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Bankrate, Inc. (NYSE:RATE)

Q1 2006 Earnings Conference Call

April 25, 2006, 11am Eastern

Executives:

Thomas R. Evans, President and CEO

G. Cotter Cunningham, Senior Vice President and Chief Operating Officer

Richard G. Stalzer, Senior Vice President and Chief Revenue Officer

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

Analysts

Colin Gillis, Canaccord Adams

Youssef Squali, Jefferies & Co.

Mark May, Needham & Company

Stewart Barry, ThinkEquity Partners

Herman JJung, Deutsche Bank

Operator:

Welcome to Bankrate Corporation’s earnings conference call. My name is Tony and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode and we will conduct a question and answer session towards the end of the conference. If at any time during the call you require assistance, please key star followed by zero and the coordinator will be happy to assist you.

I’d now like to turn the call over to Bruce Zanca, Sr. Vice President and Communications officer. Please proceed sir.

Bruce Zanca.

Thanks, Tony. Good morning everyone and thank you for joining us on this conference call to report Bankrate’s first quarter 2006 financial results. With me here in our NY office is the company’s President and CEO, Tom Evans and our new SVP and Chief Financial Officer Ed DiMaria. Let me take a minute to go over the format of the call today. First, Tom will give us the results and color on the quarter. Ed will then give us some detail on the financial results and then we’ll have plenty of time to answer the questions that you might have.

Before we begin, I need to take care of the legal prerequisites. Our lawyers have asked me to remind you that some of the statements made in this conference call, including those regarding the company’s future prospects and revenue growth, its ability to continue to reduce costs and successfully implement strategic initiatives, constitute forward-looking statements within the meanings of the security act of 1933, as amended in the security exchange act of 1934, as amended. The company intends that these forward-looking statements may be subject to safe harbor, created under the securities law. These forward-looking statements reflect our current views with respect to future events and financial performance but are subject to uncertainties and factors relating to the company’s operation and business environment which may cause the company’s actual results to be materially different from any future results.

We encourage you to read the section entitled risk factors in our 2004 annual report and on form 10K and our subsequent fillings with the SEC. so with that being taken care of, let me introduce you to Bankrate’s President and CEO, Tom Evans. Tom?

Tom Evans, President and CEO.

Thanks Bruce. That’s always my favorite part of the call. Welcome everyone and thanks for joining us on Bankrate’s first quarter 2006 earnings call. As Bruce mentioned, I’m delighted to have our new CFO, Ed DiMaria with us here today. As you may have read, Ed and I have worked together in our previous gig at official payments. He’s a great guy, a real pro, so I’m pleased to be working again with Ed.

I also want to mention that Bob DiFranco is back from medical leave. Bob is doing great and will continue his role with the company in North Palm Beach as our Senior VP of Finance. Welcome back, Bob.

I trust that many of you have seen the two press releases that we put out this morning. We will or course walk you through our first quarter results, talk about our secondary offering, update our guidance for 2006 and of course, take your questions. But first, the quarter.

I’m happy to report that the first quarter of 2006 ran not only ahead of the analysts’ consensus in all respects, but slightly ahead of our budget, as well. Revenue for the quarter was $19.8 million or 90% above the $10.4 million in the same quarter, last year. EBITDA for the quarter was slightly over $6.6 million, an increase of 128% over the $2.9 million in the first quarter of 2005.

GAAP after tax income, minus the stock com expense, was $3.7 million or $.21 per share, fully-diluted; well ahead of the analyst consensus of $.19 and again a little ahead of where we thought we’d be at this point.

Ed will go through the financials for the quarter in detail but before he does, I’d like to mention the four main factors for the strong results for the quarter.

First, we had strong organic traffic for the quarter to the Bankrate website. Second, we had a great performance by our advertising sales team and continue to see strong demand from our growing advertiser base. Third, the cost per click component of our business continued to gain momentum. In fact, total company hyperlink revenue was up 96% in the quarter, over the same quarter of 2005, and 50% over the previous quarter, and reflected an even more balanced distribution between deposits and loans. And fourth, we saw a smooth integration of our two acquisitions which are running right on schedule.

However, while it was a solid quarter and we feel great about the progress we’re making with the two acquisitions, we’re by no means hitting on ally cylinders yet. There’s more due in all areas where we still have plenty of room for growth.

I’ll provide more detail on all of that a little later, but right now let me turn it over to Ed to go through the financials for the quarter.

Ed DiMaria, CFO

Thanks, Tom and good morning everyone. First, I want to say that I’m happy to have joined the Bankrate team. I’ve worked with Tom and other members of management before and I can’t say enough about the caliber of people this company has assembled. I believe we have the talent and leadership to take this business to the next level in growing traffic, increasing monetization and enlarging our footprint in the consumer finance and related market sector. I’m excited about the business and especially what lies ahead.

Before I discuss the financial results, I wanted to outline how I plan to take you through the numbers. First, I will cover the four topline results everyone is most interested in: total revenue, EBITDA, EBITDA margin and EPS. Next, I will provide some color on revenue by breaking down the results and drivers in more detail. Third, I will cover how we did cost wise and last I will finish up by summarizing our financial position and recapping the results.

As Tom highlighted, we are pleased with our continued progress and strong financial results for the quarter ended March 31, 2006. Total revenue reported for the first quarter was $19.8 million; this is an increase of $9.4 million or 90% over the $10.4 million we reported in Q1 last year. The first quarter 2006 is now on record as the highest total revenue quarter in the company’s history, over our previous high of $13.9 million, set last quarter. This performance is indicative of the forward momentum we have built.

For EBITDA net income, we believe it is important to provide an apples-to-apples comparison. So first, I will discuss the results, excluding the non-cash stock compensation expense charge we are now required to take, beginning in 2006, due to the adoption of FAZ123R. Prior to adoption of the FAZ, we did not record such charges. So 2005 did not have stock compensation expense in the P&L.

EBITDA, excluding stock compensation expense, was $6.6 million for the quarter, which is a 128% increase over the $2.9 million for the first quarter of 2005. Also, if you look at EBITDA sequentially, we improved by 62%, compared to last quarter, the fourth quarter of 2005. So obviously, we were pleased with our performance here and plan to remain focused on EBITDA. You will hear us talk about EBITDA, adjusted for stock compensation expense, in the future, when discussing results and providing guidance, as we believe it is one of the important metrics to help measure our financial results. Also, as in the past, we will continue to guide revenue performance.

Our net income, excluding stock compensation expense, came in at $3.7 million or $.21 per diluted share. This exceeded the analysts’ consensus estimate of $.19 per diluted share as reported by First Call Thompson Financial. The $.21 per diluted share represented a 75% increase over the $.12 we reported for the first quarter of 2005 and a 40% improvement sequentially over the 4th quarter of 2005.

The bottom line net income for the quarter was $2.3 million or $.14 per diluted share, after factoring in the post-pack $.07 per share charge for non-cash stock compensation expense.

Now, looking at revenue and the underlying drivers in more detail…

Online revenue for the first quarter of 2006 was $15.6 million and revenue from published print rate tables and licensed content was $4.2 million. The $15.6 million in online revenue breaks down to graphic advertising revenue of $9.2 million and hyperlink revenue of $6.5 million. The graphic advertising revenue of $9.2 million for the quarter increased 71% over the Q1 2005 revenue of $5.4 million and 40% over the fourth quarter 2005 revenue of $6.6 million. Also, graphic advertising revenue actually could have been higher in the quarter, had we not used some inventory and impressions for FastFind to begin building that business and driving Bankrate traffic to the FastFind site. Once FastFind is optimized later in the year, we believe we will pickup incremental revenue from growth in the number of leads, increasing the number of times a lead is sold and increasing the price per lead.

Page views in Q1 2006 were 124.2 million vs. 111 million in Q1 2005 and 97.6 million in Q4 ’05. This represents a 12% and 27% increase, respectively. Of particular note is the traffic we are seeing in the deposit channel for CDs, money markets, checking and savings accounts. This traffic represented 21% of our traffic in the first quarter of 2006, compared to 9% of our traffic in Q1 2005.

We believe that the deposit channel represents an excellent opportunity for us ahead.

Another point that I want t highlight is that 95% of our traffic to the site was organic or through partners on a revenue share. All of this traffic came to us at zero cost. This is a captivating metric and key to driving EBITDA margins as we ramp the business.

Contributing to the strong graphic advertising revenue in Q1 2006 was our ability to monetize additional inventory with higher sell-through rates and more ad impressions compared to Q1 ’05. Our CPMs increased sequentially by 4%, over Q4 ’05.

Hyperlink revenue of $6.5 million for the quarter increased 96% over the Q1 2005 revenue of $3.3 million and 50% over the fourth quarter 2005 revenue of $4.3 million. Our hyperlink business model changed dramatically as of October 1 as we migrated to the cost per click model on our rate tables. This shift has dramatically increased revenue and better match revenue with the activity and benefits a hyperlink advertiser is obtaining from our site. Also, we now have the foundation and tools in place to manage yield at a highly refined level, down to the individual products and local regions.

We’re satisfied that the model is working well in its current state with CPC pricing, but we are more excited about what lies ahead as we begin to better match pricing to customer business economics at the product and regional levels.

Print publishing and licensing revenue was $4.2 million for Q1 2006 compared to $1.2 million for Q1 2005 and $2.3 million in Q4 2005. the primary growth here is due to the acquisition of MMIS’s print business. We are now in over 450 newspapers nationwide and will be focused on growing this business with added deposit tables as well as adding more newspapers to the mix.

Our gross margin on revenue after the direct costs of publishing was 69% in Q1 2006, 71% in Q4 2005 and 74% in Q1 2005. the 5 percentage point drop from Q1 2005 to the current quarter is a result of factoring into the mix the MMIS print operation, acquired on November 30, 2005 for one month in Q4 2005 and all three months in Q1 2006. the print business generates relatively low margins at 15%. Although we look at this traditional print business in two ways. First, it does generate cash flow to the business and will also provide new growth in publishing deposit tables. But equally important, we provide the Bankrate URL on every rate table published, which directs more incremental traffic to our website for zero cost, thereby providing additional support for our primary business objective of building and monetizing web traffic.

The total operating cost in Q1 2006 was $9.4 million, compared to $5 million in Q1 2005, which represents an increase of $4.4 million. The increase in operating expense was driving by $1.8 million in stock compensation expense (again, that was non-cash), approximately $1.1 million in acquired operating expense for Fast Find and MMIS, and $800,000 in legal and accounting expense and $350,000 in amortization or acquired intangible assets.

We ended the quarter with 160 empl0yees, compared to 123 at the end of the first quarter 2005. The additional headcount resulted form the acquisitions in Q4 2005.

We have now nearly completed the integration of staff, operations and systems and I am pleased to report that the process was very smooth and efficient. At the time of the acquisition, the total combined positions were 198. Now, as you can seed, we’re at 160 employees.

We continue to closely manage headcount and operating costs. We are in the business of driving and monetizing traffic and we are laser-focused on pushing these results through to the bottom line.

Other than direct costs of publishing, our costs are mostly people and to a lesser extent, system infrastructure. We have in the past and will continue to make investments in each where necessary, to take the business to the next level. But, every addition is carefully planned and scrutinized.

Earning before tax was $4.3 million for Q1 2006 compared to $3.1 million in Q1 2005, representing an increase of 40%. Again, this was dampened by the $1.8 million non-cash charge for stock compensation expense, due to the adoption of FAZ 123R.

Our income tax provision for the quarter was $1.96 million; it was charged primarly against our deferred tax assets and therefore did not result in the cash payment of tax. Please note that the adoption of FAZ123R negatively affected our provision, resulting in a higher effective tax rate on book income; although this income was and will continue to be non-cash.

We opened the year with a tax (inaudible) carry-forward of approximately $14 million, which is recognized on our books as deferred tax assets as adjusted for differences in booked vs. tax accounting. We ended the quarter with a tax (inaudible) carry-forward of approximately $9.8 million, which we believe will be used up during the second to the early part of the third quarter at which time we will begin paying tax.

Net income for Q1 ’06 was $2.3 million or $.14 per diluted share; compared to $1.9 million or $.12 per diluted share for Q1 ’05. Again, earnings per diluted share were $.21 after adding back the $.07 for stock compensation charge.

We remain in solid financial condition, despite depleting out cash position in the fourth quarter 2005 to acquire FastFind, MMIS and Interest.com. We ended the quarter with $4.4 million in available cash, compared to $3.5 million at the end of 2005.

Our balance sheet remains debt-free and our ratio of current assets to current liabilities is over 3 to 1. Of course, our balance sheet will be given a big boost when we complete the secondary offering; we will be well positioned for growth with an excellent cash position, zero debt and a strong currency.

Now, recapping quickly.

Revenue for the quarter was $19.8 million, up 90% over Q1 2005, our EBITDA adjusted for stock compensation was $6.6 million, up 128%, and EPS was $.21 per diluted share, adjusted for stock compensation, which exceeded the analysts’ consensus estimate of $.19 per share.

Tom will now take you through his business report for the remainder of 2006. Tom?

Tom Evans, President and CEO.

Thanks Ed. As Ed mentioned, we believe the financial performance for the quarter for the company was pretty solid. I’m going to go through the four growth drivers I mentioned previously and give you some greater detail.

First, traffic. By now, most of you have hear my rant about the extraordinary value of organic and free traffic. I think the traffic performance for the quarter continues to speak to the value of our editorial content and particularly with the mortgage rates rising, speaks to the diversification of our business. In the quarter, organic traffic continues to grow to our highest level ever. In Q1, 81% of the traffic to Bankrate.com came directly to our site, either through non-paid search or through people typing in the Bankrate URL. On top of that, 14% of the traffic came through our co-branded partners and only 5% of the traffic came from paid search. So fully 95% of the traffic came to us free. The 81% and the 91% numbers represent the highest level ever for the company.

In the quarter we averaged over 5 million monthly unique visitors to Bankrate.com and had 14 million aggregate unique visitors for the quarter. For interest.com, again 95% of the traffic for the quarter came organically and only 5% of the traffic came through paid search. Interest.com generated slightly over 2.2 million aggregate unique visitors for the quarter. Those of you who know us know that we have often stressed the disproportionate value of free traffic and the leverage it provides for our business model especially as it impacts margins. We are of course delighted to see that trend even improving as our data licensing, newspaper products, our SEO efforts and our co-brand activity continue to place Bankrate in front of active and engaged consumers.

Going forward, we think there’s an opportunity to improve and grow traffic as we get better and more sophisticated about the paid search market. It’s not something we’ve stressed in the past because we really didn’t need to. But now, with our strong ad sales efforts, and the ability to more greatly monetize the additional traffic across our rate tables, it’s an area we intend to improve and grow.

The second area of growth, as Ed mentioned, has been within the graphic display advertising category. Graphic ad revenue was up 51% over 2005 and 63% if you remove the barter revenue from Q1 last year, which we have completely eliminated. There are a couple of factors at work there that have been a catalyst for growth. First, our salespeople have done an excellent job of attracting new advertisers as well as getting existing advertisers to increase their spending with us. It’s not uncommon that banks and lenders of service mortgage advertisers on Bankrate.com now also run deposit campaigns, checking and savings campaigns, advertisers credit card products or home equity ads.

Second, we’ve been able to take advantage of the trend that we’ve talked about on calls before, and that’s the movement ot advertising dollars from traditional media to the internet. It’s a trend that continues and a trend that we believe will continue to benefit Bankrate. Just to give you an example. A large national mortgage and home equity lender that spends a ton of money on television, last year ran about $300,000 in graphic advertising on Bankrate.com. This year, in 2006, that same company is running graphic ads on Bankrate, graphic ads on Interest.com, running hyperlinks on our rate tables in all 50 states, buying leads from FastFind and running in our newspaper ads. We expect their total spending to go from $300,000 in 2005 to well over $2.5 million this year.

I saw a recent report that internet spending now represents just over 5% of all media expenditures. But internet usage by consumers represents over 60% of media consumptions. I think most people believe that those two numbers will sync up over time, which simply means more and more ad dollars being spent on the internet.

The interest of advertisers to reach in-market consumers, in a high quality environment like Bankrate, will benefit us, we believe, more and more as time goes by.

Another obvious area of growth has been the conversion of our hyperlink ad tables from our old flat fee model to a variable cost per click pricing. It’s also proof of the elasticity of our model in that a significant portion of the traffic in the CPC revenue is now coming from the deposit channel. CPC hyperlink revenue for the first quarter on Bankrate alone, grew 81% over Q1 2005 and 39% over the fourth quarter of 2005. of that revenue, we are pleased to see that 44% of the hyperlink CPC revenue came from the deposit channel from CD and money market advertisers. That revenue from deposits in the year ago quarter was around 15-16%. There are several great points to be made here about cost per click. First, prior to CPC there would have been no way for us to be able to take advantage of the shift in consumer demand that occurred over the last several quarters as interest rates have risen. Second, for those that were worried that Bankrate was dependent upon the mortgage and re-fi business, we have proven that the company’s business can thrive in a rising or stagnant or falling interest rate environment. And keep in mind that we haven’t really begun to optimize CPC pricing, which we’ll be able to do on both a local and product level.

As planned on April 1, we launched CPC rate tables on Interest.com.

Interest.com was previously charging its customers a flat per monthly fee, similar to what Bankrate had been doing. As of April 1, those tables are also generating revenue on a CPC basis.

Earlier in the quarter we announced that launched a new co-brand with CNN Money.com, which includes our cost-per-click rate tables as well. According to Nielsen net ratings, CNN Money.com is the third most trafficked finance site, so that was a good win for us. And there will be more to come as we continue to look for more ways and more places to push our rate tables across as many co-brands and affiliates as we can. We believe the evidence suggests that CPC is a strong monetization tool that works for our advertisers, works for Bankrate and works for our co-brand partners as well. And, by the way, the CNNMOney.com co-brand also has FastFind on it.

The fourth and final area that had a positive impact on the quarter was the speed at which we’ve been able to integrate the two acquisitions we made in December. Let me give you a progress report on that. First, on FastFind.

As promised, we began running FastFind ads on Bankrate.com and on Interest.com on January 1st. FastFind continues to build its lender base and lead demand, but we’re not running ads in all the places we could be and certainly not to an optimized level yet. But, we feel good about the business and are on-schedule so far. However, we need to continue to add lenders, continue to build lead demand and continue to build both our application process and our ad messages. Having said that, we’re pleased with the progress to date. We believe we’re on track to have this business optimized and running at full speed by the third quarter of this year.

The easiest transition has been with interest.com because the business was so similar to Bankrate. Almost immediately after we closed the acquisition, the Bankrate salespeople began selling the ads on interest.com and we’ve seen a nice improvement on sell-through rate and CPM. As I mentioned, we’ve recently converted the interest.com rate tables from a flat fee to a CPC model and made a few tweaks to the site. Next on the agenda for interest.com is a more aggressive redesign, which will take some of the learning that we acquired when we redesigned Bankrate a year ago and apply it to that site. The focus of the redesign will be, again, somewhat similar to what we did on Bankrate.com, and that’s the focus on the user experience, on navigation on getting more people to the high value places on the site. You should begin to see the change son the site in the third quarter.

Lastly, in the print area we’ve already fully consolidated the Bankrate consumer mortgage guides into the MMIS print products. The new unit, we’re calling Bankrate print, is based in Chicago and is selling and producing all of the mortgage guides that go into our 450 partner newspapers.

The team has worked very hard to get these integrated quickly, and it has been very effective. We were able to consolidate two staffs into one, reducing headcount and tapping into MMIS’s knowledge and strengths in the newspaper business. So far, we’re pleased with the results.

We think that for the first time since I’ve been at Bankrate, there’s an opportunity to actually grow the print business and improve the margins. We’ve had some success with selling weekly deposit guides in addition to our weekly mortgage guides in several of the papers. For example, in February, we launched a new weekly deposit table in the Los Angeles Times. On May 1 we’ll launch similar deposit tables in the other 13 Tribune company newspapers with which we have a relationship. It’s new, it’s incremental revenue and its something we believe we can push out to many more papers, allowing for more revenue and of course enhanced visibility for Bankrate.

Additionally, with the 2 acquisitions we’ve made great strides in consolidating our technology infrastructure. In the first quarter we opened a second (inaudible) location center in Denver, adding it to the Atlanta facility where our technology has been historically housed. That second facility allowed us to move the interest.com technology from Chicago to Denver and move the FastFind technology from san Francisco to Denver. The two moves allowed us to consolidate at one site and save about $25,000 a month in the process. And, our IT team completed all of that in the first quarter.

We also were able to make significant technology improvements to the Bankrate site, improving the speed and performance of the site. And, we deployed a standard tracking tool across all three of the websites, allowing for better monetization of traffic and advertising.

In an effort to focus our efforts on optimizing our business, we’ve been taking advantage of the opportunity that we see in front of us, we announced today that we’ve filed a secondary offering to sell 2.35 million shares of Bankrate stock; a process that will begin this Thursday, the 27th. 2 million of the 2.35 million shares will be company stock, with the other 350,000 being sold by existing share holders. The purpose of raising the money is very simple: we think there are acquisition opportunities for the company that will enhance our business and allow us to grow even faster. We like the lead generation space and what we think it will do for our growth going forward. We also think there are additional opportunities for Bankrate, up the funnel in the real estate area and down the funnel, if you will, in the insurance category. Let me explain that for a moment.

Bankrate’s proven to be an effective platform that effectively monetizes in-market consumers looking for financial products. Therefore, we see potential in a number of areas, including connecting with consumers who are looking for houses or looking to find a real estate agent. Similarly, when a person fills out a FastFind form, or they’re looking for mortgage rates on our rate tables, that person we believe is a natural candidate for property and casualty insurance. Or when looking on the auto loan rate tables, that person is a natural for car insurance. We believe there are opportunities for us to continue to build out a wider and deeper financial platform. It was our thinking behind the FastFind acquisition and we think there will be more opportunities to broaden our capabilities and to be able to monetize it effectively.

Lastly, to guidance.

Based on our progress to date, we’re increasing our guidance for the year. We’re increasing our revenue guidance from between $79-80 million to between $80-$82 million. As for the bottom line, we’ve previously guided our pretax earnings, which included the amortization of the intangibles for the acquisition but did not includes non-cash stock expense. Our previous guidance was for between $24-25 million which equated to an EBITDA of between $26.5 and $27.5 million. At many of your requests, we’re now simplifying the earnings guidance to give a straight EBITDA number. So, we’re raising the EBITDA guidance from between that $26.5 and $27.5 to between $28 and $29 million for EBITDA for the year.

Having said that, the second quarter is going to look similar to Q1 and I’ll reiterate what we’ve said before. We believe that the expansion of the top and bottom line will come in the second half as FastFind in particular begins to hit its stride as that business grows.

Now, before we take your questions, I wanted to briefly mention one last thing that’s important to us here at Bankrate. We take great pride in the quality and integrity of our editorial product and our team of writers and editors that deliver it every day. Several of our people, like Greg McBride and Laura Bruce and Holden Lewis are, in addition to their work at Bankrate, are recognized experts and are often quoted in the press. Last month, Holden Lewis was recognized with two awards by the national Association of Real Estate Editors for best column and for best body of work. It’s wonderful recognition for Holden and it’s great for Bankrate. So with that, why don’t we move to take your questions. Tony?

Question-and-Answer Session

Operator:

Ladies and gentlemen, if you wish to ask a question, please press *1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press *2. Questions will be taken in the order they are received. Please press *1 to begin.

Your first question comes from the line of Youssef Squali with Jefferies and Co.

Youssef Squali.

Thank you very much. Ed, congratulations on the new job. A few questions. First, could you speak to the organic revenue growth in the core business and how much did the acquisitions bring in terms of acquired growth? And second, how should we be thinking about growth in page views and in CPMs for graphic ads in Q2 and for the remainder of the year?

Tom Evans.

Youssef, when we look at the quarter, a little more than 50% of the growth came from the core business of Bankrate and about a little less than 50% from the acquisition. That’s a little bit misleading because when I say 50%, that is including, or I should say that’s not including the revenue that we moved to FastFind. Had we still just been running Bankrate, we would have monetized it on Bankrate.

Youssef Squali.

How much of the traffic was given to FastFind to monetize?

Tom Evans.

About 7%. You know we have this target goal of about 15%. We’re about half way to our goal in terms of them increasing their lender cap. Since we’ve acquired the company or actually since mid-December, they’ve almost tripled their lender cap or their demand from lenders. So we’re about half way to the point where we think we need to be to be optimized. And about 7% of the inventory went to FastFind. So, Bankrate would have grown in the 70%, just the core business, or slightly more than that. About 80% of the EBITDA growth came from the Bankrate core business. So, it was a great quarter for Bankrate, notwithstanding the fact that we traded off some of that to FastFind. It would have been even more spectacular. In terms of how we look at page growth, as I said, we’ve really just sort of played with this. Five percent of our traffic is coming from paid search. We think there’s more that we can do to generate non-paid traffic but we think for the first time, given that we’ve got CPC tables, there’s a real interest in driving incremental traffic across the Bankrate site. What I mean by that is, before, when we put money into paid search and driven people across the rate talbes, when we were on a flat fee we weren’t getting any more money for that. Now, we’re getting money every time somebody clicks. So it’s certainly an opportunity to optimize that paid traffic. If you think about driving somebody across a $50-$60-$70 CPM page view and then getting them in the rate tables where they’re paying $4.50 per click, it’s a pretty attractive model that didn’t fully exist before. So, we’re going to start to be more aggressive as we learn more about the real ROI on paid search. We’re not going to do it if it doesn’t work, we’re not going to do it just to spend the money and we’re not going to do it if the margins aren’t there. But we think with the way we can optimize that traffic, there’s going to be growth there.

Youssef Squali.

So you seem to be saying that the historical seasonality that we’ve seen in page views shouldn’t really hold this year.

Tom Evans.

Likely in the second half we think we’ll be able to improve that.

Youssef Squali.

Okay. And I guess lastly, to the infamous guidance…I feel I ask the same question every quarter. Your guidance assumes that your view in the last three quarters of the year has really not changed now that you have outperformed expectations by a couple of million bucks. Why is that?

Tom Evans.

You know, as you know, this is groundhog day. We’ve constantly been conservative in our guidance. We want to be prudent. We believe that we’re going to see the acceleration of this business. As we said last year and as we kind of saw in 2005, in the second half of the year is really when we get on all cylinders and start optimizing the business; particularly with what we think we can do with the acquisitions. What we’ve done in the past is we’ve under promised and over delivered. We wanted to raise guidance because we’re more confident about our business; we have outperformed. We’re conservative people and we know what we guide to we can deliver. I think you know us well enough to know that’s our comfort level.

Youssef Squali.

Okay. Well, thanks and congratulations.

Operator:

Your next question comes from the line of Stewart Barry with ThinkEquity.

Stewart Barry.

Thank you, congratulations and welcome, Ed. What was the page view growth, year over year, at interest.com?

Tom Evans.

The page view growth was about the same as last year’s, about 111 million in the first quarter from Bankrate.com and about 111 million in 2005 and 2006. I’d say the biggest difference is that we’ve cut back on paid searches. You see that in our marketing line a little bit, that we’ve cut back on paid search, until we really get a handle on what we’re spending, where we’re spending it, the ROI on that. We took a step back on that. We had such strong organic traffic to Bankrate, that we really didn’t need to goose it. So, had we been sort of apples-to-apples on paid search, we would have put another 8-10 million page views in the first quarter.

Stewart Barry.

Okay. And in terms of the use of cash, is the priority to buy – in real estate insurance – proprietary traffic or more monetization type businesses?

Tom Evans.

Probably a little bit of both. Our feeling about it, Stewart, is that we can really effectively monetize somebody’s traffic by pulling them across. If somebody is looking for a home, to pull them across Bankrate and lead them down our mortgage channel and get them into our rate tables; it’s pretty effective monetization of traffic that’s already there, who’s already identified themselves as being in-market consumers. To be able to send them down the funnel, as I mentioned, with somebody who has already identified themselves as being in the market for a mortgage and being able to shoot them down funnel into insurance is again, just greater monetization of that traffic that exists and really enhancing profitability. We think we are pretty good at monetizing traffic. We think we can do it more effectively. If we either find more traffic sources, sort of what we described as up the funnel, we can monetize that. And, we intend to be more aggressive about monetizing our traffic down the funnel. It’s certainly one of things that we think we can do with FastFind, it’s something we think we can do better on Bankrate. We’ve had some other priorities to date. We’ve had other initiatives that we’ve knocked off. This is clearly a 2006 initiative that we intend to get to in the 2nd half of the year. I think we’ve got a pretty good ability to do that.

Stewart. Barry.

An finally, did you mention how much FastFind contributed in the quarter?

Tom Evans.

FastFind was about $1.4 million in revenue.

Stewart Barry.

Okay. Great, thanks a lot.

Operator:

Your next question comes from the line of Mark May with Needham and Company.

Mark May.

Thanks for taking my questions. The first question has to do with the guidance. I’d like to try to get a better sense of what you’d baked in for the 2nd half of the year for FastFind. I guess maybe looking at what you expect revenue growth in the second half over the first half of the year; something along those lines.

Tom Evans.

You know Mark, we haven’t broken up the guidance in terms of what the different contributors are. But, obviously FastFind…and we’re being conservative about what we think FastFind can be in the 2nd half, without knowing that business as well, certainly, as we know the core business. We’ve been relatively conservative about the estimate. But we think…our goal over time, and we’ve said this for the last six months, is that FastFind will, at the optimized level, be getting about 15% of the Bankrate and interest.com inventory. We think that can equate into developing obviously a profitable business, but a growing and larger business that’s going to be really enhancing our capabilities over time. So, not breaking it out specifically, but it’s going to be a strong driver eventually for the company and we’re being a little bit conservative about what we think it will be in the 2nd half.

Mark May.

Okay. My other question has to do with acquisitions and sort of the characteristics you look for. I’m not sure how you want to talk about that, but…the Bankrate business is a highly profitable business; you had over 30% EBITDA margins this quarter and you’ve been doing 40%+ incremental margins for the last several quarters. I’m wondering, in terms of the targets that you’re looking at, do they have the type of profitability metrics right out of the gate?

Tom Evans.

We certainly hope so. It’s certainly our intention to go after things that are obviously (inaudible); that our tuck ins or (inaudible) business where we can take traffic and monetize it in additional ways. I’m not sure that we’re smart enough to try to reinvent a category or go into businesses that we don’t understand very well. Things like FastFind we understood very well, things like the real estate business, the insurance business, we think we understand pretty well. They’re naturals for us to be able to monetize. We’ve already got the kind of consumers that we know are going from our site…it doesn’t take a leap of faith to think that if a person is within 60 days of buying a new house that one of things they’re going to have to do is buy insurance. The other things we’ve talked about too, is just doing a better job, and we’ve barely begun this, in monetizing people who – again – are buying new homes, going to home depot or bed, bath beyond or buying a security system, things like that. That’s where we know there’s interest and where we know that we can do a good job of monetizing. That would bring the kind of margins, that would bring the kind of profitability, that would bring the kind of growth that I think we’d be able to do – I don’t want to say fairly easily – but, it’s not something that’s completely foreign to us and it’s not asking this management team to do something that they don’t understand.

Mark May.

Considering that you’re looking to raise over $100 million, should we think of you doing tuck-in deals in the insurance and real estate space? FastFind did $1.5 million in the first quarter; that’s a tuck-in. what are we talking about in terms of the targets you’re looking at?

Tom Evans.

You know, I don’t think we’re as specific as probably you’d like. We’re looking for good assets that we’d be able to leverage what we do, leverage our staff, leverage our experience, leverage our sales team. One of the neat things that we found out about these two acquisitions, is the capacity and strength of our ad sales staff. We started selling almost right away, Bankrate, FastFind, Interest.com, CPC tables and our co-brands, as a network. And as I mentioned, I think we were all – I don’t want to say surprised – but it’s kind of fun when you map out a play and the end goes long and you hit him with a bomb and he scores a touchdown. I mentioned that mortgage and home equity lender who was doing $300,000 and had success on Bankrate and is now buying rate tables on CPC and is now buying leads from FastFind. By the way, that customers, it’s the first time they’d ever bought leads from anybody before. And, they’re advertising in our newspaper products because they’re seen that the quality of the consumer that the Bankrate brand and the Bankrate site attracts is sort of second to none. We’re encouraged by that. When we look at other acquisitions and we think – again, we don’t want to overburden or distract our sales staff – we think that there’s more to do; particularly if we’re selling as a network and selling the same customers into similar compatible platforms.

Mark May.

Thanks for answering my questions.

Operator:

Our next question comes from the line of Collin Gillis with Canaccord. Please proceed.

Collin Gillis.

Hello everybody. Tom, is it too soon to start talking about – on a more mature basis and given the traffic you have – the leads that FastFind should be generating on a monthly basis and sort of on a mature basis the revenue-per-lead that you could monetize?

Tom Evans.

It’s certainly something we’re thinking about. Certainly something, when you look at…if you’re taking FastFind, let’s just ballpark it. If you’re getting $58 a lead and you think the potential of that – just from the number of times you can sell it to a lender, that you can sell it for $75 a lead or more and then the additional places you could optimize or sell that lead. That’s not including insurance, that’s not including some of the other marketing programs. As I mentioned, Bed, Bath, Beyond and Home Depot, places like that…and people we already know are interested in our audience because of some advertising activity and some responses that they’ve gotten. We certainly think there’s an opportunity. One of the things that we’ve done, though, and if Sean and Eric in San Francisco are listening to this they’re probably rolling their eyes…we tend to be laser-focused on short-term execution. We’ve told them there’s lots of other things we could do, there’s lots of other ways that we can monetize this, but what we have to do in the short term is build a lender base, build the Cap demand and improve the efficiency of the ad units and of the application process. We sit and brainstorm and come up with five or six or seven other ideas, including what you’re talking about – additionally monetizing those kinds of consumers once you get their financial profile, once you get where they live, once you get the kind of product that they’re looking for. It’s pretty rich information. For right now, we’ve kept them really focused. Let’s not try to do ten things poorly, let’s do three things really well and that will ramp that business. The answer to you question is yes, over time, but in the near term we’re really focused on getting it optimized by the third quarter.

Collin Gillis.

And in terms of building up a back network of people who want to buy the leads, how is that going? Can you give us any color on that? Has there been any synergy with the Bankrate team being able to start talking about getting people’s appetites ready to buy leads?

Tom Evans.

Surely. We’ve surely thought about…there are all kinds of things we’ve thought about; places we think that we could go. I’m thinking credit reports and all kinds of additional data which we think would enhance the value. Yeah. Over time, we think this could be a very big business for us. We didn’t acquire FastFind to make it a little $5, $6, $10 million business. We acquired it…as I think I said a year ago – that I thought that business would be bigger than the Bankrate business.

Collin Gillis.

Any talk about Paper Call on the print tables? Is that something that you’re looking at on the horizon?

Tom Evans.

It’s something we’ve discussed. It’s something we’re monitoring. We’re watching what other people are doing about it. We’re talking to our customers about whether they like it or not. It’s certainly something we’d like to get to…nothing to report that’s imminent, but it’s certainly something that we’re looking at as an opportunity.

Collin Gillis.

And then just on the paid traffic front…how much are you willing to pay for a click right now? Are you recalculating how much you’re willing to pay for a click, given what’s been happening at the rate table level, as a way to drive traffic going forward?

Tom Evans.

At the risk of offending our SEM people who are very smart and know what they’re doing, what we really haven’t done that we should do – and again, as I referred to earlier, it’s really been out of the lack of need to do it – is we haven’t really drilled down to the extent that I think the people that do it well know exactly, not on average but by keyword…here’s what we get when we spend on this and here’s what the return is and here’s how many pages and here’s how many clicks it drives. We haven’t gotten into that granularity. We intend to. We think we’ve got to use some outside tools to be able to do it. We were talking to a number of those companies. I’ve heard some anecdotal stories of companies that gone from half a million dollars in spend and after using one of those tools and seeing the ROI, have increased their spending to $3 million because they’re making $6 million on the spender. We’re chipping at it right now, as you know. you can look at our lineup. We’re spending a quarter of a million a month on Bankrate; probably $350,000 all in, with all the companies.

If I was convinced that it would return a much higher ROI or 60, 70, 80, 90% ROI, would I spend the $3 million? Sure. But, we really need to get a hold on the specific metrics and (inaudible) ROI before we spend money like that. We don’t just…you know me well enough to know that our board wouldn’t allow it and our team certainly isn’t the kind of people that throw money against a wall to see whether it works or not. We’re very methodical about what we do. We intend to get into it in a more aggressive way and we think…I can’t imagine who could monetize it better than we do. You’re talking about dragging somebody through four or five page views at a $60-$70 CPM and getting them on a rate table at $4.50 per click; that’s pretty attractive revenue generation. Now we’ve just got to make sure that if we’re paying $.50, $.60, $.70 – as we said before, our typical spend is less than $.30 per click – we might be able to get more aggressive on that by being able to determine if the ROI on that is significantly greater. So stay tuned, more to come. It’s an area where we think there’s growth potential. But, we don’t have all the answer yet.

Collin Gillis.

Thanks. Just a quick one for Ed. Diluted share count ticked down in the March quarter from December, sequentially. Any reason for that?

Ed DiMaria.

Yeah, as you know we adopted the FAZ123R in 2006 and that is threaded throughout the GAAP numbers. When you calculate the weighted average shares under 123R you do it differently than under APB25, that we used in the end of 2005. You dump in things like unrecognized comp expense and your treasury stock method and you dump in the tax benefits that you would get on the assumed exercise of the non-quals and things like that. The calculation is different.

Collin Gillis.

Great. Congratulations on a great quarter. Thank you.

Operator:

Your last question comes from the line of Herman Jung with Deutsche Bank.

Herman Jung.

Hey Guys. Thanks for taking my call. Just a quick question on your pricing on CPC. I think you talked about how you can optimize CPC pricing on a product level. I was wondering if you’re under-pricing on certain categories today and if there’s an opportunity to grow that? And secondly, relating to traffic levels, you talked about how there was 44% of your traffic that came from CD and Money market areas, from the 50 and 60% last year. I was wondering if was the shift mostly from the mortgage and re-fi business?

Tom Evans.

The nice thing about what we’ve seen, is we still see the nice mortgage and re-fi business on Bankrate. We’ve historically run between 35 and 40% of our traffic going to the mortgage site. In the first quarter it ran about 37%. At the height of the mortgage and re-fi boom I think the highest we ever ran was about 48%. So there still is a strong mortgage, there still is a strong housing market out there and we’re attracting those customers. We’ve seen some shift, to be sure, but we’ve also seen just a better way to monetize that traffic that’s coming there. Some of that is clearly incremental traffic of people coming to the site. Our UVs are improving in that regard. Just one point I want to mention in terms of looking at page views. We’re comparing it to the first quarter of last year, which is a pre-redesigned Bankrate site. One of the things we did intentionally, and this was a leap of faith we made, is we cut down on a lot of manufactured page views when we launched our redesign on April 1 of last year. We thought, when we looked at the prior design of the site, that we were dragging people through some page views unnecessarily in order to generate the page views; and, we eliminated some of that. We also eliminated a lot of pop-ups and pop-under, if you remember, which were in the page view count. So, part of that is just the fact that I think we’re doing a better job of getting people to the places they want to go faster.

As far as CPC pricing, there’s no doubt that we’re not optimizing CPC pricing. I think, as some of your hear – and I think everybody inside of the company is tired of the boiling frogs analogy – we talked about where we want to bring them in, get our advertisers and lenders comfortable with a variable pricing model before we start tweaking it, making it too complex and making it more expensive. We didn’t want to kill them coming in. we wanted to have a high adoption rate. The one area where we increased pricing from the 4th quarter to the first quarter was deposits. CDs went up from $2 to $3 and money markets went up from $3 to $4. I could tell you we saw almost no pushback in raising that price. We sort of looked at ourselves and said we probably could have gotten more aggressive. But it’s working well, we want to continue to raise those prices over time. When we talk about optimizing, what I mean by that is, just to give you an example…if you talk about a consumer who is in Florida, paying $4.50 a click to be on our mortgage tables in Florida. It doesn’t take a leap of faith to think, wow, if mortgage clicks are worth $4.50 in Florida and lenders are willing to pay it, what’s a click in Palm Beach worth, what’s a click in Miami worth, where the real estate is much more expensive? What’s a jumbo worth? What’s an interest-only worth? Or, some of the more exotic products that are out there in the mortgage category right now?

We think there’s an opportunity. We haven’t even begun. Other than the increasing that we did on deposits, we haven’t begun to tweak those or optimize those. We want to be mindful of lender economics, but we know they make more on jumbos and we know they make more in interest-only’s. We want to start to exploit that opportunity going forward, but we want to do it gently so we’re not killing the frogs along the way.

Herman Jung.

Got it. Great. Thanks.

Tom Evans.

Okay. Thanks. Thanks everybody. We really appreciate your time and attention today. We believe, as we’ve said, that we see strong momentum in the business. There are still several areas where we’re focused on growing and improving our business and we’ll continue to do so and report back to you on that progress. Thanks again for joining us and have a good day.

Operator.

Thank you for your attendance on today’s conference. This concludes the presentation, you may now disconnect.

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Source: Bankrate, Inc. Q1 2006 Earnings Conference Call Transcript (RATE)
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