will.

Richard Ingrassia - Roth Capital Partners

Thanks, Tom, and then just a quick question for Ed on the balance sheet -- a pretty significant sequential increase in prepaids and other assets. Can you just give us some detail there?

Edward J. DiMaria

Yeah, that’s the -- as I mentioned, the $10.5 million estimated tax, it’s prepaid taxes essentially. Most of that goes on the balance sheet as a prepaid item. The other piece of the $10.5 million that didn’t go to prepaid was against the payable that we made, so we’re actually a little ahead in our estimated taxes because we did them earlier in the quarter based on some estimates where we thought the results were going to be a little bit higher, so I think that we’d be somewhere -- call it in the 15, 16 range for the year, so we’re ahead on our taxes right now.

Richard Ingrassia - Roth Capital Partners

Okay. Thanks, guys.

Operator

Your next question comes from Sameet Sinha with JMP Securities.

Sameet Sinha - JMP Securities

Thank you. Can you talk about the mortgage CPC business? I mean, you are talking about July being a good month -- what sort of traction do you think or do you expect from catalysts such as the housing bill? And then I have a couple of other questions.

Thomas R. Evans

You know, I honestly don’t know. I mean, we had a piece on the site that I read with great interest about the new housing bill affects the consumer. I can just tell you one thing about the mortgage business currently, and it’s -- we’re not seeing growth in terms of the number of consumers that are coming to the site but on the part of lenders, there’s been a [flight to quality]. Fewer consumers are qualifying for loans and it’s clearly forced lenders to focus on prime conforming consumers. As we’ve said time and time again, that’s who the Bankrate customer is and I can tell you anecdotally that the Bankrate customer typically has a FICO over 700, is employed, proved income, and if they can’t, they are not shopping on those tables because those tables are set up for conforming loans. So the people that actually click are the customers that those lenders are working for and marketing for.

So editorial and choice is driving a better consumer to the site and those are the consumers right now that advertisers are really looking for. So the mortgage CPC as we said was up 21% in the second quarter and doing fine.

We don’t expect it to be a huge growth driver the way CDs is currently and some of the other areas are but it’s hanging in there pretty well -- in fact, better than I would have expected given all the noise and all the bad news.

Sameet Sinha - JMP Securities

At the beginning of the year, there was incremental traffic, the fed was cutting rates, there were a lot of brokers who had closed shop earlier came back into the market -- what are you seeing now? I mean, rates are fairly high or higher than previously, activity level is low. Do you think your rate tables are well populated?

Thomas R. Evans

Yes and no. What we are seeing is there are still active consumers. If you are a consumer who has an arm that resets later this year or next year, you probably wish you had done something in April or May rather than sitting now because to your point, rates are higher. And I don’t think there is anybody sitting out there that thinks that rates are going to go lower. They may. I don’t know. I’m not an economist and I don’t have a crystal ball but my guess would be the rates are going higher so if I had an arm that was going to reset, I would probably be in there trying to do something right now.

Those lenders that are still left standing are looking for consumers, they are looking to sell product and they are looking for people who qualify. Interestingly, we’ve got still a lot of people on our tables. I mean, a lot of lenders on our tables. What we’ve seen though is the tables are not as populated because they are cherry-picking -- they are cherry-picking markets, they are cherry-picking states. Instead of advertising like they used to in 24 states, they are now in the best 17 or the best 15 or the best 12. So there are guys in there -- it’s just not as comprehensive as it used to be because of -- I mean, that’s the one area where I would say we’ve sort of capitulated, if you will, to the environment and the coverage is not what it was say a year ago or two years ago. But -- and that’s in mortgage. In deposits, it’s rocking. I mean, it’s -- the demand is very, very high. The consumer interest is high and we pushed through, as I said, a 20% price increase without a peep. I mean, really without any push-back at all from our customers.

I hope that answers the question.

Sameet Sinha - JMP Securities

Sure. Thank you.

Operator

Your next question comes from Sandeep Aggarwal with Collins Stewart.

Sandeep Aggarwal - Collins Stewart

A couple of questions; one is I think, Ed, you mentioned that you would like to be or you will be again back to 40% EBITDA margin, so by when do you think you will be there? And secondly, when I look at new acquisitions, where do you see the higher incremental contribution? Is it savings from the organic traffic or is it because the higher revenue per page?

Thomas R. Evans

Well, I learned something that economists never -- they’ll give you a date and they’ll give you a number but they will never do it at the same time. You know, I don’t know when we will be back to those margins. We’re not talking two or three years out but we’re certainly not talking third or fourth quarter either. I think you will see margins start to improve like we did for the last four years up until we made these acquisitions. I mean, we get them in place, we’ll start to grow them, we’ll push more organic traffic across the site, we’ll do some more things from an SEO standpoint that drives free traffic, so yeah, the basis of the margin improvement will be by pushing more organic traffic across those, all of the platforms versus anything else. I mean, the NCS and InsureMe were largely affiliate driven businesses. We want to make that more direct organic traffic, and that has a huge impact on traffic.

Just from Q1 to Q2, InsureMe’s margins improved 100 basis points on an EPS basis, so it’s volume, there’s some price increases included but we’ve got -- and I think one of the things that we’ve spent the four-plus years that we’ve been here doing is we just created more levers and some of that is pricing, some of that is organic, some of that is SEM, some of that is just a broadened breadth of product and we’re not seeing the benefit of being able to pull those levers -- when one thing isn’t working, we pull another. But I can tell you that we are running plays and pulling levers all the time just to optimize the business.

Sandeep Aggarwal - Collins Stewart

And just one question on display advertising, Tom; I’m sure you test demand elasticity at different price points. Have you seen the results of a lower CPM on a display ad, what it can do for the demand?

Thomas R. Evans

You know, we certainly have tested that -- not a great impact. It’s not, as I said earlier, and we’ve got our finger on this every single day -- it’s not that we are not getting business because we are inappropriately priced. We’ve tested that -- you can get a little more volume if you give on price but it’s not like you can pick up a campaign that you didn’t have because you were too high a price. That’s not the current environment. And I mean, the only comfort I’ve got is this is the part of the business I really -- you know, this is what I’ve been doing for 25 years and I think we’ve got a pretty good sense of where we are priced, why we are not getting business or why display was softer than we had hoped it would be, and it’s not really a pricing issue. There’s just not the money out there right now. I think you’ve heard that from other folks. Some of the big guys have pulled back and I think it’s -- you know, it’s funny that they will look at display advertising and it’s not performance, as performance driven or measured as CPC. It ought to be and in that light, Bankrate does pretty well. The people that measure it know it does well and that’s the reason, you know, we’ve talked about this in the past -- if they are willing to pay the prices that they have for Bankrate, but the volume is down right now. It will come back. Don’t know when it will come back. We’re out there with our bags open every day just trying to -- you know, if it starts falling out of the sky, we’re there to catch it.

Sandeep Aggarwal - Collins Stewart

Thanks very much.

Operator

Your next question comes from Kyle Evans with Stephens.

Kyle Evans - Stephens Inc.

Thanks. Three questions -- on the select side, that was up 50% in the quarter. Could you give a little context around that, and was that really you pulling the select lever with unsold inventory or did you see a monetization improvement there?

Thomas R. Evans

It was up 80% for the quarter over the year.

Edward J. DiMaria

Yeah, I think Tom had mentioned 50 in his script by mistake. It was 80.

Thomas R. Evans

Can’t read.

Kyle Evans - Stephens Inc.

And what did it contribute in the period, roughly?

Edward J. DiMaria

I mean, that’s just not the kind of detail that we put out there but it’s safe to say that the select business did well. I said it was up over 80% and we saw not just from giving it more inventory but overall just a conversion improvement for it and obviously good quality, so we are getting more per lead. So it’s done pretty well for us.

Kyle Evans - Stephens Inc.

Any thoughts towards adding your own network on the back end or are you going to continue to hand that traffic off?

Thomas R. Evans

From now, we are going to continue to hand the traffic off. It’s working well. It’s sort of a no-brainer for us. We’ve got a couple of different solutions that we work to optimize and we’ve got enough balls in the air right now and things are going pretty well.

You know, one of the things I think we learned from the old Fast Find problems that we had is focus on the things that we’re good at, don’t assume that we know how to do something that we don’t and it was really the driver behind when we bought NCS and InsureMe, they both came with those networks built out. NCS came with that insurance agent network built out and they are doing very well and they are doing a great job and we are now focused on enterprise customers and we’ve hired a Chief Revenue Officer at InsureMe, Lou [Gerimia], who came from insurance.com, well-known in the industry, fabulous guy, and he’s out working that side of the street.

And on NCS, they came with all the relationships, with hundreds and hundreds of card issues and we saw just by plugging that into Bankrate on day one the conversion rate of traffic to that platform increased like triple. So we learned from the mistake we made at Fast Find and not necessarily interested in trying to visit that one again and prove that we were right. It’s going well. We’ve got other things on our plate and we are just sort of moving ahead with those other things that we think are going to really improve the business.

Kyle Evans - Stephens Inc.

And are both the InsureMe and NCS acquisitions kind of on schedule to hit their earn-out provisions?

Thomas R. Evans

They both are, yes.

Kyle Evans - Stephens Inc.

Okay. Thank you.

Bruce J. Zanca

Last question.

Operator

Your last question comes from Ross Sandler with RBC Capital Markets.

Ross Sandler - RBC Capital Markets

Thanks for squeezing me in, guys. Two questions -- can you remind us, Tom, of linearity of traffic growth in the typical third quarter? So do trends tend to hold up in August and September relative to July? That’s my first one.

Thomas R. Evans

Typically our first and third quarters are our strongest in terms of traffic. Last year the third quarter was the -- the first quarter and the third quarter were both better than the second quarter, and of course the fourth, then we get seasonality in terms of the fourth quarter from Thanksgiving to New Year’s.

Ross Sandler - RBC Capital Markets

Actually, I was asking more specifically on when you are inside 3Q, so the months within 3Q -- July, August, September.

Thomas R. Evans

Well, as I said, it bounces around. I can tell you last year, last year July was okay, August was fair, September was smoking. The year before, it kind of ran the opposite -- July was okay, August was smoking, September was good. So Q3 has always -- has typically been a pretty good quarter for traffic and just the months tend to move around.

Ross Sandler - RBC Capital Markets

Okay, and then the second question, in the hyperlink business, the spread between your page view growth and your overall revenue was around low 20s in the second quarter, which has been kind of the average spread in prior quarters, aside from 1Q when you had some really strong traffic trends. Any reason why in 3Q, because of the deposit price hike and now that the deposit represents 60% of that business, why that gap wouldn’t actually expand a little bit?

Edward J. DiMaria

Well, I think if you -- in Tom’s prepared remarks, he talked about July CPC business being up over 60%, so that’s certainly would indicate that that has expanded or already began to expand, so we would think that that would probably be the case.

Thomas R. Evans

The visit-to-click ratio on deposits is very high. The price increase helps that, so that kind of incremental traffic has a pretty dramatic impact, so if that continues, you’re absolutely right -- we would see a higher-than-normal increase from that dynamic.

Ross Sandler - RBC Capital Markets

Okay, thanks.

Thomas R. Evans

Okay. Well, thanks, everybody. We’ve run a little bit over but appreciate the time and attention. Again, I think we always fall back to kind of what sets Bankrate apart and it’s the depth and breadth of our content, the nature of our traffic at 80% organic, 90% free, it gives -- it drives a different consumer and purchase dynamic and because of the quality consumer, these are people who still can qualify for a loan, a credit card, buying insurance, and it’s a very attractive audience for the advertiser. So we’ll continue to grind away and keep you posted on our progress, so thanks for joining us and have a good afternoon.

Operator

That does conclude today’s conference. Thank you for your participation. Have a wonderful day.

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